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Google and Walla! will enter a strategic cooperation agreement expected to yield the Israeli Internet portal millions annually, TheMarker has learned.

TheMarker recently reported that Google Israel had deposed Walla! from its position as the leading Internet company in Israel. Google reported an annual revenue rate of $40 million at the end of the second quarter, compared to Walla!'s $26 million.

Walla! shares are currently up 10 percent, with a turnover of approximately NIS 3 million, canceling out the share price losses it has suffered since early this year while other shares were soaring over 20 percent during the same period.

Along with the drop in share prices came resignation of the company's top management, including its CEO, Ilan Yisraeli, who resigned in 2006 and was replaced by Ilan Yehoshua.

The firm also reported weak financial results in the first quarter of 2007. Walla!, which is controlled by Bezeq International and the Haaretz Group, reported profits of only NIS 1.5 million, a 70 percent drop compared to the same period in 2006. The weak results are primarily due to an erosion of profits from advertising during the transition period from financed links to a focused advertising system.

This type of advertising is a textual system that presents only those advertisements relevant to a search, similar to Google's Adwords system.

Yehoshua estimated at the end of the first quarter of 2007 that the company's mixed revenues would improve by the second quarter, and that the new advertising system would be one of the company's most important growth engines.

A spokesman refused to comment on what he said called "rumors." An identical response was received from Walla!.