AGREEMENT AND PLAN OF MERGER

Exhibit 2.1

EXECUTION VERSION

A GREEMENT AND P LAN OF M ERGER

D ATED AS OF J ANUARY 12, 2005

AMONG

C ADENCE D ESIGN S YSTEMS , I NC .,

V ERISITY L TD .

AND

S CIOTO R IVER L TD .

TABLE OF CONTENTS

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TABLE OF EXHIBITS

TABLE OF CONTENTS

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DISCLOSURE LETTER

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TABLE OF DEFINED TERMS

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AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER (this “ Agreement ”), dated as of January 12, 2005, is by and among Verisity Ltd., an Israeli corporation (the “ Company ”), Cadence Design Systems, Inc., a Delaware corporation (“ Parent ”), and Scioto River Ltd., an Israeli corporation and a wholly owned subsidiary of Parent (“ Acquisition ”).

WHEREAS, the Boards of Directors of the Company, Parent and Acquisition have each (i) determined that the Merger is advisable and fair and in the best interests of their respective corporations and stockholders and (ii) approved the Merger upon the terms and subject to the conditions set forth in this Agreement;

WHEREAS, Parent, as the sole shareholder of Acquisition, has approved the Merger and this Agreement;

WHEREAS, Parent, the Company and Acquisition intend to effect the Merger of Acquisition into the Company in accordance with this Agreement and the Israeli Companies Law-5759-1999 (the “ Companies Law ”);

WHEREAS, certain officers and employees of the Company have entered into employment agreements, effective upon consummation of the Merger (the “ Employment Agreements ”), as an inducement to Parent to enter into this Agreement; and

WHEREAS, certain shareholders of the Company have entered into non-competition agreements, effective upon consummation of the Merger (the “ Non Competition Agreements ”), as an inducement to Parent to enter into this Agreement.

NOW, THEREFORE, in consideration of the foregoing premises and the representations, warranties, covenants and agreements herein contained, and intending to be legally bound hereby, the Company, Parent and Acquisition hereby agree as follows:

ARTICLE 1

THE MERGER

Section 1.1. The Merger . At the Effective Time and upon the terms and subject to the conditions of this Agreement and in accordance with the Companies Law, Acquisition (as the target company ( Chevrat Ha’Ya’ad )) shall be merged with and into the Company (as the absorbing company ( HaChevra Ha’Koletet )) (the “ Merger ”). Following the Merger, the Company shall continue as the surviving corporation (the “ Surviving Company ”) and the separate corporate existence of Acquisition shall cease.

Section 1.2. Effective Time . Subject to the terms and conditions set forth in this Agreement, the Merger shall become effective after the delivery of the Shareholder Approval Notices to the Companies Registrar, after the expiration of the 70 day waiting period set forth in such Section 323 of the Companies Law, after the Closing has

occurred, and upon the issuance of a certificate of merger by the Companies Registrar in accordance with Section 323(5) of the Companies Law (the “ Effective Time ”). For the removal of doubt, the Merger shall not be effective for any and all purposes, and the parties shall cooperate to cause the issuance of the certificate of merger not to be made, until after the satisfaction or waiver of the conditions set forth in Article 5, notwithstanding the expiration of the 70 day waiting period set forth in such Section 323 of the Companies Law and/or any filings made and approvals obtained in connection with the Merger.

Section 1.3. Closing of the Merger . The closing of the Merger (the “ Closing ”) will take place at a time and on a date (the “ Closing Date ”) to be specified by the parties, which shall be no later than the third business day after satisfaction of the latest to occur of the conditions set forth in Article 5, at the offices of Gibson, Dunn & Crutcher LLP, 1881 Page Mill Road, Palo Alto, California 94304, but in no event before the delivery of the Shareholder Approval Notices and the expiration of the 70 day period referred to in Section 1.2, unless another time, date or place is agreed to in writing by the parties hereto.

Section 1.4. Effects of the Merger . The Merger shall have the effects set forth in the Companies Law. Without limiting the generality of the foregoing and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of the Company and Acquisition shall vest in the Surviving Company, and all debts, liabilities and duties of the Company and Acquisition shall become the debts, liabilities and duties of the Surviving Company.

Section 1.5. Articles of Association and Memorandum of Association . The Articles of Association of the Surviving Company shall be amended as necessary to read the same as the Articles of Association of Acquisition in effect at the Effective Time until amended in accordance with applicable law. The Memorandum of Association of the Company shall be the Memorandum of Association of the Surviving Company until amended in accordance with applicable law.

Section 1.6. Directors . The directors of Acquisition at the Effective Time shall be appointed as the initial directors of the Surviving Company, each to hold office in accordance with the Articles of Association of the Surviving Company until such director’s successor is duly elected or appointed and qualified.

Section 1.7. Officers . The officers of Acquisition at the Effective Time shall be appointed as the initial officers of the Surviving Company, each to hold office in accordance with the Articles of Association of the Surviving Company until such officer’s successor is duly elected or appointed and qualified.

Section 1.8. Conversion of Shares .

(a) At the Effective Time, each ordinary share, NIS 0.01 par value per share, of the Company (each a “ Share ” and, collectively, the “ Shares ”) issued and outstanding immediately prior to the Effective Time (other than (i) Shares held in the Company’s treasury or by any of the Company’s Subsidiaries and (ii) Shares held by

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Parent, Acquisition or any other subsidiary of Parent) shall, by virtue of the Merger and without any action on the part of Acquisition, the Company or the holder thereof, be converted into the right to receive $12.00 in cash without interest (the “ Merger Consideration ”).

(b) At the Effective Time, each outstanding ordinary share, NIS 0.01 par value per share, of Acquisition shall be converted into one ordinary share, NIS 0.01 par value per share, of the Surviving Company.

(c) At the Effective Time, each Share held in the treasury of the Company and each Share held by Parent or any subsidiary of Parent, Acquisition or the Company immediately prior to the Effective Time shall remain outstanding and no Merger Consideration shall be delivered with respect thereto.

(d) Each Share subject to repurchase by the Company, or that is otherwise subject to a risk of forfeiture or other condition under any applicable restricted stock purchase agreement or other agreement with the Company, issued and outstanding immediately prior to the Effective Time (each a “ Restricted Company Share ”) shall be exchanged pursuant to Section 1.8(a) into the right to receive the Merger Consideration, subject to permanent retention (i.e., forfeiture by the holder thereof) by Parent on the same terms as governed such Restricted Company Share prior to the Merger (such Merger Consideration, until the restrictions thereon lapse, is referred to as “ Restricted Cash ”); provided, however, that upon permanent retention of any Restricted Cash, Parent will pay to the former holder of the applicable Restricted Company Share an amount equal to the repurchase price of the Restricted Company Shares in effect immediately prior to the Effective Time, if any. Parent will distribute to former holders of Restricted Company Shares any amount of Restricted Cash with respect to which the restrictions lapse after the Effective Time in accordance with the terms that governed the Restricted Company Share.

Section 1.9. Exchange of Certificates .

(a) Prior to the Effective Time Parent shall deliver to its transfer agent, or a depository or trust institution of recognized standing selected by Parent and Acquisition and reasonably satisfactory to the Company (the “ Exchange Agent ”) for the benefit of the holders of Shares for exchange in accordance with this Article 1 an amount of cash equal to the Merger Consideration multiplied by the number of Shares outstanding as of the Effective Time, other than the Shares referred to in Section 1.8(c) (such cash is hereinafter referred to as the “ Exchange Fund ”), to be exchanged for outstanding Shares.

(b) Promptly after the Effective Time, the Exchange Agent shall mail to each holder of record of a certificate or certificates that immediately prior to the Effective Time represented outstanding Shares (the “ Certificates ”) and whose shares were converted into the right to receive Merger Consideration pursuant to Section 1.8: (i) a letter of transmittal (which shall specify that delivery shall be effected and risk of loss and title to the Certificates shall pass only upon delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent and

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the Company may reasonably specify prior to Closing) and (ii) customary instructions for use in effecting the surrender of the Certificates in exchange for Merger Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration to which such holder is entitled. In the event of a transfer of ownership of Shares that is not registered in the transfer records of the Company, Merger Consideration may be issued to a transferee if the Certificate representing such Shares is presented to the Exchange Agent accompanied by all documents required to evidence and effect such transfer and by evidence sufficient to show that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 1.9, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Consideration as contemplated by this Section 1.9.

(c) If any Certificate shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange therefor, upon the making of an affidavit of that fact by the holder thereof, such Merger Consideration as may be required pursuant to this Agreement; provided , however , that Parent or the Exchange Agent may, in its discretion, require the delivery of a suitable bond or indemnity against any claim that may be made against it with respect to such certificate.

(d) Merger Consideration paid upon the surrender for exchange of Shares in accordance with the terms hereof shall be deemed to have been paid in full satisfaction of all rights pertaining to such Shares. From the Effective Time, there shall be no further registration of transfers on the stock transfer books of the Surviving Company of the Shares that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Company for any reason, they shall be canceled and exchanged as provided in this Article 1.

(e) Any portion of the Exchange Fund that remains undistributed to the former shareholders of the Company upon the one year anniversary the Effective Time shall be delivered to Parent upon demand, and any former shareholders of the Company who have not theretofore complied with this Article 1 shall thereafter look only to Parent for payment of their claim for Merger Consideration.

(f) The Exchange Agent shall invest the cash included in the Exchange Fund, as so directed by Parent. Any interest and other income resulting from such investments shall be paid to Parent upon the termination of the Exchange Fund pursuant to Section 1.9(e).

(g) Neither Parent nor the Company shall be liable to any holder of Shares for Merger Consideration from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.

Section 1.10. Stock Options and Restricted Stock Units .

(a) At the Effective Time, except as set forth below with respect to Sub-Plan Options, each outstanding option to purchase Shares (each “ Company Stock

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Option ” and, collectively, “ Company Stock Options ”) issued pursuant to the Company’s Amended and Restated Verisity Ltd. 2000 U.S. Share Incentive Plan, Verisity Ltd. 1999 Israeli Share Option Plan, Verisity Ltd. 1999 Share Incentive Plan, the Verisity Ltd. 1997 Israel Share and Stock Option Incentive Plan (but not including the Sub-Plan for the Issuance of Options to the Company’s Employees), 1996 U.S. Stock Option Plan (as amended on October 28, 1999), Verisity Ltd. 2000 Israeli Share Option Plan and Amended and Restated Axis Systems Inc. 1997 Stock Plan or other agreement or arrangement, whether vested or unvested, shall be converted as of the Effective Time into options to purchase shares of Parent Common Stock in accordance with this Section 1.10. All plans or agreements described above pursuant to which any Company Stock Option has been issued or may be issued are referred to collectively as the “ Company Plans ”. Notwithstanding the foregoing, subject to any changes made in accordance with Section 4.22, each outstanding Company Stock Option outstanding under the Sub-Plan for the Issuance of Options to the Company’s Employees under the Verisity Ltd. 1997 Israel Share and Stock Option Incentive Plan (the “ Sub-Plan ” and such Company Stock Options, the “ Sub-Plan Options ”) shall not be converted into options to purchase shares of Parent Common Stock, but shall be exercisable for the consideration specified in Sub-Plan and the Tamir Fishman Trust. At the Effective Time, each Company Stock Option assumed by Parent pursuant to this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Company Plan under which such option was granted and the agreement evidencing the grant thereof immediately prior to the Effective Time, including provisions with respect to vesting, except that: (i) such option will be exercisable for that number of whole shares of common stock of Parent, par value $.01 per share (the “ Parent Common Stock ”), equal to the product of (A) the number of Shares that were issuable upon exercise of such option immediately prior to the Effective Time multiplied by (B) the Exchange Ratio, and rounded down to the nearest whole number of shares of Parent Common Stock; and (ii) the per share exercise price of each such Company Stock Option shall be adjusted by dividing (A) the per share exercise price of each such Company Stock Option by (B) the Exchange Ratio, and rounding up to the nearest cent. The terms of each Company Stock Option shall, in accordance with its terms, be subject to further adjustment as appropriate to reflect any stock split, stock dividend, recapitalization or other similar transaction with respect to Parent Common Stock on or subsequent to the Effective Time. The “ Exchange Ratio ” shall be equal to the quotient of (1) $12.00, divided by (2) the average of the closing prices on the NYSE of a share of Parent Common Stock during the five (5) trading days ending on the date that is two trading days prior to the Closing Date. The parties acknowledge that, with respect to any option to which Section 421 of the Code applies by reason of its qualification under Section 422 of the Code (“ incentive stock options ” or “ ISOs ”), the foregoing provisions comply with the requirements of Section 424(a) of the Code.

(b) At the Effective Time, each outstanding restricted stock unit for Shares (each “ Company Restricted Stock Unit ” and, collectively “ Company Restricted Stock Units ”) issued pursuant to any Company Plan, whether vested or unvested, shall be converted as of the Effective Time into restricted stock units for shares of Parent Common Stock in accordance with this Section 1.10. At the Effective Time, each Company Restricted Stock Unit assumed by Parent pursuant to this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Company Plan under which such Company Restricted Stock Unit was issued and the

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agreement evidencing the grant thereof immediately prior to the Effective Time, including provisions with respect to vesting, except that upon vesting the Company Restricted Stock Unit shall result in that number of shares of Parent Company Stock equal to the product of the number of Shares that remained issuable upon vesting of the Company Restricted Stock Unit immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole share of Parent Common Stock. The terms of each Company Restricted Stock Unit shall, in accordance with its terms, be subject to further adjustment as appropriate to reflect any stock split, stock dividend, recapitalization or other similar transaction with respect to Parent Common Stock on or after the Effective Time.

(c) As soon as practicable after the Effective Time, Parent shall deliver to the holders of Company Stock Options and Company Restricted Stock Units appropriate notices setting forth such holders’ rights pursuant to the Company Plans and that the agreements evidencing the grants of such options shall continue in effect on the same terms and conditions (subject to the adjustments required by this Section 1.10 after giving effect to the Merger).

(d) Parent shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Parent Common Stock for delivery upon exercise of Company Stock Options and Company Restricted Stock Units assumed in accordance with this Section 1.10. No later than five business days after the Effective Time, Parent shall file a registration statement on Form S-8 (or any successor or other appropriate forms) with respect to the shares of Parent Common Stock subject to any Company Stock Options or Company Restricted Stock Units held by persons who are directors, officers or employees of, or consultants to, the Company or any Subsidiary and shall use all commercially reasonable efforts to maintain the effectiveness of such registration statement or registration statements (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such options or restricted stock units remain outstanding.

(e) At or before the Effective Time, the Company shall cause to be effected any necessary amendments to the Company Plans to give effect to the foregoing provisions of this Section 1.10.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company hereby represents and warrants to each of Parent and Acquisition, subject to the exceptions set forth in the Disclosure Letter delivered by the Company to Parent in accordance with Section 4.12 (the “ Disclosure Letter ”) and certified by the Chief Executive Officer and the Chief Financial Officer of the Company (which exceptions shall specifically identify the Section, subsection or paragraph, as applicable, to which such exception relates, and shall be deemed to relate to each other Section, subsection or paragraph to which such exceptions clearly relate on their face), that:

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Section 2.1. Organization and Qualification; Subsidiaries; Investments .

(a) Section 2.1(a) of the Disclosure Letter sets forth, as of the date of this Agreement, a true and complete list of the persons of which the Company owns fifty percent (50%) or more of the voting interests or otherwise has the right to direct the management (each, a “ Subsidiary ”) together with the jurisdiction of incorporation or organization of each Subsidiary and the percentage of each Subsidiary’s outstanding capital stock or other equity interests owned directly or indirectly by the Company. All the outstanding capital stock or other ownership interests of each Subsidiary is owned by the Company, directly or indirectly, free and clear of any Lien or any other limitation or restriction. Each of the Company and Subsidiaries is duly organized, validly existing and (to the extent such concept exists under the laws of its jurisdiction of incorporation or organization) in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Company has delivered to Parent’s counsel accurate and complete copies of the Articles of Association or Certificate of Incorporation and Bylaws or comparable governing documents, each as in full force and effect on the date hereof, of the Company and each Subsidiary. The Company’s Amended and Restated Articles of Association, as amended and restated on June 4, 2002, and filed with the SEC as Exhibit 3.3 to the Company’s Form 10-K on March 12, 2004, were adopted and approved by more than 50% of the voting rights present at the meeting and voting on the resolution, as required by the then current Articles of Association of the Company. Other than as specified in Section 2.1(a) of the Disclosure Letter, the Company has no operating Subsidiaries other than those incorporated in a state of the United States.

(b) Each of the Company and the Subsidiaries is duly qualified or licensed and, to the extent such concept exists under applicable law, in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing does not, individually or in the aggregate, have a Material Adverse Effect on the Company. For purposes hereof, the term “ Material Adverse Effect on the Company ” means (i) any circumstance involving, change in or effect on the Company or any Subsidiary that is, or is reasonably likely in the future to be, materially adverse to the assets, liabilities (including contingent liabilities), business, financial condition or results of operations of the Company and Subsidiaries, taken as a whole, excluding from the foregoing the effect, if any, of (A) changes in general economic conditions, (B) any action or inaction required of the Company under Section 4.1, (C) changes in the securities markets in general, (D) changes generally affecting the industry in which the Company and Subsidiaries operate (provided that such changes do not affect the Company and Subsidiaries, taken as a whole, in a disproportionate manner), (E) the effect of the public announcement or pendency of the transactions contemplated hereby on the bookings, orders or purchases by, provision of materials by, or other actions of, existing or prospective customers or suppliers of the Company or any Subsidiary, (F) any shareholder class action litigation arising directly out of allegations of a breach of fiduciary duty relating to this Agreement, or (G) any change in the price or trading volume of the Shares from the date hereof, in and of itself;

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or (ii) any circumstance involving, change in or effect on the Company or any Subsidiary that is reasonably likely to prevent the Company from consummating the transactions contemplated by this Agreement; provided, however , that any reference to dollar amounts in this Agreement shall not be deemed, in and of itself, to constitute the point at which a change or event is sufficiently material to be “material” or “materially adverse”.

(c) Other Interests . Section 2.1(c) of the Disclosure Letter sets forth a true and complete list of each equity investment made by the Company or any Subsidiary in any person (including the percentage ownership, purchase price and any management or directorship rights granted to the Company or any such Subsidiary) other than the Subsidiaries (“ Other Interests ”). The Other Interests are owned directly or indirectly by the Company free and clear of all Liens.

Section 2.2. Capitalization of the Company and Subsidiaries .

(a) The authorized capital stock of the Company consists of 1,000,000 NIS, divided into (i) 91,222,534 Shares, of which, as of December 31, 2004, 24,027,344 were issued and outstanding; (ii) 3,777,466 Class B Ordinary Shares of NIS 0.01 par value each, none of which are outstanding; and (iii) 5,000,000 Special Preferred Shares of NIS 0.01 par value each, none of which are outstanding. The Company does not have outstanding any preferred stock purchase rights issuable pursuant to a rights agreement. All of the outstanding Shares are, and the Shares issuable upon exercise of the Company Stock Options, when issued in accordance with the Company Plans, will be, validly issued and fully paid, nonassessable and free of preemptive rights. As of December 31, 2004, an aggregate of 1,287,655 Shares were available for grant and 3,844,812 Shares were issuable upon or otherwise deliverable in connection with the exercise of outstanding Company Stock Options granted pursuant to the Company Plans. As of December 31, 2004, an aggregate of 404,033 Shares were available for issuance pursuant to the Company ESPP. Between December 14, 2004 and the date hereof, no shares of the Company’s capital stock have been issued other than pursuant to Company Stock Options already in existence on such date. Except as set forth above, as of December 31, 2004, there are outstanding (i) no shares of capital stock or other voting securities of the Company, (ii) no securities of the Company or any Subsidiary convertible into, or exchangeable or exercisable for, shares of capital stock or voting securities of the Company or any Subsidiary, (iii) no options, warrants or other rights to acquire from the Company or any Subsidiary, and no obligations of the Company or any Subsidiary to issue, any capital stock, voting securities or securities convertible into or exchangeable or exercisable for capital stock or voting securities of the Company or any Subsidiary, and (iv) no equity equivalent interests in the ownership or earnings of the Company or any Subsidiary or other similar rights. All of the outstanding Shares, Company Stock Options and Company Restricted Stock Units (collectively, the “ Company Securities ”) were issued in compliance with the U.S. Securities Act of 1933, as amended (the “ Securities Act ”), applicable U.S. state securities laws, the Israeli Companies Ordinance [New Version] 1983, the Companies Law and the Israeli Securities Law, 5728-1968. As of December 31, 2004, except with respect to the Restricted Company Shares, there are no outstanding rights or obligations of the Company or any Subsidiary to repurchase, redeem or otherwise acquire any of its outstanding capital stock or other ownership interests. There are no shareholder agreements, voting trusts or other arrangements or

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understandings to which the Company or any Subsidiary is a party or by which it or the Company Board is bound, and to its knowledge, as of the date hereof, there are no other agreements, voting trusts or other arrangements or understandings, relating to the voting or registration of any shares of capital stock or other voting securities of the Company or any Subsidiary. No Company Securities are owned by the Company or any Subsidiary. Section 2.2 of the Disclosure Letter sets forth a true and complete list, as of December 31, 2004, of all holders of outstanding Restricted Company Shares, Company Stock Options and Company Restricted Stock Units, the exercise or vesting schedule, the exercise price per share, and the term of each such Share, Company Stock Option or Company Restricted Stock Unit, as applicable and in the case of Company Stock Options, whether such option is a nonqualified stock option or incentive stock option, and any restrictions on exercise or sale of the option or underlying Shares, and whether or not, to the Company’s knowledge, an election under Section 83(b) of the Code is in effect with respect to any Shares that are Restricted Company Shares, in each case as of the date hereof. Each Company Stock Option intended to qualify as an “incentive stock option” under Section 422 of the Code so qualifies ( provided that a holder may have altered the Tax treatment of the Shares issued on exercise of an ISO by making a disqualifying disposition). Except as set forth in Section 2.2 of the Disclosure Letter, none of the terms of the Company Stock Options, Company Restricted Stock Units or Restricted Company Shares provides for accelerated vesting as a result of the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby (either alone or in combination with any other events). Other than as disclosed in the Company SEC Reports, the Company has not granted Company Stock Options to employees or consultants under any Company Plan at an exercise price of less than the fair market value per Share at the time of grant as determined in good faith by the Company Board.

(b) The Shares constitute the only class of equity securities of the Company or any Subsidiary registered or required to be registered under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”).

Section 2.3. Authority Relative to this Agreement; Recommendation .

(a) The Company has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations under this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Company (the “ Company Board ”), and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement, or to consummate the transactions contemplated hereby, except the approval of the Merger and the approval and adoption of this Agreement by the shareholders of the Company as specified in Section 2.3(b) below. Without limiting the generality of the foregoing, the Company Board, at a meeting duly called and held, has adopted resolutions by the unanimous vote of the non-employee directors (i) approving and declaring advisable this Agreement, the Merger and the other transactions to be entered into by the Company, as contemplated by this Agreement, (ii) exempting the Merger and the transactions contemplated by this Agreement from the “interested shareholder” provisions of the Company’s Articles of Association, (iii) concluding, after

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taking into account the financial condition of the merging companies, that in its opinion there is no reasonable suspicion that the Surviving Company will not be able to pay its debts to its creditors, (iv) declaring that it is in the best interests of the Company (including its shareholders) that the Company enter into this Agreement and consummate the Merger and the other transactions contemplated hereby, (v) directing that the adoption of this Agreement be submitted as promptly as practicable to a vote at the Company Shareholders Meeting, and (vi) recommending that the shareholders of the Company adopt this Agreement and approve the Merger, which resolutions have not been subsequently rescinded, modified or withdrawn in any way. This Agreement has been duly and validly executed and delivered by the Company and constitutes, assuming the due authorization, execution and delivery hereof by Parent and Acquisition, a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject to any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws now or hereafter in effect relating to creditors’ rights generally or to general principles of equity.

(b) Assuming neither Parent nor Acquisition, nor any of their affiliates (as specified in Section 320(c) of the Companies Law), (i) owns or holds any Shares, or (ii) votes any Shares it owns, the affirmative vote of a majority of the voting power of the Shares present and voting at the Company Shareholder Meeting is the only vote of the holders of any securities of the Company necessary to approve the Merger. The quorum required for the Company Shareholder Meeting is at least two shareholders who hold or represent at least a majority of the voting rights of the issued share capital of the Company. No vote or approval of (i) any creditor of the Company or any Subsidiary (subject to the rights of creditors under Section 319 of the Companies Law), (ii) any holder of any option or warrant granted by the Company or any Subsidiary, or (iii) any shareholder of the Company’s Subsidiaries is necessary in order to approve or permit the consummation of the Merger.

Section 2.4. SEC Reports; Financial Statements .

(a) The Company has filed all required forms, reports and documents (“ Company SEC Reports ”) with the Securities and Exchange Commission (the “ SEC ”) in connection with and since its initial public offering in March 2001, and each of such Company SEC Reports complied at the time of filing in all material respects with all applicable requirements of the Securities Act and the Exchange Act, each as in effect on the dates such forms, reports and documents were filed. None of such Company SEC Reports, including any financial statements or schedules included or incorporated by reference therein, contained when filed any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein in light of the circumstances under which they were made not misleading, except to the extent superseded by a Company SEC Report filed subsequently and prior to the date hereof. The statements of operations included in the financial statements of the Company contained in the Company SEC Reports (the “ Financial Statements ”) do not reflect items of special or nonrecurring revenue in excess of $200,000 in the aggregate or other income not earned in the ordinary course of business in excess of $200,000 in the aggregate, except as expressly specified therein, and such Financial Statements include all adjustments, which consist only of

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normal recurring accruals, necessary for a fair presentation. The Financial Statements have been prepared in all material respects in accordance with United States generally accepted accounting principles (“ US GAAP ”) consistently applied and maintained throughout the periods indicated and fairly present the consolidated financial condition of the Company and Subsidiaries at their respective dates and the results of their operations and changes in financial position for the periods covered thereby (subject to normal year-end adjustments and except that unaudited financial statements do not contain all required footnotes). Neither the Company nor any Subsidiary has any off-balance sheet financing arrangements.

(b) The Company has heretofore made available to Acquisition or Parent a complete and correct copy of any amendments or modifications that, as of the date hereof, are required to be filed with the SEC but have not yet been filed with the SEC to agreements, documents or other instruments that previously had been filed by the Company with the SEC under Item 601(b) of Regulation S-K, and all such amendments or modifications will be timely filed with the SEC.

(c) None of the Subsidiaries is, or has at any time been, subject to the reporting requirements of Sections 13(a) and 15(d) of the Exchange Act.

Section 2.5. Information Supplied . None of the information supplied or to be supplied by the Company for inclusion or incorporation by reference in the proxy statement relating to the meeting of the Company’s shareholders to be held in connection with the Merger (the “ Proxy Statement ”) will, at the date mailed to shareholders of the Company and at the time of the meeting of shareholders of the Company to be held in connection with the Merger (the “ Company Shareholders Meeting ”), contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein in light of the circumstances under which they are made not misleading. The Proxy Statement will comply as to form in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. Notwithstanding the foregoing, the Company makes no representation, warranty or covenant with respect to any information supplied or required to be supplied by Parent or Acquisition which is contained in or omitted from any of the foregoing documents.

Section 2.6. Consents and Approvals; No Violations . Except for such filings, permits, authorizations, consents and approvals as may be required under applicable requirements of the Securities Act, the Exchange Act, state securities or blue sky laws, and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “ HSR Act ”), any filings under similar merger notification laws or regulations of non-Israeli or U.S. Governmental Entities, to the extent required by applicable law, the consent of the Israeli Commissioner of Restrictive Trade Practices, to the extent required pursuant to the Restrictive Trade Practices Law (1988) as amended, the filing and recordation of the Merger Proposal and the Shareholder Approval Notice and other filings as required by the Companies Law, the approval of the Office of the Chief Scientist in the Israeli Ministry of Industry and Commerce (the “ OCS ”) and the approval of the Israeli Investment Center in the Israeli Ministry of Industry and Commerce (the “ Investment Center ”), no other filing with or notice to and no other permit, authorization, consent or

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approval of any Israeli, United States (federal, state or local) or foreign court or tribunal, or administrative, governmental or regulatory body, agency or authority (each a “ Governmental Entity ”) is necessary for the execution and delivery by the Company of this Agreement or the consummation by the Company of the transactions contemplated hereby, except for filings, notices, permits, authorizations, consents or approvals the failure of which to make or obtain may be cured solely by payment of not more than $200,000 in the aggregate. Neither the execution, delivery and performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby will (i) conflict with or result in a breach of any provision of the respective Articles of Association or Memorandum of Association or other charter or governing documents of the Company or any Subsidiary; (ii) except as set forth in Section 2.6 of the Disclosure Letter, result in a violation or breach of or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration or Lien) under any of the terms, conditions or provisions of any Material Contract to which the Company or any Subsidiary is a party or by which any of them or their respective properties or assets may be bound; (iii) contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Entity the right to revoke, withdraw, suspend, cancel, terminate, modify or exercise any right or remedy or require any refund or recapture with respect to, any Grant (as hereinafter defined) given by any Governmental Entity (or any benefit provided or available thereunder) or other permit, license, consent, authorization, grant, benefit, right that is held by the Company or that otherwise relates to the business or assets of the Company, or (iv) except as set forth in Section 2.6 of the Disclosure Letter, violate any applicable law pertinent to the Company or any Subsidiary or any of their respective properties or assets, except, in the case of foregoing clause (ii), (iii) or (iv), for violations, breaches or defaults that would not, individually or in the aggregate, result in any loss, expense, charge, assessment, levy, fine or other liability being imposed upon or incurred by the Company or any Subsidiary exceeding $200,000.

Section 2.7. No Default . Except as set forth in Section 2.7 of the Disclosure Letter, neither the Company nor any Subsidiary is in breach, default or violation (and no event has occurred that, with notice or the lapse of time, or both, would constitute a breach, default or violation) of any term, condition or provision of (i) its Memorandum of Association or Articles of Association or other charter or governing documents; (ii) any Material Contract or other obligation to which the Company or any Subsidiary is now a party or by which it or any of its properties or assets may be bound; or (iii) any applicable law pertinent to the Company or any Subsidiary or any of its properties or assets, except, in the case of the foregoing clause (ii) or (iii), for violations, breaches or defaults that would not, individually or in the aggregate, result in any loss, expense, charge, assessment, levy, fine or other liability being imposed upon or incurred by the Company or any Subsidiary exceeding $500,000.

Section 2.8. No Undisclosed Liabilities; Absence of Changes . Except as set forth in Section 2.8 of the Disclosure Letter, neither the Company nor any Subsidiary has any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, that would be required by United States generally accepted accounting principles to be reflected on a consolidated balance sheet of the Company (including the notes thereto), other than liabilities and obligations which are reflected on the Company’s unaudited

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balance sheet as of September 30, 2004 or incurred after such date in the ordinary course of business consistent with past practices. Except for transactions, arrangements and other relationships otherwise specifically identified in the Financial Statements, Section 2.8 of the Disclosure Letter sets forth a true, complete and correct list of all transactions, arrangements and other relationships between and/or among the Company and any of its affiliates. Except as set forth in Section 2.8 of the Disclosure Letter, since September 30, 2004, the Company and each Subsidiary has conducted its business in all material respects only in, and has not engaged in any material transaction other than according to, the ordinary and usual course of such business consistent with past practices, and there has not been any:

(a) Material Adverse Effect on the Company;

(b) damage, destruction or other casualty loss with respect to any asset or property owned, leased or otherwise used by the Company or any Subsidiary and having a value at the time of exceeding $300,000, whether or not covered by insurance;

(c) declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of the Company or any Subsidiary, repurchase, redemption or other acquisition by the Company or any Subsidiary of any outstanding shares of capital stock or other securities of, or other ownership interests in, the Company or any Subsidiary;

(d) amendment of any material term of any outstanding security of the Company or any Subsidiary, except for waivers of vesting acceleration set forth in the Employment Agreements or stock option agreements;

(e) incurrence, assumption or guarantee by the Company or any Subsidiary of any indebtedness for borrowed money other than in the ordinary course of business and in amounts and on terms consistent with past practices;

(f) creation or assumption by the Company or any Subsidiary of any Lien on any asset or property with a value in exceeding $200,000;

(g) loan, advance or capital contribution made by the Company or any Subsidiary to, or investment in, any person other than (i) loans or advances to employees in connection with business-related matters, in each case made in the ordinary course of business consistent with past practices, (ii) loans, advances or capital contributions or investments by the Company to or in any wholly-owned Subsidiary, by any wholly-owned Subsidiary in the Company or by any wholly-owned Subsidiary in any other wholly-owned Subsidiary, and (iii) the Other Interests;

(h) transaction or commitment made, or any Contract entered into, by the Company or any Subsidiary relating to its assets or business (including the acquisition or disposition of any assets or property) or any relinquishment by the Company or any Subsidiary of any Contract or other right, in either case having a stated contract amount or otherwise potentially involving Company or Subsidiary obligations or entitlements exceeding $200,000 (other than Contracts with customers and suppliers entered into in the ordinary course of business, consistent with past practice);

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(i) change by the Company in any of its accounting principles, practices or methods;

(j) increase in the compensation payable or that could become payable by the Company or any Subsidiary to (i) officers of the Company or any Subsidiary or (ii) any employee of the Company or any Subsidiary whose annual cash compensation is $100,000 or more, except for annual bonuses, the aggregate total of which shall not exceed the amount set forth in Section 2.8(j) of the Disclosure Letter;

(k) labor dispute, other than routine individual grievances, or any activity or proceeding by a labor union or representative thereof to organize any employees of the Company or any Subsidiary, or any lockouts, strikes, slowdowns, work stoppages or threats thereof by or with respect to any such employees; or

(l) between December 31, 2004 and the date hereof, issuance of any Company Securities or other shares of capital stock or voting securities of the Company, securities of the Company or any Subsidiary convertible into, or exchangeable or exercisable for, shares of capital stock or voting securities of the Company or any Subsidiary, options, warrants or other rights to acquire from the Company or any Subsidiary, obligations of the Company or any Subsidiary to issue, any capital stock, voting securities or securities convertible into or exchangeable or exercisable for capital stock or voting securities of the Company or any Subsidiary, or equity equivalent interests in the ownership or earnings of the Company or any Subsidiary or other similar rights, other than the issuance and sale of shares upon exercise of Company Stock Options granted prior to December 31, 2004 which are listed in Section 2.2 of the Disclosure Letter.

Section 2.9. Litigation . Except as set forth in Section 2.9 of the Disclosure Letter, there are no suits, claims, actions, proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company, any Subsidiary or any of their respective properties or assets before any Governmental Entity that would, individually or in the aggregate, result in any charge, assessment, levy, fine or other liability being imposed upon or incurred by the Company or any Subsidiary exceeding $200,000. Neither the Company nor any Subsidiary is subject to any outstanding order, writ, injunction or decree of any Governmental Entity that would, individually or in the aggregate, result in any charge, assessment, levy, fine or other liability being imposed upon or incurred by the Company or any Subsidiary exceeding $200,000.

Section 2.10. Compliance with Applicable Law . Except as set forth in Section 2.10 of the Disclosure Letter, each of the Company and Subsidiaries holds all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary for the lawful conduct of its business (collectively, the “ Company Permits ”), except for failures to hold such permits, licenses, variances, exemptions, orders and approvals that would not, individually or in the aggregate, result in any charge, assessment, levy, fine or other liability being imposed upon or incurred by the Company or any Subsidiary exceeding $200,000 and that have not resulted in, and could not reasonably be expected to result in, any injunction or other equitable remedy being imposed on the Company or any Subsidiary. Each of the Company and Subsidiaries is in

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compliance with the terms of the Company Permits held by it, except where the failure so to comply would not, individually or in the aggregate, result in any charge, assessment, levy, fine or other liability being imposed upon or incurred by the Company or any Subsidiary exceeding $200,000 and that have not resulted in, and could not reasonably be expected to result in, any injunction or other equitable remedy being imposed on the Company or any Subsidiary. The businesses of the Company and Subsidiaries are being conducted in compliance with all applicable laws of the United States, Israel or any other country or any political subdivision thereof or of any Governmental Entity, except for violations or possible violations of any United States, Israeli or foreign laws, ordinances or regulations that do not and will not result, individually or in the aggregate, in any charge, assessment, levy, fine or other liability being imposed upon or incurred by the Company or any Subsidiary exceeding $200,000 and that have not resulted in, and could not reasonably be expected to result in, any injunction or other equitable remedy being imposed on the Company or any Subsidiary. No investigation or review by any Governmental Entity with respect to the Company or any Subsidiary is pending nor, to the knowledge of the Company, has any Governmental Entity indicated an intention to conduct the same.

Section 2.11. Employee Benefit Plans; Labor Matters .

(a) Section 2.11(a) of the Disclosure Letter lists as of the date hereof all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ ERISA ”)), and all bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, health, life, or disability insurance, dependent care, severance and other similar fringe or employee benefit plans, programs or arrangements and any current or former employment or executive compensation or severance agreements, written or otherwise, maintained, contributed to or required to be maintained or contributed to for the benefit of or relating to any employee or former employee of the Company, any trade or business (whether or not incorporated) that is a member of a controlled group including the Company or that is under common control with the Company within the meaning of Section 414 of the Code (an “ ERISA Affiliate ”), as well as each plan with respect to which the Company or an ERISA Affiliate could incur liability under Section 4069 (if such plan has been or were terminated) or Section 4212(c) of ERISA (together, the “ Employee Plans ”). The Company has made available to Parent a copy of (i) the two (2) most recent annual reports on Form 5500 filed with the Internal Revenue Service (the “ IRS ”) for each disclosed Employee Plan where such report is required; (ii) the documents and instruments governing each such Employee Plan (other than those referred to in Section 4(b)(4) of ERISA); (iii) all trust documents and custodial agreements relating to each Employee Plan, (iv) the current summary plan description and each summary of material modifications relating to each Employee Plan; (v) the most recent IRS determination letter received with respect to each Employee Plan intended to qualify for favorable tax treatment under Section 401(a) of the Code; (vi) all insurance contracts, investment management or advisory agreements, audit reports, relating to each Employee Plan; and (vii) all material correspondence with any Governmental Entity relating to each Employee Plan. No Employee Plan is subject to Title IV of ERISA or Section 412 of the Code, and neither the Company nor any ERISA Affiliate has incurred any liability (contingent or otherwise) with respect to any such Employee Plan. Each Employee Plan

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has been maintained in all material respects, by its terms and in operation, in accordance with ERISA, the Code and other applicable law, and there has been no material violation of any reporting or disclosure requirement imposed by ERISA or the Code. Each Employee Plan intended to be qualified under Section 401(a) of the Code, and each trust intended to be exempt under Section 501(a) of the Code, has been determined to be so qualified or exempt by the IRS, and since the date of each most recent determination, there has been no event, condition or circumstance that has adversely affected or could reasonably be expected to adversely affect such qualified status. No Employee Plan has participated in, engaged in or been a party to any transaction that is prohibited under Section 4975 of the Code or Section 406 of ERISA and not exempt under Section 4975 of the Code or Section 408 of ERISA, respectively. With respect to any Employee Plan, (i) neither the Company, nor any of its ERISA Affiliates has had asserted against it any claim for taxes under Chapter 43 of Subtitle D of the Code and Section 5000 of the Code, or for penalties under ERISA Section 502(c), (i) or (l), nor, to the knowledge of the Company, is there a basis for any such claim, and (ii) no officer, director or employee of the Company has committed a material breach of any fiduciary responsibility or obligation imposed by Title I of ERISA. Other than routine claims for benefits, there is no claim or proceeding (including any audit or investigation) pending or, to the knowledge of the Company, threatened, involving any Employee Plan by any person, or by the IRS, the United States Department of Labor or any other Governmental Entity against such Employee Plan or the Company or any ERISA Affiliate.

(b) Section 2.11(b) of the Disclosure Letter sets forth a list as of the date hereof of all (i) employment agreements with officers of the Company or any ERISA Affiliate, (ii) agreements with consultants who are individuals obligating the Company or any ERISA Affiliate to make annual cash payments in an amount of $200,000 or more, (iii) severance agreements, programs and policies of the Company with or relating to its employees, except such programs and policies required to be maintained by applicable law, and (iv) plans, programs, agreements and other arrangements of the Company or any ERISA Affiliate with or relating to its employees that contain change in control provisions whether or not listed in other parts of the Disclosure Letter. The Company has made available to Parent copies of all such agreements, plans, programs and other arrangements.

(c) There will be no payment, accrual of additional benefits, acceleration of payments or vesting of any benefit under any Employee Plan or any other agreement or arrangement to which the Company or any ERISA Affiliate is a party, and no employee, officer or director of the Company or any ERISA Affiliate will become entitled to severance, termination allowance or similar payments, solely by reason of entering into or in connection with the transactions contemplated by this Agreement (either alone or in combination with each other).

(d) No Employee Plan that is a welfare benefit plan within the meaning of Section 3(1) of ERISA provides benefits to former employees of the Company or its ERISA Affiliates other than pursuant to Section 4980B of the Code or similar state laws. The Company and its ERISA Affiliates have complied in all material respects with the provisions of Part 6 of Title I of ERISA and Sections 4980B, 9801, 9802, 9811 and 9812 of the Code.

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(e) There are no controversies relating to any Employee Plan or other labor matters pending or, to the knowledge of the Company, threatened between the Company or any ERISA Affiliate and any of its employees. Neither the Company nor any ERISA Affiliate is a party to or bound by any collective bargaining agreement, collective labor agreement or other contract or arrangement with a labor union, trade union or other organization applicable to persons employed by the Company or any ERISA Affiliate nor does the Company nor any ERISA Affiliate know of any activities or proceedings of any labor union to organize any such employees, or is otherwise required (under any legal requirement, contract or otherwise) to provide benefits or working conditions beyond the minimum benefits and working conditions required by applicable law to be provided pursuant to rules and regulations of any jurisdiction in which the Company and its Subsidiaries have employees, including the Histadrut (General Federation of Labor), the Coordination Bureau of Economic Organization and the Industrialists’ Association, and the Company has not been officially apprised that any petition has been filed or proceeding instituted by an employee or group of employees of the Company or any Subsidiary, with any Governmental Entity seeking recognition of a bargaining representative. Except as set forth in Section 2.11 of the Disclosure Letter, neither the Company nor any Subsidiary has or is subject to, and no employee of the Company or any Subsidiary benefits from, any extension order ( tzavei harchava ) or any contract or arrangement with respect to termination of employment. All of the employees of the Company and its Subsidiaries are “at will” employees subject to the termination notice provisions included in employment agreements or applicable law. No strikes, work stoppage, material grievance, material claim of unfair labor practice, or dispute against the Company or any ERISA Affiliate has occurred, is pending or, to the knowledge of the Company or any ERISA Affiliate, threatened, and to the knowledge of the Company and its ERISA Affiliates there is no basis for any of the foregoing. To the knowledge of the Company and its ERISA Affiliates, none of their employees is a member of any labor union, there is no organizational activity being made or threatened by or on behalf of any labor union with respect to any employees of the Company or any ERISA Affiliate. Neither the Company nor any of its ERISA Affiliates has a workers’ committee (including any “Vaad Ovdim” or similar committee or organization).

(f) Neither the Company nor any of its ERISA Affiliates sponsors or has ever sponsored, maintained, contributed to, or incurred an obligation to contribute or incurred a liability (contingent or otherwise) with respect to any Multiemployer Plan or to a Multiple Employer Plan. For these purposes, “ Multiemployer Plan ” means a multiemployer plan, as defined in Section 3(37) and 4001(a)(3) of ERISA, and “ Multiple Employer Plan ” means any Employee Benefit Plan sponsored by more than one employer, within the meaning of Sections 4063 or 4064 of ERISA or Section 413(c) of the Code.

(g) To the extent permitted by applicable law, each Employee Plan that is an employee benefit plan (as defined in Section 3(3) of ERISA) or a Foreign Plan can be amended or terminated at any time, without consent from any other party and without liability other than for benefits accrued as of the date of such amendment or termination (other than charges incurred as a result of such termination). The Company and its ERISA Affiliates have made full and timely payment of all amounts required to be contributed or paid as expenses or accrued such payments in accordance with normal procedures under the terms of each Employee Plan and applicable law, and the Company and its ERISA Affiliates shall continue to do so through the Closing.

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(h) As of the date hereof, no employee at the level of director or above of the Company or any Subsidiary has given written notice terminating his or her employment with the Company or any Subsidiary. To the knowledge of the Company and its ERISA Affiliates, no key employee, or group of employees, of the Company or any ERISA Affiliate has any plans to terminate employment with the Company or any ERISA Affiliate. The Company and its ERISA Affiliates has complied in all material respects with all applicable laws relating to the employment of labor, including provisions thereof relating to wages, hours, overtime, payment of wages or overtime, equal opportunity and collective bargaining.

(i) With respect to each master and prototype tax-qualified retirement plan (“ M&P Plan ”) sponsored or maintained by the Company and/or any ERISA Affiliate, the Company and any such ERISA Affiliate has, on or before the end of the 2001 plan year, either adopted or certified in writing its intent to adopt the required GUST amendments to each such M&P Plan, and the Company hereby represents and warrants that an application for a GUST opinion letter for each such M&P Plan was filed with the IRS by the M&P Plan sponsor on or before December 31, 2000. The Company and each ERISA Affiliate shall also adopt the GUST-approved M&P Plan by the deadline specified in IRS Announcement 2001-104. For purposes hereof, “ GUST ” means the statutes referenced in IRS Announcement 2001-104. With respect to any individually designed tax-qualified retirement plans sponsored or maintained by the Company or any ERISA Affiliate, the Company and each such ERISA Affiliate has adopted the required GUST amendments and submitted the plan to the IRS on or before February 28, 2002 for a favorable determination letter as to its tax qualified status.

(j) The Company and its ERISA Affiliates, with respect to any employee benefit plan or arrangements maintained outside of the United States (each a “ Foreign Plan ”): (i) each Foreign Plan and the manner in which it has been administered satisfies all applicable laws, (ii) all contributions to each Foreign Plan required through the Closing have been and will be made by the Company (including by way of accruals in the Company’s financial statements, to the extent permitted by US GAAP), (iii) each Foreign Plan is either fully funded (or fully insured) based upon generally accepted local actuarial and accounting practices and procedures or adequate accruals for each Foreign Plan have been made in the Company’s financial statements in accordance with United States generally accepted accounting principles, (iv) there are no pending investigations by any Governmental Entity involving any Foreign Plan nor any pending claims (except for claims for benefits payable in the normal operation of the Foreign Plans), suits or proceedings against any Foreign Plan or asserting any rights or claims to benefits under any Foreign Plan; and (v) the consummation of the transactions contemplated by this Agreement will not by itself create or otherwise result in any material liability with respect to any Foreign Plan. Without derogating from the above, the Company’s or any Subsidiary’s obligations to provide severance pay to its employees are fully funded or have been properly provided for in the Financial Statements attached to the Company SEC Reports in accordance with US GAAP. All other liabilities of the Company relating to its employees (excluding liabilities for illness pay) were properly accrued in the Financial Statements in accordance with United States generally accepted accounting principles.

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(k) To the knowledge of the Company, no employee of the Company or any Subsidiary is in any material respect in violation of any term of any employment contract, non-disclosure agreement, non-competition agreement, or any restrictive covenant to a former employer relating to the right of any such employee to be employed by the Company or any Subsidiary because of the nature of the business conducted or presently proposed to be conducted by it or to the use of trade secrets or proprietary information of others.

(l) All amounts that the Company or any Subsidiary is legally or contractually required either (i) to deduct from its employees’ salaries or to transfer to such employees’ pension or provident, life insurance, incapacity insurance, continuing education fund or other similar fund or (ii) to withhold from their employees’ salaries and pay to any Governmental Entity as required by the Israeli Income Tax Ordinance [New Version] and other applicable laws have, in each case, been duly deducted, transferred, withheld and paid, and the Company does not have any outstanding obligation to make any such deduction, transfer, withholding or payment.

(m) Neither the Company nor any Subsidiary is liable for any material payment to any trust or other fund or to any Governmental Entity, with respect to unemployment compensation benefits, social security or other benefits or obligations for Employees (other than routine payments to be made in the normal course of business and consistent with past practice).

Section 2.12. Environmental Laws and Regulations . Except as disclosed in Section 2.12 of the Disclosure Letter, (a) each of the Company and Subsidiaries has been in compliance with all applicable laws relating to pollution or protection of public or worker health or the environment (including ambient air, surface water, ground water, land surface or subsurface strata) (collectively, “ Environmental Laws ”) except for instances of non-compliance that, individually or in the aggregate, would not result in any loss, expense, charge, assessment, levy, fine or other liability being imposed upon or incurred by the Company or Subsidiary exceeding $200,000 and that have not resulted in, and could not reasonably be expected to result in, any injunction or other equitable remedy being imposed on the Company or any Subsidiary, which compliance includes the possession by the Company and Subsidiaries of all material Company Permits required under applicable Environmental Laws and compliance with the terms and conditions thereof; (b) to the knowledge of the Company, there are no existing facts that are reasonably likely to prevent or interfere with such material compliance in the future and neither the Company nor any Subsidiary is required to, or will within the next three years be required to, make any capital or other expenditures exceeding $500,000 to comply with or maintain compliance with any Environmental Law with respect to current or planned operations; (c) there are no circumstances or conditions involving the Company or any Subsidiary that could reasonably be expected to result in any claim, liability, investigation, cost or restriction on the ownership, use or transfer of any real property of which the Company or any Subsidiary is or was the owner or operator pursuant to any Environmental Law; (d) no substance, material or waste that is toxic, or

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poses a risk to the health or safety of persons, or which is listed, classified or regulated pursuant to any Environmental Law (a “ Hazardous Substance ”) has been disposed, released or is present on, under, in, from or about any property currently or formerly owned or operated by the Company or any Subsidiary, or which is otherwise related to the operations of the Company or any Subsidiary, that has resulted or could reasonably be expected to result in any loss, expense, charge, assessment, levy, fine or other liability being imposed upon or incurred by the Company or Subsidiaries exceeding $500,000; (e) neither the Company nor any Subsidiary has received any notice, demand, letter, claim or request for information alleging violation of or liability under any Environmental Law, and neither the Company nor any Subsidiary is subject to any proceedings, actions, orders, decrees, settlements, injunctions or other claims or, to the knowledge of the Company, any threatened actions or claims, relating to or otherwise alleging liability of the Company or any Subsidiary under any Environmental Law; (f) neither the Company nor any Subsidiary has assumed or retained by Contract any material liabilities of any kind, fixed or contingent, known or unknown, under any Environmental Law; and (g) neither the Company, any of Subsidiary nor any of their respective predecessors in interest have ever manufactured, produced, repaired, installed, sold, conveyed or otherwise put into the stream of commerce any product, merchandise, manufactured good, part, component or other item comprised of or containing asbestos or have been the subject of any claims or litigation arising out the alleged exposure to asbestos or asbestos-containing material.

Section 2.13. Taxes .

(a) Definitions . For purposes of this Agreement:

(i) “ Tax ” (including “ Taxes ”) means all U.S. federal, state, local, Israeli, other foreign and other taxes of any kind or nature whatsoever, regardless of whether the word “tax” or any derivation thereof is used in applicable law (including but not limited to withholding taxes), together with any interest, indexation differentials and any penalties, additions to tax or additional amounts with respect thereto; and

(ii) “ Tax Return ” means any return, declaration, report, statement, information statement and other document filed or required to be filed with respect to Taxes, including any claims for refunds of Taxes and any amendments or supplements of any of the foregoing.

(b) Tax Matters . Except to the extent that such failures in the aggregate would not result in Taxes being imposed upon or incurred by the Company or any Subsidiary exceeding $200,000, (1) within the times and in the manner prescribed by applicable law, the Company and Subsidiaries (and their predecessors) have properly prepared and filed all Tax Returns required by applicable law and have timely paid all Taxes due and payable (whether or not shown on any Tax Return), and (2) all such Tax Returns are true, correct and complete. The Company and Subsidiaries (and their predecessors) have complied in all material respects with all applicable laws relating to Taxes. Neither the Company nor of any Subsidiary (or any predecessor thereof) (i) has filed a consent, election or agreement pursuant to former Section 341 of the Internal Revenue Code of 1986, as amended (including any predecessor provision or comparable

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provision of state, local, Israeli or other foreign law, the “ Code ”), (ii) is a party to or bound by any closing agreement, offer in compromise or any other agreement with any Tax Authority or any Tax indemnity, Tax allocation or Tax sharing agreement with any person, or any other express or implied agreement to pay or indemnify any other person with respect to Taxes (other than as described in Section 2.13(c) of the Disclosure Letter), (iii) has present or contingent liabilities for Taxes, other than Taxes incurred in the ordinary course of business thereof and reflected on the most recent balance sheet included in the Financial Statements or incurred in the ordinary course of business since the date of the most recent Financial Statements in amounts consistent with prior years adjusted for changes in operating results, (iv) has engaged in a trade or business, had a permanent establishment (within the meaning of an applicable tax treaty) or has otherwise become subject to Tax jurisdiction in a country other than the country of its formation, (v) is a party to an agreement that could give rise to an “excess parachute payment” within the meaning of Section 280G of the Code or to remuneration the deduction for which could be disallowed under Section 162(m) of the Code, (vi) has issued options or stock purchase rights (or similar rights) that purported to be governed by Sections 421 or 423 of the Code that remain outstanding and are not so governed, (vii) has ever been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code, or (viii) has liability for the Taxes of any person (other than the Company and Subsidiaries), whether as a result of transferee liability, joint and several liability for being a member of an affiliated, consolidated, combined or unitary group for any period, or otherwise by operation of law. There are and have been no (1) proposed, threatened or actual assessments, audits, examinations or disputes as to Taxes relating to the Company or any Subsidiary (or their predecessors), (2) adjustments under Section 481 of the Code or any similar adjustments (whether under the Code or under state, local or foreign law) with respect to the Company or any Subsidiary (or their predecessors), or (3) waivers or extensions of the statute of limitations with respect to Taxes for which the Company or any Subsidiary could be held liable. Neither the Company nor any Subsidiary (nor any predecessor thereof) has been a “distributing corporation” or a “controlled corporation” in connection with a distribution described in Section 355 of the Code. Neither the Company nor any Subsidiary (nor any predecessor thereof) has been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code, or a member of a combined, consolidated or unitary group for state, local or foreign Tax purposes, other than an affiliated group the common parent of which is the Company. No Subsidiary that is a “United States person” (as such term is used in Section 1291(a) of the Code) has at any time owned a material (determined with reference to the Company) interest in a passive foreign investment company within the meaning of Section 1297 of the Code. No Subsidiary that was or is a “controlled foreign corporation” (as defined in the Code) (determined solely with reference to ownership of such Subsidiary, directly or indirectly, by other Subsidiaries that are “United States persons” as defined in Section 957(c) of the Code) has had an investment in “United States property” within the meaning of Section 956(c) of the Code. Neither the Company nor any Subsidiary is or has been a party to a “reportable transaction,” as such term is defined in Treasury Regulation § 1.6011-4(b)(1)(other than such transactions that have been properly reported or are not yet required to have been reported), or to a transaction that is or is substantially similar to a “listed transaction,” as such term is defined in Treasury Regulation § 1.6011-4(b)(2), or any other transaction requiring disclosure under provisions of state, local or foreign Tax law that address transactions that may be tax avoidance transactions.

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(c) Israeli Tax Incentives . Section 2.13(c) of the Disclosure Letter lists each material tax incentive granted to the Company and any Subsidiary under the laws of the State of Israel, the period for which such tax incentive applies, and the nature of such tax incentive. The Company and Subsidiaries have complied with all material requirements of Israeli law to be entitled to claim all such incentives. Subject to the receipt of the approvals set forth in Section 2.6 of the Disclosure Letter and compliance by the Surviving Company with the applicable requirements and conditions, the consummation of the Merger will not adversely affect the remaining duration of the incentive or require any recapture of any previously claimed incentive, and no consent or approval of any Governmental Entity is required, other than as contemplated by Section 2.6, prior to or after the consummation of the Merger in order to preserve the entitlement of the Surviving Company or its Subsidiaries to any such incentive.

Section 2.14. Intellectual Property .

(a) Certain Definitions . As used herein, the term “ Intellectual Property ” means all intellectual property rights arising from or associated with the following, whether protected, created or arising under the laws of the United States or any other jurisdiction: (i) trade names, trademarks and service marks (registered and unregistered), domain names and other Internet addresses or identifiers, trade dress and similar rights and applications (including intent to use applications) to register any of the foregoing (collectively, “ Marks ”); (ii) patents and patent application