In recent years, email has become one of the most important forms of electronic communication worldwide. In its June 2005 “US Online User Consumer Survey, 2005,” Jupiter Research stated that email is the most popular online activity and that 88% of respondents indicate they use email regularly. The next closest activity referenced in such report was search engines/portals at 76%. All other online activities were found to be less popular, including product/service purchase at 59%, instant messaging at 45% and online newspapers at 42%.

The May 2005 Radicati Report estimates that the number of worldwide email users will increase from approximately 680 million in 2005 to 920 million in 2009 and that the number of email mailboxes will increase from approximately 1.2 billion in 2005 to 1.8 billion in 2009.

The email market may be divided into two segments: the consumer, or home user, market and the business, or corporate, market. Both the consumer and the business markets are serviced by many of the same popular email software programs, such as Microsoft Outlook, and by web-based email services, such as Hotmail, Yahoo!® Mail and Gmail. The Radicati Report estimates that total consumer email clients will grow from approximately 760 million in 2005 to 1.3 billion in 2009 with an approximately 65%-35% split between desktop and web-based remaining constant for the period.

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

The Company’s product Xe Xe, launched in September 2000, is the flagship product that is available over the Internet free of charge. It offers a variety of features that the user can apply to email messages including pre-prepared backgrounds and letterheads, animated notifiers, emoticons, 3D effects, handwritten signatures, a web gallery with additional animations, notifiers and email backgrounds, sound effects, and virtual e-cards.

The Company’s Premium, launched in the first quarter of 2001, is an enhanced version of Xe. Users who upgrade their free version of Xe through the purchase of Premium also benefit from the following features: no advertising banners displayed in the product, the ability to change the appearance of the product through the use of software skins, voice message recorder, no promotional link at the bottom of outgoing emails, enhanced notifiers, a web gallery with additional animations, notifiers and email backgrounds, advanced account access, and user support.

The Company’s Letter Creator, also launched in the first quarter of 2001, is an application that enables Xe and Premium users to design and create their own personalized email letters and ecards. Such users can create their own letterheads, customize their emails with 3D effects, font styles, images and pictures and add personalized backgrounds. The Gold Gallery, launched in February 2004, is a subscription-based content database. It offers access to additional content files in the form of email backgrounds, animations, sounds, graphics and email notifiers.

Junk Filter Plus, launched in July 2005, is an advanced anti-spam product, based on the Recurrent Pattern Detection Technology (RPD) that the Company license from Commtouch Ltd. Junk Filter Plus offers a filtering technique to manage unwanted email, including offensive content, viruses, hoax emails and identity theft scams. This anti-spam product is designed to automatically identify and block undesirable mail from the user\'s inbox and protect against fraudulent and malicious emails.

The Company intends to offer SMS communication services, which will allow its users to send and receive mobile phone text messages through its email programs, by entering into revenue sharing agreements with mobile telecommunication operators. The Company intends to offer both automatic email notifications by SMS direct to cellular phones and SMS communication between the email programs and cellular phones.

Cost of revenues increased by $60.0 thousand, from $244.0 thousand for the six months ended June 30, 2004 to $304.0 thousand for the six months ended June 30, 2005.

Research and development expenses increased by $232.0 thousand, from $651.0 thousand for the six months ended June 30, 2004 to $883.0 thousand for the six months ended June 30, 2005.

Selling and marketing expenses increased by $163.0 thousand, from $277.0 thousand for the six months ended June 30, 2004 to $440.0 thousand for the six months ended June 30, 2005.

Income before tax increased 22% from $1.4 million in the six months ended June 30, 2004 to $1.7 million in the six months ended June 30, 2005.