Orca Interactive Ltd

Final Results

Orca Interactive Ltd
02 April 2007









                              Orca Interactive Ltd



                              Preliminary Results

                      for the year ended 31 December 2006



Ra'anana, Israel, 2 April 2007 - Orca Interactive Ltd ('Orca'), a global leader
in the IPTV middleware market, announces its preliminary results for the year
ended 31 December 2006.



Financial Performance:



*      Revenue of $3.3 million (2005: $5.3 million)

       -      Second half revenue of $2.4 million (2005: $2.3 million)



*      Gross profit of $2.7 million (2005: $4.7 million)



*      Gross margin of 80.4% (2005: 87.9%)



*      Net loss of $5.3 million (2005: $3.5 million)



*      Net cash of $17.0 million at year end



*      Order book of $7.3 million at year end



Operational Performance:



*      New wins with Sonaecom and ON Telecom



*      Further progress with Orca's Interactive Alliance partner programme



*      Continued product investment during 2006: Orca's product was ranked #2 in
       a worldwide innovation survey published by ABI Research in October 2006



Haggai Barel, CEO of Orca Interactive, said:



'Consolidation remains a feature of our market and the timing of revenues
therefore remains difficult to predict.  However, the current year has started
brightly and our backlog is strong.  We have strengthened our channel
relationships during 2006 and are confident in the prospects for our business
this year.'



Enquiries:


Orca Interactive Ltd
Haggai Barel, Chief Executive Officer                            +972 9 769 9400

Financial Dynamics
James Melville-Ross / Matt Dixon                                +44 20 7831 3113



About Orca Interactive

Orca Interactive (LSE: ORCA) is a leading provider of IPTV middleware and
applications for broadband network operators and service providers. Orca enables
triple-play providers to deliver a full array of attractive video-over-IP
services that generate new revenue streams and strengthen customer loyalty.
Leveraging a flexible telco-grade middleware platform, Orca empowers operators
to deliver broadcast TV, video on demand (VOD), personal video recording (PVR),
home media and other compelling interactive services. Orca's SI-enabled
solutions are designed for easy outsourcing of integration services by an
operator's preferred systems integrator. Orca has formed strategic partnerships
with leading players across the IPTV value chain to ensure best-of-breed
solutions with low total cost of ownership. For more information, please visit
www.orcainteractive.com.











Chief Executive's Review



Financial performance

Revenue for the year ended 31 December 2006 was $3.3 million, compared to $5.3
million in 2005. Whilst first half revenues of $0.9 million were materially
below the $3.0 million reported in 2005, revenues in the second half compared
favourably at $2.4 million against the $2.3 million in the equivalent period in
2005.



This first half decline was partly caused by a substantial drop in revenues from
the Americas, from $3.3 million in 2005 to $568,000 in 2006.  2005 revenues in
this region were boosted by the license deal with Lucent, but the merger of
Lucent with Alcatel in 2006 impacted decision making on new technologies.  M&A
activity in the telecoms sector also resulted in delays to technology purchasing
decisions.



The strongest revenue growth was seen in Europe and the Middle East, where
revenues grew by 40% from $1.9 million in 2005 to $2.7 million in 2006, owing to
new license agreements with a number of European operators.



Overall gross profit for the fiscal year was $2.7 million (2005: $4.7 million),
a margin of 80.4% (2005:87.9%).



Total operating expenses for the year were broadly flat at $8.7 million (2005:
$9.0 million).  Included in these were Research and Development costs which grew
to $3.0 million (2005: $2.6 million) as we continued to ensure that our products
and technologies remained at the forefront of the market.  General and
Administrative costs declined from $2.0 million in 2005 to $1.5 million
predominantly due to the existence of a one off expense relating to a bad debt
in 2005.



Our operating loss therefore increased to $6.1 million (2005: $4.3 million) and,
after net interest income from our cash balances, our net loss increased from
$3.5 million in 2005 to $5.3 million in 2006.  This resulted in a net loss per
share of $0.15 (2005: $ 0.10 net loss per share).



Operating cash outflow during the period was $4.0 million (2005: $2.3 million).
At 31 December 2006, the Company had cash balances of $17.0 million.



As at 31 December 2006, the Company had 74 employees, a decrease of 6.3%
compared to 31 December 2005.



Partnerships

Orca's IPTV Interactive Alliance gained further momentum during the year with
seven new partners joining the alliance, including Code baby, a global leader in
interactive virtual agent solutions and Ruckus Wireless, an innovator of smart
Wi-Fi technology and systems.  By selecting Orca and its Interactive Alliance
partners, IPTV operators can enjoy rapid time to market, decreased total cost of
ownership and subscriber satisfaction through these pre-integrated, certified
and interoperable solutions. Orca also continued to sign up and train new System
Integrators that act as sales channels both globally and in specific regions.



New business wins

During 2006, Orca launched its Hybrid DVB-T/IP Solution in association with
leading Next Generation Network Equipment Vendor, Nortel.  The commercial launch
included the deployment of a triple play service of IPTV, Video-over-IP and
broadband Internet access by a large European telecommunications service
provider. The deal consisted of an initial purchase of 50,000 Orca RiGHTvTM
middleware licenses and professional services.



In November 2006, we announced that Orca had been selected by major Portuguese
telecommunications provider, Sonaecom, for Portugal's first IPTV Service.
Orca's RiGHTv IPTV middleware has been deployed by Clix, Sonaecom's mass market
brand. Clix SmarTV will offer live broadcast television and radio channels, an
electronic programming guide, video on demand and subscription video on demand.
The service has been successfully deployed in the cities of Lisbon and Porto.
All major cities in Portugal will be covered in the full commercial deployment
that is expected to reach a large subscriber base in 2007.



These wins were in addition to those announced in the first half of the year
with Jazztel in Spain and NewNet Telecoms in Georgia.



Product development

We recently presented our Product Catalog at the IPTV World Forum in London.
Designed to help IPTV operators support new types of pricing methods for
services and innovative bundles, the Product Catalog is an enhanced business
management system that is aimed at driving growth through enhanced revenue
generation and customer loyalty.



We also launched a new User Interface during the year to address the future
needs of IPTV subscribers.

The new Orca SUI incorporates easy-to-access advanced features that guide the
user to an active, on-demand experience and help operators to generate revenues
by luring and retaining subscribers.



Orca's product was ranked second in a worldwide innovation survey published by
ABI Research in October 2006.



Offer talks

On 12 January 2007, following press speculation in Israeli, the Company
announced that it had received preliminary approaches expressing an interest in
making an offer for the Company. Discussions in this regard are continuing and
due diligence information has been provided. The Company would like to reiterate
that there can be no certainty that any formal offer for the Company will be
forthcoming. Further updates will be provided in due course.



Current trading and outlook

On 26 March 2007, Orca announced that ON Telecoms, a Greek alternative telecoms
provider, had selected Orca's RiGHTv middleware in a pioneering IPTV deployment.
Powered by Orca's latest version of RiGHTv middleware, the ON Telecoms IPTV
service includes live TV (a hybrid of DVB-T and IP channels), on-demand services
such as video on demand and super fast broadband up to 10 Mbps. ON Telecoms
began offering its Greek IPTV solution just four months after starting the
project. This further demonstrates Orca's ability to enable innovative operators
to design solutions and launch successful IPTV rollouts in a short time to
market.



Consolidation continues to be a feature of our market and the timing of revenues
therefore remains difficult to predict.  However, the current year has started
brightly and our backlog is strong.  We are hopeful of recognizing revenue in
the current year with the Israeli franchise of the Global Media company,
dependent on the successful delivery of our product.  We have strengthened our
channel relationships during 2006 and are confident in the prospects for our
business this year.



Haggai Barel

CEO











BALANCE SHEETS



U.S. dollars in thousands, except share and per share data


                                                                                                     31 December
                                                                        Note               2005             2006
ASSETS



CURRENT ASSETS:

Cash and cash equivalents                                                3           $      961     $      1,878

Short-term available-for-sale-marketable securities                      4                6,395            9,166

Trade receivables                                                                         1,568              698

Other accounts receivable and prepaid expenses                                              511              331



Total current assets                                                                      9,435           12,073



NON-CURRENT ASSETS:

Long-term available-for-sale marketable securities                       5               13,938            5,963

Property and equipment, net                                              6                  488              394

Investment in an associate                                               7                    -            2,425



Total non-current assets                                                                 14,426            8,782



Total assets                                                                      $      23,861    $      20,855



LIABILITIES AND EQUITY



CURRENT LIABILITIES:

Trade payables                                                                       $      480       $      425

Deferred revenues                                                                           599              321

Other accounts payable and accrued expenses                              8                2,954            1,947

Advances from customers, net of work in process                          9                    -            3,045

Parent company                                                           16                 336              234



Total current liabilities                                                                 4,369            5,972



SEVERANCE PAY LIABILITY                                                  10                 266              199



Total liabilities                                                                         4,635            6,171



EQUITY:                                                                  12

Share capital -

Ordinary shares of NIS 0.01 par value - Authorized:

 55,000,000 shares at 31 December 2005 and 2006; Issued

 and outstanding: 35,477,299 shares and 35,573,299 shares

    at 31 December 2005 and 2006, respectively                                               81               82

Additional paid-in capital                                                               45,755           46,411

Net unrealized loss reserve                                                               (163)             (86)

Foreign currency translation adjustments                                                      -               13

Accumulated deficit                                                                    (26,447)         (31,736)



Total equity                                                                             19,226           14,684



                                                                                  $      23,861    $      20,855






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

















STATEMENTS OF OPERATIONS

U.S. dollars in thousands, except share and per share data




                                                                                            Year ended 31 December
                                                                      Note                  2005              2006


Revenues                                                               14           $      5,325      $      3,339

Cost of revenues                                                       15a                   643               655



Gross profit                                                                               4,682             2,684



Operating expenses:

Research and development, net                                          15b                 2,585             3,001

Selling and marketing                                                  15c                 4,430             4,224

General and administrative                                             15d                 1,979             1,514



Total operating expenses                                                                   8,994             8,739



Operating loss                                                                           (4,312)           (6,055)

Financial income, net                                                  15f                   794               854



Loss before share in losses of an associate                                              (3,518)           (5,201)

Share of losses of an associate                                                                -              (88)



Net loss                                                                          $      (3,518)    $      (5,289)



Basic and diluted net loss per share                                               $      (0.10)     $      (0.15)



Weighted average number of shares used in computing

basic and diluted net loss per share                                                  35,412,746        35,533,652








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



STATEMENTS OF CHANGES IN EQUITY
U.S. dollars in thousands, except share data


                                                                    Net     Foreign                           Total
                                                  Additional unrealized    currency                      recognized
                               Ordinary shares       paid-in     income translation Accumulated          income and
                                 Shares    Amount    capital     (loss) adjustments     deficit    Total   expenses
                                                                                                                   
Balance as of 1 January 2005 35,323,799      $ 81   $ 45,425        $ -         $ -  $ (22,929) $ 22,577           
                                                                                                                   
Issuance of shares upon                                                                                            
exercise of employees'                                                                                             
share options, net              153,500      *) -         42          -           -           -       42                
Unrealized losses on                  -         -          -      (163)           -           -    (163)    $ (163)     
available-for-sale                                                                                                 
marketable securities                                                                                              
Share-based compensation              -         -        288          -           -           -      288           
Net loss                              -         -          -          -           -     (3,518)  (3,518)    (3,518)
                                                                                                                   
Balance as of 31 December    35,477,299        81     45,755      (163)           -    (26,447)   19,226  $ (3,681)
2005                                                                                                               
                                                                                                                   
Issuance of shares upon                                                                                            
exercise of employees'                                                                                             
share options, net               96,000         1         25          -           -           -       26                
                                                                            
Cancellation of issuance              -         -        455          -           -           -      455           
expenses (see Note 12c)                                                                                            
Unrealized income on                                                                                               
available-for-sale                                                                                                 
marketable securities                 -         -          -         77           -           -       77       $ 77
Share-based compensation              -         -        176          -           -           -      176          -
Foreign currency translation          -         -          -          -          13           -       13         13
adjustments                                                                                                        
Net loss                              -         -          -          -           -     (5,289)  (5,289)    (5,289)
                                                                                                                   
Balance as of 31 December    35,573,299      $ 82   $ 46,411     $ (86)        $ 13  $ (31,736) $ 14,684  $ (5,199)
2006                                                                                                               




*) Represents an amount lower than $ 1.





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



STATEMENTS OF CASH FLOWS


U.S. dollars in thousands




                                                                                           Year ended 31 December

                                                                                           2005              2006



Cash flows from operating activities:

Net loss                                                                         $      (3,518)    $      (5,289)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation                                                                                295               284

Share-based compensation                                                                    288               176

Decrease (increase) in trade receivables, other accounts receivable                       (623)             1,050
 and prepaid expenses                                                                     

Increase (decrease) in trade payables and other accounts payable and accrued
expenses                                                                                    633             (538)
                                                                                            

Increase (decrease) in deferred revenues                                                    584             (278)

Increase in advances from customers, net of work in progress                                  -               545

Increase (decrease) in accrued severance pay, net                                            24              (67)

Equity in losses of an associate                                                              -                88



Net cash used in operating activities                                                   (2,317)           (4,029)



Cash flows from investing activities:

Investment in long-term available-for-sale marketable securities                       (14,012)             (492)

Proceeds from maturity of short-term available-for-sale

  marketable securities, net                                                              8,066             5,773

Purchase of property and equipment                                                        (289)             (190)



Net cash provided by (used in) investing activities                                     (6,235)             5,091



Cash flows from financing activities:

Refundable grants received from the Chief Scientist Office                                  292                27

Payments of royalties to Chief Scientist Office                                           (202)              (96)

Parent company, net                                                                       (539)             (102)

Proceeds from exercise of employees' share options, net                                      42                26

Issuance expenses                                                                         (109)                 -



Net cash used in financing activities                                                     (516)             (145)



Increase (decrease) in cash and cash equivalents                                        (9,068)               917

Cash and cash equivalents at the beginning of the year                                   10,029               961



Cash and cash equivalents at the end of the year                                     $      961      $      1,878



Supplemental disclosure of cash flows activities:

Cash received during the year for:

Interest                                                                     Ub      $      656        $      855

Non-cash activities:

Cancellation of issuance expenses payable                                              $      -        $      455



Investment in associate (see Note 1c)                                                  $      -      $      2,500




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







NOTE 1:-   GENERAL



a.       Orca Interactive Ltd. ('the Company') was incorporated in Israel and
commenced operations in August 1995. The Company is headquartered in Ra'anana,
Israel. The Company's shares are traded on AIM of the London Stock Exchange
('LSE'). The Company is a subsidiary of Emblaze Ltd. ('the parent company'), a
company incorporated in Israel and traded on the LSE.



b.       The Company develops and licenses software for the provision of
television and other entertainment services over IP network infrastructures. As
of 31 December 2006, the Company employs 74 employees.



c.       On 15 October 2006 the Company signed an agreement to become the owner
of 33.33% of the Ordinary shares in an Israeli Franchise ('the Franchise') of
one of the world's leading media companies.



The Franchise is engaged in the retail business of rental and sale of DVD and
video products under an area development agreement and a Franchise agreement
with Blockbuster Video International Corporation



The Franchise intends to enter into the video-on-demand/Internet Protocol
Television ('IPTV') activities and to establish commercial IPTV services.



On the same date and in consideration for the Franchise's shares, a commercial
agreement ('the agreement') that was signed between the Company and the
Franchise on 29 December 2005 became effective. Under the agreement, the Company
will become the sole provider to the Franchise of an end-to-end IPTV solution
system. The two agreements are accounted for as a non-monetary transaction,
under which the Company will provide its software and services in consideration
for a 33.33% holding in the Franchise, plus $ 500 in cash. The Company's
management, based on a valuation performed by a third party, determined that the
fair value of the shares received is approximately $ 2,500. Accordingly, the
Company's management determined that the value of the licenses and the services
to by provided by the Company to the Franchise is approximately $ 3,000, based
on the value of the shares received plus $ 500 in cash. Revenues from the
agreement will be generated from the provision of licenses for the use of the
Company's RiGHTv IPTV middleware, professional services and complementary third
party IPTV solution systems.



As no work had been performed in this transaction at 31 December 2006, the
entire value of the contract in the amount of approximately $ 3,000 was recorded
as an advance from customers.



d.             As for major customers - see also Note 14b.





NOTES TO FINANCIAL STATEMENTS


U.S. dollars in thousands, except share and per share data







NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES



a.       The financial statements of the Company have been prepared on a
historical cost basis, in accordance with International Financial Reporting
Standards ('IFRS').



b.       The accounting policies adopted by the Company for all periods
presented are in compliance with the IFRS, that are effective at 31 December
2006.



c.       Functional currency and translation:



Substantially part of the Company's sales are made outside Israel in non Israeli
currencies, mainly the U.S. dollar. A substantial portion of the Company's
expenses, mainly selling and marketing expenses is incurred in or linked to U.S.
dollars. The funds of the Company are held in U.S. dollars. Therefore, the
Company's management has determined that the U.S. dollar is the currency of the
primary economic environment of the Company, and thus its functional and
presentation currency.



Monetary assets and liabilities denominated in non-U.S. dollar currencies (new
Israeli shekels ('NIS') or Euros) are translated into U.S. dollars at the
exchange rate on balance sheet date. Transactions in non-U.S. dollar currencies
are translated into U.S. dollars at the exchange rate on the date of
transaction. Transaction differences are included in financing income in the
statements of operations.



The functional currency of an associate is the New Israeli Shekel. As at the
reporting date, the investment in an associate in the balance sheet is
translated into the presentation currency of the Company ('the dollar') at the
rate of exchange prevailing at the balance sheet date. Equity losses are
translated at the weighted average exchange rates for the year. The exchange
differences arising form the translation are taken directly to a separate
component of equity. On disposal of a foreign entity, the deferred cumulative
amount recognized in equity, relating to that particular foreign operation, is
recognized in the statement of income.



Data regarding exchange rates for the NIS and Euro in relation to U.S. dollar
are as follows:


                                        Exchange rate of               Exchange rate of
As of                                    one U.S. dollar                one U.S. dollar

31 December 2006                               NIS 4.225                      Euro 0.759
31 December 2005                               NIS 4.603                      Euro 0.845




d.       Cash equivalents:



The Company considers all highly liquid investments originally purchased with
maturities of three months or less to be cash equivalents.

















NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (Cont.)



e.       Investment in financial assets:



The Company accounts for investments in debt securities in accordance with
International Accounting Standard No. 39, 'Financial Instruments: Recognition
and Measurement' ('IAS 39'). The Company determines the classification of its
financial assets after initial recognition and, where allowed and appropriate,
reevaluates this designation at balance sheet date.



Available-for-sale financial assets



After initial recognition, available-for-sale financial assets are measured at
fair value with gains or losses being recognized as a separate component of
equity until the investment is derecognized or until the investment is
determined to be impaired at which time the cumulative gain or loss previously
reported in equity is included in the statement of operations. As of 31 December
2005 and 2006, no impairment loss has been identified.



The fair value of investments that are actively traded in organized financial
markets is determined by reference to quoted market prices at the close of
business on the balance sheet date.



f.       Trade receivables:



Trade receivables are recognized and carried at the original invoice amount less
an allowance for any uncollectible amounts. An allowance for doubtful debts is
recorded when there is evidence that the Company will be unable to collect the
full amount. Bad debts are written-off when identified by management.



g.       Fair value of financial instruments:



The carrying amounts of cash and cash equivalents, marketable securities, trade
receivables, other accounts receivable, trade payables and other accounts
payable approximate their fair value.



h.       Property and equipment:



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


                                                                               %

Computers and peripheral equipment                                           25-33
Office furniture and equipment                                               6-15
Leasehold improvements                                            Over the term of the lease









NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (Cont.)



The carrying value of the equipment is reviewed for impairment wherever events
or changes in circumstances indicate that the carrying value may not be
recoverable. As of 31 December 2005 and 2006, no impairment losses have been
identified



i.        Severance pay:



The Company's liability for severance pay pursuant to the Israel's Severance Pay
Law is based on the last monthly salary of the employee multiplied by the number
of years of employment, as of the date of severance. The cost of providing
severance pay is determined using an independent actuary. Actuarial gains and
losses are recognized immediately in the statement of operations in the period
in which they occur.



The value of the deposited funds is based on the cash surrender value of the
insurance policies. The deposited funds include profits accumulated up to the
balance sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the severance pay obligation, pursuant to Israel's Severance Pay
Law or labor agreements.



Severance pay expense amounted to $ 364 and $ 315 for the years ended 31
December 2005 and 2006, respectively.



j.        Revenue recognition:



The Company generates revenues mainly from licensing the rights to use its
software products, sales of third party hardware systems, from software licenses
that require customization and from integration and professional services. The
Company also generates revenues from maintenance, support and training. The
Company does not grant a right of return to its customers.



Revenues from software licensing arrangements and from third party hardware
system sales are recognized to the extent that it is probable that the economic
benefits will flow to the Company and the revenues can be reliably measured.



Software licenses that require significant customization, integration and
professional service revenues are recognized on a percentage of completion
method when no significant acceptance provision is included in the agreement
based on the relationship of actual costs incurred to total costs estimated to
be incurred over the duration of the contract. A provision for estimated losses
on uncompleted contracts is recorded in the period in which such losses are
first identified. As of 31 December 2005 and 2006, no provision for such losses
has been identified.



Maintenance and support are recognized on a straight-line basis over the term of
the maintenance and support agreement. Deferred revenue includes unearned
amounts received under maintenance and support contracts, and amounts received
from customers but not recognized as revenues.



Income from interest is recognized as the income accrues.







NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (Cont.)



k.       Research and development:



Research costs are expensed to operations as incurred. Development costs are
also expensed to operations as incurred if such costs do not meet the criteria
for capitalization as set forth in IAS 38, 'Intangible assets'. In the years
ended 31 December 2005 and 2006, no development costs were capitalized.



l.        Government grants:



Royalty-bearing grants and non-royalty-bearing grants from the Government of
Israel for funding approved research and development projects are recognized at
the time the Company is entitled to such grants, on the basis of the costs
incurred. Non-royalty-bearing grants are presented as a deduction from research
and development expenses. Royalty-bearing grants are presented as a deduction
from research and development expenses when there is reasonable assurance that
the grants will not be repaid based on estimated future sales. Such grants are
recorded as a liability when repayment is probable.



Development grants that were deducted from research and development expenses
amounted to $ 0 and $ 204 for the years ended 31 December 2005 and 2006,
respectively.



m.      Investment in an associate:



The Company's investment in its associate is accounted for using the equity
method of accounting. An associate is an entity in which the Company has
significant influence and which is neither a subsidiary nor a joint venture.



Under the equity method, the investment in the associate is carried in the
balance sheet at cost plus post acquisition changes in the Company's share of
net assets of the associate. Goodwill relating to an associate is included in
the carrying amount of the investment and is not amortized. The statement of
operations reflects the share of the results of operations of the associate.
Where there has been a change recognized directly in the equity of the
associate, the Company recognizes its share of any changes and discloses this,
when applicable, in the statement of changes in equity. Profits and losses
resulting from transactions between the Company and the associate are eliminated
to the extent of the interest in the associate.



n.       Income taxes:



The Company accounts for deferred income taxes under the liability method of
accounting. Under the liability method, deferred taxes are provided based on the
differences between the financial reporting and tax basis of assets and
liabilities and are measured at enacted tax rates that are expected to be
applicable in the year in which the differences reverse. Deferred tax assets in
respect of carryforward losses and other temporary deductible differences are
recognized to the extent that it is probable that they will be utilized.



o.       Basic and diluted net loss per share:



Basic net loss per share is computed based on the weighted average number of
Ordinary shares outstanding during each year. Diluted net loss per share is
computed based on the weighted average number of Ordinary shares outstanding
during each year, plus dilutive potential Ordinary shares considered outstanding
during the period, except when such potential shares are anti-dilutive.



p.       Concentrations of credit risk:



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



The majority of the Company's cash and cash equivalents are invested in U.S.
dollars with major banks in the United States. Management believes that the
financial institutions that hold the Company's investments are financially sound
and accordingly, minimal credit risk exists with respect to these investments.



Trade receivables are mainly derived from sales to customers primarily located
in Europe. The Company performs ongoing credit evaluations of its customers. An
allowance for doubtful accounts is determined with respect to those amounts that
the Company has determined to be doubtful of collection. Bad debts are
written-off when identified by management.



The Company relies upon two major customers that, as of 31 December 2006,
represent 45% and 10% of the Company's revenues (see also Note 14b).



The Company's marketable securities include investments in corporate debentures,
foreign government debt, auction rate securities and U.S. government and agency
debt. Management believes that those corporations and governments are
financially sound and the portfolio is well diversified, and accordingly,
minimal credit risk exists with respect to these marketable debt securities.



As of 31 December 2006, the Company has no significant off-balance sheet
concentration of credit risk, such as forward exchange contracts, options
contracts or other foreign hedging arrangements.









NOTE 2:-   SIGNIFICANT ACCOUNTING POLICIES (Cont.)



q.       Share-based payment transactions:



The Company applies the provisions of IFRS 2, 'Share-Based Payment'. IFRS 2
requires an expense to be recognized where the Company buys goods or services in
exchange for shares or rights over shares ('equity-settled transactions'), or in
exchange for other assets equivalent in value to a given number of shares of
rights over shares ('cash-settled transactions'). The main impact of IFRS 2 on
the Company is the expensing of employees' and directors' share options
(equity-settled transactions).



The cost of equity-settled transactions with employees is measured by reference
to the fair value at the date on which they are granted. The fair value is
determined by using the Black-Scholes option-pricing model taking into account
the terms and conditions upon which the instruments were granted.



The cost of equity-settled transactions is recognized, together with a
corresponding increase in equity, over the period in which the performance and/
or service conditions are fulfilled, ending on the date on which the relevant
employees become fully entitled to the award ('the vesting date'). The
cumulative expense recognized for equity-settled transactions at each reporting
date until the vesting date reflects the extent to which the vesting period has
expired and the Company's best estimate of the number of equity instruments that
will ultimately vest.



r.       IFRS and IFRIC Interpretations not yet effective:



The Company has not early adopted IFRS and IFRIC Interpretations that have been
issued but are not effective as of 31 December 2006. Management expects that
adoption of those pronouncements will not have a material impact on the
financial position and profit of the Company in the period of initial
application.





NOTE 3:-   CASH AND CASH EQUIVALENTS


                                                                                   31 December
                                                                                 2005                2006


Cash in banks                                                          $          886      $          878

Short-term bank deposits                                                           75               1,000



                                                                       $          961      $        1,878








NOTE 4:-   SHORT-TERM AVAILABLE-FOR-SALE MARKETABLE SECURITIES



The Company invests in marketable debt securities, which are classified as
available-for-sale investments. The following is a summary of marketable debt
securities:


                                       31 December 2005                         31 December 2006
                              Amortized    Unrealized       Market     Amortized    Unrealized       Market
                                   cost        losses        value          cost        losses        value

Corporate debentures          $   3,014     $    (12)    $   3,002     $   4,018     $    (18)    $   4,000
Foreign government debt           1,000           (7)          993         4,500          (34)        4,466
Auction rate securities           2,400             -        2,400           700             -          700

Total                         $   6,414     $    (19)    $   6,395     $   9,218     $    (52)    $   9,166




The unrealized losses on the investments in available-for-sale securities are a
result of increases in market interest rates. Since the Company has the ability
and intent to hold these investments until a recovery of fair value, which may
be until maturity, the Company does not consider these investments to be
impaired as of 31 December 2006.



As of 31 December 2005 and 2006, short-term available-for-sale marketable
securities bear average nominal interest of 3.7% and 4.25%, respectively.





NOTE 5:-   LONG-TERM AVAILABLE-FOR-SALE MARKETABLE SECURITIES



The Company's long-term marketable securities are classified as
available-for-sale. The following is a summary of marketable debt securities:


                                               31 December 2005                         31 December 2006
                                     Amortized    Unrealized         Market    Amortized    Unrealized      Market
                                          cost        losses          value         cost        losses       value

Available-for-sale  - mature
after
   one year through three
years:
U.S. government and agency debt      $   6,500     $    (73)      $   6,427    $   2,500     $    (25)   $   2,475
Corporate debentures                     5,082          (53)          5,029        1,497          (16)       1,481

Available-for-sale - mature
after three years through five
years:
U.S. government and agency debt          2,000          (18)          1,982        1,500           (8)       1,492
Other                                      500             -            500          500            15         515

Total                                $  14,082     $   (144)      $  13,938    $   5,997     $    (34)   $   5,963




The unrealized losses on the Company's investments in available-for-sale
securities are a result of the increase in market interest rates. Since the
Company has the ability and intent to hold these investments until a recovery of
fair value, which may be until maturity, the Company does not consider these
investments to be impaired as of 31 December 2006.



As of 31 December 2005 and 2006, long-term available-for-sale marketable
securities bear average nominal interest of 4.6% and 4.39%, respectively.





NOTE 6:-   PROPERTY AND EQUIPMENT
                                        Computers and     Office                             Leasehold         Total
                                         peripheral      furniture                          improvements
                                          equipment         and
                                                         equipment
Cost:
Balance at 1 January 2005               $       1,949    $       62                             $       5       $ 2,016
                                                                                                                  
Additions during the year                         287             2                                     -           289

Balance at 31 December 2005                     2,236            64                                     5         2,305
Additions during the year                         181             9                                     -           190
Disposals                                       (191)             -                                     -         (191)

Balance at 31 December 2006                     2,226            73                                     5         2,304

Accumulated depreciation:
Balance at 1 January 2005                       1,489            30                                     3         1,522
Additions during the year                         291             4                                     -           295

Balance at 31 December 2005                     1,780            34                                     3         1,817
Additions during the year                         280             4                                     -           284
Disposals                                       (191)             -                                     -         (191)

Balance at 31 December 2006                     1,869            38                                     3         1,910

Depreciated cost at 31 December 2006      $       357    $       35                             $       2   $       394

Depreciated cost at 31 December 2005     $        456    $       30                             $       2   $       488



NOTE 7:-   INVESTMENT IN AN ASSOCIATE



The Company has a 33% interest in the Franchise which it acquired in October
2006.



The Franchise is a private entity that is not listed on any public exchange. The
following table illustrates summarized financial information of the Company's
investment in the associate:


                                                                                                31 December
                                                                                                       2006
Share of the associate's balance sheet:

Current assets                                                                                   $      614

Non-current assets                                                                                    4,411

Current liabilities                                                                                 (2,592)

Non-current liabilities                                                                                 (8)



Net assets                                                                                     $      2,425



Share of the associate's revenue and losses:

Revenue                                                                                        $      2,343

Losses                                                                                        $        (88)














NOTE 8:-   OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
                                                                                         31 December
                                                                                         2005       2006


Employees and payroll accruals                                                         $1,155     $  979
                                                                                                

Accrued expenses                                                                        1,195        476

Government authorities - Office of the Chief Scientist                                    503        473

Other                                                                                     101         19



                                                                                       $2,954     $1,947







NOTE 9:-   ADVANCES FROM CUSTOMERS, NET OF WORK IN PROCESS


Advances from customers                                                             $      -     $      385

Advance from customers - related party                                                     -          3,000

Work in progress                                                                           -          (326)

Work in progress - related party                                                           -           (14)



                                                                                    $      -         $ 3,045
                                                                                                          




NOTE 10:- SEVERANCE PAY LIABILITY



a.             The amounts recognized in the balance sheet are as follows:

Defined benefit obligation                                                         $     844     $     751
Fair value of plan assets                                                                578           552
Benefit liability                                                                  $     266     $     199




b.       Amounts recognized in the statement of operations are as follows:

Current service cost                                                              $       252   $       290
Interest cost                                                                              49            62
Expected return on assets                                                                 (8)          (12)
Net actuarial gain (loss) recognized in the year                                           71          (25)

Total expense included in statement of operations                                 $       364   $       315



c.       Changes in present value of the defined benefit obligation are as
follows:

Liability at the beginning of the year                                            $       635   $       844
Current service cost                                                                      252           290
Interest cost                                                                              49            62
Benefits paid                                                                            (59)         (289)
Actuarial gains on obligation                                                              13         (217)
Foreign exchange differences                                                             (46)            61

Liability at the end of the year                                                   $     844     $      751









NOTE 10:- SEVERANCE PAY LIABILITY (Cont.)


                                                                                                      31 December
                                                                                                     2005          2006

d.       Changes in the fair value of plan assets are as follows:
                                                                                                                    
Plan asset at the beginning of the year                                                        $      445     $     578
Expected return                                                                                         8            12
Contribution by employer                                                                              265           357
Benefits paid from assets                                                                            (50)         (251)
Actuarial losses                                                                                     (58)         (192)
Foreign exchange differences                                                                         (32)            48

Plan asset at the end of the year                                                              $      578     $     552



e.       The actuarial assumptions used are as follows:

Discount rate                                                                                       6.73%         6.24%
Future salary increases                                                                                5%            4%
Average expected remaining working years                                                              9.0           8.3





NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES



a.       Operating leases:



The parent company has an agreement ('the lease agreement') to lease facilities
for its own use and for the use of its Israeli based subsidiaries, under a
non-cancelable operating lease agreement, for a period of five years commencing
in June 2002. On 1 January 2004, the Company signed with the parent company a
reimbursement agreement ('the reimbursement agreement') under which, it was
agreed that for the portion of the total facilities allocated to the Company,
the Company shall be liable to the parent company for all obligations the parent
company undertook under the lease agreement.



Future minimum rental commitments under the above lease as of 31 December 2006
are as follows:


2007                            $              202



Total rental expense amounted to $ 476 and $ 679 for the years ended 31 December
2005 and 2006, respectively.







NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)



b.       Royalty commitments:



Royalties to the Office of the Chief Scientist ('OCS'):



Under the research and development agreement of the Company with the OCS and
pursuant to applicable laws, the Company is required to pay royalties at the
rate of 3% of sales of products developed with funds provided by the OCS, up to
an amount equal to 100% of the grants received, plus interest at the 12-month
LIBOR rate. The Company is obligated to repay the Israeli Government for the
grants received only to the extent that there are sales of the funded products.



In 2005 and 2006, royalty-bearing grants received and that were included as a
liability in the balance sheet amounted to $ 292 and $ 27, respectively.



The Company accrued and paid royalties in the net amounts of $ 142 and $ 96 for
the years ended 31 December 2005 and 2006, respectively, relating to the
repayment of such grants. As of 31 December 2005 and 2006, the Company has a
contingent obligation to pay royalties which amounts to approximately $ 400 and
$ 372, respectively.





NOTE 12:- EQUITY



a.       Right of Ordinary shares:



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



b.       Share-based payment plans:



In 2001, the Company implemented the 2000 stock option plan ('the Plan'). Under
the Plan, 3,000,000 options to purchase Ordinary shares have been reserved for
issuance. These options may be granted to consultants, directors and employees.
Options granted are mainly vested as follows: 25% after the first year, 25%
after the second year, 25% after the third year and 25% after the fourth year,
effective from the date of grant. If not exercised, the options will expire on
the tenth anniversary of the date of the grant. The exercise price of these
options may not be less than 100% of the fair value of the share at the date of
grant. Any options which are canceled or forfeited before expiration become
available for future grants.



The Company approved in 2005 an increase of 1,136,000 Ordinary shares reserved
for option grants under the Plan.



         The total amount of Ordinary shares available for future grants as of
31 December 2006, amounted to 1,421,085.



A summary of the Company's stock activity and related information is as follows:


                                                                        Year ended 31 December
                                                                   2005                       2006
                                                           Number       Weighted      Number       Weighted
                                                             of         average     of options      average
                                                           options      exercise                   exercise
                                                                         price                       price

Outstanding at the beginning of the                       2,594,500     $    0.82     2,582,000    $    0.86
period                                                                      

Granted                                                     230,000     $    1.56       320,000    $    0.67
Exercised                                                 (153,500)     $    0.28      (96,000)    $    0.28
Canceled or forfeited                                      (89,000)     $    1.32     (456,000)    $    1.21




Outstanding at the end of the period                      2,582,000     $    0.86     2,350,000    $    0.79

Exercisable at the end of the period                      1,545,125     $    0.46     1,575,750    $    0.66


                          Options           Weighted                         Options            Weighted
                        outstanding         average         Weighted       exercisable      average exercise
     Range of              as of           remaining         average          as of             price of
     exercise           December 31,      contractual       exercise       December 31,         options
       price                2006          life (years)        price            2006           exercisable

$         0.28 - $ 0.39     1,429,625              5.55    $   0.29            1,223,125      $         0.28
$         0.77 - $ 1.08       132,000              9.87    $   1.01                    -      $           -
$         1.24 - $ 1.49       106,000              1.35    $   1.35               26,500      $         1.35
$          1.94 - $ 2.69      682,375              2.07    $   2.10              326,125      $         2.07
                            2,350,000              6.91    $   0.90            1,575,750       $        0.66




As of 31 December 2006, the Company's employees also hold 290,226 options to
acquire the parent company's Ordinary shares, out of which 253,902 are
exercisable.



The weighted average fair value of the options granted during 2005 and 2006 was
approximately $ 0.64 and $ 0.26, respectively. The weighted average share price
at the date of exercise in 2006, was approximately $ 0.46.



The fair value of the share options is measured at the grant date using the
Black-Scholes option pricing model taking into account the terms and conditions
upon which the options were granted. The following are the inputs to the model
used for the years ended 31 December 2006 and 2005: risk-free interest rates in
the range of 3.0% - 4.4% and 4.7% - 5.16%, respectively; dividend yield of 0%
for each year; a volatility factor of the expected market price of the Company's
Ordinary shares in the range of 50% - 73% and 64% - 82%, respectively; and a
weighted average expected life of the option for each year in the range of 2.5 -
4 years.



In the year ended 31 December 2006, the Company recorded employee benefit
expense in respect of options in the amount of $ 176, with a corresponding
increase in  equity (2005-$288).







c.     Share issuance expenses - During 2006, based on the opinion of its legal
counsel, the Company's management decided to cancel a previously recorded
accrual in the amount of $ 455 for issuance expenses in respect of stamp duty on
shares issued in 2004.





NOTE 13:- INCOME TAXES



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



Until 31 December 2005, results for tax purposes in Israel were measured in
terms of earnings in NIS after certain adjustments for increases in Israel's
Consumer Price Index ('CPI').



Commencing in 2006, the Company has elected to measure its taxable income and
file its tax return under the Israeli Income Tax Regulations (Principles
Regarding the Management of Books of Account of Foreign Invested Companies and
Certain Partnerships and the Determination of Their Taxable Income), 1986. Such
an election obligates the Company for three years. Accordingly, commencing in
2006, results for tax purposes are measured in terms of earnings in U.S.
dollars.



b.       Tax rates:



On 25 July 2005, the Knesset (Israeli Parliament) approved the Law of the
Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among
others, a gradual decrease in the corporate tax rate in Israel to the following
tax rates: 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and 2010 and
thereafter - 25%.









NOTE 13:- INCOME TAXES (Cont.)



c.       Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ('the Law'):



In respect of the Company's production facilities in Israel, the Company
submitted applications for 'Approved Enterprise' status for two investment
programs under the above Law. The main benefit arising from such status is the
reduction in tax rates on income derived from 'Approved Enterprises'.
Consequently, the Company is entitled to two years of a tax exemption and five
years of a reduced tax rate (25%) on income from its 'Approved Enterprises'
beginning from the time that the Company initially has taxable income. The
period of tax benefits, is subject to limits of the earlier of 12 years from the
commencement of production, or 14 years from the approval date. As the Company
had no taxable income, the benefit periods have not yet commenced.



The entitlement to the above benefits is conditional upon the Company fulfilling
the conditions stipulated by the above law, regulations published thereunder,
and the letters of approval for the specific investments in 'Approved
Enterprises'. In the event of failure to comply with these conditions, the
benefits may be canceled and the Company may be required to refund the amount of
the benefits, in whole or in part, including interest. As of 31 December 2006,
the Company had not utilized any of the aforementioned tax benefits.



In 2002 the Company completed the implementation of its first investment
program, however, due to the Company's changing the scope of the investment
programs from website management design, the Company's first investment program
was not approved by the Investment Center. The Company's second investment
program has been completed this year, but not yet approved. Accordingly, income
that will not be attributed to the second program may be subject to tax at the
regular rate.



If tax-exempt profits are distributed to shareholders, they would be taxed at
the corporate tax rate applicable to such profits as if the Company had not
elected the alternative system of benefits, currently 25% for an 'Approved
Enterprise'.



Income from sources other than the 'Approved Enterprise' during the benefit
period will be subject to tax at the regular rate prevailing at that time.



A recent amendment to the law, which has been officially published effective as
of 1 April  2005 ('the Amendment') has changed certain provisions of the law. As
a result of the Amendment, a company is no longer obliged to implement an
Approved Enterprise status in order to receive the tax benefits previously
available under the Alternative Benefits provisions, and therefore there is no
need to apply to the Investment Center for this purpose (Approved Enterprise
status remains mandatory for companies seeking grants). Rather, a company may
claim the tax benefits offered by the Investment Law directly in its tax
returns, provided that its facilities meet the criteria for tax benefits set out
by the Amendment. A company is also granted a right to approach the Israeli Tax
Authorities for a pre-ruling regarding their eligibility for benefits under the
Amendment.





Tax benefits are available under the Amendment to production facilities (or
other eligible facilities), which are generally required to derive more than 25%
of the company's business income from export. In order to receive the tax
benefits, the Amendment states that a company must make an investment in the
benefited enterprise exceeding a minimum amount specified in the law. Such
investment may be made over a period of no more than three years ending at the
end of the year in which the company requested to have the tax benefits apply to
the benefited enterprise ('the Year of Election'). Where a company requests to
have the tax benefits apply to an expansion of existing facilities, then only
the expansion will be considered a benefited enterprise and the company's
effective tax rate will be the result of a weighted combination of the
applicable rates. In this case, the minimum investment required in order to
qualify as a benefited enterprise is required to exceed a certain percentage of
the company's production assets before the expansion. The duration of tax
benefits is subject to a limitation of the earlier of seven years from the
Commencement Year, or 12 years from the first day of the Year of Election.



d.       Net operating loss carryforward:



The Company has accumulated net operating loss carryforwards for tax purposes as
of 31 December 2006 of approximately $ 30,000, which may be carried forward and
offset against taxable income in the future for an indefinite period. Other
deductible temporary differences are immaterial.



Since management believes that it is not probable that these tax loss
carryforwards will be utilized in the foreseeable future, no deferred tax assets
have been recorded in respect thereof.





NOTE 14:- REVENUES BY GEOGRAPHIC AREAS AND MAJOR CUSTOMERS



The Company manages its business on a basis of one reportable segment.



a.       Revenues classified by geographical destinations based on the
customer's location:


                                                                          Year ended 31 December
                                                                            2005               2006


America                                                               $    3,320      $         568
Europe and Middle East                                                     1,944              2,729
Far East                                                                      61                 42
                                                                      $    5,325    $         3,339










NOTE 14:- REVENUES BY GEOGRAPHIC AREAS AND MAJOR CUSTOMERS (Cont.)



b.       Information about major customers:


                                                                              Year ended 31 December
                                                                             2005               2006


Customer A                                                                  51%                 8%

Customer B                                                                  22%                10%

Customer C                                                                  10%                 8%

Customer D                                                                    -                45%





NOTE 15:- SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS



a.       Cost of revenues:
                                                                          Year ended 31 December
                                                                          2005               2006


Salaries and related benefits                                    $          91       $        100



Depreciation *)                                                  $           6        $         -




b.       Research and development expenses, net:


Salaries and related benefits                                     $      1,881        $     2,387



Depreciation *)                                                   $         180       $       160



Share-based compensation                                          $          69       $         61




c.       Selling and marketing expenses:


Salaries and related benefits                                      $      2,386       $      2,352



Depreciation *)                                                    $        143       $        130

                                                                   $        127      $          77

Share-based compensation



d.       General and administrative expenses:


Salaries and related benefits                                     $         751     $         785

                                                                  
                                                           
Depreciation *)                                                   $          53     $          44


Share-based compensation                                          $          92     $          38



Bad debts                                                         $         552       $         3




*)       Includes also depreciation expense allocated by the parent company
based on agreements between the parent company and the Company.







NOTE 15:- SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS (Cont.)



e.       Compensation to key management personnel:


                                                                                    Year ended 31 December
                                                                                     2005                  2006



                                                                       
Salaries and short-term benefits                                             $         863          $       960

                                                                        

Share-based compensation                                                     $         138           $       87



f.     Financial income, net:

       Financial income:
       Interest on bank deposits and marketable debt securities                 $       810         $       785
       Foreign currency translation differences, net                                     47                  95

                                                                                        857                 880
       Financial expenses:
       Interest and other bank charges                                                 (63)                (26)

                                                                                $       794         $       854





NOTE 16:- TRANSACTIONS AND BALANCES WITH PARENT COMPANY



a.       The following transactions with the parent company are included in the
statements of operations (mainly in respect of rental and overhead expenses):


                                                                       Year ended 31 December
                                                                       2005                   2006


          Research and development                                     $      303      $       370



          Sales and marketing                                          $      292      $       301



          General and administrative                                   $      175      $       198




b.       Balances with related parties:


Current liabilities                                                   $      336         $      234






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