Research and Development Expenses, Net

Research and development costs incurred in the process of software development before establishment of technological feasibility are charged to expenses as incurred. Costs of the production of a detailed program design incurred subsequent to the establishment of technological feasibility are capitalized. Based on our product development process, technological feasibility is established upon completion of a detailed program design.

Capitalized software development costs are amortized commencing with general product release by the straight-line method over the estimated useful life of the software product.

At each balance sheet date, we assess the recoverability of this intangible asset by comparing the unamortized capitalized software costs to the net realizable value on a product by product basis. Should the amount of the unamortized capitalized costs of a computer software product exceed the net realizable value, these products will be written down by the excess amount.

Recently issued accounting pronouncements.

~~See Item 18. Financial Statements. Note 2(u).~~In June 2011, the FASB issued guidance to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements, thus eliminating the option to present the components of other comprehensive income as part of the statement of equity. In addition, the guidance requires that the reclassification adjustments for items that are reclassified from other comprehensive income to net income be presented on the face of the financial statements. However, in December 2011, the FASB indefinitely deferred the requirements related to the presentation of reclassification adjustments. The guidance became effective for us beginning January 1, 2012, and will only result in changes in our financial statements presentation.

Results of Operations

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

	Year Ended December 31,									Year Ended December 31,
	2008			2009			2010			2010			2011			2012
Revenues from advertising, primarily search, and other services		58	%		74	%		82	%
Revenues from products		42			26			18
Revenues, net		100	%		100	%		100	%
Revenues:
Search											77	%		72	%		63	%
Products											19			20			29
Other											4			8			8
Total revenues											100	%		100	%		100	%
Cost of revenues		8			6			5			5			8			9
Gross profit		92			94			95			95			92			91
Operating expenses
Research and development costs		35			23			22
Selling and marketing expenses		34			17			18
General and administrative expenses		17			12			16
Goodwill impairment and other charges		5			-			-
Research and development, net											23			21			18
Selling and marketing											18			37			49
General and administrative											16			22			14
Total operating expenses		91			52			56			57			80			81
Operating income		1			42			39			38			12			10
Financial income, net		21			-			1			1			4			0
Income before taxes on income		22			42			40			39			16			10
Income tax expense		1			13			11			11			-			4
Net income		21	%		29	%		29	%		28	%		16	%		6	%

As shown in the above table, our operations are generally characterized by high gross profit margins, which are attributable mainly to two factors: (i) we do not have manufacturing costs for our products, and (ii) our search generated revenues have virtually no direct cost associated with them. Starting the second half of 2011, we ~~sell~~dramatically increased our ~~products online~~investment in customer acquisition costs to fuel future growth. These expenses increased from $8.1 million in 2011 to $22.1 million in 2012. This was the primary reason for the increase in selling and ~~rely primarily on viral marketing. Our operating margins decreased~~marketing expenses in ~~2010, in comparison to 2009 primarily~~2012, both nominally and as a ~~result~~percentage of ~~our enhancing our management capabilities~~sales, resulting in lower operating and ~~hiring of experienced professionals capable of scaling our profitable model and growing the business organically and non-organically.~~net income margins in 2011. We expect to further increase our customer acquisition costs ~~dramatically~~ in ~~2011,~~2013, increasing our sales and marketing expenses. In addition, general and administrative expenses included expenses related to the acquisition of subsidiaries of $1.1 million and ~~reducing operating margin in 2011. While increasing our customer acquisition costs is a long-term strategy, as we ramp up this expense, we expect it to have a more negative effect~~$2.1 million in 2011 and ~~less so in future years, and~~2012, respectively. However, as a result of these acquisitions, we expect ~~the~~increased revenues and improved operating margins ~~to improve~~ in ~~2012 and beyond, compared to 2011.~~2013.

Year Ended December 31, ~~2010~~2012 Compared to Year Ended December 31, ~~2009~~2011

Revenues.Revenues increased by 70% in 2012, from ~~advertising, primarily~~$35.5 million in 2011 to $60.2 million in 2012. This increase was a result of increases in each of our revenue streams. Although we expect continued growth in 2013 in all revenue streams, we expect such growth to be driven substantially by search generated revenues as a result of the recent acquisition of SweetPacks, which was focused on search, and ~~other services~~as we increase significantly the investment in customer acquisition.

Search revenues. ~~These~~Search revenues increased by ~~17%,~~49% in 2012, from ~~$20.5~~$25.5 million in ~~2009,~~2011 to ~~$24.0~~$38.1 million in ~~2010. The~~2012. This increase ~~in revenues~~ was due to ~~a $2.8 million~~an increase in search generated revenues and a $0.8 million increase in other advertising and other revenues. In 2010 we continued to collaborate with two search providers; with approximately 90% of search generated revenues being provided by our partnership with Google and the remaining 9% coming from other search providers, primarily InfoSpace. The continued increase in search generated revenues reflects the success of our strategy to leverage our large user base, primarily those using our free products. In 2011, as we implement our strategy for growth and invest in customer acquisition, we expect to accelerate the growth coming from these revenues. In 2010, we were not successful in increasing HiYo registrations and revenues, and this product while still generating revenues, no longer constitutes a product that we are focused on. As to PhotoJoy, while we now have completed a marketable product, we expect that through our customer acquisition strategy, this product will start attracting a significant number of downloads and subsequently ~~generate~~the number of users using our search service. We offer our search service in conjunction with our products and toolbar, with Google currently powering the search service for ostensibly all our users. In addition, our SweetIM acquisition contributed one month of search revenues from the acquired company in 2012. On January 31, 2013, we signed an amendment to our agreement with Google extending the ~~latter part~~term of ~~2011.~~the agreement to May 31 2013, to coincide with the expiration date of the agreement between SweetIM and Google. On April 23, 2013, we entered into a new agreement with Google, effective from May 1, 2013 to April 30, 2015. The new agreement combines the activities of Perion and SweetIM into one agreement and replaces both of the existing agreements with Google. We expect ~~to be able~~our search revenues to continue ~~and~~to grow ~~other revenues, albeit they still are not expected to contribute a significant portion of our revenues in 2011.~~

~~Revenues from products. These revenues continued to decrease from $6.7 million in 2009 to $5.4 million in 2010. We believe this decrease is attributable to our continued focus on search generated revenues,~~ as well as the decreasing popularity in purchasing downloadable software and the effect of the economic downturn in 2009 had on discretionary purchases. In the latter part of 2010, we saw this trend level out, with new product sales increasing. As we increase our marketing ~~efforts~~expenses in ~~this area~~general and customer acquisition costs in 2011, we can expect cash sales from products to increase. However, the increase in accounting revenues recorded according to US GAAP, will be delayed as these revenues are for the most part deferred over the period of their subscriptions.particular.

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Products revenues. Product revenues increased by 144% in 2012, from $7.2 million in 2011 to $17.6 million in 2012. This increase was primarily attributable to the addition of Smilebox to our product portfolio in September 2011, and the subsequent growth in sales of our Smilebox product. Revenues from our Smilebox product in 2012 were $11.6 million, compared to $2.2 million in 2011. IncrediMail product revenues increased by $1.0 million in 2012, as a result of our discontinuing the Gold Gallery Lifetime subscription. We believe that in 2013 we will see increasing revenues from our products, particularly from our Smilebox product, as we improve the product and our marketing and distribution techniques. In addition, we expect to focus future acquisitions on product oriented companies, enriching our product portfolio and providing for a more balanced revenue stream.

Other revenues. Advertising and other revenues increased 63% in 2012, from $2.8 million in 2011 to $4.6 million in 2012. This increase is attributable to increased distribution of our software and to the offering of our homepage, which includes display advertising, and the subsequent acceptance of this offer by our users. We believe these revenues will continue to increase in 2013, as our distribution increases, nominally and as a percentage of total sales.

Cost of revenues. Cost of revenues ~~from products~~ in ~~2010~~2012 was ~~$1.6~~$5.2 million, as compared to ~~$1.5~~$2.8 million in ~~2009. This increase was primarily~~2011. Amortization of intangible assets increased by $1.2 million due to ~~our allocating increasing communication~~the acquisition of SweetIM, and ~~other~~the balance was due to the inclusion of Smilebox for a full year in 2012 and additional infrastructure ~~costs to maintain and servicing our existing user base, as opposed to marketing to new users~~costs. The increase in amortization expenses stemming from the ~~past. Despite this nominal increase, as~~SweetIM acquisition caused a ~~result of the increasing portion of revenues attributable to search, the~~slight decrease in gross profit margin from 92% in ~~2010 increased~~2011, to ~~95%, as compared to 94%~~91% in ~~2009.~~2012. As we expect search generated revenues ~~continue~~ to ~~account for~~grow at a ~~growing portion of~~higher pace than product revenues, this will offset the increase in amortization expenses, so our ~~revenues, we expect the~~ gross profit margin towill still remain ~~at its current level.~~above 90%.

Research and development expenses, net ("R&D"). R&D increased by ~~$0.3 million, from $6.3~~$3.2 million in ~~2009 to $6.6~~2012, from $7.5 million in ~~2010,~~2011 to $10.7 million in 2012, decreasing as a percentage ~~from~~of sales from ~~24%~~21% in ~~2009~~2011 to ~~22%~~18% in ~~2010. This decrease~~2012. The increase was as a result of ~~us maintaining the existing product suite without~~our investing in enriching ~~the~~our product pipeline in 2012, primarily by making our products available on mobile platforms. A mobile version of our Smilebox product, available for ~~future years. Looking at~~the iPhone, was announced in the third quarter of 2011 and already has accumulated over 1 million downloads. In the first quarter of 2013, we released a mobile version of our IncrediMail product for the iPad. In 2013 we intend to develop additional mobile versions of our products for other platforms, such as Android, and possibly others. As a result, we expect this expenditure to further increase nominally, although ~~generally remain stable~~to continue to decrease as a percentage of ~~sales. The increase in expenditure in 2011 is planned for contributing~~sales as our sales continue to ~~a richer product pipeline to fuel future growth.~~grow more rapidly.

Selling and marketing expenses. Selling and marketing expenses more than doubled, from $13.0 million in 2011 to $29.5 million in 2012. This increase was primarily attributable to the increased investment in customer acquisition costs, which increased from $8.0 million in 2011 to $22.1 million in 2012. This increase reflects a ramping up of these expenses all through 2012, reaching $9.7 million in the fourth quarter of 2012. This investment is to fuel future accelerated growth and we expect to further increase this investment in 2013, even as a percentage of sales, in order to fuel growth in 2013 and 2014. In addition, marketing expenses increased due to personnel costs incurred by increasing the size of our marketing department as we added the Smilebox marketing department in 2012. We expect these expenses, excluding the customer acquisition costs, to grow only nominally from the level established in the last quarter of 2012. In 2013, we expect to continue and increase customer acquisition costs to more than $50 million, in order to further accelerate the growth of our revenues. That being said, we continue to condition this investment on a positive return on investment (“RoI”) within one year, and to the extent we cannot maintain a positive RoI, we may curtail this expenditure.

General and administrative expenses ("G&A"). G&A increased from $7.6 million in 2011 to $8.6 in 2012. This increase was primarily due to costs associated with the acquisition of subsidiaries in 2012, compared to the previous year. G&A expenses from organic operations in 2012 were at a level similar to that of 2011. As a result, and even after the increased in acquisition expenses, G&A as a percentage of sales decreased from 22% in 2011 to 14% in 2012. With the exception of costs that could be incurred in connection with future acquisitions, although we expect G&A cash expenses to increase nominally; we expect these cash expenses to decrease as a percentage of sales in 2013.

Taxes on Income. Income tax in 2012 was $2.5 million, compared to $0.2 million in 2011. The increase in income tax was primarily a result of a number of tax credits received in 2011 with respect to past years, a tax refund due to the settlement of a tax audit with the Israeli tax authorities and the discontinuation of our dividend distribution policy. In 2012, we did not benefit from these credits, and while our maximum statutory tax rate is 25%, we suffered from non-recurring tax expenses which coupled with an increase in non-deductible expenses, caused an effective tax rate of 41%. As we look towards 2013, we do not currently expect a recurrence of the tax credits from 2011, or as significant non-recurring tax expenses experienced and accrued for in 2012.

Net Income. Net income in 2012 was $3.5 million, compared to $5.7 million, in 2011. As described above, this decrease was primarily a result of the $14.0 million increase in customer acquisition costs, the nominal increases in other operating expenses and the $2.3 million increase in tax expenses, partially offset by increased profits from the increase in revenues.

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Search revenues. These revenues increased by ~~$0.6 million, or 14%~~12%, from ~~$4.6~~$22.8 million in ~~2009~~2010, to ~~$5.2~~$25.5 million in 2011. This increase was due to an increase in the number of downloads and subsequently the number of users using our search service. As the number of downloads of our IncrediMail products increased, while the number of downloads of our Magentic and HiYo products decreased, search generated revenues through our partnership with Google accounted for more than 94% of these revenues, with the remaining revenues coming from other search providers.

Products revenues. These revenues grew by over 33% in 2011, from $5.4 million in 2010 to $7.2 million in 2011. This increase was primarily attributable to our acquisition of Smilebox, whose products sales were $2.2 million in the last four months of the year, partially offset by a $0.4 million decrease of organic products sales.

Other revenues. These revenues more than doubled in 2011, from $1.3 million in 2010 to $2.8 million in 2011. This increase is attributable to collaboration with other vendors for the sale of their product to our users and an increase in other advertising revenues through a toolbar, on our homepage and other advertising revenues.

Cost of revenues. Cost of revenues in 2011 was $2.8 million, as compared to $1.6 million in 2010. This increase was primarily ~~attributable~~due to the ~~consumer research contracted~~acquisition of Smilebox, whose associated direct costs of approximately $0.6 million included amortization of intangible assets and direct content costs. Smilebox content costs are based on usage and, as a result, are included in the cost of revenues.

Research and development expenses, net ("R&D"). R&D increased by $0.9 million, from $6.6 million in 2010 to $7.5 million in 2011, decreasing as a percentage from sales from 23% in 2010 to 21% in 2011. The increase was as a result of our investing in enriching our product pipeline in 2011, with the Fixie product coming to market in the fourth quarter ~~as well as~~of 2011, the mobile version of our Smilebox product announced shortly after the acquisition, and the announced PhotoJoy product for iPad and iPhone platforms.

Selling and marketing expenses. Selling and ~~sales consultants hired. Marketing~~marketing expenses ~~included approximately $1.8~~more than doubled from $5.2 million in 2010 to $13.0 million in 2011. This increase was primarily attributable to the increased investment in customer acquisition costs, which increased from $1.8 million in 2010 ~~similar~~ to $8.1 million in 2011. In addition, marketing expenses increased due to personnel costs incurred by our increasing the ~~level in 2009. In 2011, as we implement~~size of our ~~strategy for growth, we intend~~marketing department to ~~increase this expense more than three-fold, with most of~~enable us to make these investments and subsequently track the return generated. Finally, the increase ~~being in the latter part of 2011. As a result, we can expect operating margins to be lower during that part of 2011,~~was also due to the ~~fact~~marketing expenses incurred by the acquisition of Smilebox and the marketing expenses needed to support that ~~a substantial part of the return on that investment is only expected in 2012.~~product.

General and administrative expenses ("G&A"). G&A increased from ~~$3.3~~$4.7 million in ~~2009~~2010 to ~~$4.7~~$7.6 in ~~2010.~~2011. This increase was primarily due to our building a management team, primarily in the latter part of 2010, capable of scaling ~~the~~our business model and taking ~~the Company~~us to the next level, both organically and through acquisitions. In the third quarter we engaged a new experienced CEO (while still retaining the prior CEO through the end of the year), created a corporate and business development department, hired a new VP of Corporate Development and started staffing that department. We expect to further invest in enhancing our management team in 2012, however, we do not expect this expenditure to increase as a percentage of revenues.

~~Financial income, net~~. We recorded $0.3 million, net, in financial income in 2010, compared to $0.1 million in 2009. We continue to maintain a stringent investment policy so that a majority of our investments are in US treasury or US government backed securities, with the balance in debentures of a limited sum and relatively short-term maturity, rated at A and higher and dollar denominated or linked. As a result, in 2011, G&A on average was at a level similar to that of the ~~returns on our portfolio have been minimal. Assuming interest rates and~~last quarter of 2010. In addition, we recorded over $1.0 million in expenses related to the ~~financial environment do not change drastically we expect the current rate~~acquisition of ~~return~~Smilebox, which in according to ~~continue going forward.~~U.S. GAAP is accounted for as an expense immediately.

Taxes on Income. Income tax in ~~2010~~2011 was $0.2 million, compared to $3.2 million ~~with an effective~~in 2010. The decrease in income tax rate of 28%, compared to $3.5 million, with the same effective tax rate of 31% in 2009. This rate reflects our decision to institute a dividend distribution policy, distributing at least 50% of net income as a dividend, in 2009 and 2010. We distributed dividends of $8.5 million in each of the years, 2009 and 2010. Aswas a result of ~~our policy~~a number of tax credits received with respect to ~~distribute dividends, we are not able~~past years, a tax refund due to ~~take full advantage~~the settlement of a tax audit with the Israeli tax ~~reduced tax rates afforded to Approved~~authorities and ~~Beneficiary Enterprises. As we announced in November 2010, we have changed~~the discontinuation of our dividend distribution policy and do not intend to distribute dividends from earnings in 2011 or beyond. As a result, and assuming a similar tax environment in 2011, we expect to have a substantially lower effective tax rate in 2011.policy.

Net Income. ~~The~~ Net ~~Income~~income in ~~2010~~2011 was ~~$8.4~~$5.7 million, compared to ~~$8.0~~$8.4 million, in ~~2009.~~2010. As described above, this decrease was primarily a result of ~~our~~the $6.2 million increase in customer acquisition costs, amortization of intangibles resulting from the Smilebox acquisition, partially offset by increased profits from the increase in revenues ~~being offset by a higher level~~and capitalization of ~~expenditure.~~

~~Year Ended December 31, 2009 Compared to Year Ended December 31, 2008~~

~~Revenues from advertising, primarily search,~~research and ~~other services~~. These revenues increased by 61%, from $12.7 million in 2008, to $20.5 million in 2009. The increase in revenues was due to an $8.2 million increase in search generated revenues, partially offset by a $0.5 million decrease in other advertising and other revenues. In 2009 we continued to collaborate with two search providers; with approximately 88% of search generated revenues being provided by our partnership with Google and the remaining 12% coming from other search providers, primarily InfoSpace. The continued increase in search generated revenues reflects the success of our strategy to leverage our large user base, primarily those using our free products. In 2010 we expected to further increase these revenues, while diversifying, our search generated revenues through our continued market penetration of HiYo, adding our PhotoJoy user base and additional search assets. In addition, we intended to invest in increasing other advertising based revenues from affiliates other than companies powering search.development costs.

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~~Revenues from product~~s. These revenues decreased from $9.2 million in 2008 to $6.7 million in 2009. We believe this decrease is attributable to the decreasing popularity in purchasing downloadable software and the effect of the economic downturn in 2009 had on discretionary purchases. We believed that in 2010 we would be able to reverse this trend and see some growth in product sales, as a result of increased marketing efforts and an improvement in the economic environment.

~~Cost of revenues~~. Cost of revenues from products in 2009 was $1.5 million, as compared to $1.7 million in 2008. This decrease was primarily a result of a reduction in compensation expenses, as well as the aforementioned decrease in product sales and their associated costs. As a result of the increasing portion of revenues attributable to search and the decrease in direct costs, the gross profit margin in 2009 increased to 94%, as compared to 92% in 2008. As search generated revenues continue to account for a growing portion of our revenues, we expected the gross profit margin to remain at its current level.

~~Research and development expenses ("R&D")~~. R&D decreased by $1.5 million, from $7.8 million in 2008 to $6.3 million in 2009. This was a result of our refocusing our activities on our core competencies discontinuing some projects and freezing others. After releasing ~~PhotoJoy~~ in 2008, in 2009 we suspended most of the development and marketing costs related to this product, until the viral marketing aspects were achieved. In addition, in August 2009 we released a substantially new version of our back-bone email client product IncrediMail®, enabling us to further reduce some of our development costs. As a result of the above, as a percentage of revenues, R&D decreased from 36% in 2008 to 23% in 2009. We expected our research and development expenditures to remain as a percentage of sales, at the general current level of the last couple of quarters, increasing only to enable us to pursue our current strategy for increasing downloads, reducing churn and continue enhancing our existing suite of products.

~~Selling and marketing expenses~~. Selling and marketing expenses, decreased by $2.6 million, or 36%, from $7.2 million in 2008 to $4.6 million in 2009. This decrease was primarily attributable to a $2 million decrease in customer acquisition expenses, from $3.8 million in 2008 to $1.8 million in 2009, as well as a $0.7 million decrease in other marketing expenses as we refocused our activities. The reduction in customer acquisition expenses was a result of having achieved the market penetration objectives for HiYo by the end of 2008 and a reduced level of other customer acquisition costs reflecting the economic environment and our focusing on profitability.

~~General and administrative expenses ("G&A").~~ G&A decreased from $3.8 million in 2008 to $3.3 in 2009. As a percentage of sales, G&A decreased from to 17% in 2008 to 12% in 2009, and we expected to be able to maintain a similar level of G&A expenditure as a percentage of sales in 2010.

~~Goodwill impairment and other charges~~. In 2008 the Company realigned its strategy and decided to focus on its core competencies. As a result it reorganized and suspended certain activities. These expenses included $0.5 million compensation expenses, $0.1 million goodwill impairment and $0.5 million of other expenses related to activities suspended. As this effort was completed, there were no similar expenses in 2009.

~~Financial income, net~~. We recorded $0.1 million, net, in financial income in 2009, compared to $4.5 million in 2008. The sum in 2008 was primarily due to receiving in the last quarter of 2008 the proceeds from the sale of an Auction Rate Security, which had been written-off in the fourth quarter of 2007, and recorded as a gain upon receipt in 2008. In light of the economic situation in general and the financial markets in particular, we have further tightened our investment policy so that a majority of our investments are in US treasury or US government backed securities, with the balance in debentures of a limited sum and relatively short-term maturity, rated at A and higher and dollar denominated or linked. As a result, the returns on our portfolio have been minimal. Assuming interest rates and the financial environment do not change drastically we expected the current rate of return to continue going forward.

~~Income before Tax.~~ The income before tax in 2009 was $11.6 million, compared to income before tax in 2008 of $4.7 million. While the income before tax in 2009 was attributable to profit from operations, in 2008 this income was primarily attributable to the aforementioned $4.5 million financial income.

~~Taxes on Income.~~ Income tax in 2009 was $3.6 million compared to $0.3 million in 2008. Our effective tax rate in 2009 was 31%, reflecting our decision to institute a dividend distribution policy, distributing at least 50% of net income as a dividend, starting 2009. In 2009 we distributed a dividend totaling $8.5 million, of which $3.8 million was on account of net income on 2009. As a result of the distribution of dividends and our accounting for this policy, we are not able to take full advantage of the tax reduced tax rates afforded Approved Enterprises. We expected to continue to distribute dividends and therefore the effective tax rate to remain at a similar level in 2010. The low taxes on income and effective tax rate in 2008 was due to the fact that the income before tax in 2008 was primarily due to the proceeds from selling an Auction Rate Security at cost, for which no tax was incurred.

~~Net Income.~~ The Net Income in 2009 was $8 million compared to Net Income of $4.4 million, in 2008. As described above, while the net income was attributable to profit from operations, offset by a higher effective tax rate, net income in 2008 was primarily attributable to financial income recognized from the sale of the Auction Rate Security.

B. LIQUIDITY AND CAPITAL RESOURCES

~~From inception until consummation~~As of December 31, 2012, our ~~initial public offering we funded our operations principally from private placements of ordinary and preferred shares that resulted in aggregate net proceeds~~working capital was a negative $4.3 million, consisting of approximately ~~$3.3~~$47.7 million in current assets, less $52.0 million in current liabilities. As of December 31, 2011, our working capital was zero, as current assets and current liabilities both equaled $21.0 million. The decrease in working capital was primarily due to the acquisition of SweetIM in the last quarter of 2012. Under the terms of the acquisition agreement, virtually all the cash ~~flow from operations. We received net proceeds~~acquired, approximately $13 million, is payable to the sellers of ~~$16.8~~SweetIM. At closing, which occurred on November 30, 2012, we paid $10 million ~~from our initial public offering, consummated~~ in ~~February 2006.~~cash, a second payment of up to $7.5 million in cash is due towards the end of 2013, 12 months after closing, and we’ve accrued a $3.0 million contingent tax liability related to this acqusition. These items related to the acqusition of SweetIM caused a decrease in working capital of approximately $20.5 million. This reduction was subtantially offset by cash generated by ongoing activities.

As of December 31, ~~2010,~~2012, we had ~~working capital of $28.1~~bank loans outstanding totaling $8.9 million, to be paid over the next three to four years, including $6.6 million classified as long term debt and ~~our primary source of liquidity was $31.0~~$2.3 million in cash, cash equivalents and marketable securities. As of December 31, 2009, we had working capital of $26.8 million and our primary source of liquidity was $29.6 million in cash, cash equivalents and marketable securities. The increase in working capital and cash, cash equivalents and marketable securities was primarily due to the $9.8 million from operating activities, less $8.5 million distributed as dividends in 2010.with current maturities.

We believe that our cash balances and cash generated from operations will be more than sufficient to meet our anticipated cash requirements for operations, as well as our deferred acquisition payments, for at least the next 12 months.

Net Cash Provided By Operating Activities. Net cash provided by operating activities was ~~$0.9~~$9.8 million, ~~$10.7~~$8.1 million and ~~$9.8~~$16.3 million for ~~2008, 2009~~2010, 2011 and ~~2010,~~2012, respectively. The ~~change~~increase in ~~net~~ cash provided by operating activities ~~reflects~~in 2012 was primarily a result of an increase in operating payables coupled with a decrease in operating assets, resulting in a net increase of $7.8 million. The $2.1 million decrease in net income in 2012 compared to 2011, was more than offset by the $3.3 million increase in non-cash expenses included in net income for 2012, as compared to 2011.

Net Cash Used In Investing Activities. Net cash used in investing activities was $10.2 million, $8.0 million and $14.7 million in 2010, 2011 and 2012, respectively. While in 2010, the net cash used in investment activities was a result of ~~$8.4~~the net investment in marketable securities; in 2011 and 2012 the cash used in investing activities was primarily a result of the acquisition of Smilebox and SweetIM, respectively. In 2011, we invested $21.7 million in cash for the acquisition of Smilebox and $1.1 million ~~non-cash expenses,~~in equipment and capitalized content and software cost. These investments were partially offset by the $14.8 million in proceeds from the net sale of marketable securities. In 2012, we invested $13.6 million cash in connection with the acquisition of Smilebox and ~~$0.3~~SweetIM and $1.5 million ~~non-cash increase~~ in ~~working capital.~~equipment and capitalized content and software cost.

Net Cash Provided ~~By (Used In) Investing Activities. Net cash provided~~ by (used in) investing activities was $3.0 million, $13.5 million and ($10.2) million in 2008, 2009 and 2010, respectively. In 2009, net cash provided by investing activities consisted primarily of the net proceeds from the sale of marketable securities and short term deposits of $13.8 million, net of $0.5 million investment in property and equipment. While in 2010, we used cash primarily for net investments in marketable securities of $9.8 million, in addition to investing $0.4 million in property, equipment and content purchased.

~~Net Cash~~ (Used In) Financing Activities. Net cash provided by (used in) financing activities was ($~~0.7)~~7.9) million, ~~used~~($3.9) million and $2.3 million in ~~2008,~~2010, 2011 and 2012, respectively. In 2010 and 2011, the cash was used primarily for the ~~repurchase~~payment of dividends to shareholders, a policy that has been discontinued. In 2012, the cash was provided by the bank loan taken, less payments already made on account, providing net cash of $8.9 million, less $6.6 million deferred payment for acquisitions.

Credit Facilities

In September 2011, we entered into an agreement with each of Bank Leumi Le-Israel ("Leumi") and First International Bank of Israel ("FIBI"), to secure a credit facility for up to a total of $20 million of financing. During the second quarter of 2012, we amended both agreements, and reduced the amount of each credit facility, to $6 million provided by Leumi, and $4 million by FIBI. The repayment of the ~~Company’s shares, ($7.6) million used in 2009, primarily $8.5 million distributed as a dividend, net of $1.0 million received~~debt is structured over four and five years from the ~~exercise~~draw date, respectively, and we have an option for early repayment.

In order to secure our obligations to the banks we pledged and granted to the banks a first priority floating charge on all of ~~options,~~our assets and ~~($7.9) million~~a first priority fixed charge on certain other immaterial assets (namely, rights for unpaid shares, securities and other deposits deposited with the banks from time to time, and rights for property insurance). The pledge agreements contain a number of customary restrictive terms and covenants that limit our operating flexibility, such as (1) limitations on the creation of additional liens, on the incurrence of indebtedness, on the provision of loans and guarantees and on distribution of dividends, and (2) the ability of the banks to accelerate repayment in ~~2010, primarily, $8.5 million distributed~~certain events, such as breach of covenants, liquidation, and a ~~dividend, net~~change of ~~$0.4 million received from~~control of our Company. Such provisions may hinder our future operations or the ~~exercise~~manner in which we operate our business, which could have a material adverse effect on our business, financial condition or results of ~~options.~~operations.

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

Our research and development activities are conducted internally by ~~our Chief Technology Officer and~~ a 54117 person research and development staff. ~~Our research~~

Research and development efforts are currently focused on upgrading the software and new features for IncrediMail and HiYo products. In 2009 we released the full version of IncrediMail, which improves the graphics and numerous user- friendly functions, bringing a much more graphically advanced user interface. In addition, we released new versions of our HiYo product supporting the Yahoo! Messenger and AIM platforms.

~~Our research and development expenditures~~expenses, net were ~~$7.8~~$6.6 million, ~~$6.3~~$7.5 million and ~~$6.6~~$10.5 million in the years ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010,~~2012, respectively. In 2012, our efforts were focused on developing the back-end systems required for tracking the usage of our products and their monetization, developing new products, particularly the mobile version of our photo sharing product Smilebox, now available on the iPhone, as well as the mobile version of our IncrediMail communication client, introduced in the first quarter of 2013. We ~~intend~~plan to continue ~~our~~these efforts through 2013, as well as initiate the development of an ad-network platform expected to be functional and providing revenues starting in 2014. We expect this investment ~~in product development at a level similar~~ to ~~that of 2010, increasing~~continue and increase nominally in ~~order~~2013, although it will likely decrease as a percentage of sales relative to ~~enrich our product pipe line.~~2012.

See "Business Overview—Intellectual Property" under Item 4.B above.

D. TREND INFORMATION

~~Sales.~~ The increase in sales in 2010 compared to 2009 was due to the continued increase in search generated revenues, partially offset by a decrease in product sales. The rate of growth in 2010 tapered off to 8.5% and was derived entirely from our email product, more than offsetting the decline in revenues from our HiYo and Magentic products. We have therefore reduced our investment in promoting HiYo and Magentic and expect to increase our marketing efforts for IncrediMail as well as to begin generating revenues from PhotoJoy. We signed a new two-year agreement with Google for powering the search offered to IncrediMail and HiYo users. Although there are several changes in the terms and conditions in the new agreement, we expect that the new agreement will provide results similar to those of the previous agreement. In 2010 our dependence on search generated revenues and revenues generated by our email product increased. In 2011 we intend to invest in diversifying our revenue base, reducing our reliance on search generated revenues and the dependence on revenues from our flagship email product. We expect to achieve this by introducing and generating revenues from new products, such as PhotoJoy which we expect to initiate marketing efforts in the second quarter of 2011, as well as other products to be developed or acquired in 2011. We have recently completed extensive consumer research the findings of which we expect to implement during the coming months and as a result we hope to increase product sales. Although we will be making these investments in 2011, we expect these efforts will not provide for a significant increase in sales until 2012.

~~R&D~~. R&D expenses increased nominally in 2010 after decreasing significantly in 2009. In 2011 we expect these expenses to increase moderately as a result of our implementing the findings of our consumer research and investing in increasing our product pipeline so as to diversify our product suite in future years.

~~Sales and marketing expenses~~. Our sales and marketing expenses increased in 2010, after decreasing significantly in 2009. This resulted from our engaging in depth consumer research and hiring marketing and sales consultants in order to better appreciate what our consumers need and how best to service these needs. In 2011 we will continue to engage these consultants, although less so. In 2010 we relied predominantly on the viral nature of our products and our expenditure on customer acquisition costs was $1.8 million, similar to the level of expenditure in 2009. However, in 2011 we intend to increase this expenditure more than three-fold, in an effort to increase significantly the number of downloads and users of our software and search services, as part of our strategy to accelerate revenue growth.

~~General and administrative expenses~~. G&A expenses increased as well in 2010. This increase was a result of our enhancing management with new and experienced professionals capable of taking the Company to the next level by implementing organic and non-organic growth strategies. This effort began with hiring a new CEO with extensive corporate and internet related experience, continued with creating a Corporate Development department, hiring an experienced VP to manage this department and staffing it, and other investments. We intend to continue this effort in 2011, enabling us to implement our growth strategy. However, we do not expect G&A expenses to increase significantly beyond the level established in the latter part of 2010.

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

In recent months there have been certain changes introduced by Google, changing the way Google’s partners, such as ourselves, acquire and retain customers. These changes aim to improve the user experience, a principle that is important to us as well. However, the changes could reduce the return on investment in the short term, and will cause long term changes to the search market as well. We believe that our recent acquisition of SweetIM, our existing team and the experienced team that joined us as part of the acquisition, make us well positioned to address and accommodate these changes. As a result, we expect that a as result of the combination of the two companies, as well as the further increases in our customer acquisition efforts, search generated revenues will be our primary organic growth catalyst in 2013. We are working to ensure compliance with our contractual obligations and an improved user experience. However, although we believe the measures being taken are good for the consumer and in the long-term for us as well, it is possible that in the short term, as the market adapts to these new requirements and environment, the return on our marketing investment could decrease.

In recent years, we have witnessed an increase in the use on the desktop of web-based ~~e-mail~~email solutions, such as Microsoft ~~Hotmail,~~Outlook, Yahoo! Mail and Google’s Gmail. Facebook Mail is a relatively new addition to this market, having a lot of potential based on its social network popularity. While our IncrediMail product is based on the use of these email products, and there is still a vast market for ~~PC based~~PC-based email clients, there is no doubt that the popularity of web-based email is growing at the expense of the ~~PC based~~PC-based software. This has caused us to increase our efforts in adapting our IncrediMail product to the specific consumer needs not satisfied by the web-based solution. Further investment is also required in other forms of online communication as audiences (especially younger ones) are using email less. The continual growth in social communication products and services, including smartphones, makes it essential for our products to be compatible with Facebook, Twitter, SMS and other forms of social communication and mobile platforms. While the use of an email client on mobile devices is common practice, there is increasing competition from dedicated email applications, such as Mailbox, Inky, Mailbird, Sparrow and others. We will continue to make investments, both organic and through acquisitions, to further solidify our position with new products and services focusing on mobile applications as well as social communication products and look to increase our investment on the usage of social media and mobile devices to attract more users to our brands.

As a result of our in depth consumer research and the success of our email client, we have found that our products address an underserved market of later technology adapters. We have found that these consumers are looking for simple, safe and useful products that assist in better utilizing their time. We intend to address this unique market segment by further adapting our products to better address their evolving requirements as well as offering them other products and services that they use frequently and address similar needs. This market segment is currently underserved as it is not targeted by the new technology companies that are targeting early hi-tech adapters, or by the large conglomerates that seek to service horizontally the general public, rather than a specific vertical demographic. We believe that we on the other hand with our successful experience with our IncrediMail email client, are well equipped to address these needs.

The sharing and storing of digital photos on personal computers, and on photo hosting sites such as ~~Flickr.com,~~Instagram, Facebook or Shutterfly, has increased substantially in recent years. The convenience of such online storage of photos has ~~caused~~created a decrease in usage of regular printed picture albums. However, a problem often experienced by people that store their photos on their hard disk or on a photo-hosting site is that they simply do not enjoy their photosgrowing commercial industry with products like personalized photo books, cards, calendars, stationery, scrapbooks (printed and digital) as ~~they had previously. In the past, people spent time looking through their~~well as photo ~~albums, but today photos are saved in a computer folder~~backup services and ~~easily forgotten about or lost. Access to photos saved on personal computers is not immediate and is somewhat tedious; hence, old favorite photos are neglected over time.~~ ~~PhotoJoy, which we have completed developing,~~storage services. Smilebox is aimed ~~to address this problem, by~~at helping people create and share their pictures enabling users to enjoy all the photos that they have stored on their computer or online using new capabilities, with nominimal effort from the user. ~~Photos can be revealed on~~As camera phones continue to improve and more and more users use their camera phones to capture their special moments, there is significant growth opportunity for us to help users create special memories both “in the ~~users' desktop constantly, in more creative~~moment” and ~~high-quality ways than those available on~~“after the ~~web. Some examples of~~ ~~PhotoJoy's~~ features are 3D Photo Screensavers showing the users' photos and enriched with a variety of styles and designs, fun desktop widgets that display users' photos in creative and playful ways (nicknamed "PhotoToys"), and Collage Wallpapers presenting photos within various themes, sceneries, and illustrations. In addition, the software lets users take photos stored on other photo web sites (such as Flickr and Picasa) and enjoy them using ~~PhotoJoy’s~~ fun capabilities. Until now we did not have the back-end systems required to support customer acquisition efforts needed for this product, as it is not inherently viral. We have almost completed these systems, and expect to begin significant marketing efforts and subsequently enjoying revenues from this product in the second quarter of 2011.

moment.”

There has been a growing usage of portable platforms, ~~bridging between the mobile phone~~including smartphones and ~~the PC,~~tablets, enabling users to enjoy a more graphic and creative experience ~~while not requiring~~without a PC. This trend is most ~~prominent~~prominently represented by the popularity of the iPhone and its Android mobile platforms, as well as with the ~~advent of the iPhone~~TM ~~and since then other similar "smart phone" products and the more recent~~popular iPadTM ~~and similar products.~~ tablet. In addition, and partially as a result of these successes, the Apple-Mac platform popularity has increased as well. Although this trend is attracting an increasing portion of the market, we believe that particularly with regard to our demographic segment, the PC environment will remain the predominant platform for managing emails in the near future. ~~That being said, as~~To address this trend, we have been developing mobile versions of our desktop applications. We have already introduced Smilebox for the ~~growth~~iPhone and this application has recorded over 1.2 million downloads to date. In addition, in the first quarter of ~~these alternative platforms increases,~~2013, we introduced IncrediMail for the iPad. In 2013, we intend to ~~incorporate solutions~~increase our investments in ~~our~~this direction offering better and more products ~~that will enable cross-platform access.~~

on various mobile platforms.

Recently there has been a trend of market leaders in different areas to incorporate services from other areas. An example of this has been the social network leader Facebook with their increasing penetration into instant messaging and now email. This trend has caused us to focus efforts in accommodating the Facebook platform, and transforming our email client from software managing emails to a communication client capable of incorporating other methods of communication, such as social networks, instant messaging, etc. However, this could radically change the competition and integration scenario for the Company.

As ~~almost 80%~~roughly 63% of our revenues are search generated, and this percentage is expected to increase in 2013, we are affected by the general trends and metrics of the search revenue market. One of the most significant metrics is the ~~cost~~revenue per ~~click ("CPC")~~thousand impressions, or RPM, rate. In an economic downturn, the amount advertisers are willing to pay naturally declines, reducing ~~the~~their cost per click, or CPC, rate and subsequently our revenues. The ~~CPC~~RPM rate has fluctuated dramatically over the past months and it is difficult to predict a specific trend in this important metric going forward. This fluctuation is a function of economic conditions in each country and more importantly by the different economic conditions in each country and which countries are the focus for growth in this market. Moreover, this market is becoming more susceptible to alternative methods of advertising and commerce trends. Advertising through generic search sites is facing growing competition from alternative commerce sites as the latter become more popular and more visible, and also have the ability to leverage the increasing user data available through these sites. We have begun to invest in systems and products that could possibly leverage this trend in 2014 and beyond.

8.7.

The downloadable software market and the way it interacts with search providers have been changing. With its market leading position, Google has been the forerunner of these changes, which have also impacted our agreement with Google. It is difficult to know how this process will end, although we are convinced that the process is ongoing and has not reached equilibrium. We will continue to work with Google as well with the other search companies to improve the consumer experience and address the market needs. As more and more products become cloud based services, this may also impact the way in which companies like ours generate search revenue. The clear trend is to provide users with a solution that is at least partly cloud-driven, enabling portability for consumers and easier maintenance for companies. More and more companies, however, are finding new ways to generate revenues, including advertising and premium sales as well as search from the web based service. Another trend in the market as it relates to downloadable software with search monetization is the intensity of the competition. In 2012, the amount of competitors and the intensity of the competition have made it more difficult to maximize the lifetime value of a consumer. We continue to focus on providing real value to the consumer from our products and services with a belief that in the long run companies with a real relationship with consumers based on a product that gives them real value is sustainable. This will be especially true in the future as the next generation of browsers may block the installation of toolbars in their current format. As mentioned earlier, our solution is one of value. Our focus is on creating products and services that serve the needs of our users and provide them with real value so that they continue to use our products and brand instead of those of the competition.

For more information on uncertainties, demands, commitments or events that are reasonably likely to have a material effect on revenue, please see Item 3, “Key Information—Risk Factors.”

For additional trend information see the discussion in Item 5.A “Operating and Financial Review and Prospects – Operating Results.”

E. OFF-BALANCE SHEET ARRANGEMENTS

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

3743

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual commitments as of December 31, ~~2010~~2012 and the effect those commitments are expected to have on our liquidity and cash flow in future periods:

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

(in thousands)
Accrued severance pay $ 1,384 $ 287 $ - $ - $ 1,097
Uncertain Income Tax Positions(*)
1,388 - - -
Termination benefits 410 129 - - 281
Operating leases 597 597 $ - - -
Total $ 3,779 $ 1,013 $ - $ - $ 1,378

(*) Uncertain income tax positions are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 9(f) of our Consolidated Financial Statements for further information.

			Payments Due by Period
Contractual Commitments	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 Years
	(in thousands)
Long-term debt, including current portion(*)	$	8,850	$	2,300	$	6,150	$	400		-
Accrued severance pay(**)	$	933
Uncertain income tax positions(***)	$	3,952						-		-
Deferred and contingent Consideration(****)	$	15,000	$	7,500	$	7,500
Operating leases	$	2,904	$	1,173	$	1,731		-		-
Total	$	31,639	$	10,973	$	15,381	$	400

(*) Long-term debt obligations represent repayment of principal and do not include interest payments due thereunder.

(**) Severance pay obligations to our Israeli employees, as required under Israeli labor law and as set forth in employment agreements, are payable only upon termination, retirement or death of the respective employee and are for the most part covered by on going payments to funds to cover its obligation. Of this amount only, $449 is unfunded.

(***) Uncertain income tax positions are due upon settlement and we are unable to reasonbaly estimate the ultimate amount or timing of settlment. See Note 10i to our consolidated financial statements for further informaiton.

(****) Deferred and contingent consideration represents the maximum cash payments we will be obligated to make under contingent consideration arrangements with former owners of certain entities we acquired if specified operating objectives and financial results are achieved.

ITEM 6. DIRECTORS, SENIOR ~~MANAGEMENT~~ MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth information regarding our executive officers and directors as of ~~February 28, 2011:~~April 24, 2013:

Name	Age	Position
~~Josef Mandelbaum~~ Tamar Gottlieb*(3) (4)	44	~~Chief Executive Officer and Director~~
~~Ofer Adler~~	40	~~Director~~
~~Li Carmel~~	38	~~Vice President – Human Resources~~
~~Arik Czerniak~~	35	~~Director~~
~~Limor Gershoni Levy~~	40	~~General Counsel~~
~~Tamar Gottlieb~~	5456	Director and Chairperson of the Board
~~Yuval Hamudot~~	37	~~Chief Operating Officer and Chief Technologies Officer~~
Iris Beck~~David~~ ~~Jutkowitz~~ (2)	6047	Director
Alan Gelman*(1)	57	Director
David Jutkowitz*(1)(2)(3) (4)	62	External Director ~~member of Audit Committee~~
Avichay Nissenbaum*(1)(2)(4)	46	External Director
Adi Soffer Teeni*	42	Director
Josef Mandelbaum(4)	46	Chief Executive Officer and Director
Yacov Kaufman	5355	Chief Financial Officer
Avichay Nissenbaum *Li Carmel	4440	~~External Director, member of Audit Committee~~ Vice President, Human Resources
~~Arik Ramot~~Limor Gershoni Levy	5942	~~Director, member of the Audit Committee~~Vice President, General Counsel
Mark Ziering	4446	Vice President, – Corporate Development
Yuval Hamudot	39	General Manger, Smilebox
Ron Harari	41	General Manager, Incredimail
Tomer Pascal	34	General Manager, Utilities

~~_______________~~____________

* "Independent" for NASDAQ Stock Market purposes;

* "Independent" for Nasdaq Stock Market purposes.

(1)	Member of the audit committee.

(2)	Member of the compensation committee.

(3)	Member of the nominating and governance committee.

(4)	Member of the investment committee.

Nadav Goshen served as our COO from December 1, 2012 until April 11, 2013.

~~David Jutkowitz and Avichay Nissenbaum were elected to serve as~~There are no arrangements or understandings between any of our ~~external directors by our shareholders as required by Israeli law. No shareholder has special voting rights with respect to the election of~~ directors or ~~otherwise.~~

~~Josef Mandelbaum~~ ~~joined the Company as a Chief Executive Officer on July 7, 2010~~executive officers and was elected as a Director in January 2011. Before joining the Company, Mr. Mandelbaum worked at American Greetings as Chief Executive Officer of the AG Intellectual Properties group, since 2000 and as Senior Vice President of the Sales and Business Development AG Interactive group from1998 until 2000. Mr. Mandelbaum holds a BA in economics from Yeshiva University and an MBA from the Weatherhead School of Management at Case Western Reserve University.

~~Ofer Adler~~ ~~co-founded IncrediMail and has been a director since~~any other person pursuant to which our incorporation, most recently reelected in January 2011, for another three year term. Mr. Adler served as the Company's Chief Executive Officer since February 5, 2008 up until being replaced by Mr. Josef Mandelbaum on August 5, 2010 and Chief Product Officer until November 2, 2011 Before co-founding the Company, Mr. Adler worked as a trader and portfolio manager at Clal Insurance from 1997 to 1999, and as a trader and technical analysis expert at Batucha, Israel’s largest private brokerage firm, from 1994 to 1997.

~~Li Carmel~~ joined us in November 2009 and serves as Vice President of Human Resources. Li brings with her more than ten years of experience in Human Resources management positions in the Hi-Tech industry. She served as VP of Human Resources at Surf Communications Ltd., as Human Resources Manager at Radware Ltd., and held HR positions at Nice Systems Ltd. and Orbotech Ltd. Li holds a B.A in Psychology and Philosophy, and an M.B.A. from Tel-Aviv University.

~~Arik Czerniak~~ was elected director in December 2009. Arik is a veteran internet entrepreneur and a founder of several consumer focused internet startups. He spent 4 years as founding CEO of Metacafe Inc., one of the world’s largest privately held video sites, with 50 million monthly visitors. Before becoming an entrepreneur, Arik spent 10 years in the Israeli Air Force - first studying for a BA in mathematics, physics and computer sciences at the Talpiot R&Ddirectors or executive officers ~~project, and later serving as a fighter pilot. Arik also holds an MBA in finance and banking.~~

~~Limor Gershoni Levy~~ joined us in January 2011 and serves as Vice President, General Counsel and Corporate Secretary. Prior to joining IncrediMail Ms. Gershoni-Levy was General Legal Counsel for 7 years at Veraz Networks (NASDAQ: VRAZ), a leading provider of band-with optimization and next generation switching products. Veraz recently merged with Dialogic (NASDAQ: DLGC). Before that, Ms. Gershoni-Levy was General Counsel at Medigate Ltd. a start-up that developed management software. Ms. Gershoni-Levy has an L.L.M from University Tel Aviv Law School and a L.L.B in Law from Essex University, England.were selected.

Tamar Gottlieb has ~~served as our~~been a director of the Company since 2001 and ~~became Chair~~has served as the Chairperson of the ~~Board~~Company's board of ~~Directors on February 3, 2006,~~directors since the ~~closing date of our~~Company's initial public ~~offering. She is~~offering in February 2006. Since January 2001, Ms. Gottlieb has served as a Managing Director of Harvest Capital Markets Ltd., an investment banking and financial consulting firm that she founded in January 2001. Prior to 2001, Ms. Gottlieb ~~held Managing Director~~served as either a managing director or ~~Senior Manager positions in~~a senior manager at several investment banking institutions, including Investec Clali – Management & Underwriting Ltd. ~~(from July~~(July 1997 to January 2001), Oscar Gruss (1996) Ltd. ~~(from February~~(February 1996 to May 1997) and Leumi & Co. Investment Bankers Ltd. ~~(from 1980~~(1980 to 1991). From ~~August~~ 1991 to ~~June~~ 1994, Ms. Gottlieb served as the Founding Managing Director of Maalot – The Israeli Securities Rating Company Ltd., Israel’s first credit rating agency. ~~She~~Ms. Gottlieb currently serves as a board member of several Israeli public and private companies, including ~~Emilia Development~~Albaad Massuot Yitzhak Ltd. (TASE: ALBA), ~~Leumi Mortgage Bank~~Carasso Motors Ltd.~~, N.R. Spuntech Industries Ltd.~~ (TASE: CRSO) and Reit 1 Ltd. ~~In the past she~~(TASE: RIT1). Ms. Gottlieb has also served as a director of ~~among others,~~other companies, including El Al Israeli Airlines Ltd. (TASE: ELAL) and "Dan" ~~the~~Public Transportation Company ~~for Public Transport~~ Ltd. Ms. Gottlieb ~~has~~holds a B.A. in international relations from the Hebrew University of Jerusalem and an M.A. in economics from Indiana University.

~~Yuval Hamudot~~Iris Beck ~~is our Chief Operating Officer (COO) and Chief Technology Officer (CTO) Yuval was appointed COO in March 2010 and~~ has been ~~CTO~~a director of the Company since ~~March 2007. As CTO, Yuval is responsible for the technological design and development of our products and online system. In that capacity he manages our research and development team~~November 2011. Since April 2013, she serves as well as our quality assurance and information technology departments. As COO, Yuval is also responsible for business intelligence and customer support. Yuval joined us in 2000, and since 2003, and until his recent appointment, wasSenior Vice President, ~~– Research~~Corporate Communications Officer of Teva Pharmaceutical Industries Ltd. From 2008 to 2012, Ms. Beck served as the Chief Executive Officer of McCann Erickson Israel. From 2002 to 2008, she served as the Chief Marketing Officer of Partner Communications Company Ltd. (NASDAQ and ~~Development. Prior~~TASE: PTNR), and from 2001 to ~~joining us, Mr. Hamudot worked for two years~~2002 she served as the Chief Executive Officer of Unilever Israel Ltd. Ms. Beck serves as a director of Golf and Co Israel. Ms. Beck holds a B.A in ~~the research and development at Commonsense Ltd., a software company that outsourced hi-end technology solutions. Mr. Hamudot served in the IDF computer unit ("Mamram") and has a B.Sc. in Computer~~Economic Science from ~~Tel Aviv~~Haifa University, and an M.B.A. from ~~Bar-Ilan University~~.Bar Ilan University.

Alan Gelman has been a director of the Company since August 2011. Since December 2012, he serves as the Global CFO and Deputy CEO of Better Place Inc. From 2008 to 2012, Mr. Gelman served as the Chief Financial Officer and Deputy Chief Executive Officer of Bezeq the Israeli Telecommunication Corp Ltd. (TASE: BEZQ). From 2006 to 2012, Mr. Gelman served in various positions at the Delek Group Ltd. (TASE: DELKG), including as the Chief Financial Officer from 2008 to 2012, and as Deputy Chief Executive Officer from 2006 to 2008. From 2001 to 2006, Mr. Gelman served as the Chief Financial Officer of Partner Communications Company Ltd. (NASDAQ and TASE: PTNR), and from 1997 to 2000, he served as the Chief Financial Officer of Barak ITC. Mr. Gelman serves as Chairman of the Board of Directors of Better place Denmark and a director of various subsidiaries of Better Place Inc. Mr. Gelman holds a B.A. in Accounting from Queens College and an M.B.A. from Hofstra University. Mr. Gelman is licensed as a Certified Public Accountant in the United States and in Israel.

David Jutkowitz has been an external director of the Company since December 2007, and in January 2011, he was reelected to serve ~~another~~a second three year ~~term as an "external director" in January, 2011.~~term. Mr. Jutkowitz serves as a director of Extal ~~Ltd a producer~~Ltd., and of ~~aluminum profiles and systems.~~King Engine Bearings Ltd. (TASE: KING). From 2006 to 2010, Mr. Jutkowitz served as a director of Arad Investment and Industrial Development ~~from 2006 till 2010,~~Ltd. (TASE: ARAD), and from 2001 ~~until~~to October 2007, Mr. Jutkowitz ~~has~~ served as an external director of Carmel Investment Group Ltd., and ~~was~~as a member of the audit, investment and portfolio committees of Carmel Investment Group Ltd. ~~Between~~From 2000 ~~and~~to 2003, Mr. Jutkowitz ~~held~~served as the ~~position~~Chief Executive Officer of ~~CEO at~~ BXS Ltd.~~, where his responsibilities included managing all stages in development of the business, including the raising of funds from investors and building a local and international distribution.~~ From 1995 ~~until~~to 2002, Mr. Jutkowitz ~~held~~served as the ~~position~~Chief Executive Officer of ~~CEO at~~ E.L. Advanced Science Ltd.~~, where his responsibilities included identifying and acquiring appropriate companies and taking an active part in the management of such companies.~~ From 1976 to 2001, Mr. Jutkowitz ~~held~~served as the ~~position~~Chief Financial Officer of ~~CFO at~~ Etz Lavud Ltd.

Avichay Nissenbaum has been an external director of the Company since July 2009, and in September 2012, he was reelected to serve a second three year term. In 2012, Mr. Nissenbaum co-founded Lool Ventures L.P. and has since served as its general partner. In 2006, Mr. Nissenbaum co-founded Yedda, Inc., which was acquired by AOL, Inc. (NYSE: AOL) in November 2007. He served as Yedda's Chief Executive Officer from 2006 to 2011. In 1996, Mr. Nissenbaum co-founded SmarTeam Corporation Ltd., which was acquired by Dassault Systems, S.A. in 1999. From 1996 to 2005, Mr. Nissenbaum served in various positions at SmarTeam, including as VP Product, Executive VP Sales, Marketing and Business Development. Mr. Nissenbaum serves as a director of Winbuyer Ltd. and Tipa-Corp Ltd., as well as certain portfolio companies of Lool Ventures, including Zooz Ltd., Familio Technologies Ltd., Online Permission Technologies and SharePops. Mr. Nissenbaum also serves as a director of “leaders of the Future” NPO. Mr. Nissenbaum holds a B.Sc. in Computer Science and a B.A. in Economics, both from Bar-Ilan University.

Adi Soffer Teeni has been a director of the Company since September 2012. From 2008 to 2011, Ms. Soffer Teeni served as the Managing Director of 888 Holdings Public Limited Company (LON: 888). From 2002 to 2007, she served as the Chief Executive Officer of the Kidum Group Ltd., and from 1998 to 2001, she served as the Chief Executive Officer of Wall Street Institute School of English in Israel. Ms. Soffer Teeni holds an L.L.B. in Law from the Tel-Aviv University and an M.B.A. from Kellogg Recanati.

Josef Mandelbaum has been the Chief Executive Officer of the Company since July 2010 and has served as a director since January 2011. From 1998 to 2010, Mr. Mandelbaum served in various positions at American Greetings Corporation (NYSE: AM), including as Chief Executive Officer of the AG Intellectual Properties group, from 2000 to 2010 and as Senior Vice President of the Sales and Business Development of the AG Interactive group, from 1998 to 2000. Mr. Mandelbaum holds a B.A. in economics from Yeshiva University and an M.B.A. from the Weatherhead School of Management at Case Western Reserve University.

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

Li Carmel has been the Vice President of Human Resources of the Company since November 2009. During 2008, Ms. Carmel served as the VP of Human Resources at Surf Communications Ltd. From 2002 to 2008, Ms. Carmel served as the Human Resources Manager at Radware Ltd. (NASDAQ: RDWR); from 2000 to 2001, she served as the Divisional Human Resources Manager at Nice-Systems Ltd. (NASDAQ and TASE: NICE); and from 1997 to 2000, she served as the Human Resources Recruiter at Orbotech Ltd. (NASDAQ: ORBK). Ms. Carmel holds a B.A. in Psychology and Philosophy, and an M.B.A, all from Tel-Aviv University.

Limor Gershoni Levy has been the Vice President, General Counsel and Corporate Secretary of the Company since January 2011. From 2003 to 2010, Ms. Gershoni-Levy served as General Legal Counsel at Veraz Networks Inc., a company which was listed on NASDAQ (VRAZ) prior to its merger in 2010 with Dialogic Inc. (NASDAQ: DLGC). From 2000 to 2003, Ms. Gershoni-Levy served as the General Counsel at Medigate Ltd. Ms. Gershoni-Levy holds an L.L.B in Law from Essex University, England and an L.L.M. from Tel Aviv University Law School.

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~~Mr. Arik Ramot~~Mark Ziering ~~was elected as a director at our annual meeting of shareholders held on December 24, 2008. Mr. Ramot is the founder and~~ has been the CEO of Ramot & Co, Investment House since 1996. From 1988 to 1996, Mr. Ramot served as legal advisor and manager at Kaszierer International, working in more than 20 countries. Prior to that, Mr. Ramot practiced law in Israel. Mr. Ramot is also the founder of Hayoman Ltd., an Israeli internet company. Mr. Ramot holds LLB and LLM degrees from Tel Aviv University.

~~Mark Ziering~~ ~~joined IncrediMail as VP~~Vice President of Corporate Development inof the Company since August of 2010. ~~Mark has over 17 years experience in the biotech, Internet and enterprise software technologies. Prior~~From 1999 to ~~joining IncrediMail, Mark~~2008, Mr. Ziering was a partner at Genesis Partners, L.P., a leading Israeli venture capital ~~fund where he was investing in software since 1999. At Genesis he was involved in over 30 investments and 5 successful exits. Before that Mark was~~fund. From 1993 to 1996, Mr. Ziering served as an analyst at Chemical Bank (predecessor to JP Morgan Chase) and, ~~The~~from 1989 to 1991, at the Federal Reserve Bank of ~~NY.~~New York. Mark ~~has~~holds a B.A. ~~From~~from Yeshiva University and an ~~M.B.A~~M.B.A. from Yale University.

Yuval Hamudot has been the General Manager of Smilebox Inc. since September 2012. From September 2011 to September 2012, he served as the Chief Operating Officer of Smilebox. From 2003 to September 2011, Mr. Hamudot served the Company in various positions, including as the Chief Operating Officer from 2010 to 2011, as the Chief Technology Officer from 2007 to 2010, and as a Vice President – Research and Development from 2003 to 2007. From 1994 to 2000, Mr. Hamudot served in the Israeli Defense Force’s top computer unit as a project officer responsible for nationwide projects. Mr. Hamudot holds a B.Sc. in Computer Science from Tel Aviv University and an M.B.A. from Bar-Ilan University.

Ron Harari has been the General Manager of the Incredimail Business division of the Company since May 2011. From 2000 to 2011, Mr. Harari served in various positions at ICQ/AOL (NYSE: AOL) including as the Vice President of Web R&D, Vice President Operations and Vice President Products and Operations. From 2005 to 2007, he served as a member of ICQ/AOL's management team. From 1996 to 2000, Mr. Harari served in various positions at Walla! Communications Ltd. (TASE: WALA). From 1993 to 1995, Mr. Harari served as a Computers & Electronics Buyer in the Mission to the U.S. of the Government of Israel. Mr. Harari currently serves as an Advisory Board Member at Vicomi Ltd.

Tomer Pascal has been the General Manager of the Utilities Business division of the Company since January 2012. From 2010 to 2012, Mr. Pascal served as the Vice President of Marketing of the Company. In 2005, Mr. Pascal co-founded bp Interactive Technologies Ltd., and from 2005 to 2009, he served as its Vice President of Marketing and Product Management.

There are no family relationships between any of our directors or executive officers.

B. COMPENSATION

The aggregate direct compensation we paid to our officers as a group (6(9 persons) for the year ended December 31, ~~2010,~~2012, was approximately ~~$2.2~~$3.9 million, which included approximately ~~$0.4~~$0.9 million that was set aside or accrued to provide for pension, retirement, severance or similar benefits. This amount does not include expenses we incurred for other payments, including dues for professional and business associations, business travel and other expenses, and other benefits commonly reimbursed or paid by companies in Israel. We did not pay our officers who also serve as directors any separate compensation for their directorship during ~~2010.~~2012.

The aggregate ~~direct~~ compensation we paid to our directors who are not officers for their services as directors as a group for the year ended December 31, ~~2010~~2012 was approximately ~~$221 thousand. Directors~~$370,000. In addition, our directors are ~~also~~ reimbursed for expenses incurred in order to attend board or committee meetings.

~~As of February 28, 2011, there were outstanding~~

In the year ended December 31, 2012, we granted options to purchase ~~200,828~~617,500 ordinary shares ~~granted~~ to ~~12 of~~ our directors and officers, at a weighted average exercise price of ~~$5.44~~$7.18 per ~~share.~~share, and the latest expiration date for such options is December 2017. These options were granted under our 2003 ~~employees share option plan~~Israeli Share Option Plan, as amended, (the "2003 Plan"). As of April 24, 2013, options to purchase 300,000 out of the abovementioned ordinary shares have been forfeited.

~~The compensation~~Pursuant to the requirements of the Companies Law, remuneration of our directors ~~who are not officers of~~generally requires shareholder approval. In October 2011, our ~~Company, including~~shareholders approved a compensation package for our non-employee directors (other than our external ~~directors, was~~directors) comprised of an annual fee of $35,000, and all other terms of compensation, which were previously approved by our shareholders, including the ~~Company’s governing bodies, as required under the Israeli law In accordance with these resolutions, (i)~~ annual gross compensation for independent directors is $25,000, and $500 per meeting, while other directors, who are not officers, receive $18,000, and $500 per meeting (plus V.A.T, if applicable) to be paid in four equal quarterly installments; (ii) a grant of options to purchase ~~10,000 of~~ our ordinary shares ~~with the following terms: (a) each option shall be exercisable~~as approved by our shareholders in July 2009, and reimbursement for one ordinary share at an exercise equal to the closing price on the date of grant of the options, as reported by the Nasdaq Capital Market; (b) the options shall vest in three equal parts; and (c) any and all other terms and conditions pertaining to the grant of the options shall betravel expenses in accordance with our travel reimbursement policy for directors. In September 2012, our shareholders approved the re-election of Mr. Avichay Nissenbaum. In addition, the shareholders approved that upon his appointment, Mr. Nissenbaum will receive compensation in the form of the payment of an annual fee of $25,000 and ~~subject~~participation fees (per meeting) of $500 per meeting (plus value added tax (“V.A.T.”), if applicable) pursuant to the ~~"2003 Plan" adopted~~regulations promulgated under the Companies Law that govern standardized payments to external directors of dual-listed companies. In addition, the shareholders approved an annual grant of options to purchase our ordinary shares pursuant to a grant made to all external directors, as previously approved by ~~IncrediMail~~our shareholders in ~~2003~~July 2009 (see below). Our other external director, Mr. David Jutkowitz was reelected at our 2010 annual general meeting of shareholders, and ~~our standard option agreement executed by each director and by IncrediMail promptly after~~he receives the ~~date of grant.~~same compensation as Mr. Nissenbaum.

In accordance with ~~the~~our shareholders' approval in December 2007, as amended by our shareholders ~~approval of December 27, 2007~~in July 2009, each of ~~the~~our directors who is not an employee of the Company, receives for each year of service, ~~by such person as a director of the Company, an option~~options to purchase 10,000 ordinary shares of the Company ~~(in this subsection - the~~(the "Annual Grant"), ~~under~~pursuant to the following terms: (a) the Annual Grant shall be made immediately following the annual ~~general~~ meeting of ~~the~~ shareholders ~~of the Company~~ in the relevant year, commencing with the shareholders meeting held onin December ~~27,~~ 2007; (b) each option shall be exercisable for one ordinary share at an exercise price equal to the closing price of anour ordinary ~~share~~shares on the date of the annual ~~general~~ meeting of ~~the~~ shareholders ~~of the Company~~ upon which such option was granted, as reported by the ~~Nasdaq~~NASDAQ Global Market; ~~and~~ (c) the options shall vest in ~~four~~three equal portions on each anniversary of the Annual Grant, commencing with the first anniversary. Any and all other terms and conditions pertaining to the grant of the options shall be in accordance with, and subject to, the 2003 Plan adopted by IncrediMail in 2003 and our standard option agreement. In accordance with this resolution, all directors that are not officers were granted 10,000 options on December 31, 2009 and January 6, 2011, after the 2009 and 2010 annual general meetings.

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

On July 17, 2008, and following approval by our audit committee and board of directors, our shareholders approved a grant to Ms. Tamar Gottlieb of options to purchase 10,000 ordinary shares of the Company, under the following terms: (a) each option shall be exercisable for one ordinary share at an exercise price equal to the closing price of an ordinary share on July 17, 2008, as reported by the Nasdaq Global Market; and (b) the options shall vest in three equal portions on each anniversary of the date of approval of the grant, commencing with the first anniversary. Any and all other terms and conditions pertaining to the grant of the options hereunder shall be in accordance with, and subject to, the 2003 Plan adopted by the Company in 2003 and the Company's standard option agreement. See "Item 6.E Share Ownership — Employee Benefit Plans — The 2003 Plan" below.

On July 9, 2009, and following approval by our audit committee and board of directors, our shareholders amended the terms of options granted to the external directors and the directors of the Company. In accordance with the amendment, our directors' recurring annual stock option grants now have a vesting period of three years (instead of four years) from the date of their annual stock option grant. Also, upon termination or expiration of the applicable director's service with the Company, provided that the termination or expiration is not ~~"for Cause"~~for “cause" (as such term is defined in the 2003 Plan) and not resulting from the director's resignation, the stock options granted to such director shall retain their original ~~termination~~expiration dates, ~~and shall not terminate 90 days after the applicable termination date,~~ and the next upcoming tranche of stock options, of each grant, that are scheduled to vest immediately subsequent to the termination date, if any, shall automatically vest and become exercisable immediately prior to the termination ~~date. In addition,~~date; and (e) to avoid a possible conflict of interest while discussing a ~~Change~~"Change of ~~Control~~Control" of the Company (which may result in the termination of the director’s term of office), all unvested options held by the director shall automatically vest and become exercisable upon such "Change of Control" event. "Change of Control" is defined for these purposes as: (i) a merger, acquisition or reorganization of the Company with one or more other entities in which the Company is not the surviving entity, (ii) a sale of all or substantially all of the assets of the Company; (iii) a transaction or a series of related transactions as a result of which more than 50% of the outstanding shares or the voting rights of the Company are held by any party (whether directly or indirectly). Any and all other terms and conditions pertaining to the grant of the options shall be in accordance with, and subject to, the 2003 Plan and our standard option agreement.

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

C. BOARD PRACTICES

~~Board of Directors and Executive Officers~~Corporate Governance Practices

We are ~~deemed a "limited liability public company"~~incorporated in Israel and therefore are subject to various corporate governance practices under the ~~Israeli~~ Companies ~~Law. As~~Law, relating to such matters as external directors, the audit committee, the internal auditor and approvals of interested party transactions. These matters are in addition to the ongoing listing conditions of NASDAQ and other relevant provisions of U.S. securities laws. Under the NASDAQ Listing Rules, a ~~limited liability public company, we~~foreign private issuer may generally follow its home country rules of corporate governance in lieu of the comparable NASDAQ requirements, except for certain matters such as composition and responsibilities of the audit committee. For further information, see “Item 16.G – Corporate Governance.”

NASDAQ Requirements

Under the NASDAQ Listing Rules, a majority of our directors are ~~managed by a~~required to be “independent directors” as defined in the NASDAQ Listing Rules. Six out of the seven members of our board of directors, namely, Messrs. Tamar Gottlieb, Iris Beck, Alan Gelman, David Jutkowitz, Avichay Nissenbaum, and Adi Soffer Teeni, are independent directors under the NASDAQ requirements.

We are also required by ~~our executive officers. Under~~ the NASDAQ Listing Rules to have an audit committee, all of whose members must satisfy certain independence requirements.

The NASDAQ Listing Rules require that director nominees be selected or recommended for the board’s selection either by a committee composed solely of independent directors or by a majority of the independent directors on the board. We have a nominating and governance committee, composed solely of independent directors.

See Item "16.G – Corporate Governance" for exemptions that we have taken from certain NASDAQ Listing Rule requirements.

Israeli Companies Law

Board of Directors

According to the Companies Law and our articles of association, ~~the~~our board of directors is responsible, among other things, for:

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

convening shareholders’ meetings;

~~preparing and~~ approving our financial statements;

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

issuing securities and distributing dividends.

Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders. Our board of directors also appoints and may remove our chief executive officer and may appoint or remove other executive officers, subject to any rights that the executive officers may have under their employment agreements.

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

Our board of directors ~~generally~~currently consists of seven directors, two of whom qualify as "external directors" ~~for~~under Israeli law ~~purposes~~ and have also been determined by our board of directors to qualify as "independent" for ~~Nasdaq Stock Market Purposes as well.~~the purpose of the NASDAQ Listing Rules. Other than external directors, who are subject to special election requirements under Israeli law, our directors are elected in three staggered classes by the vote of a majority of the ordinary shares present and entitled to vote at meetings of our shareholders at which directors are elected. The members of only one staggered class will be elected at each annual meeting for a three-year term, so that the regular term of only one class of directors expires annually. Our annual meeting of shareholders is required to be held at least once during every calendar year and not more than fifteen months after the last preceding meeting. At our 2012 annual ~~general~~ meeting of shareholders, held ~~in 2008, the~~on September 27, 2012, Ms. Tamar Gottlieb was reelected as a director for an additional three-year term ~~of the third class, consisting of Gittit Guberman, expired, she did not stand for reelection~~ and ~~Arik Ramot~~Ms. Adi Soffer Teeni was elected ~~in her place~~as a director for aan initial three-year term. At our 2011 annual ~~general~~ meeting of shareholders, held on ~~December 31, 2009, the term of the first class, consisting of Tamar Gottlieb and Yaron Adler, expired, Tamar Gottlieb was reelected, Yaron Adler was not and Arik Czerniak~~October 27, 2011, Ms. Iris Beck was elected ~~in his place~~as a director for an initial three-year term. At our 2010 annual meeting of shareholders, held on January 6, 2011, Mr. Josef Mandelbaum was elected as a director for an initial three-year term. The external directors ~~will~~are not be assigned to a class and ~~will serve~~are elected in accordance with ~~Israeli law.~~the Companies Law. On ~~March 30, 2009 the term of one of our external directors,~~September 27, 2012, Mr. ~~James H. Lee, expired and at the extraordinary shareholder meeting on July 9, 2009,~~ Avichay Nissenbaum was ~~elected~~reelected to serve as an external director for a second three-year term. At our 2010 annual ~~shareholder~~ meeting of shareholders, held on January 6, 2011, Mr. David Jutkowitz was reelected ~~for another three year term~~to serve as an external director ~~of the Company, Ofer Adler was reelected~~ for a ~~three year term as director, Josef Mandelbaum was elected for a three year term as director, and the term of service of Yair M. Zadik's term as a member of the Company's~~second three-year term. In August 2011 our board of directors ~~expired.~~appointed Mr. Alan Gelman as a director, to fill a vacancy. Mr. Gelman was appointed to serve as a director until the 2013 annual meeting of shareholders, and the election of his successor.

If the number of directors constituting ~~the~~our board of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case will a decrease in the number of directors constituting ~~the~~our board ~~shorten~~of directors reduce the term of any ~~incumbent~~then current director.

~~The~~Our board of directors may appoint any other person as a director, whether to fill a vacancy or as an addition to the then current number of directors, provided that the total number of directors shall not at any time exceed seven directors. Any director so appointed shall hold office until the annual ~~general~~ meeting of ~~our~~ shareholders at which the term of his ~~or her~~ class expires, unless otherwise ~~stated in the appointing resolution.~~

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

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

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

The board of directors appoints its chairperson from among its members in accordance with our articles of association and subject to the provisions of the Companies Law. Pursuant and subject to our articles of association, the chairperson convenes and presides over the meetings of the board. The quorum required for meetings of the board is a majority of the members of the board who are lawfully entitled to participate and vote at the meeting, and resolutions are approved by a vote of the holders of more than two-thirds of our voting power.

A resolution proposed at any meeting of our board of directors is deemed adopted if approved by a majority of the ~~members present. If~~directors present and voting on the matter. Under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting expertise, as defined in the regulations that our board of directors should have. In determining the number of directors required to have such expertise, the board of directors meeting is adjourned for failure to obtain a quorum and at the adjourned meeting a quorum is not present, then the quorum shall be constituted by the presence of two directors then in office who are lawfully entitled to participate and vote at that meeting. A director may appoint an alternate director to attend a meeting in his or her place, but an alternate director so appointed must ~~be approved by the board prior to the relevant meeting.~~

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

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~~Each~~Under the Companies Law, the chairman of ~~our executive officers serves at~~ the ~~discretion of our~~ board of ~~directors and holds office until his~~a company is not permitted to hold another position in the company or ~~her successor is elected~~a subsidiary thereof other than chairman or ~~his~~director of a subsidiary or, ~~her earlier resignation or removal.~~if approved by a special majority of shareholders, chief executive officer of the company.

External Directors

Under the ~~Israeli~~ Companies Law, Israeli companies whose shares have been offered to the public in or outside of Israel are required to appoint at least two individuals to serve as external directors. Our external directors ~~to serve on their board of directors for a three year term. Mr. James H. Lee was appointed as an external director on March 30, 2006 and his term expired on March 30, 2009. At~~under the ~~extraordinary shareholder meeting held on July 9, 2009,~~Companies Law are Mr. Avichay Nissenbaum, ~~was appointed as an external director. In addition~~whose second three-year term commenced on September 27, 2012, and Mr. David Jutkowitz, ~~was appointed as an external director on December 27, 2007 and reappointed~~whose second three-year term commenced on January 6, 2011.

Each committee of ~~the~~a company's board of directors ~~entitled~~that is authorized to exercise any powers of the board of directors is required to include at least one external director. The audit committee and the compensation committee must include all the external directors.

~~An amendment~~External directors are required to possess professional qualifications as set out in regulations promulgated under the ~~Israeli~~ Companies ~~Law in January 2006 provides that~~Law. Any individual who is eligible to be appointed as a ~~person~~director may be appointed as an external director, ~~if he~~provided that such person, such person’s relative, partner, employer or ~~she~~any entity under the person’s control does not have at the date of appointment, or has ~~professional qualifications or if he or she has accounting and financial expertise. In addition, at least one~~not had during the two years preceding the date of ~~the external directors must have accounting and financial expertise. A~~appointment, any affiliation with

the company;

a controlling shareholder of the company or a relative thereof; or

any entity controlled by the company or by its controlling shareholder on the date of the appointment or during the two years preceding such date.

The term affiliation means any of:

an employment relationship;

a business or professional relationship that is not negligible;

control; and

service as an office holder.

No person ~~may not~~can serve as an external director if at the date of his or her appointment or within the prior two years, that person, or his or her relatives, partners, employers or entities under his or her control, are subject to, have or had any affiliation with us or any entity or person controlling us at the time of appointment or an entity that is controlled, at the time of appointment or the prior two years, by us or by the person or entity controlling us. Under the Companies Law, "affiliation" is defined in this context to include an employment relationship, a business or professional relationship maintained on a regular basis, control or service as an office holder. However, the service of a director who was appointed for the purpose of being an external director in a company that intends to first offer its shares to the public is not considered a prohibited affiliation. An office holder is defined in the Companies Law as any director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions regardless of that person’s title.

~~A person may not serve as an external director if that~~ person’s position or other ~~activities create,~~business creates or may create a conflict of interest with the person’s ~~service~~responsibilities as aan external director, or if it may ~~otherwise interfere with the person’s~~adversely affect his ability to serve as a director. Until the lapse of two years from termination of office, a company or its controlling shareholder may not employ or give any direct or indirect benefit to the former external director.

If at the time any external director is appointed, all members of the board are the same gender, then the external director to be appointed must be of the other gender.

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

the majority of shares voted ~~for~~on the ~~election includes~~matter, including at least ~~one-third~~a majority of the shares of non-controlling shareholders voted aton the ~~meeting (excluding abstaining votes);~~matter, vote in favor of election; or

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

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

The initial term of an external director is three years and such director may be reappointed for up to two additional three-year terms. Thereafter, he or she may be reelected by our shareholders for additional periods of up to three years each only if the audit committee and the board of directors confirm that, in light of the external director’s expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period is beneficial to us. Reelection of an external director may be effected through one of the following mechanisms: (1) the board of directors proposed the reelection of the nominee and the election was approved by the shareholders by the majority required to appoint external directors for their initial term; or (2) a shareholder holding 1% or more of the voting rights proposed the reelection of the nominee, and the reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders, provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders constitute more than 2% of the voting rights in the company. An external director may be removed only in a general meeting, by the same percentage of shareholders as is required for electing an external director, or by a court, and ~~then~~in both cases only ~~if:~~

if the external ~~directors cease~~director ceases to meet the statutory qualifications for ~~their appointment;~~

~~they violate their~~appointment or if he or she has violated the duty of loyalty to ~~the company;~~

us.

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

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

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

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

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

~~Nasdaq Market Governance Requirements for Foreign Private Issuers~~

Assuming that we maintain our status as a foreign private issuer, under the Nasdaq Market Rules, a foreign private issuer may generally follow its home country rules of corporate governance except for certain matters such as composition of the audit committee (as discussed below). Nasdaq Marketplace Rules specify that the board of directors must contain a majority of independent directors and that the independent directors must have, regularly scheduled meetings at which only independent directors are present. Our board contains two independent directors in accordance with the provisions contained in Sections 239-249 of the Israeli Companies Law – 1999 and Rule 10A-3 of the general rules and regulations promulgated under the Securities Act of 1933, rather than a majority of independent directors. Israeli law does not require, nor do our ~~independent~~subsidiaries have, any directors’ service contracts granting to the directors ~~conduct, regularly scheduled meetings at which only they are present. See "Item 10.B Memorandum and Articles~~any benefits upon termination of ~~Association — Nasdaq Marketplace Rules and Home Country Practices" and "Item 16G – Corporate Governance" for a summary of the significant ways~~their service in which our corporate governance practices follow the requirements of Israeli law rather than Nasdaq governance requirements for domestic companies. Investors are cautioned that there are other Nasdaq governance requirements with which,their capacity as a foreign private issuer, we may elect not to comply. If we so elect, we will provide disclosure of any Nasdaq governance requirements we elect not to comply with in accordance with Nasdaq's disclosure requirements, as may be in effect from time to time.directors.

Committees of the Board of Directors

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

Audit Committee

Our audit committee is comprised of Mr. David Jutkowitz, Mr. Avichay Nissenbaum ~~(both of which are external directors)~~and Mr. ~~and Arik Ramot~~Alan Gelman, and operates pursuant to a written charter.Mr. Jutkowitz serves as the chairperson of the audit committee.

~~Nasdaq~~NASDAQ Requirements

Under the listing requirements of the ~~Nasdaq~~NASDAQ Stock Market, a foreign private issuer is required to maintain an audit committee that has certain responsibilities and authority ~~(such~~. The NASDAQ Listing Rules require that all members of the audit committee must satisfy certain independence requirements. We have adopted an audit committee charter as ~~being directly~~required by the NASDAQ Listing Rules. Our audit committee assists the board of directors in fulfilling its responsibility for oversight of the quality and integrity of our accounting, auditing and financial reporting practices and financial statements. Our audit committee is also responsible for the ~~appointment, compensation, retention~~establishment of policies and ~~oversight~~procedures for review and pre-approval by the committee of all audit services and permissible non-audit services to be performed by our independent auditor, in order to ensure that such services do not impair our auditor’s independence. For more information see Item "16.C – Principal Accountant Fees and Services." Under the NASDAQ Listing Rules, the approval of the ~~work of the issuer’s~~ ~~public accountants). In addition,~~ ~~applicable Nasdaq Marketplace Rules require that a foreign private issuer can maintain an~~ audit committee is also required to effect related-party transactions that ~~meets the requirements of Rule 10A-3(b)(subject~~would be required to ~~the exemptions provided~~be disclosed in Rule 10A-3(c)) under the Exchange Act, instead of an audit committee composed solely of independent directors. We currently maintain a board of audit in accordance with Israeli home country regulations, meeting these requirements of Rule 10A-3, in that our ~~audit committee complies with the requirements under Israeli law.~~annual report.

~~Israeli~~ Companies Law Requirements

Under the ~~Israeli~~ Companies Law, the board of directors of a public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the external directors, and the majority of its members must be independent directors. The audit committee may not include the chairman of the board, any director employed by the company or ~~providing services to~~employed by a person or entity controlling the company or by an entity in control of such a controlling person or entity, director who provides services on an ongoing basis to the company, a person or entity controlling the company as well as a director who derives most of his earnings from a controlling ~~shareholder or any~~entity. The chairperson of the audit committee must be an external director, the required quorum for audit committee meetings and decisions is a majority of the committee members, of which the majority of members present must be independent and external directors, and any person who is not eligible to serve on the audit committee is further restricted from participating in its meetings and votes, unless the chairman of the audit committee determines that such person’s presence is necessary in order to present a certain matter, provided however, that company employees who are not controlling ~~shareholder’s relatives.~~shareholders or relatives of such shareholders may be present in the meetings but not for the actual votes, and likewise, company counsel and secretary who are not controlling shareholders or relatives of such shareholders may be present in the meetings and for the decisions if such presence is requested by the audit committee.

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

On December 20, 2010 our Audit committee had been authorized by the Company's board of directors to act as the financial statements review committee in accordance with the new Israeli Companies regulations with respect to the procedure in which financial statements should be approved by companies. Such regulations require, among others, that a financial statements review committee shall discuss and prepare recommendations to the board of directors about matters related to the financial statements such as: estimations, internal control procedures, accounting policies, etc. The said regulations permit that the audit committee shall act as the financial statements review committee, provided that the audit committee meets the requirements set forth in the regulations.

Compensation Committee

AsOur compensation committee is authorized to, among other things, review, approve and recommend to our board of directors base salaries, incentive bonuses, including the specific goals and amounts, stock option grants, employment agreements, and any other benefits, compensation or arrangements of our executive officers and directors. Under a ~~foreign private issuer, we comply with our home country regulations with respect~~recent amendment to the Companies Law, our compensation ~~committee. Unlike the Nasdaq Marketplace Rules, applicable to domestic issuer, which require that the determination~~committee must be comprised of at least three directors, include all of the ~~compensation of an executive officer be made by a majority of the independent~~external directors, ~~on the board or a compensation committee comprised solely of independent directors,~~its other members must satisfy certain independence standards under the ~~Israeli~~ Companies Law, and the ~~Company's article of association,~~chairman is required to be an external director. In addition, pursuant to the amendment, our compensation committee is required to propose for shareholder approval by a special majority, a policy governing the compensation of anoffice holders based on specified criteria, to review, from time to time, modifications to the compensation policy and examine its implementation; to approve the actual compensation terms of office holders prior to approval thereof by the board of directors; and to resolve whether to exempt the compensation terms of a candidate for chief executive officer ~~who does not serve on our board, can be approved by the~~from shareholder approval. Our compensation committee ~~provided that such compensation is not considered as an Extraordinary Transaction, in which case~~also oversees the ~~approval~~administration of ~~the audit committee followed by the approval of the board are required.~~

Under the Israeli Companies Law, "Extraordinary Transaction" - means a transaction not in a company’s ordinary course of business, a transaction that is not undertaken in market conditions or a transaction that is likely substantially to influence the profitability of a company, its property or liabilities.our equity based plan.

Our compensation committee consists of Messrs. David Jutkowitz, the chairman of our compensation committee, Ms. Iris Beck and Mr. Avichay Nissenbaum, all of whom satisfy the respective “independence” requirements of the Companies Law, SEC and NASDAQ Listing Rules for compensation committee members. Our compensation committee meets at least once each quarter, with additional special meetings scheduled when required.

Investment Committee

Our investment committee is comprised of Tamar Gottlieb, David Jutkowitz, Avichay Nissenbaum and ~~David Jutkowitz,~~Josef Mandelbaum. The Investment Committee is responsible for formulating the overall investment policies of the Company, and ~~operates pursuant to a written charter.~~establishing investment guidelines in furtherance of those policies. The ~~compensation committee is authorized to approve on a yearly basis,~~Committee monitors the ~~terms~~management of ~~compensation~~the portfolio for ~~officers who are not~~compliance with the investment policies and guidelines and for meeting performance objectives over time as well as assist the board of directors in fulfilling its oversight responsibility for the ~~issuance~~investment of ~~employee share options under our share option and benefit plans and approve incentive compensation for our other employees.~~assets of the company.

Nominating and Governance Committee

Our nominating and governance committee is comprised of Tamar Gottlieb and David Jutkowitz, and operates pursuant to a written charter. It is responsible for making recommendations to the board of directors regarding candidates for directorships and the size and composition of the board. In addition, the committee is responsible for overseeing our corporate governance guidelines and reporting and making recommendations to the board concerning corporate governance matters. Under ~~Israeli~~the Companies Law, the nominations for director are generally made by our directors but may be made by one or more of our shareholders. However, any shareholder or shareholders holding at least 5% of the voting rights in our issued share capital may nominate one or more persons for election as directors at a general meeting only if a written notice of such shareholder’s intent to make such nomination or nominations has been given to our secretary and each such notice sets forth all the details and information as required to be provided under our articles of association.

Internal Auditor

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

Certain Employment Agreements with ~~Directors~~Officers

~~We have entered into employment agreements, effective~~Mr. Josef Mandelbaum has been our Chief Executive Officer since July 2010 and has served as a director since January 2011. Effective July 6, 2010, we entered into an employment agreement with ~~Josef~~Mr. Mandelbaum, with respect to ~~retain~~ his services as our Chief Executive ~~Officer.~~Officer (the "CEO Agreement"). The ~~employment agreement~~CEO Agreement does not provide for a specified term and may be terminated by either party upon 180 ~~days~~days' prior notice. The ~~employment agreement includes the~~CEO Agreement provides for a one-time grant of options upon commencement of employment and an annual grant of options thereafter, the terms of which are substantially in accordance with the 2003 Plan and as is customary in the Company. However, ~~a portion~~the vesting of the one-time grant of options ~~are~~is also subject to ~~the Company’s~~our share price reaching a strike price higher than the market price at the ~~time.~~time of grant. Upon termination by us of the employment of ~~the executive~~Mr. Mandelbaum, other than for "cause" (as ~~set forth~~defined in the ~~agreement)~~CEO Agreement), we are required to continue to pay ~~the terminated executive~~Mr. Mandelbaum his salary, benefits and bonus until the end of the 180 day notice period. However, we will have the option to pay ~~the terminated executive~~Mr. Mandelbaum a lump sum equal to all amounts due as of the notice date. As required by Israeli law, we will also remit severance payment to ~~the terminated executive~~Mr. Mandelbaum in an amount equal to one month’s salary for each year of employment with us following the first year of employment (and a pro rata portion of such monthly salary for each portion of a year of employment following the first year of employment). Such amount of severance payment will be remitted to the executive even if he voluntarily terminates his employment with us. In the event that we terminate the employment of Mr. Mandelbaum for "cause," (as defined in the CEO Agreement), we will not be required to give prior notice and/or to pay the executive severance payment, except for ~~payment~~the payments required by Israeli law. In the event that ~~the executive~~Mr. Mandelbaum resigns without giving the required notice period, we may deduct from the money that we owe ~~the executive~~Mr. Mandelbaum, including wages, an amount equal to the ~~wages to which he~~compensation Mr. Mandelbaum would have been entitled had he worked during the notice period. With regard to the options previously granted, and not yet exercised, in the event that Mr. Mandelbaum resigns: ~~(1) the period during which~~(i) his vested options will be exercisable ~~shall be~~for one (1) year from the termination date (as such term is ~~define~~defined in the 2003 ~~plan)~~Plan); and ~~(2) a number~~(ii) the amount of unvested options equal to the pro rata options (as such term is defined in ~~his~~Mr. Mandelbaum's option agreement) shall become vested. In the event that ~~the~~Mr. Mandelbaum's employment is terminated by ~~the Company~~us without “cause” (as defined in the 2003 Plan)~~: the period during which~~ (i) vested options will be exercisable ~~shall be the period ending on~~until the expiration date (as ~~set forth~~such term is defined in ~~his~~Mr. Mandelbaum's option agreement) and ~~(2) a number~~(ii) the amount of unvested options equal to the pro rata options ~~(as such term is defined in his option agreement)~~ shall become vested.

~~Josef~~Mr. Mandelbaum has agreed not to compete with us during the term of the ~~agreement~~CEO Agreement and for a period of 180 days thereafter. The ~~agreement~~CEO Agreement also contains customary confidentiality and intellectual property assignment provisions.

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

D. EMPLOYEES

As of December 31, ~~2010~~2012 we had ~~107 employees all of which are based in Israel.~~208 employees. The breakdown of our employees by department and fiscal period is as follows:

	December 31,						December 31,
	2008		2009		2010			2010	2011	2012
Management and administration		16		12		21		21	24	30
Support		16		16		14		14	14	11
Research and development		69		64		54		54	69	117
Selling and marketing		18		19		18		18	32	50
Total		119		111		107		107	139	208

~~(4)~~(3)

Includes options to purchase ~~16,666 ordinary shares at an exercise price of $6.75, exercisable within 60 days of this Annual Report.~~

ITEM 10. ADDITIONAL ~~INFORMATION~~INFORMATION

~~Nasdaq Marketplace Rules and Home Country Practices~~

Information reporting requirements will generally apply to payments with respect to ordinary shares paid to a U.S. Holder other than certain exempt recipients (such as corporations). Backup withholding will apply to such payments if such U.S. Holder fails to provide a taxpayer identification number or certification of other exempt status or fails to comply with the applicable requirements of the backup withholding rules. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such U.S. Holder's United States Federal income tax liability provided the required information is furnished by such U.S. Holder to the Internal Revenue Service. A U.S. Holder who does not provide a correct taxpayer identification number may be subject to penalties imposed by the Internal Revenue Service.

ITEM 11. QUANTITATIVE AND QUALITATIVE ~~DISCLOSURES~~DISCLOSURES ABOUT MARKET RISK

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

~~ITEM 14.~~

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

A. ~~None.~~

ITEM 15. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our "disclosure controls and procedures" (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, ~~2010.~~2012. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, ~~2010,~~2012, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act and the rules thereunder, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

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

—●

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

—●

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

—●

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Our management recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or override of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation, and may not prevent or detect all misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, ~~2010.~~2012. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control – Integrated Framework." On November 30, 2012, we completed the acquisition of SweetIM. Due to the limited time between the closing date and the fiscal year end, and as permitted by SEC guidance, management excluded from its assessment the acquisition of the SweetIM business, which accounted for less than 1% of consolidated total assets and approximately 7% of consolidated revenues as of and for the year ended December 31, 2012. Our management has concluded, based on its assessment, that our internal control over financial reporting was effective as of December 31, ~~2010.~~2012.

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

(c) Attestation Report of Registered Public Accounting Firm: This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.Not applicable.

(d) Changes in Internal Control Over Financial Reporting: During the period covered by this report, no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) have occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~ITEM 16. [Reserved]~~

~~ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT~~

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that Mr. David Jutkowitz, who is an independent director (as defined ~~under Rule 4200(a)(15) of~~in the ~~NASD market rules)~~NASDAQ Listing Rules) and serves on our audit committee, qualifies as an "audit committee financial expert" as defined in Item 16A of Form 20-F.

~~ITEM 16B. CODE OF ETHICS~~

ITEM 16B.

CODE OF ETHICS

Our board of directors has adopted a code of conduct applicable to all of our directors, officers and employees as required by the ~~Nasdaq Marketplace~~NASDAQ Listing Rules, which also complies with the definition of a "code of ethics" set out in Section 406(c) of the Sarbanes-Oxley Act of 2002. A copy of the code of ethics ~~is included herein as Exhibit 11.~~can be found on our website at: www.perion.com.

~~ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES~~

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

~~We paid the following fees~~Fees for the professional services rendered by our independent accountants Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, ~~which have served as our registered public accounting firm~~ for each of the last ~~three~~two fiscal years ~~in thousands:~~were as follows (in thousands):

	2009		2010		2011		2012
Audit Fees	$	96		128	$	173	$	181
Tax Fees		92		68		150		105
Other		-		9
Audit Related fees						39		15
Total	$	188	$	205	$	362	$	301

Audit Fees include fees for professional services rendered by our principal accountant in connection with the audit ~~services, quarterly reviews.~~ of our consolidated annual financial statements and review of our unaudited interim financial statements.

Audit ~~related fees includes~~Related Fees include consultation regarding financial ~~reporting.~~ reporting and due diligence in connection with acquisitions.

Tax fees include: corporate tax returns, international tax, tax implication regarding our status as a PFIC, VAT advice related to dividend distribution and possible acquisitions.

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

~~ITEM 16D.~~

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

None.

~~None.~~

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Not applicable.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

7278

~~ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS~~

~~Not applicable.~~

ITEM ~~16F.CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT~~16G. CORPORATE GOVERNANCE

~~Not applicable.~~

~~ITEM 16G. CORPORATE GOVERNANCE~~

AsWe are a foreign private issuer whose ordinary shares are listed on the ~~Nasdaq~~NASDAQ Global ~~Market,~~Market. As such, we are ~~permitted~~required to comply with U.S. federal securities laws, including the Sarbanes-Oxley Act, and the NASDAQ Listing Rules, including the NASDAQ corporate governance requirements. The NASDAQ Listing Rules provide that foreign private issuers may follow ~~certain~~ home country practice in lieu of certain qualitative listing requirements subject to certain exceptions and except to the extent that such exemptions would be contrary to U.S. federal securities laws, so long as the foreign issuer discloses that it does not follow such listing requirement and describes the home country practice followed in its reports filed with the SEC. Below is a concise summary of the significant ways in which our corporate governance practices ~~instead of certain~~differ from the corporate governance requirements of ~~the Nasdaq Marketplace Rules.~~NASDAQ applicable to domestic U.S. listed companies:

~~As described~~Shareholder Approval. Although the NASDAQ Listing Rules generally require shareholder approval of equity compensation plans and material amendments thereto, we follow Israeli practice, which is to have such plans and amendments approved only by the board of directors, unless such arrangements are for the compensation of chief executive officer or directors, in ~~Item 10.B "Additional Information – Nasdaq Marketplace~~which case they also require the approval of the compensation committee and the shareholders.

In addition, rather than follow the NASDAQ Listing Rules requiring shareholder approval for the issuance of securities in certain circumstances, we follow Israeli law, under which a private placement of securities requires approval by our board of directors and ~~Home Country Practices," we do not comply with the Nasdaq requirement~~shareholders if it will cause a person to become a controlling shareholder (generally presumed at 25% ownership) or if:

	·	the securities issued amount to 20% or more of our outstanding voting rights before the issuance;
	·	some or all of the consideration is other than cash or listed securities or the transaction is not on market terms; and
	·	the transaction will increase the relative holdings of a shareholder that holds 5% or more of our outstanding share capital or voting rights or will cause any person to become, as a result of the issuance, a holder of more than 5% of our outstanding share capital or voting rights.

Shareholder Quorum. The NASDAQ Listing Rules require that an issuer ~~listed on the Nasdaq Global Market~~ have a quorum requirement ~~that in no case be less than 33 1/3%~~for shareholders meetings of at least one-third of the outstanding shares of the ~~company’s~~issuer’s common voting stock. However, our articles of association, consistent with the Israeli Companies Law, provide that the quorum requirements for an adjourned meeting are the presence of a minimum of two shareholders present in person. Our quorum requirements for an adjourned meeting do not comply with the Nasdaq requirements and we instead follow our home country practice.

~~As a foreign private issuer listed on the Nasdaq Global Market, we may also~~We have chosen to follow home country practice with ~~regard~~respect to ~~among other things, distribution~~the quorum requirements of an adjourned shareholders meeting. Our articles of association, as permitted under the Companies Law, provide that if at the adjourned meeting a legal quorum is not present after 30 minutes from the time specified for the commencement of the adjourned meeting, then the meeting shall take place regardless of the number of members present and in such event the required quorum shall consist of any number of shareholders present in person or by proxy.

Annual Reports. While the NASDAQ Listing Rules generally require that companies send an annual ~~and quarterly reports~~report to shareholders ~~approval of related party transactions, composition of~~prior to the ~~board of~~annual general meeting, we follow the generally accepted business practice for companies in Israel. Specifically, we file annual reports on Form 20-F, which contain financial statements audited by an independent accounting firm, electronically with the SEC and post a copy on our website.

Executive Sessions. While the NASDAQ Listing Rules require that "independent directors, ~~approval of compensation of executive officers, director nomination process and~~" as defined in the NASDAQ Listing Rules, must have regularly scheduled meetings at which only "independent directors" are present. Israeli law does not require, nor do our independent directors necessarily conduct, regularly scheduled meetings at which only they are present. In addition, we may follow our home country practice, instead of the Nasdaq Marketplace Rules, which require that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company. Under Nasdaq Marketplace Rules, U.S. domestic issuers are required to solicit proxies, provide proxy statements for all shareholder meetings and provide copies of such proxy materials to Nasdaq; however, as a foreign private issuer, we are generally exempt from the SEC’s rules governing the solicitation of shareholder proxies.

~~See Item 6 "Directors, Senior Management and Employees – Board Practices" and Item 10.B "Additional Information – Nasdaq Marketplace~~Approval of Related Party Transactions. Although the NASDAQ Listing Rules ~~and Home Country Practices" for a detailed description~~(Rule 5630(a)) require the approval of the ~~significant ways in which~~audit committee or another independent body of a company's board of directors for all "related party transactions" required to be disclosed pursuant to Item 7.B. of Form 20-F, we follow the ~~registrant’s corporate governance practices differ from those followed by U.S. companies under the listing standards~~provisions of the ~~Nasdaq Global Market.~~Israeli Companies Law. Specifically, that all related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and transactions, set forth in sections 268 to 275 of the Israeli Companies Law, and the regulations promulgated thereunder, which allow for the approval of certain related party transactions, which are immaterial, in the normal course of business and on market terms, by the board of directors. Other specified transactions can require audit committee approval and shareholder approval, as well as board approval. See also "Item 10.B Memorandum and Articles of Association — Approval of Related Party Transactions" for the definition and procedures for the approval of related party transactions.

ITEM 16H. MINE SAFETY DISCLOSURE

Not applicable.

7379

PART III

ITEM 17. FINANCIAL STATEMENTS

Not applicable.

~~ITEM 17. FINANCIAL STATEMENTS~~

~~Not applicable.~~

ITEM 18. FINANCIAL STATEMENTS

The following financial statements and related auditors’ report are filed as part of this annual report:

	Page
Report of Independent Registered Public Accounting Firm	F-2
Balance Sheets as of December 31, ~~2009~~2011 and ~~2010~~2012	F-3 - F-4
Statements of Income for the Years Ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010~~2012	F-5
Statements of Changes in Shareholders' Equity ~~(Deficiency)~~ for the Years Ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010~~2012	~~F-6~~F-7
Statements of Cash Flows for the Years Ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010~~2012	~~F-7~~F-8
Notes to Financial Statements	~~F-9~~F-10

ITEM 19. ~~EXHIBITS:~~EXHIBITS:

No.	Description

1.1	Memorandum of Association of ~~Registrant~~Registrant. (1)

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

~~1.3~~

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

~~4.3~~ 4.1

The Registrant’s 2003 Israeli Share Option Plan and the ~~form of Option Agreement (1)~~U.S. Addendum to such plan.

~~4.4~~ 4.2

Google Search and Advertising Services Agreement, dated December 27, 2010*2010, between the Company and Google Ireland Limited, (2) and the Amendment to said agreement, dated January 31 2013.

~~4.5~~ 4.3

Stock Purchase Agreement among Ofer Adler, the Company and the purchasers listed therein, dated January 24, 2011. (3)

~~4.6~~ 4.4

Registration Rights Agreement among the Company and the investors listed therein, dated January 24, 2011. (3)

4.5	Commitment Letter and Financial Covenants Letter among the Company and Bank Leumi Le-Israel, B.M., dated September 6, 2011, (4) and an amendment thereto.

4.6	Commitment Letter and Financial Covenants Letter among the Company and the First International Bank of Israel, B.M., dated September 6, 2011 (translated from Hebrew), (4) and an amendment thereto (translated from Hebrew).

4.7	Agreement and Plan of Merger, dated July 31, 2011, by and among the Company, Incredimail Inc., Seder Merger Inc., Smilebox, Inc. and Andrew Wright and Shareholder Representative Services LLC, as the Shareholder Representative dated as of July 31, 2011. (4) (5)

4.8	Google Search and Advertising Services Agreement, dated April 23, 2013, between the Company and Google Ireland Limited.*

4.9	Share Purchase Agreement by and among Perion Network Ltd., SweetIM Ltd., SweetIM Technologies Ltd., the Shareholders of SweetIM Ltd. and Nadav Goshen as Shareholders’ Agent, dated as of November 7, 2012, and Amendment No. 1, dated as of November 30, 2012.

4.10	Registration Rights Agreement among the Company and the investors listed therein, dated as of November 7, 2012.

8	List of all ~~subsidiaries~~subsidiaries.

11	~~Code of Ethics (4)~~

12.1	Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive Officer of the ~~Company~~Company.

12.2	Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial Officer of the ~~Company~~Company.

13.1	Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of T~~Title~~itle 18 of the United States ~~Code~~Code.

13.2	Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 ofTitle 18 of the United States ~~Code~~ Code.

1415.1

Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, Independent ~~Auditors~~Auditors.

~~___________________________~~

101

The following financial information from Perion Network Ltd.’s Annual Report on Form 20-F for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at December 31, 2011 and 2012; (ii) Consolidated Statements of Income for the years ended December 31, 2010, 2011 and 2012; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2011 and 2012; (iv) Statements of Changes in Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2010, 2011 and 2012; (v) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2011 and 2012; and (vi) Notes to Consolidated Financial Statements. (6)

__________________________

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

(2)

Previously filed with the SEC on ~~January 5, 2006~~March 8, 2011 as an exhibit to our ~~registration statement~~annual report on Form ~~F-1/A (File No. 333-129246).~~20-F, and incorporated herein by reference. Confidential treatment was requested and approved with respect to certain portions of this exhibit pursuant to 17.C.F.R. §§ 230.406 and 200.83. Omitted portions were filed separately with the SEC.

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

~~(4)~~

~~Previously filed with the SEC on May 12, 2008~~March 9, 2011 as an exhibit to our annual report on Form ~~20-F.~~20-F, and incorporated herein by reference.

*(4)	Previously filed with the SEC on March 22, 2012 as an exhibit to our annual report on Form 20-F, and incorporated herein by reference.

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

(6)

In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

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

7481

~~INCREDIMAIL~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, ~~2010~~2012

IN U.S. DOLLARS

~~INDEX~~

INDEX

	Page

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets as of December 31, ~~2009~~2011 and ~~2010~~2012	F-3 - F-4

Consolidated Statements of Income for the Years Ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010~~2012	F-5

Consolidated Statements of ~~Changes in Shareholders' Equity~~Comprehensive Income for the Years Ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010~~2012	F-6

Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2010, 2011 and 2012	F-7

Consolidated Statements of Cash Flows for the Years Ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010~~2012	~~F-7~~ F-8- F - ~~F-8~~9

Notes to Consolidated Financial Statements	~~F-9 - F-29~~F-10- F-35

~~Kost~~ ~~Forer Gabbay & Kasierer~~

~~3 Aminadav St.~~

~~Tel-Aviv 67067, Israel~~

~~Tel: 972 (3)6232525~~

~~Fax: 972 (3)5622555~~

~~www.ey.com/il~~

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

~~INCREDIMAIL~~PERION NETWORK LTD.

We have audited the accompanying consolidated balance sheets of ~~Incredimail~~Perion Network Ltd. ("the Company") and its subsidiaries as of December 31, ~~2009~~2011 and ~~2010,~~2012, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, ~~2010.~~2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries ~~as of~~at December 31, ~~2009~~2011 and ~~2010,~~2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2010~~2012, in conformity with U.S. generally accepted accounting principles.

Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
~~March 9, 2011~~XXX, 2013	A Member of Ernst & Young Global

F - 2

~~INCREDIMAIL~~ ~~LTD~~. PERION NETWORK LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	December 31,
	2009		2010		December 31,
					2011		2012
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	24,368	$	16,055	$	11,260	$	21,762
Marketable securities		5,225		14,973
Trade receivables		2,320		2,795
Restricted cash						-		10,260
Trade receivables (net of allowance for doubtful accounts and sales reserves in a total amount of $ 57 and $ 108 in 2011 and 2012, respectively)						3,265		10,246
Other receivables and prepaid expenses		4,819		4,485		6,459		5,424

Total current assets		36,732		38,308		20,984		47,692

LONG-TERM ASSETS:
Severance pay fund		1,104		877
Deferred taxes, net		63		102
Other long-term assets		495		478
Property and equipment, net		1,366		1,381		1,300		1,522
Other intangible assets, net		134		202		6,606		35,295
Goodwill						24,753		37,435
Other assets						1,261		1,215

Total long-term assets		3,162		3,040		33,920		75,467

Total assets	$	39,894	$	41,348	$	54,904	$	123,159

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

F - 3

~~INCREDIMAIL LTD~~. PERION NETWORK LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	December 31,						December 31,
	2009			2010			2011			2012
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Current maturities of long term debt							$	-		$	2,300
Trade payables	$	1,039		$	1,831			3,207			9,560
Deferred revenues		2,270			2,204			4,280			5,132
Payment obligation related to acquisitions								6,574			20,317
Accrued expenses and other liabilities		6,577			6,206			6,950			14,679

Total current liabilities		9,886			10,241			21,011			51,988

LONG-TERM LIABILITIES:
Long-term debt								-			6,550
Contingent purchase consideration								-			6,078
Deferred revenues		1,616			1,576			1,120			-
Accrued severance pay		1,390			1,379
Other long term liabilities								958			3,833

Total long-term liabilities		3,006			2,955			2,078			16,461

COMMITMENTS AND CONTINGENT LIABILITIES

SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.01 par value -
Authorized: 15,000,000 shares as of December 31, 2009 and 2010; Issued and outstanding: 9,527,821 and 9,701,750 shares at December 31, 2009 and 2010, respectively		21			22
Authorized: 40,000,000 shares at December 31, 2011 and 2012, respectively; Issued and outstanding: 9,916,194 and 12,064,510 shares at December 31, 2011 and 2012, respectively								22			28
Additional paid-in capital		22,390			23,734			25,714			45,069
Accumulated other comprehensive income		207			100
Retained earnings		5,386			5,298			7,081			10,615
Treasury stock		(1,002	)		(1,002	)		(1,002	)		(1,002	)

Total shareholders' equity		27,002			28,152			31,815			54,710

Total liabilities and shareholders' equity	$	39,894		$	41,348		$	54,904		$	123,159

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

F - 4

~~INCREDIMAIL~~ ~~LTD~~. PERION NETWORK LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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

	Year ended December 31,						Year ended December 31,
	2008		2009		2010		2010		2011		2012

Revenues:
Advertising and other services	$	12,748	$	20,478	$	24,093
Search							$	22,792	$	25,466	$	38,061
Products		9,158		6,717		5,404		5,404		7,191		17,574

Other								1,301		2,816		4,588
		21,906		27,195		29,497
								29,497		35,473		60,223
Cost of revenues		1,687		1,505		1,606		1,606		2,840		5,230

Gross profit		20,219		25,690		27,891		27,891		32,633		54,993

Operating expenses:
Research and development		7,838		6,254		6,607
Research and development, net								6,607		7,453		10,735
Selling and marketing		7,202		4,616		5,244		5,244		12,984		29,517
General and administrative		3,806		3,334		4,741		4,741		7,649		8,560
Goodwill impairment and restructuring		1,153		-		-

Total operating expenses		19,999		14,204		16,592		16,592		28,086		48,812

Operating income		220		11,486		11,299		11,299		4,547		6,181
Financial income, net		4,494		72		322
Financial income (expense), net								322		1,293		(174	)

Income before taxes on income		4,714		11,558		11,621		11,621		5,840		6,007
Taxes on income		289		3,545		3,232		3,232		172		2,473

Net income	$	4,425	$	8,013	$	8,389	$	8,389	$	5,668	$	3,534

Net earnings per Ordinary share:

Basic	$	0.47	$	0.86	$	0.87	$	0.87	$	0.58	$	0.35

Diluted	$	0.46	$	0.84	$	0.85	$	0.85	$	0.57	$	0.34

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

F - 5

~~INCREDIMAIL~~ ~~LTD~~. PERION NETWORK LTD. AND ITS SUBSIDIARIES

~~STATEMENTS~~CONSOLIDATED STATEMENT OF ~~CHANGES IN SHAREHOLDERS' EQUITY~~COMPREHENSIVE INCOME

U.S. dollars in thousands

~~INCREDIMAIL~~ ~~LTD~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

~~INCREDIMAIL LTD~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

In accordance with ASC 605-50, "Customer Payments and Incentives", the Company accounts for cash consideration given to customers, for whom it does not receive a separately identifiable benefit or cannot, reasonably estimate fair value, as a reduction of revenue rather than as an expense.

In the past, collaboration arrangements had been established with companies that used the Company's brand name "Incredi" for their website and to which the Company referred users. In consideration of the brand and promotional activity that the Company provided, it was entitled to a share of the gross revenues generated from the website or to a share of the net license fees received by the Company's collaborator through its website. Revenues from these collaboration arrangements were recognized when earned. Such arrangements were not active in 2010.

Revenues from email software license sales are recognized when all criteria outlined in ASC 985-605, "Software – Revenue Recognition" are met. Revenues from software license are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectability is probable. The Company's e-mail users may also purchase a license to its content database. This content database provides additional Incredimail content files in the form of email background, animation sounds, graphics and e-mail notifiers. Licensing fees are recognized over the license period. Lifetime licensing revenues are recognized over the estimated usage period of the content database. In accordance with its policy, the Company reviews the estimated usage period of the lifetime licensing on an ongoing basis.

~~Revenues from email anti-spam license fees are recognized ratably over the term of the license.~~

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

With regard to arrangements involving multiple elements, the Company's revenues are allocated to the different elements in the arrangement under the "relative fair value method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists for all elements. Under the relative fair value method, the Company recognizes and defers revenue proportionally based on the fair value of its delivered and undelivered elements, when the basic criteria in ASC 985-605 have been met. Any discount in the arrangement is allocated pro rata to the different elements in the arrangements.

Cost of revenues:

Cost of revenues consists primarily of salaries and related expenses, license fees, amortization of acquired technology, amortization of capitalized research and development costs and payments for content and server maintenance, all related to its product revenues and communicating with its users. The direct cost relating to search and advertising revenues is immaterial.

Research and development costs:

Research and development costs incurred in the process of software production before establishment of technological feasibility, are charged to expenses as incurred. Costs of the production of a product master incurred subsequent to the establishment of technological feasibility are capitalized according to the principles set forth in ASC 985-20, "Software –- Costs of Software to Be Sold, Leased, or Marketed". Based on the Company's product development process, technological feasibility is established upon completion of the detailed program design ("DPD") (the DPD of a ~~working model.~~

~~F - 12~~

computer software product that takes product function, feature, and technical requirements to their most detailed, logical form and is ready for coding).

~~INCREDIMAIL LTD AND ITS SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 2:-~~

~~SIGNIFICANT ACCOUNTING POLICIES (Cont.)~~

Costs incurred by the Company between completion of the ~~working model~~DPD and the point at which the product is ready for general release, are capitalized unless considered immaterial.

Capitalized software development costs are amortized commencing with general product release by the greater of the amount computed using the: (i) ratio between current gross revenues from sales of the software to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method over the estimated useful life of the product. The Company assesses the recoverability of this intangible asset on an annually basis by determining whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product, ~~sold.~~which is generally 3 - 5 years.

k.l.

Income taxes:

The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". This Statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. ~~The Company classifies interest as tax expenses.~~

~~Advertising costs:~~

~~Advertising costs are expensed as incurred. Advertising costs for the years ended December 31, 2008, 2009 and 2010 amounted to $3,466,000, $1,938,000 and $1,782,000, respectively.~~

~~Content costs:~~

The Company assembles content for the use of its customers through purchases of a variety of creative and diverse graphics, sound and multimedia from third party manufacturers and through internal creation of such content. Content costs acquired from third party manufacturers, are capitalized and amortized over their estimated useful life of three years.

Content costs in 2008, 2009 and 2010 amounted to $779,000, $620,000 and $554,000, respectively, of which $74,000, $75,000 and $180,000 was capitalized and the remaining expensed as incurred. Amortization of capitalized content costs in 2008, 2009 and 2010 amounted to $33,000, $65,000 and $101,000, respectively.

F - 1314

~~INCREDIMAIL LTD~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

In the year ended December 31, 2010 the Company accrued interest and penalties related to unrecognized tax benefits in its tax expenses. During 2010 interest expense amounted to $ 140. Starting 2011, the Company changed the classification of interest from tax expenses to financial expenses as it distorts its tax expense. Interest for 2011 and 2012 amounted to income of $ 988 and $ 225 respectively. As the amount included in tax expense for interest during 2010 was immaterial, the Company did not reclassify such amounts to conform to current year's presentation.

Advertising costs:

Advertising costs are expensed as incurred and consist primarily of customer acquisition cost. Advertising costs for each of the three years in the period ended December 31, 2012 amounted to $ 1,782, $ 8,136 and $ 22,270, respectively.

Concentrations of credit risk:

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

The majority of the Company’s cash and cash equivalents and restricted cash are invested ~~mainly~~ in dollar instruments with major banks in Israel and the U.S. ~~Deposits~~deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk.

The Company’s marketable securities consist of investment-grade corporate debentures and government debentures. The Company’s investment policy, approved by the Investment Committee, limits the amount the Company may invest in any one type of investment or issuer, thereby reducing credit risk concentrations.

The Company is subject to a low amount of credit risk with respect to sales of the Company’s software products and content database, as these sales are primarily obtained through credit card sales. The Company’s major customer is financially sound, and the Company believes low credit risk is associated with this customer. To date, the Company has not experienced any material bad debt losses.

Severance pay:

The Company's liability for severance pay is calculated pursuant to Israel's Severance Pay Law based on its employees' most recent monthly salaries, multiplied by the number of years of their employment, or a portion thereof, as of the balance sheet date.

This liability is fully provided for by monthly deposits in insurance policies and by an accrual.

The deposited funds include profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel's Severance Pay Law or labor agreements.

F - 15

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company's agreements with employees in Israel, joining the Company since February 2, 2008, are in accordance with section 14 of the Severance Pay Law, 1963, where the Company's contributions for severance pay shall be instead of its severance liability. Upon contribution of the full amount of the employee's monthly salary, and release of the policy to the employee, no additional calculations shall be conducted between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the employee. Further, the related obligation and amounts ~~deposits~~deposited on behalf of such obligation are not stated on the balance sheet, as they are legally released from obligation to employees once the deposit amounts have been paid.

Severance expenses for the years ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010~~2012 amounted to ~~$715,000, $362,000~~$ 786, $ 586 and ~~$504,000,~~$ 589, respectively.

~~F - 14~~

~~INCREDIMAIL LTD AND ITS SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 2:-~~

~~SIGNIFICANT ACCOUNTING POLICIES (Cont.)~~

Net earnings per Ordinary share:

Basic net earnings per Ordinary shares are computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings per Ordinary share are computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with ASC 260, "Earnings Per Share".

The ~~total~~ weighted average number of Ordinary shares related to the outstanding options excluded from the calculations of diluted net earnings per Ordinary share, ~~because~~as these securities are anti-dilutive, was ~~1,205,834, 789,411~~922,069, 1,266,919 and ~~922,069~~1,315,106 for the years ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010,~~2012, respectively.

Accounting for stock-based compensation:

The Company accounts for stock-based compensation under ASC 718, "Compensation –- Stock Compensation", which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors.

ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated ~~statements~~statement of income. ASC No. 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company recognizes compensation expenses for the value of its awards, which have graded vesting based on service conditions, using the straight line method, over the requisite service period of each of the awards, net of estimated forfeitures. For awards containing multiple service, and market conditions the Company recognizes compensation expenses over the longest derived service period, based on the accelerated attribution method, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.

F - 16

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company estimates the fair value of standard stock options granted using the Binomial ~~method~~ option-pricing ~~model and options which exercise is subject to a stock price target, using the Monte Carlo simulations.~~model. The option-pricing models require a number of assumptions, of which the most significant are; ~~expected stock price~~ volatility and the expected option term. ~~Expected~~In 2010, expected volatility was calculated based upon an average between historical volatilities of the Company, similar entities and industry sector index similar to the Company's characteristics, since it ~~does~~did not have sufficient company specific data.

In 2011 and 2012, expected volatility was calculated based upon actual historical stock price movements. The expected option term was calculated based on the Company’s assumptions of early exercise multiples which were calculated based on comparable companies and termination exit rate which was calculated based on actual historical data. The expected option term represents the period that the Company’s stock options are expected to be outstanding. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term.

~~F - 15~~

~~INCREDIMAIL LTD AND ITS SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 2:-~~

~~SIGNIFICANT ACCOUNTING POLICIES (Cont.)~~

In November 2010 the Company's Board decided to change its dividend policy so that beginning with earnings of 2011 and beyond, the Company does not intend to distribute any dividends.

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

	Year ended December 31,									Year ended December 31,
	2008			2009			2010			2010		2011		2012
Risk free interest rate		3.18	%		2.73	%		1.62	%

Risk-free interest rate											1.62%		2.23%		0.75%
Dividend yield		0	%		0%-13.82	%		0%-7.83	%		0%-7.83%		0%		0%
Weighted average Dividend yield		0	%		13.01	%		5.65	%
Weighted average dividend yield											5.65%		0%		0%
Expected volatility		50.24%-73.13	%		55.41%-74.67	%		62.77%-64.56	%		62.77%-64.56%		47.31%-65.27%		45.60%-61.90%
Weighted average volatility		61.69	%		65.04	%		63.67	%		63.67%		56.29%		53.76%
Expected term (years)		6.194			3.915			4.600			4.6		3.75		4.09

~~Derivatives~~Derivative instruments:

The Company ~~uses~~accounts for derivatives ~~instruments~~and hedging based on ASC No. 815, "Derivatives and Hedging". ASC No. 815 requires the Company to ~~protect against~~recognize all derivatives on the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship.

In order to reduce the impact of changes in foreign currency ~~fluctuations.~~ exchange rates on its results, the Company enters into foreign currency exchange forward contracts and options contracts to purchase and sell foreign currencies to hedge a portion of its foreign currency net exposure resulting from payroll expenses denominated in NIS.

F - 17

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

These instruments were not designated as cash flow hedge as defined by ASC 815, "Derivative and Hedging", and, therefore, the Company recognized the changes in fair value of these instruments toin the ~~statements~~statement of income as financial income or expense, as incurred. Gains or losses on these derivatives, which partially offset the foreign currency impact from the underlying exposures, and amounted to $ (13), $ (25) and $ 238 for the years ended December 31, 2010, 2011 and 2012, respectively.

The notional value of the Company’s derivative instruments as of December 31, 2011 and 2012 amounted to $ 4,300 and $ 6,891, respectively. Notional values are U.S. dollar translated and calculated based on forward rates for forward contracts and based on spot rates for options. Gross notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of settlements under the contracts. The Company measured the fair value of these contracts in accordance with ASC No. 820 and they were classified as level 2.

Fair value of financial instruments:

The carrying amounts of financial instruments carried at cost, including cash and cash equivalents, restricted cash, trade receivables, ~~and~~other receivables, trade payables and other liabilities approximate their fair value due to the short-term maturities of such instruments.

The Company ~~adopted~~follows the provisions of ASC 820, "Fair Value Measurements and Disclosures"~~, effective January 1, 2008.~~. Under this standard, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market participants at the measurement date.

In determining fair value, the Company uses various valuation approaches. ASC 820 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:

Level ~~1-Valuations~~1 - Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level ~~2-Valuations~~2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

F - 18

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

·	Level ~~3-Valuations~~3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

~~F - 16~~

~~INCREDIMAIL LTD AND ITS SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 2:-~~

~~SIGNIFICANT ACCOUNTING POLICIES (Cont.)~~

The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment, and categorizes as Level 3.

The Company’s marketable securities trade in markets that are not considered active, but are valued based on quoted market prices, broker or dealer quotations, and therefore are categorized as Level 2.

~~The Company's assets measured at fair value on a recurring basis as~~As of December 31, ~~2010, included money~~2012 and 2011, the Company had cash, cash equivalents and restricted cash of $32,012 and $11,220, respectively, which are classified in the Level 1 hierarchy. Money market funds and treasury notes in the total amount of ~~$9,094,000~~$ 10 and $ 40, respectively, presented as part of cash and cash equivalents ~~marketable securities in the amount of $14,973,000~~ and derivative financial instruments, in the amount of ~~$27,000~~$ 248 and $ (44) respectively, presented in other receivables and prepaid expenses ~~all~~and as part of accrued expenses and other liabilities, respectively, measured using input type Level 2. ~~The Company's assets measured at fair value on a recurring basis as of December 31, 2009, included money market funds~~Payment obligation related to acquisitions (short term and ~~treasury notes in the total amount of $7,839,000 presented as part of cash and cash equivalents, marketable securities~~long term) in the amount of ~~$5,225,000~~$ 16,427 and ~~derivative financial instruments,~~$ 6,574 respectively, is classified as level 3. Changes in level 3 are primarily attributable to increase related to the ~~amount of $36,000 presented in other receivables~~Sweet IM acquisition during 2012 (refer to Note 3) and ~~prepaid expenses, all measured using input type Level 2.~~the decrease is primarily due to the payment made during 2012 for Smilebox acquisition (refer to Note 3).

Treasury shares:

~~The~~

In the past the Company ~~repurchases~~repurchased its Ordinary shares ~~from time to time~~ on the open market and holds ~~such~~those shares as treasury shares. The Company presents the cost to repurchase treasury shares as a reduction of shareholders' equity.

~~Impact of Recently Issued Accounting Standards~~Comprehensive income:

~~Adoption~~The Company accounts for comprehensive income in accordance with ASC 220, "Comprehensive Income". This statement establishes standards for the reporting and display of ~~New Accounting Standards:~~comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders. The Company determined that its items of other comprehensive income relates to unrealized gains and losses on available for sale securities.

In ~~January 2010,~~May 2011, the FASB ~~updated~~issued guidance that changed the ~~"Fair Value Measurements Disclosures" codified~~requirement for presenting "Comprehensive Income" in ~~ASC 820. More specifically, this~~the consolidated financial statements. The update ~~require (a)~~requires an entity to disclose separately the amounts of significant transfers in and out of Levels 1 and 2 fair value measurements and to describe the reasons for the transfers; and (b) information about purchases, sales, issuances and settlements to be presented separately (i.e. present the activity on a gross basis rather than net) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3 inputs). This update clarifies existing disclosure requirements for the levelcomponents of disaggregation used for classes of assets and liabilities measured at fair value, and requires disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements using Level 2 and Level 3 inputs. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09 - amendments to certain recognition and disclosure requirements of Subsequent Events codified in ASC 855. This update removes the requirement to disclose the date through which subsequent events were evaluated in both originally issued and reissued financial statements for "SEC Filers." Nevertheless still requires the Company to evaluate subsequent events through the date that the financial statements are issued. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

~~F - 17~~

~~INCREDIMAIL LTD AND ITS SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 2:-~~

~~SIGNIFICANT ACCOUNTING POLICIES (Cont.)~~

~~Recently Issued Accounting Standards~~

In October 2009, the FASB issued “Accounting Standards Update (“ASU”) 2009-13 Multiple Deliverable Revenue Arrangements a consensus of EITF” (formerly topic 08-1) an amendment to ASC 605-25. The update provides amendments to the criteria in Subtopic 605-25 for separating consideration in multiple-deliverable arrangements. The amendments in this update establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments in this update will also replace the term “fair value” in the revenue allocation guidance with the term “selling price” in order to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant.

The amendments will also eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable's selling price.

The update will be effective for revenue arrangements entered into or modified in fiscal years beginning on or after June 15, 2010 with earlier adoption permitted. The adoption of this update is not expected to have material impact on the Company’s consolidated financial statements.

~~Reclassification~~

~~Certain amounts in prior years’ financial statements have been reclassified in order to conform to current year presentation.~~

~~NOTE 3:-~~

~~MARKETABLE SECURITIES~~

The Company's marketable securities are classified as available-for-sale securities and are carried at fair value. The following table summarizes amortized costs, gross unrealized holding gains and losses and market value of marketable securities as of December 31, 2009 and 2010:

Amortized cost Gross unrealized gains Gross unrealized losses Fair value
December 31, December 31, December 31, December 31,
2009 2010 2009 2010 2009 2010 2009 2010
U.S. dollars in thousands

Corporate debentures $ 3,262 $ 6,805 $ 210 $ 116 $ 1 $ 9 $ 3,471 $ 6,912
U.S. Government agency debentures - 7,405 - 10 - 13 - 7,402
Government debentures 1,687 218 67 20 - - 1,754 238
U.S. municipal bonds - 419 - 2 - - - 421

$ 4,949 $ 1 4,847 $ 277 $ 148 $ 1 $ 22 $ 5,225 $ 14,973

On April 1, 2009, the Company adopted the accounting pronouncement that provides guidance on recognition and presentation of other-than-temporary impairments and assessed whether the unrealized losses for the investments in its portfolio were other-than-temporary under this guidance.

~~F - 18~~

~~INCREDIMAIL LTD AND ITS SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 3:-~~

~~MARKETABLE SECURITIES (Cont.)~~

For securities with fair value that is less than the amortized cost and that the Company intends to sell or it is more likely than not that it will be required to sell the securities before recovery, the entire difference between amortized cost and fair value is recognized in earnings. For those securities that the Company does not intend to sell and it is not more likely than not that the Company will be required to sell, the Company used a discounted cash flow analysis to determine the portion of the impairment that relates to credit loss. To the extent that the net present value of the projected cash flows is less than the amortized cost of the security, the difference is considered a credit loss and is recorded through earnings. The inputs on the future performance of the underlying assets used in the cash flow models include prepayments, defaults and loss severity assumptions.

A non-credit related amount of $210,000 for other-than-temporary impairment losses recognized in earnings prior to April 1, 2009 was reclassified as a cumulative effect adjustment that increased retained earnings and decreased accumulated other comprehensive income ~~at April~~either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and should be applied retrospectively. The Company adopted this new guidance on January 1, ~~2009.~~2012 and elected to present the comprehensive income in two separate but consecutive statements.

The carrying amount of available-for-sale debt marketable securities as of December 31, 2009 and 2010 was $5,225,000 and $14,973,000, respectively, of which $355,000 and $1,521,000 is scheduled to mature within one year and the remaining $4,870,000 and $13,452,000 is scheduled to mature after one year and up to five years, respectively.

~~NOTE 4:-~~

~~OTHER RECEIVABLES AND PREPAID EXPENSES~~

December 31,
2009 2010
U.S. dollars in thousands

Government authorities $ 4,387 $ 3,773
Prepaid expenses 223 228
Current severance fund - 243
Other 209 241
$ 4,819 $ 4,485

~~NOTE 5:-~~

~~PROPERTY AND EQUIPMENT, NET~~

December 31,
2009 2010
U.S. dollars in thousands
Cost:
Computers and peripheral equipment $ 3,045 $ 3,570
Office furniture and equipment 366 400
Leasehold improvements 453 533
Motor vehicles 38 -
3,902 4,503
Accumulated depreciation 2,536 3,122
Depreciated cost $ 1,366 $ 1,381

~~Depreciation expenses totaled $970,000, $625,000 and $627,000 for the years ended December 31, 2008, 2009 and 2010, respectively.~~

F - 19

~~INCREDIMAIL LTD~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Business combinations:

The Company accounted for business combination in accordance with ASC No. 805, "Business Combinations". ASC No. 805 requires recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. In addition, changes in valuation allowance related to acquired deferred tax assets and in acquired income tax position are to be recognized in earnings.

Acquisition related costs are expensed to the statement of income in the period incurred.

Reclassifications:

Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation. The reclassification had no effect on previously reported net income or shareholders' equity.

NOTE 6:3:-

~~OTHER INTANGIBLE ASSETS, NET~~ACQUISITIONS

~~Composition:~~

Acquisition of Sweet IM Ltd.

December 31,
2009 2010
U.S. dollars in thousands
Original amounts:
Capitalized software development costs $ 76 $ -
Capitalized content costs 233 413
Domain 35 35
344 448
Accumulated amortization 210 246
Other intangible assets, net $ 134 202
On November 30, 2012 ("Closing Date") the Company completed the acquisition of 100% of the shares of Sweet IM Ltd. ("Sweet IM"), an Israeli-based consumer internet company that produces a variety of applications. The financial results of Sweet IM are included in the consolidated financial statements from the Closing Date. The total consideration is composed as follows:

·	$ 13,054 in cash, including $ 3,014 for working capital acquired from Sweet IM;

·	1,990,000 ordinary shares of the Company issued at closing for total value of $17,863, which considered the market restrictions on these shares;

·	$ 7,500 in cash (subject to certain adjustments), payable within 12 months following the Closing Date (December 2013). In connection with this consideration, the Company recorded a $ 7,324 liability; and

·	A milestones-based contingent cash payment of up to $7,500 payable in June 2014. In connection with this contingent payment consideration, the Company recorded at the Closing Date, an estimated liability of $5,992.

In addition, the Company incurred acquisition related costs in a total amount of $ 1,593, which are included in general and administrative expenses for the year ended December 31, 2012. Acquisition related costs include legal, accounting fees and other costs directly related to the acquisition.

F - 20

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3:-

ACQUISITIONS (Cont.)

The primary reasons for this acquisition include; Sweet IM’s back-end systems, the talent and professional background of its employees, and its product suite, so as to include other consumer products that bear similar characteristics appealing to its unique demographic segment. A significant amount of the acquisition was recorded as goodwill due to the synergies with Sweet IM.

Under business combination accounting, the total purchase price was allocated to Sweet IM’s net tangible and intangible assets based on their estimated fair values as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill.

Cash	$	2,733
Restricted cash		10,260
Trade receivables		7,473
Other receivables and prepaid expenses		1,253
Property and equipment		216
Long-term prepaid expenses and other		70
Trade payables		(2,318	)
Accrued expenses and other liabilities		(5,148	)
Payment obligation related to acquisition		(9,958	)
Intangible assets		30,756
Deferred tax liability		(3,786	)
Goodwill		12,682

Total purchase price	$	44,233

Intangible assets:

In performing the purchase price allocation, the Company considered, among other factors, analysis of historical financial performance, highest and best use of the acquired assets and estimates of future performance of Sweet IM's products. The fair value of intangible assets was based on market participant approach to valuation, performed by a third party valuation firm using estimates and assumptions provided by management. The following table sets forth the components of intangible assets associated with Sweet IM acquisition:

	Fair value		Useful life

Technology	$	20,066	5 years
Logo		5,242	4 years
IP R&D		5,448		(*)

Total intangible assets	$	30,756

(*) Will be determined upon completion of the development

F - 21

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3:-

ACQUISITIONS (Cont.)

The following unaudited condensed combined pro forma information for the years ended December 31, 2011 and 2012, gives effect to the acquisition of Sweet IM as if the acquisition had occurred on January 1, 2011. The pro forma information is not necessarily indicative of the results of operations, which actually would have occurred if the acquisition had been consummated on that date, nor does it purport to represent the results of operations for future periods. For the purposes of the pro forma information, the Company has assumed that net income includes additional amortization of intangible assets related to the acquisition of $ 6,484 and $ 6,345 in 2011 and 2012, respectively and related tax effects .

	Year ended December 31,
	2011		2012
	Unaudited		Unaudited

Revenues	$	$51,190	$	$79,254

Net income	$	1,154	$	$ 4,887

Basic earnings per share	$	0.12	$	0.48

Diluted earnings per share	$	0.12	$	0.47

Acquisition of Sweet IM Ltd.

On August 31, 2011, the Company completed the acquisition of all of the outstanding shares of Smilebox Inc. ("Smilebox"). The Company included the financial results of Smilebox in its consolidated financial statements from the date of acquisition. Under the Purchase Agreement, the total consideration is composed of cash and Ordinary shares of the Company, as follows:

·	$ 24,269 in cash;

·	128,538 Ordinary shares of the Company issuable at closing at fair value of $ 750;

$ 7,000 in cash and in Ordinary shares of the Company (subject to certain adjustments), payable within 7 months following the closing (March 2012). In connection with this consideration, the Company recorded a $ 6,474 liability at closing. This amount was paid in full in 2012, including $ 6,266 paid in cash and 65,720 shares issued at value of $ 337 and;

A milestone-based contingent cash and Ordinary shares of the Company payment ("Contingent Payment") of up to $ 8,000 payable in September 2012. The Company recognized a liability of zero with respect to this Contingent Payment, which represents its fair value. No payment was made in September 2012 as the milestones were not met.

F - 22

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3:-

ACQUISITIONS (Cont.)

In addition, the Company incurred acquisition related costs in a total amount of $ 1,069, which are included in general and administrative expenses for the year ended December 31, 2011. Acquisition related costs include compensation to executive, legal and accounting fees directly related to the acquisition.

Smilebox provides a subscription allowing people to connect with family and friends in a creative and personal way. Smilebox enable users to personalize hundreds of unique, multimedia designs with their photos, videos, and music and then share them via print, email, blog or DVD. The main reason for this acquisition was to enrich the Company's product suite to include other consumer products that bear similar characteristics appealing to its unique demographic segment. A significant amount of the acquisition was recorded as goodwill due to the synergies with Smilebox.

Under business combination accounting, the total purchase price was allocated to Smilebox’s net tangible and intangible assets based on their estimated fair values as set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill.

Cash	$	2,100
Trade receivables		87
Other receivables and prepaid expenses		616
Property and equipment		191
Long-term prepaid expenses and other		449
Trade payables		(1,268	)
Accrued expenses and other liabilities		(1,171	)
Deferred revenues		(622	)
Intangible assets		6,358
Goodwill		24,753

Total purchase price	$	31,493

Intangible assets:

In performing the purchase price allocation, the Company considered, among other factors, analysis of historical financial performance, highest and best use of the acquired assets and estimates of future performance of Smilebox's products. The fair value of intangible assets was based on market participant approach to valuation, performed by a third party valuation firm using estimates and assumptions provided by management. The following table sets forth the components of intangible assets associated with Smilebox acquisition:

	Fair value		Useful life

Customer relationships	$	1,488	4.3-6.3 years
Technology		3,000	3 years
Trade name		1,870	10.25 years

Total intangible assets	$	6,358

F - 23

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 4:- OTHER RECEIVABLES AND PREPAID EXPENSES

	December 31,
	2011		2012

Government authorities	$	5,555		3,661
Prepaid expenses		471		1,079
Deferred tax asset, net		258		360
Other		175		324

	$	6,459		5,424

NOTE 5:- PROPERTY AND EQUIPMENT, NET

	December 31,
	2011		2012
Cost:
Computers and peripheral equipment	$	3,861	$	3,745
Office furniture and equipment		533		670
Leasehold improvements		606		618

		5,000		5,033

Accumulated depreciation		3,700		3,511

Property and equipment, net	$	1,300	$	1,522

Depreciation expenses totaled $ 627, $ 588 and $ 657 for the years ended December 31, 2010, 2011 and 2012, respectively.

During 2011 and 2012 the Company recorded a reduction of $ 10 and $ 846 respectively, to the cost and accumulated depreciation for fully depreciated equipment no longer in use.

NOTE 6:-

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill:

The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows:

	2011		2012

Balance as of January 1	$	-		24,753
Changes during year		24,753		12,682

Balance as of December 31	$	24,753		37,435

F - 24

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 6:-

GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Cont.)

Other intangible assets, net

Net other intangible assets consisted of the following:

	Useful		December 31,
	life		2011		2012
Original amount:
Capitalized software development costs		3-5	$	739	$	1,587
Capitalized content costs and domain		3-5		555		556
Technology		3-5		3,000		23,066
Trade name		10.25		1,870		1,870
Customer relationship		4.3-6.3		1,488		1,488
Logo		5		-		5,242
IP R&D				-		5,448

				7,652		39,257
Accumulated amortization:
Capitalized software development costs				22		398
Capitalized content costs and domain				368		485
Technology				333		1,822
Trade name				61		243
Customer relationship				262		913
Logo				-		101

				1,046		3,962

			$	6,606	$	35,295

Amortization expense amounted to ~~$80,000, $90,000~~$ 112, $ 800 and ~~$112,000~~$ 2,915 for the years ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010,~~2012, respectively.

c.d.

~~Estimated~~The estimated future amortization expense ~~is expected to be $101,000, $77,000 and $24,000 in the years ending~~of other intangible assets as of December 31, ~~2011,~~ 2012 ~~and 2013, respectively.~~is as follows:

2013		9,686
2014		9,853
2015		7,539
2016		5,393
2017 and thereafter		2,824

	$	35,295

F - 25

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7:-

ACCRUED EXPENSES AND OTHER LIABILITIES

	December 31,
	2009		2010		December 31,
	U.S. dollars in thousands				2011		2012

Employees and payroll accruals	$	1,794	$	1,827	$	1,556		3,865
Current Severance pay		-		287
Government authorities		2,835		2,523		1,429		3,812
Uncertain tax position liability						2,151		3,952
Deferred tax liabilities, net		1,342		996		-		971
Accrued expenses		606		573
Accrued expenses and other						1,814		2,079

	$	6,577	$	6,206	$	6,950		14,679

NOTE 8:-

COMMITMENTS AND CONTINGENT LIABILITIES

The facilities of the Company ~~rents its facilities~~are rented under an operating lease ~~agreement with an initial term expiring~~agreements that expire in ~~November 2011, with an option for additional two years.~~2015. The Company leases its motor vehicles and servers under cancelable operating lease agreements.

~~Future~~Aggregate minimum lease commitments under ~~non-cancelable~~ operating leases ~~are $554,000~~ as of December 31, ~~2010.~~2012, were as follows:

2013	$	1,173
2014		1,145
2015		586

	$	2,904

Total rent expenses for the years ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010~~2012 amounted to ~~$678,000, $448,000~~$ 503, $ 586 and ~~$503,000,~~$ 967, respectively.

The Company leases its motor vehicles under cancelable operating lease agreements. The minimum payment under these operating leases, upon cancellation of these lease agreements amounted to $43,000 as of December 31, 2010. Total lease expenses for the years ended December 31, ~~2008, 2009~~2010, 2011 and ~~2010~~2012 amounted to ~~$556,000, $382,000~~$ 395, $ 349 and ~~$395,000,~~$ 234, respectively.

NOTE 9:-

LONG-TERM LOAN

On May 17, 2012, the Company entered into Loan Agreements (the "Agreements"), with two Israeli Banks (the "Banks"), based on which the Company borrowed $10,000

The Agreements contain various provisions including a pledge of all the Company’s assets under a floating charge, compliance with certain financial covenants, restrictive covenants, including negative pledges, and other commitments, typically contained in facility agreements of this type. As of December 31, 2012, the Company was in compliance with all covenants.

The loans shall be repaid in 16 and 20 equal quarterly installments, respectively starting July 17, 2012. Interest rates applicable are 4.35% and 4.64%, payable monthly starting May 17, 2012.

F - 2026

~~INCREDIMAIL LTD~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9:-

LONG-TERM LOAN (Cont.)

As of December 31, 2012, the aggregate principal annual maturities according to the loan agreement are as follows:

	Repayment amount
2013 (current maturities)	$	2,300
2014		2,300
2015		2,300
2016		1,550
2017		400

Total	$	8,850

NOTE 10:-

INCOME TAXES

Tax benefits under the Israel Law for the Encouragement of Capital Investments, 1959 (the "Law"):

Various industrial programs of the Company ~~have~~had been granted "Approved Enterprise" and "Beneficiary Enterprise" status, which provides certain benefits, including tax exemptions and reduced tax rates. Income not eligible for Approved Enterprise and Beneficiary Enterprise benefits is taxed at a regular rate.

In the event ~~of distribution of~~ dividends are distributed from ~~the said~~ tax-exempt income, the amount distributed will be subject to corporate tax at the rate ordinarily applicable to the Approved Enterprise's income. The tax-exempt income attributable to the "Approved Enterprise" programs mentioned above can be distributed to shareholders without subjecting the Company to taxes only upon the complete liquidation of the Company. Tax-exempt income generated under the Company's Beneficiary Enterprise program will be subject to taxes upon dividend distribution or complete liquidation. The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the Law and regulations published thereunder.

Should the Company fail to meet such requirements in the future, income attributable to its Approved Enterprise and Beneficiary Enterprise programs could be subject to the statutory Israeli corporate tax rate and the Company could be required to refund a portion of the tax benefits already received, with respect to such programs. As of December 31, ~~2010,~~2012, management believes that the Company is in compliance with ~~all~~ the ~~conditions required by the Law.~~

In 2009, the Company has revised its dividend policy whereby at least 50% of annual net income of the Company will be paid out as a dividend beginning with the net income for 2009. Declaring and issuing the dividend will be subject to the Board's review of the Company's financial condition at the time. As a result of the dividend policy, the Company records a deferred tax liability with respect to its tax-exempt income generated starting 2009 under its Beneficiary Enterprise plan, since its distribution as dividend will create a tax liability to the Company. The Company does not intend to distribute dividend out off tax exempt income incurred up to December 31, 2008. As a result, no deferred tax liability was created with respect to approximately $8 million. Should this amount be distributed, it would be taxed at the reduced corporate tax rate applicable to such profits (currently 25%), incurring as of December 31, 2010 an income tax liability of up to approximately $2 million.Law’s conditions.

In November 2010 the Company's Board decided to change its dividend policy ~~so that beginning with earnings of 2011 and beyond,~~whereby the Company does not intend to distribute ~~any~~ dividends ~~to the holders~~from earnings of its ordinary shares. This change to the dividend policy had no effect on the deferred tax liabilities that were recorded in 2010, as the new dividend policy will be in effect commencing with 2011 earnings.

~~In December 2010, the Law for Economic Policy for~~ 2011 and beyond. As of December 31, 2012, ~~(Amended Legislation)~~tax exempt income incurred up to December 31, 2010 that was ~~passed, and among others, amended~~not distributed was approximately $ 8,900. Should this amount be distributed, it would be taxed at the ~~Investment Law, ("the amendment") effective January 1, 2011. According to the amendment, the benefit tracks in the Investment Law were modified and a flat~~corporate tax rate ~~applies~~applicable to ~~the Company's entire preferred income. The Company will~~such profits (currently 25%), and an income tax liability of up to approximately $ 2,225 would be able to opt to apply (the waiver is non-recourse) the amendment and from then on it will be subject to the amended tax rates as follows: 2011 and 2012 - 15%, 2013 and 2014 - 12.5% and in 2015 and thereafter - 12%.incurred.

F - 2127

~~INCREDIMAIL LTD~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9:10:-

INCOME TAXES (Cont.)

The ~~Company~~Investment Law, was subject to a reform effective January 2011. According to the reform a flat tax rate will apply to companies eligible for the “Preferred Enterprise” status. In order to be eligible for Preferred Enterprise status, a company must meet minimum requirements establishing that it contributes to the country’s economic growth and is ~~examining~~a competitive factor for the ~~possible effect of~~Gross Domestic Product (a competitive enterprise). Israeli companies which currently benefit from an Approved or Beneficiary Enterprise status and meet the ~~amendment on its results, and at this time has not yet decided whether to opt~~criteria for qualification as a Preferred Enterprise can elect to apply the ~~amendment.~~new Preferred Enterprise benefits by waiving their benefits under the Approved and Beneficiary Enterprise status.

Commencing 2011, the Company elected to apply the new Preferred Enterprise benefits. Benefits granted to a Preferred Enterprise include reduced and gradually decreasing tax rates. The tax rate is 15% in 2011 and 2012, 12.5% in 2013 and 2014 and 12% starting from 2015.

A distribution from a Preferred Enterprise out of the “Preferred Income” would be subject to 15% withholding tax for Israeli-resident individuals and non-Israeli residents (subject to applicable treaty rates). A distribution from a Preferred Enterprise out of the “Preferred Income” would be exempt from withholding tax for an Israeli-resident company.

Corporate tax rates in Israel:

~~The regular corporate tax rate in Israel in 2008 and 2009 and 2010 was 27% and 26% and 25%, respectively.~~

Taxable income of Israeli companies is subject to the Israeli corporate tax at the ~~rate of~~following rates: 2010 - 25%, 2011 - 24% ~~in 2011, 23% in~~, 2012 ~~22% in 2013, 21% in 2014, 20% in 2015, and 18% in 2016 and thereafter.~~– 25%.

Income taxes of non-Israeli subsidiaries:

Non-Israeli subsidiaries are taxed according to the tax laws in their respective countries of residence.

Tax reports filed by the Company and its subsidiaries in Israel through the year ended December 31, 2008 are considered final. The U.S tax returns of the U.S subsidiaries remain subject to examination by the U.S tax authorities for the tax years beginning on December 31, 2008.

F - 28

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:-

INCOME TAXES (Cont.)

Tax loss carry-forwards:

The company has a Net operating loss carry-forwards in the United States as of December 31, 2012 of approximately $ 20,000.

Net operating losses in the U.S. may be carried forward through periods which will expire in the years starting from 2026 up to 2031. Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

Deferred tax assets, net:

Deferred taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.

Components of the Company's deferred tax assets (liabilities) are as follows:

December 31,
2009 2010
U.S. dollars in thousands
Deferred tax assets:
Employee benefits $ 314 $ 214
Losses on marketable securities 324 119
Other 208 197
Deferred tax assets, before valuation allowance 846 530
Valuation allowance (255 ) (93 )
Total deferred tax assets net of valuation allowance 591 437

Deferred tax liabilities:
Tax exempt income *) (1,801 ) (1,305 )
Unrealized gain on marketable securities (69 ) (26 )
Total deferred tax liabilities (1,870 ) (1,331 )

Net deferred tax liabilities $ (1,279 ) $ (894 )

*) Deferred tax liability with respect to tax exempt income that the Company does not have intention to permanently re-invest (see Note 9a).

~~All deferred tax assets and liabilities are domestic.~~

	December 31,
	2011			2012
Deferred tax assets:
Net operating loss carry forwards	$	6,821		$	7,800
Other		331			500

Deferred tax assets, before valuation allowance		7,152			8,300
Valuation allowance		(4,113	)		(6,254	)

Total deferred tax assets, net of valuation allowance		3,039			2,046

Deferred tax liabilities:
Intangible assets		(2,281	)		(5,248	)
Deferred revenues		(427	)		-
Capitalized software development costs		(85	)		(148	)

Total deferred tax liabilities		(2,793	)		(5,396	)

Deferred tax asset (liability), net	$	246		$	(3,350	)

F - 2229

~~INCREDIMAIL LTD~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9:10:-

INCOME TAXES (Cont.)

Domestic:
	December 31,
	2011			2012

Current deferred tax asset, net	$	258		$	360
Current deferred tax liability		-			(971	)
Non-current deferred tax asset, net		-			140
Long-term deferred tax liability		(12	)		(2,879	)

	$	246		$	(3,350	)

Current deferred tax assets, net, is included within other receivables and prepaid expenses in the balance sheets. Current deferred tax liability, net, is included within accrued expenses and other liabilities in the balance sheets. Non-current deferred tax asset, net is included within other assets on the balance sheets

d.g.

~~A reconciliation~~Reconciliation of the Company's effective tax rate to the statutory tax rate in Israel ~~is as follows:~~

	Year ended December 31,									Year ended December 31,
	2008			2009			2010			2010			2011			2012
	U.S. dollars in thousands, except for per share data
Income before taxes on income	$	4,714		$	11,558		$	11,621		$	11,621		$	5,840		$	6,007

Statutory tax rate in Israel		27	%		26	%		25	%		25	%		24	%		25	%

Theoretical income tax expense	$	1,273		$	3,005		$	2,905		$	2,905		$	1,402		$	1,502
Increase (decrease) in tax expenses resulting from:
"Approved Enterprise" benefits		(236	)		(4	)		-
"Preferred Enterprise" benefits (*)											-			(1,751	)		(1,369	)
Non-deductible expenses		374			232			230			230			78			757
Previous years taxes		(234	)		185			-			-			(156	)		-
Losses (gains) from marketable securities and ARSs for which valuation allowance has been provided		(1,065	)		22			-
Tax on previously distributed dividend from tax-exampt income											-			-			812
Loss and timing differences for which no deferred taxes were recorded											-			994			1,009
Tax adjustment in respect of different tax rate of foreign subsidiary											-			(400	)		(151	)
Other		177			105			97			97			5			(87	)

Taxes on income	$	289		$	3,545		$	3,232		$	3,232		$	172		$	2,473

(*) Benefit per Ordinary share, resulting from " Preferred Enterprise " status:
Basic	$	-	$	0.18	$	0.13
Diluted	$	-	$	0.18	$	0.13

Year ended December 31,
2008 2009 2010
U.S. dollars in thousands, except for per share data
Benefit per Ordinary share, resulting from "Approved Enterprise" status:
Basic $ (0.06 ) $ - $ -
Diluted $ (0.06 ) $ - $ -

F - 30

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:-

e.INCOME TAXES (Cont.)

Income taxes are comprised as follows:

Year ended December 31,
2008 2009 2010
U.S. dollars in thousands
Deferred tax (benefit) expense $ (216 ) $ 1,515 $ (385 )
Current taxes 739 1,845 3,617
Previous years taxes (234 ) 185 -
$ 289 $ 3,545 $ 3,232

	Year ended December 31,
	2010			2011			2012

Deferred tax benefit	$	(385	)	$	(1,140	)	$	(172	)
Current taxes		3,617			1,312			2,645
	$	3,232		$	172		$	2,473

~~F - 23~~

~~INCREDIMAIL LTD AND ITS SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 9:-~~

~~INCOME TAXES (Cont.)~~

f.i.

Uncertain tax position:

~~A reconciliation~~Reconciliation of the beginning and ending balances of unrecognized tax benefits ~~is as follows:~~

December 31,
2009 2010
U.S. dollars in thousands

Balance at January 1, 2010 $ 1,357 $ 1,341
Reductions for prior year tax positions (82 ) -
Increases in tax positions for current year 66 47

Balance at December 31, 2010 $ 1,341 $ 1,388

	December 31,
	2011		2012

Balance at January 1	$	1,388	$	2,151
Additions for prior year tax positions		505		622
Additions in tax positions for current year		258		1,179

Balance at December 31	$	2,151	$	3,952

g.j.

Income before taxes on income is comprised as follows:

	Year ended December 31,
	2008		2009		2010		Year ended December 31,
	U.S. dollars in thousands						2010		2011			2012

Domestic	$	4,676	$	11,532	$	11,553	$	11,553	$	8,325		$	8,530
Foreign - U.S.A		38		26		68		68		(2,485	)		(2,523	)
	$	4,714	$	11,558	$	11,621
							$	11,621	$	5,840		$	6,007

F - 2431

~~INCREDIMAIL LTD~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE ~~10:~~11:-

SHAREHOLDERS' EQUITY

Ordinary share:

The Ordinary shares entitle their holders to voting rights, the right to receive cash dividend and the right to a share in excess assets upon liquidation of the Company. OnIn January 6, 2011 the shareholders resolved to increase the authorized share capital of the Company to 40,000,000 ~~ordinary~~Ordinary shares with a nominal value of NIS 0.01 each.

~~Treasury shares:~~

In July 2008, the Company's Board of Directors authorized the repurchase of up to $3,750,000 in the open market, subject to normal trading restrictions. During 2008 and 2009, the Company purchased 300,564 and 45,455 of its Ordinary shares for total consideration of $882,000 and $120,000, respectively which were recorded as Treasury stock, at cost as part of shareholders' equity.

Share option plans:

In 2003, the Company adopted a share option plan ("the 2003 ~~Option~~ Plan"). Under the 2003 ~~Option~~ Plan, employees, officers and non-employees may be granted options to acquire Ordinary shares. Pursuant to the 2003 ~~Option~~ Plan, the Company has reserved for issuance a total of ~~2,368,000~~4,368,000 Ordinary shares. As of December 31, ~~2010, 108,363~~2012, 1,005,173 options were still available for future grant under the 2003 ~~Option Plan. On January 20, 2011, the Company registered an additional 1,000,000 Ordinary Shares, which are reserved for offer and sale under the 2003 Israeli Share Option~~ Plan.

Options granted under the 2003 Plan vested over three ~~to four~~ years from the grant date. The options expire no later than five years from the date of grant.

~~F - 25~~

~~INCREDIMAIL LTD AND ITS SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 10:-~~

~~SHAREHOLDERS' EQUITY (Cont.)~~

A summary of the activity in the share options granted to employees, non-employees and directors for the year ended December 31, ~~2010~~2012 and related information is as follows:

	Number of options			Weighted average exercise price		Weighted average remaining contractual term		Aggregate intrinsic value					Weighted average
						Years		U.S. dollars in thousands		Number of options			Exercise price		Remaining contractual term (in Years)		Aggregate intrinsic value

Outstanding at January 1, 2010		1,322,431		$	5.30		3.20	$	6,185
Outstanding at January 1, 2012											1,776,072		$	5.87		3.39	$	113
Granted		717,000		$	4.97						1,060,501		$	6.19
Exercised *)		(222,777	)	$	3.05						(209,067	)	$	4.41
Cancelled		(179,042	)	$	5.40						(221,206	)	$	6.12
Forfeited		(28,666	)	$	6.75						(82,666	)	$	7.09
Outstanding at December 31, 2010		1,608,946		$	5.43		3.24	$	3,858
Exercisable at December 31, 2010		591,796		$	5.77		1.66	$	1,227

Outstanding at December 31, 2012 **)											2,323,634		$	6.09		3.38	$	6,971

Exercisable at December 31, 2012 ***)											694,005		$	5.72		2.31	$	2,278

During 2012, 25,000 share options were exercised in consideration for cash received in an amount of $ 76 and 184,067 share options were exercised under net-share settlement.

**)

Represents intrinsic value of 1,930,300 outstanding options that are in-the-money as of December 31, 2012. The remaining 393,334 outstanding options are out of the money as of December 31, 2012, and their intrinsic value was considered as zero.

F - 32

*) During 2010, 128,251

PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands (except share ~~options were exercised in return for cash received in the amount of $375,000, the remaining 94,526~~and per share ~~options were exercised under net-share settlement.~~data)

NOTE 11:-

SHAREHOLDERS' EQUITY (Cont.)

***)

Represents intrinsic value of 650,672 exercisable options that are in-the-money as of December 31, 2012. The remaining 43,333 outstanding options are out of the money as of December 31, 2012, and their intrinsic value was considered as zero.

The weighted-average grant-date fair value of options granted during the years ~~2008, 2009~~2010, 2011 and ~~2010~~2012 was ~~$1.32, $1.68~~$ 1.23, $ 2.29 and ~~$1.23,~~$ 1.83, respectively.

As of December 31, ~~2010,~~2012, the total compensation cost related to options granted to employees, not yet recognized, amounted to ~~$1,164,000.~~$ 2,278. The cost is expected to be recognized over a weighted average period of ~~2.23~~2.37 years.

Aggregate intrinsic value of options exercised in ~~2008, 2009~~2010, 2011 and ~~2010~~2012 amounted to ~~$76,000, $281,000~~$ 713, $ 580 and ~~$713,000,~~$ 555, respectively.

~~In February 2008,~~The options outstanding under the Company's ~~Board of Directors resolved to re-price 516,100 options which were previously granted to the Company's employees to the fair market value~~Stock Option Plans as of ~~that date. The Company accounted for the re-pricing~~December 31, 2012 have been separated into ranges of exercise price as ~~a modification in accordance with ASC 718 and~~follows:

Outstanding								Exercisable
				Weighted
				average		Weighted				Weighted
Ranges of				remaining		average				average
exercise		Number of		contractual		exercise		Number of		exercise
price		options		life (years)		price		options		price

	2.30-3.51		50,000		0.52		3.27		50,000		3.27
	4.04-4.38		997,168		3.39		4.23		300,000		4.38
	5.12-5.99		299,336		3.12		5.80		33,334		5.61
	6.04-6.93		229,004		2.68		6.65		145,670		6.62
	7.11-7.85		354,792		3.12		7.47		121,667		7.49
	9.14-9.98		393,334		4.59		9.80		43,334		9.98

			2,323,634						694,005

Stock-based compensation was recorded ~~an additional compensation expense,~~ in the ~~amount of $309,000 which is recognized over the vesting period, or immediately for vested options.~~following items

	Year ended December 31,
	2010		2011		2012

Cost of sales	$	7	$	10	$	16
Research and development		145		108		221
Selling and marketing		151		78		168
General and administrative		458		987		651

Total Expenses	$	761	$	1,183	$	1,056

F - 2633

~~INCREDIMAIL LTD~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE ~~11:~~12:-

SUPPLEMENTARY DATA ON SELECTED CONSOLIDATED STATEMENTS OF INCOME ITEMS

~~Goodwill impairment and other charges:~~Financial income, net:

Year ended December 31,
2008 2009 2010
U.S. dollars in thousands

Goodwill impairment $ 125 $ - $ -
Severance and other employee related Termination benefit 528 - -
Contract termination costs 500 - -

$ 1,153 $ - $ -

	Year ended December 31,
	2010		2011		2012
Financial income:
Interest from bank deposits and marketable securities	$	449	$	304		29
Gains from marketable securities, net		-		71		-
Exchange rate differences , net		-		102		170
Interest from government authorities, net		-		988		225

		449		1,465		424
Financial expenses:
Losses from marketable securities, net		38		-		-
Exchange rate differences , net		45		-		-

Accretion of payment obligation related to acquisitions		-		100		177
Interest with respect to long-term loans		-		-		373
Other		44		72		48

		127		172		598

	$	322	$	1,293		(174	)

Research and development costs, net:

	Year ended December 31,
	2010		2011			2012

Total costs	$	6,607	$	8,192		$	11,583
Capitalized software development costs		-		(739	)		(848	)

	$	6,607	$	7,453		$	10,735

F - 2734

~~INCREDIMAIL LTD~~PERION NETWORK LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE ~~11:~~12:-

SUPPLEMENTARY DATA ON SELECTED CONSOLIDATED STATEMENTS OF INCOME ITEMS (Cont.)

~~Financial income, net:~~

Year ended December 31,
2008 2009 2010
U.S. dollars in thousands

Financial income:
Interest from bank deposits and marketable securities $ 883 $ 360 $ 449
Gains from marketable securities, net 3,587 - -
Exchange rate differences , net 3 12 -
Other 87 9 -
4,560 381 449
Financial expenses:
Losses from marketable securities, net - 237 38
Exchange rate differences , net - - 45
Other 66 72 44
66 309 127
$ 4,494 $ 72 $ 322

Net earnings per Ordinary share:

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

~~Numerator:~~

Numerator:

Year ended December 31,
2008 2009 2010

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

Net income available to Ordinary shareholders $ 4,425 $ 8,013 $ 8,389
Numerator:

	Year ended December 31,
	2010		2011		2012

Net income available to Ordinary shareholders	$	8,389	$	5,668	$	3,534

Denominator:

Denominator for basic net earnings per share -
Weighted average number of Ordinary shares, net of treasury stock 9,427,424 9,347,915 9,622,181
Effect of dilutive securities:
Add - stock options 89,053 214,806 209,447
Denominator for diluted net earnings per share - adjusted weighted average shares 9,516,477 9,562,721 9,831,628

~~F - 28~~

~~INCREDIMAIL LTD AND ITS SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 12:-~~

~~DERIVATIVE FINANCIAL INSTRUMENTS~~

In order to reduce the impact of changes in foreign currency exchange rates on its results, the Company enters into foreign currency exchange forward contracts and options contracts to purchase and sell foreign currencies to hedge a portion of its foreign currency net exposure resulting from payroll expenses denominated in NIS.

The foreign currency exchange forward contracts and options contracts are not designated as hedging instruments under hedge accounting. These instruments are generally short term in nature, with typical maturities of less than one year, and are subject to fluctuations in foreign exchange rates. Gains or losses on these derivatives, which partially offset the foreign currency impact from the underlying exposures, were classified into financial income (expenses), net and amounted to $130,000, $(25,000) and $69,000 for the years ended December 31, 2008, 2009 and 2010, respectively.

The Company’s derivatives expose it to credit risks from possible non-performance by counterparties. The maximum amount of loss due to credit risk that the Company would incur if counterparties to the derivative financial instruments failed completely to perform according to the terms of the contracts, based on the gross fair value of the Company’s derivative contracts that are favorable to the Company, was approximately $27,000, presented as part of other receivables and prepaid expenses, as of December 31, 2010. The Company has limited its credit risk by entering into derivative transactions exclusively with investment-grade rated financial institutions and monitors the creditworthiness of these financial institutions on an ongoing basis.

The notional amounts of the Company’s derivative instruments as of December 31, 2010 amounted to $1,950,000. Notional values are U.S. dollar translated and calculated based on forward rates for forward contracts and based on spot rates for options. Gross notional amounts do not quantify risk or represent assets or liabilities of the Company, but are used in the calculation of settlements under the contracts.

~~NOTE 13:-~~

~~PRODUCT LINES~~

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

Year ended December 31,
2008 2009 2010
U.S. dollars in thousands
Search $ 11,745 $ 20,011 $ 22,792
Software license 3,609 2,451 1,822
Anti-spam and content database subscriptions 5,549 4,266 3,582
Advertising, collaborations and other 1,003 467 1,301
$ 21,906 $ 27,195 $ 29,497

	Year ended December 31,
	2010		2011		2012

Weighted average number of Ordinary shares, net of treasury stock		9,622,181		9,796,380		10,159,049
Effect of dilutive securities:
Add - stock options		209,447		205,791		207,759

Adjusted weighted average shares		9,831,628		10,002,171		10,366,808

F - 2935

SIGNATURES

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

		~~IncrediMail~~Perion Network Ltd.

By:	/s/ Josef Mandelbaum
	Josef Mandelbaum
	Chief Executive Officer

Date: ~~March 9, 2011~~April 29, 2013

EXHIBIT INDEX

No.	Description

~~1.1~~

~~Memorandum of Association of Registrant (1)~~

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

~~1.3~~

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

~~4.3~~ 4.1

The Registrant’s 2003 Israeli Share Option Plan and the ~~form of Option Agreement (1)~~U.S. Addendum to such plan.

~~4.4~~ 4.2

Amendment to Google Search and Advertising Services Agreement, dated December 27, 2010*January 31 2013.

4.5	Amendment to the Commitment Letter and Financial Covenants Letter among the Company and Bank Leumi Le-Israel, B.M., dated May 10, 2012.

4.6	Amendment to Commitment Letter and Financial Covenants Letter among the Company and the First International Bank of Israel, B.M., dated April 15, 2012 (translated from Hebrew).

~~4.5~~ 4.8

~~Stock Purchase~~Google Search and Advertising Services Agreement, ~~among Ofer Adler,~~dated April 23, 2013, between the Company and ~~the purchasers listed therein, dated January 24, 2011.~~Google Ireland Limited.*

4.9	Share Purchase Agreement by and among Perion Network Ltd., SweetIM Ltd., SweetIM Technologies Ltd., the Shareholders of SweetIM Ltd. and Nadav Goshen as Shareholders’ Agent, dated as of November 7, 2012, and Amendment No. 1, dated as of November 30, 2012.

~~4.6~~ 4.10

Registration Rights Agreement among the Company and the investors listed therein, dated ~~January 24, 2011.~~as of November 7, 2012.

8	List of all ~~subsidiaries~~subsidiaries.

11	~~Code of Ethics (4)~~

12.1	Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Executive Officer of the ~~Company~~Company.

12.2	Certification required by Rule 13a-14(a) or Rule 15d-14(a) executed by the Chief Financial Officer of the ~~Company~~Company.

13.1	Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 ofTitle 18 of the United States ~~Code~~Code.

13.2	Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 ofTitle 18 of the United States ~~Code~~Code.

1415.1

Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, Independent ~~Auditors~~Auditors.

101

___________________________

(1)	~~Previously~~In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed ~~with the SEC on October 25, 2005 as an exhibit to our~~or a part of a registration statement ~~on Form F-1/A (File No. 333-129246).~~

~~(2)~~

~~Previously~~or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed ~~with~~for purposes of Section 18 of the ~~SEC on January 5, 2006 as an exhibit~~Exchange Act of 1934, and otherwise is not subject to ~~our~~liability under these sections and shall not be incorporated by reference into any registration statement ~~on Form F-1/A (File No. 333-129246).~~

~~(3)~~

~~Previously~~or other document filed ~~with~~under the ~~SEC on January 26, 2006~~Securities Act of 1933, as ~~an exhibit to our registration statement on Form F-1/A (File No. 333-129246).~~

~~(4)~~

~~Previously filed with the SEC on May 12, 2008~~amended, except as ~~an exhibit to our annual report on Form 20-F.~~expressly set forth by specific reference in such filing.

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

Title of Each Class	~~Name of Each Exchange on which Registered~~
Ordinary shares, par value NIS 0.01 per share	Name of Each Exchange on which Registered NASDAQ ~~Stock~~Global Market ~~LLC~~

		~~Page~~
~~PART I~~
Item 1.	Identity of Directors, Senior Management and Advisers	43

Item 12.	Description of Securities Other than Equity Securities	7076
~~PART II~~

Name	Number of Ordinary Shares Beneficially Owned		Percentage of Ordinary Shares Outstanding
Ofer Adler (1)		704,456		7.2	%
Yacov Kaufman (2)		118,666		1.2	%
Tamar Gottlieb (3)		114,965		1.2	%
Yuval Hamudot (4)		66,666		*
David Jutkowitz (5)		17,499		*
Arik Ramot (6) .		6,666		*
Arik Czerniak (7)		3,333		*
Avichay Nissenbaum (8)		3,333		*
All directors and officers as a group (12 persons) (9)		1,035,584		10.4*	%

Name	Number of Ordinary Shares Beneficially Owned		Percentage of Ordinary Shares Outstanding
Josef Mandelbaum (1)		330,833		2.7	%
Yacov Kaufman (2)		141,167		1.2	%
All directors and officers as a group (14 persons) (3)		768,867		6.0	%

	Year ended December 31,												Year ended December 31,
Statement of Operations Data:	2006		2007			2008		2009		2010			2008		2009		2010		2011		2012
	(dollars, except per share data, in thousands)												U.S. dollars in thousands (except share and per share data)
Revenues
Advertising and other services	$	3,066	$	9,597		$	12,748	$	20,478	$	24,093
Search												$	11,747	$	20,011	$	22,792	$	25,466	$	38,061
Products		7,785		9,078			9,158		6,717		5,404		9,158		6,717		5,404		7,191		17,574
Other													1,001		467		1,301		2,816		4,588
	$	10,851	$	18,675		$	21,906	$	27,195	$	29,497	$	21,906	$	27,195	$	29,497	$	35,473	$	60,223
Cost of products		858		1,740			1,795		1,579		1,606
Cost of revenues													1,795		1,505		1,606		2,840		5,230
Gross profit		9,993		16,935			20,111		25,616		27,891		20,111		25,690		27,891		32,633		54,993
Operating expenses:
Research and development costs		3,251		6,125			7,589		5,972		6,607
Research and development costs, net													7,589		6,254		6,607		7,453		10,735
Selling and marketing expenses		1,767		4,682			7,343		4,824		5,244		7,343		4,616		5,244		12,984		29,517
General and administrative expenses		2,717		3,693			3,806		3,334		4,741		3,806		3,334		4,741		7,649		8,560
Goodwill impairment and other charges		-		163			1,153		-		-		1,153		-		-		-		-
Total operating expenses		7,735		14,663			19,891		14,130		16,592		19,891		14,204		16,592		28,086		48,812
Operating income		2,258		2,272			220		11,486		11,299		220		11,486		11,299		4,547		6,181
Financial income (expenses), net		984		(3,641	)		4,494		72		322
Income (loss), before taxes on income		3,242		(1,369	)		4,714		11,558		11,584
Financial income, net													4,494		72		322		1,293		(174	)
Income, before taxes on income													4,714		11,558		11,621		5,840		6,007
Taxes on income		765		1,393			289		3,545		3,306		289		3,545		3,232		172		2,473
Net income	$	2,477	$	(2,762	)	$	4,425	$	8,013	$	8,389	$	4,425	$	8,013	$	8,389	$	5,668	$	3,534
Net earnings (loss) per share:
Net earnings per share:
Basic	$	0.27	$	(0.29	)	$	0.47	$	0.86	$	0.87	$	0.47	$	0.86	$	0.87	$	0.58	$	0.35
Diluted	$	0.27	$	(0.29	)	$	0.46	$	0.84	$	0.85	$	0.46	$	0.84	$	0.85	$	0.57	$	0.34
Weighted average number of shares used in net earnings (loss) per share:
Basic		8,982,201		9,442,658			9,427,424		9,347,915		9,622,181		9,427,424		9,347,915		9,622,181		9,796,380		10,159,049
Diluted		9,146,393		9,442,658			9,516,477		9,562,721		9,831,628		9,516,477		9,562,721		9,831,628		10,002,171		10,366,808

	As of December 31,										As of December 31,
	2006		2007		2008		2009		2010		2008		2009		2010		2011			2012
	(in thousands)										(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	8,366	$	4,611	$	7,835	$	24,368	$	16,055	$	7,835	$	24,368	$	16,055	$	11,260		$	21,762
Working capital		21,561		19,756		25,143		26,846		28,067		25,143		26,846		28,067		(27	)		(4,296	)
Total assets		31,424		31,766		37,651		39,894		41,348		37,651		39,894		41,348		54,904			123,159
Total liabilities		8,847		10,995		12,107		12,892		13,196		12,107		12,892		13,196		23,083			68,449
Shareholders’ equity		22,577		20,771		25,544		27,002		28,152		25,544		27,002		28,152		31,815			54,710

	Search Generated
	Registrations			Revenues			Product Revenues			Search Generated Revenues	Product Revenues
Tier 1		20	%		40	%		53	%	47%	84%

Tier 2		36	%		42	%		32	%	35%	8%

Tier 3		44	%		17	%		15	%	18%	8%

	Nasdaq Capital Market or Nasdaq Global Market				Tel Aviv Stock Exchange
	High ($)		Low ($)		High (NIS)			Low (NIS)
Five most recent full financial years
2010		10.68		3.97		40.28			15.85
2009		10.56		2.50		39.69			9.12
2008		5.17		2.00		20.39			8.23
2007		9.99		4.94		25.50	*		19.57	*
Financial quarters during the past two recent full financial years
Fourth Quarter 2010		7.82		5.83		28.35			20.95
Third Quarter 2010		6.25		3.97		23.35			15.85
Second Quarter 2010		7.32		4.46		27.14			17.30
First Quarter 2010		10.68		6.23		40.28			23.75
Fourth Quarter 2009		9.98		7.08		37.98			27.00
Third Quarter 2009		10.56		5.39		39.69			21.22
Second Quarter 2009		5.92		3.53		21.40			15.90
First Quarter 2009		3.76		2.50		15.88			9.12
Most recent six months
February 2011		7.65		7.01		27.64			25.49
January 2011		8.00		6.98		28.30			24.96
December 2010		7.82		6.65		28.35			23.81
November 2010		7.13		6.12		25.71			22.42
October 2010		6.68		5.83		24.47			20.95
September 2010		6.25		4.74		23.35			17.55

	NASDAQ Global Market				Tel Aviv Stock Exchange
	High ($)		Low ($)		High ($)		Low ($)
Five most recent full financial years
2012		10.50		3.68		10.45		3.85
2011		8.25		3.45		8.20		3.41
2010		10.75		3.85		10.96		4.04
2009		10.89		2.30		10.46		2.48
2008		5.58		1.86		5.28		2.00
Financial quarters during the past two recent full financial years and any subsequent period
First Quarter 2013		13.10		8.19		12.79		8.21
Fourth Quarter 2012		10.50		6.66		10.45		6.65
Third Quarter 2012		7.68		4.04		7.38		4.16
Second Quarter 2012		5.20		3.68		5.13		3.81
First Quarter 2012		5.59		3.90		5.59		3.85
Fourth Quarter 2011		5.87		3.45		5.65		3.41
Third Quarter 2011		7.96		4.50		7.77		4.67
Second Quarter 2011		8.25		6.57		7.92		6.44
First Quarter 2011		8.10		6.85		8.20		6.59
Most recent six months
April 2013 (through April 24)		11.98		9.53		12.08		9.57
March 2013		10.39		8.19		10.06		8.21
February 2013		10.84		8.56		10.48		8.74
January 2013		13.10		9.01		12.79		8.87
December 2012		10.50		8.38		10.45		8.61
November 2012		10.15		7.45		10.31		7.56
October 2012		7.48		6.66		7.85		6.65

	US Dollars			New Israeli Shekels			Other Currencies			Total
	In thousands of US dollars
Current assets		33,326			4,251			517			38,094
Long-term assets		397			877			-			1,274
Current liabilities		(7,975	)		(2,260	)		(6	)		(10,241	)
Long-term liabilities		(1,576	)		(1,379	)		-			(2,955	)
Total		24,172			1,489			511			26,172

	U.S. dollars			NIS			Other Currencies			Total
	In thousands of U.S. dollars
Current assets		38,241			7,823			1,628			47,692
Long-term assets		72,382			3,085			--			75,467
Current liabilities		(41,482	)		(8,951	)		(1,555	)		(51,988	)
Long-term liabilities		(15,528	)		(933	)		--			(16,461	)
Total		53,615			1,024			73			54,170

	Notional Amount		Fair Value
	In thousands of US dollars
Zero-cost collar contracts to hedge payroll expenses		1,950		27

	Up to 1 year		1 – 3 years		4 – 5 years		Total
	In thousands of US dollars
Corporate debentures		-		5,443		1,470		6,913
U.S. government agency debentures		-		-		238		238
U.S. government debentures		10,615		2,663		3,217		16,495
U.S. municipal bonds		-		421		-		421
Total		10,615		8,527		4,835		24,067

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

Balance as of January 1, 2008	$	20	$	22,029		$	112		$	(1,390	)	$	-		$	20,771
Stock based compensation expense		-		1,165			-			-			-			1,165
Exercise of share options		1		164			-			-			-			165
Repurchase of Ordinary shares		-		-			-			-			(882	)		(882	)
Comprehensive income:
Net income		-		-			-			4,425			-			4,425
Changes in unrealized holding gains on marketable securities, net		-		-			(100	)		-			-			(100	)

Balance as of December 31, 2008		21		23,358			12			3,035			(882	)		25,544
Cumulative effect from adoption of FSP No. 115-2/124-2 (primarily codified in ASC 320-10- Investments-Debt and Equity Securities-Overall) at April 1, 2009		-		-			(210	)		210			-			-
Stock based compensation expense		-		672			-			-			-			672
Exercise of share options		-		984			-			-			-			984
Dividends		-		(2,624	)		-			(5,872	)		-			(8,496	)
Repurchase of Ordinary shares		-		-			-			-			(120	)		(120	)
Comprehensive income:
Net income		-		-			-			8,013			-			8,013
Changes in unrealized holding gains on marketable securities, net		-		-			405			-			-			405

Balance as of December 31, 2009		21		22,390			207			5,386			(1,002	)		27,002
Stock based compensation expense		-		761			-			-			-			761
Excess tax benefit from share-based payment arrangements				209												209
Exercise of share options		1		374			-			-			-			375
Dividends		-		-			-			(8,477	)		-			(8,477	)
Comprehensive income:
Net income		-		-			-			8,389			-			8,389
Changes in unrealized holding gains on marketable securities, net		-		-			(107	)		-			-			(107	)

Balance as of December 31, 2010	$	22	$	23,734		$	100		$	5,298		$	(1,002	)	$	28,152

	Year ended December 31,
	2010			2011			2012

Net income	$	8,389		$	5,668		$	3,534

Other comprehensive income:
Reclassification adjustments to income on marketable securities, net of tax		(107	)		(100	)		-

Other comprehensive income, net of tax		(107	)		(100	)		-

Comprehensive income	$	8,282		$	5,568		$	3,534

	%

Computers and peripheral equipment	33
Office furniture and equipment	7 ~~– 15~~
~~Motor vehicles~~	- 15

	Amortized cost				Gross unrealized gains				Gross unrealized losses				Fair value
	December 31,				December 31,				December 31,				December 31,
	2009		2010		2009		2010		2009		2010		2009		2010
	U.S. dollars in thousands

Corporate debentures	$	3,262	$	6,805	$	210	$	116	$	1	$	9	$	3,471	$	6,912
U.S. Government agency debentures		-		7,405		-		10		-		13		-		7,402
Government debentures		1,687		218		67		20		-		-		1,754		238
U.S. municipal bonds		-		419		-		2		-		-		-		421

	$	4,949	$	1 4,847	$	277	$	148	$	1	$	22	$	5,225	$	14,973