**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      20-F**




 ̈  **REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES** **EXCHANGE
      ACT OF 1934**




**OR**




ý  **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE** **ACT
      OF 1934**




**For the Fiscal year ended December 31, 2005**




**OR**




 ̈  **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES** **EXCHANGE
      ACT OF 1934**




Commission
      File Number 0-29634




FUNDTECH
      LTD.


(Exact
      Name of Registrant as specified in its charter)




STATE
      OF ISRAEL


(Jurisdiction
      of incorporation or organization)




12
      Ha’hilazon Street, 5th Floor


Ramat-Gan,
      Israel 52522


(Address
      of principal executive offices)




Securities
      registered or to be registered pursuant to Section 12(b) of the Act:


None.




Securities
      registered or to be registered pursuant to Section 12(g) of the Act:


Ordinary
      Shares, NIS 0.01 par value




Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:
      None




Indicate
      the number of outstanding shares of each of issuer’s classes of capital or
      common stock as of the close of the period covered by the annual
      report:




As
      of
      December 31, 2005, the Registrant had outstanding 14,993,964 Ordinary Shares,
      NIS 0.01 par value per share.




Indicate
      by check mark if the registrant is a well known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes:  ̈ No: x





If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Securities Exchange Act of 1934 . Yes:  ̈ No: x





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer .


Large
                accelerated filer:   ̈
            Accelerated
                filer: x
            Non-accelerated
                filer:  ̈







Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.  Yes: ý No:  ̈




Indicate
      by check mark which financial statement item the Registrant has elected to
      follow:  Item
      17  ̈ Item 18 ý




If
      this
      is an annual report, indicate by check mark whether the registrant is a shell
      company (as defined in rule 12b-2 of the Exchange Act).


Yes:  ̈ No: x









**CAUTIONARY
      STATEMENT FOR FORWARD-LOOKING INFORMATION**




Except
      for the historical information contained herein, the statements contained in
      this annual report are forward-looking statements, within the meaning of the
      Private Securities Litigation Report Act of 1995 with respect to our business,
      financial condition and results of operations. Actual results could differ
      materially from those anticipated in these forward-looking statements as a
      result of various factors, including, but not limited to, all the risks
      discussed or identified in this annual report and our other public filings,
      such
      as general economic and market conditions, changes in regulations and taxes
      and
      changes in competition and pricing environments.




We
      desire
      to take advantage of the safe harbor provisions of the Private Securities
      Litigation Reform Act of 1995 and we are including this cautionary statement
      in
      connection with this safe harbor legislation. This document and any other
      written or oral statements made by us or on our behalf may include
      forward-looking statements, which reflect our current views with respect to
      future events and financial performance. We urge you to consider that statements
      which use the terms “believe,” “do not believe,” “expect,” “plan,” “intend,”
“estimate,” “anticipate,” and similar expressions are intended to identify
      forward-looking statements. These statements reflect our current views with
      respect to future events and are based on assumptions and are subject to risks
      and uncertainties. Except as required by applicable law, including the
      securities laws of the United States, we do not intend to update or revise
      any
      forward-looking statements, whether as a result of new information, future
      events or otherwise.




The
      forward-looking statements in this document are based upon various assumptions,
      many of which are based, in turn, upon further assumptions, including without
      limitation, management’s examination of historical operating trends, data
      contained in our records and other data available from third parties. Although
      we believe that these assumptions were reasonable when made, because these
      assumptions are inherently subject to significant uncertainties and
      contingencies which are difficult or impossible to predict and are beyond our
      control, we cannot assure you that we will achieve or accomplish these
      expectations, beliefs or projections. In addition to these important factors
      and
      matters discussed elsewhere herein and in the documents incorporated by
      reference herein, important factors that, in our view, could cause actual
      results to differ materially from those discussed in the forward-looking
      statements, include the achievement of the anticipated levels of profitability,
      growth, cost, the timely development and acceptance of new products, the impact
      of competitive pricing, the impact of general business and global economic
      conditions and other important factors described from time to time in the
      reports filed by us with the Securities and Exchange Commission.




As
      used
      in this annual report, the terms “we,” “us,” “our,” the “Company” and “Fundtech”
mean Fundtech Ltd. and its subsidiaries, unless otherwise indicated. All
      reference to dollars or “$” are to United States Dollars and all references to
“NIS” are to New Israeli Shekels and all references to “Ordinary Shares”
are to our Ordinary Shares, NIS 0.01 par value per share.









**TABLE
      OF CONTENTS**




**PART
                  I****ITEM
                  1.**
              IDENTITY
                  OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
              1**ITEM
                  2.**
              OFFER
                  STATISTICS AND EXPECTED TIMETABLE.
              1**ITEM
                  3.**
              KEY
                  INFORMATION.
              1**ITEM
                  4.**
              INFORMATION
                  ON THE COMPANY.
              12**ITEM
                  4A.**
              UNRESOLVED
                  STAFF COMMENTS.
              24**ITEM
                  5.**
              OPERATING
                  AND FINANCIAL REVIEW AND PROSPECTS.
              24**ITEM
                  6.**
              DIRECTORS,
                  SENIOR MANAGEMENT AND EMPLOYEES.
              44**ITEM
                  7.**
              MAJOR
                  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
              57**ITEM
                  8.**
              FINANCIAL
                  INFORMATION.
              60**ITEM
                  9.**
              THE
                  OFFER AND LISTING.
              61**ITEM
                  10.**
              ADDITIONAL
                  INFORMATION.
              63**ITEM
                  11.**
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
              78**ITEM
                  12.**
              DESCRIPTION
                  OF SECURITIES OTHER THAN EQUITY SECURITIES.
              78**PART
                  II****ITEM
                  13.**
              DEFAULTS,
                  DIVIDEND ARREARAGES AND DELINQUENCIES.
              78**ITEM
                  14.**
              MATERIAL
                  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                  PROCEEDS.
              78**ITEM
                  15.**
              CONTROLS
                  AND PROCEDURES.
              78**ITEM
                  16.**
              [RESERVED]
              78**ITEM
                  16A.**
              AUDIT
                  COMMITTEE FINANCIAL EXPERT.
              78**ITEM
                  16B.**
              CODE
                  OF ETHICS.
              79**ITEM
                  16C**.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES.
              79**ITEM
                  16D.**
              EXEMPTIONS
                  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
              80**ITEM
                  16E.**
              PURCHASES
                  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                  PURCHASERS.
              80**PART
                  III****ITEM
                  17.**
              FINANCIAL
                  STATEMENTS.
              81**ITEM
                  18.**
              FINANCIAL
                  STATEMENTS.
              81**ITEM
                  19.**
              EXHIBITS.
              81




-i-




**PART
      I**




**ITEM
              1.**
            **IDENTITY
                OF DIRECTORS, SENIOR MANAGEMENT AND
                ADVISERS**




*Not
      Applicable*




**ITEM
              2.**
            **OFFER
                STATISTICS AND EXPECTED
                TIMETABLE**




*Not
      Applicable*




**ITEM
              3.**
            **KEY
                INFORMATION**




**A.**
            **Selected
                Financial Data.**




The
      following selected consolidated financial data for each of the year in the
      three
      year period which ended December 31, 2005 are derived from our audited
      Consolidated Financial Statements set forth elsewhere in this report, which
      have
      been prepared in accordance with and utilizing accounting principles generally
      accepted in the United States (“US GAAP”). The selected consolidated financial
      data for each of the years in the two year period which ended December 31,
      2001
      are derived from other audited consolidated financial statements not appearing
      in this report. All of the financial data set forth below are in thousands
      (except per share amounts). You should read the following selected consolidated
      financial data in conjunction with “Operating and Financial Review and
      Prospects” and the Consolidated Financial Statements and Notes thereto appearing
      elsewhere herein. Historical results are not necessarily indicative of any
      results to be expected in any future period.




**2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005****FINANCIAL
                DATA:**Total
                revenues
            
            $
            44,994
            
            $
            39,828
            
            $
            47,614
            
            $
            58,537
            
            $
            74,466Operating
                income (loss)
            
            
            (26,931
            )
            
            (16,692
            )
            
            318
            
            
            2,215
            
            
            4,417Net
                income (loss)
            
            
            (31,626
            )
            
            (16,647
            )
            
            67
            
            
            2,467
            
            
            4,336Basic
                earnings (loss) per share
            
            $
            (2.22
            )
            $
            (1.16
            )
            $
            0.00
            
            $
            0.17
            
            $
            0.29Diluted
                earnings (loss) per share
            
            $
            (2.22
            )
            $
            (1.16
            )
            $
            0.00
            
            $
            0.16
            
            $
            0.27Cash,
                cash equivalents, short-term bank deposits and short term
                investments
            
            $
            45,385
            
            $
            42,496
            
            $
            37,928
            
            $
            36,430
            
            $
            49,599Long-term
                marketable securities
            
            
            
            
            
            
            
            
            8,436
            
            
            9,591Working
                capital
            
            
            55,206
            
            
            44,630
            
            
            41,183
            
            
            37,917
            
            
            49,909Total
                assets
            
            
            102,056
            
            
            89,380
            
            
            89,560
            
            
            98,881
            
            
            105,801Shareholders’
                equity
            
            
            91,220
            
            
            75,166
            
            
            76,534
            
            
            79,805
            
            
            85,010




Israeli
      Securities Law allows Israeli companies, such as ours, whose securities are
      listed on both the Tel Aviv Stock Exchange and on certain stock exchanges in
      the
      United States (including The NASDAQ National Market) to report exclusively
      under
      the United States Securities and Exchange Commission rules and utilizing US
      GAAP. All financial statements included in this report and all financial
      information released in Israel are presented solely under US GAAP.




**B.**  **Capitalization
      and Indebtedness.**




*Not
      applicable.*




-1-




C.Reasons
        for the Offer and Use of Proceeds.
  *Not applicable.*
  D.Risk
        Factors.
  *You
        should carefully consider the risks described below and in the documents
        we have
        incorporated by reference into this prospectus before making an investment
        decision. The risks described below and in the documents we have incorporated
        by
        reference into this prospectus are not the only ones facing our company.
        Our
        business, financial condition or results of operations could be materially
        adversely affected by any of these risks. The trading price of our Ordinary
        Shares could decline due to any of these risks, and you may lose all or part
        of
        your investment.*
  *Statements
        included or incorporated by reference in this prospectus that are not historical
        facts are forward-looking statements within the meaning of the federal
        securities laws. These statements may contain works such as “expects,”
“anticipates,” “intends,” “plans,” “believes,” “estimates,” or other wording
        indicating future results or expectations. Forward-looking statements are
        subject to risks and uncertainties. Our actual results may differ materially
        from the results discussed in forward-looking statements. Factors that could
        cause our results to differ materially include, but are not limited to, those
        discussed below, elsewhere in this prospectus and in the documents we have
        incorporated by reference. We undertake no obligation to revise or update
        any
        forward-looking statements to reflect any event or circumstance that may
        arise
        or develop after the date of this prospectus.*
  **Risk
        Relating to Our Business**
  ***Our
        business is affected by conditions in the financial services
        industry.***
  Our
        customers are highly concentrated in the financial services industry. Our
        business is therefore susceptible to a downturn in that industry. For example,
        a
        decrease in spending for software and related services within this industry
        could result in a decrease in demand for our products. Financial institutions
        around the world continue to consolidate which decreases the overall potential
        market for our products and services. These factors, as well as other changes
        occurring in the financial services industry, could have a material adverse
        effect on our business, financial condition and results of
        operations.
  ***If
        we are unable to accurately predict and respond to market developments or
        demands, our business will be adversely affected.***
  The
        market for financial institutions payments and cash management solutions
        continues to develop and evolve. This makes it difficult to predict demand
        for
        our products. We cannot guarantee that the market for our products will grow
        or
        that our products will become widely accepted. If the market for our products
        does not develop in the time frames and demand that we have projected, our
        future revenues and profitability will be adversely affected. In addition,
        changes in technologies, industry standards, the regulatory environment,
        customer requirements and new product introductions by existing or future
        competitors could render our existing products obsolete and unmarketable,
        or
        require us to develop new products. A significant increase in the number
        of
        customers and/or a significant increase in our development of new product
        offerings would require us to expend significant amounts of money, time and
        other resources to meet demand. These expenditures could strain our personnel
        and financial resources.
  -2-
  ***We
        are and expect to continue to be dependent upon a limited number of customers
        for a significant portion of our future revenues.***
  We
        believe that the market for our payments and cash management software products
        and services consists of a relatively small number of customers who have
        very
        large potential accounts as well as a great number of customers comprising
        smaller accounts. These large accounts may from time to time comprise a
        significant percentage of our revenues in a specific fiscal period. Our failure
        to attract and retain these large accounts may have a material adverse effect
        on
        our business, financial condition and results of operations.
  We
        have
        entered into contracts with two customers for the sale of one of our payments
        products and one for sale of our securities product. These customers represented
        14%, 10% and 7% of our revenues in 2005 and 2%, 14% and 2% of our revenues
        in
        2004. The cessation of projects of this size, which have an indefinite term,
        could have a material adverse effect on our business, financial condition
        and
        results of operations and could also negatively impact the market acceptance
        of
        this product. We expect that a significant portion of our future revenues
        will
        continue to be derived from a relatively small number of customers. We cannot
        assure you that other customers will purchase our products and services in
        the
        future. See Item 5, “Operating Results and Financial Review and Prospects -
        Major Customers.”
  ***Our
        sales cycle is variable and sometimes long and involves significant resources
        on
        our part, but may never result in actual sales.***
  Our
        sales
        cycle from our initial contact with a potential customer to the signing of
        a
        license agreement has historically been lengthy and is variable. We generally
        must educate our potential customers about the use and benefit of our products
        and services, which can require the investment of significant time and
        resources. In addition, the purchasing decisions of our customers are subject
        to
        the uncertainties and delays of the budgeting, approval and competitive
        evaluation processes that typically accompany significant capital expenditures.
        If our sales cycle lengthens, our quarterly operating results may become
        less
        predictable and may fluctuate more widely than in the past. A number of
        companies decide which products to buy through a request for proposal process.
        In those situations, we run the risk of investing significant resources in
        a
        proposal that does not result in revenue, because either a competitor obtains
        the desired contract from the customer or the customer decides not to proceed
        with the project or the customer decides to internally develop the product.
        Due
        to the relatively large size of some orders, a lost or delayed sale could
        have a
        material adverse effect on our quarterly revenue and operating
        results.
  ***We
        may experience significant fluctuations in our quarterly results, which makes
        it
        difficult for investors to make reliable period-to-period comparisons and
        may
        contribute to volatility in the market price for our Ordinary
        Shares.***
  Our
        quarterly revenues, margins and results of operations have fluctuated
        significantly in the past as a result of various factors, many of which are
        outside our control. These factors include:
  ·
            the
                size, timing and shipment of orders for our products and
                services;  ·
            changes
                in global economic conditions in general, and conditions in our industry
                and target markets in particular;  ·
            our
                customers’ budget cycles;  ·
            the
                timing of the release of new product
                upgrades;  ·
            any
                lengthening of our sales cycle;  -3-
  ·
            changes
                in the proportion of service and license
                revenues;  ·
            price
                and product competition;  ·
            enhancements
                or introductions by us and our
                competitors;  ·
            the
                mix of product sales;  ·
            software
                “bugs” or other product quality problems;  ·
            product
                pricing;  ·
            our
                effectiveness in providing customer
                support;  ·
            delays
                in implementation;  ·
            impact
                of unrest or political instability in the places we do business,
                such as
                the current unrest in Israel;  ·
            consolidation
                of our customers; and  ·
            currency
                fluctuations.  A
        substantial portion of our expenses, including most product development and
        selling and marketing expenses, must be incurred in advance of when revenue
        is
        generated. If our projected revenue does not meet our expectations, we are
        likely to experience an even larger shortfall in our operating profit relative
        to our expectations. As a result, we believe that period-to-period comparisons
        of our historical results of operations are not necessarily meaningful and
        that
        you should not rely on them as an indication for future performance. It is
        also
        possible that our quarterly results of operations may be below the expectations
        of public market analysts and investors. If this happens, the price of our
        Ordinary Shares will likely decrease.
  ***Decisions
        by customers to develop their own payments and cash management solutions
        or
        greater market acceptance of our competitors’ products could result in reduced
        revenues.***
  The
        market for payments and cash management solutions is continuing to develop
        and
        competition is intense. We compete for the business of global or national
        and
        regional financial services organizations that seek to support complex and
        sophisticated products. Some of the larger financial institutions have developed
        products that are similar in function to our global payments and cash management
        products, in lieu of purchasing our products which they have then marketed
        to
        other banks or implemented in banks that they have acquired. Thus we might
        be
        competing with both software vendors within our industry and the in-house
        IT
        departments of certain of our clients.
  We
        believe there are several principal competitive factors in the industry in
        which
        we operate, including:
  ·
            product
                performance;  ·
            technical
                features;  -4-
  ·
            compatibility
                with existing operating systems;  ·
            reliability;  ·
            security;  ·
            relational
                database power;  ·
            price;  ·
            customer
                service and support; and  ·
            ease
                of use.  Our
        competitors may be in a better position to devote significant funds and
        resources to the development, promotion and sale of their products, thus
        enabling them to respond more quickly to new or emerging technologies and
        changes in customer requirements. Current and potential competitors have
        established or may establish cooperative relationships among themselves or
        with
        third parties to increase their ability to successfully market their products.
        We also expect that competition will increase as a result of consolidation
        within the industry. As we develop new products, we may begin to compete
        with
        companies with which we have not previously competed. Our competitors include,
        but are not limited to, BankServ, Logica PLC, Digital Insights, Inc., Politzer
        & Haney, S1 Corporation, Fidelity Information Services, Banklink,
        TietoEnator, Sunguard, Smartstream Technologies and Transaction Systems
        Architects, Inc.
  We
        may be
        unable to differentiate our products from the products of our competitors
        or
        successfully develop and introduce new products that are less costly than,
        or
        superior to, those of our competitors. In addition, existing and new competitors
        may establish relationships with our existing and potential customers. This
        could have a material adverse effect on our ability to compete.
  In
        addition to our current competitors, we expect substantial competition from
        both
        established and emerging companies. Many of our existing and potential
        competitors have, or are likely to have, more extensive engineering,
        development, marketing, distribution, financial, technological and personnel
        resources than us. This increased competition may result in our loss of market
        share and pricing pressure which may have a material adverse effect on our
        business, financial condition and results of operations. We cannot assure
        you
        that competition with both competitors within our industry and with the in-house
        IT departments of certain of our clients or prospective clients will not
        result
        in price reductions for our products and services, fewer customer orders,
        deferred payment terms, reduced revenues or loss of market share, any of
        which
        could materially adversely affect our business, financial condition and results
        of operations. See Item 4B, “Information on the Company — Business Overview —
Competition.”
  ***We
        may be unable to expand our support organizations which may hinder our ability
        to grow and meet customer demands and rapid expansion of these resources
        could
        increase our cost and reduce our operating profit.***
  Prior
        to
        2003 in order to reduce costs, we substantially reduced the number of employees
        in both our research & development and administrative departments. We may
        need to increase our technical and customer support staff to support new
        customers and the expanding needs of existing customers. With the addition
        of
        our Cashtech business, we are increasingly looking to India to source these
        requirements. Since our products are complex we expect that the training
        process
        will take a significant period of time before these personnel can support
        our
        customers. Qualified individuals are in demand throughout the software industry
        globally and there is significant competition for qualified personnel.
        Competition for qualified people may lead to increased labor and personnel
        costs. If we do not succeed in retaining our personnel or in attracting new
        employees, our business could suffer significantly. If we are unable to attract,
        train and retain qualified personnel, we may not be able to achieve our
        objectives and our business could be harmed.
  -5-
  ***Marketing
        and distributing our products outside of the United States may require increased
        expenses and greater exposure to risks that we may not be able to successfully
        address.***
  We
        market
        and sell our products and services throughout the world. We received 39.3%
        of
        our total revenues in 2003, 45.5% of our total revenues in 2004 and 46.4%
        of our
        total revenues in 2005 from sales to customers located outside of the United
        States. The expansion of our existing operations and entry into additional
        international markets will require significant management attention and
        financial resources. We are subject to a number of risks customary for
        international operations, including:
  ·
            economic
                or political changes in international
                markets;  ·
            greater
                difficulty in accounts receivable collection and longer collection
                periods;  ·
            unexpected
                changes in regulatory requirements;  ·
            difficulties
                and costs of staffing and managing foreign
                operations;  ·
            the
                uncertainty of protection for intellectual property rights in some
                countries;  ·
            multiple
                and possibly overlapping tax structures;
                and  ·
            currency
                and exchange rate fluctuations.  ***The
        market price of our Ordinary Shares may be volatile.***
  The
        stock
        market in general, and particularly over the past four years, has experienced
        price and volume fluctuations. The market prices of securities of technology
        companies have not completely recovered from the declines experienced in
        the
        year 2000, and have experienced fluctuations that have often been unrelated
        or
        disproportionate to the operating performance of those companies. For additional
        information, see the table in Item 9, “The Offer and Listing — Market Price
        Information.” These market fluctuations could adversely affect the market price
        of our Ordinary Shares. The market price of the Ordinary Shares may fluctuate
        substantially due to a variety of factors, including:
  ·
            any
                actual or anticipated fluctuations in our financial condition and
                operating results;  ·
            public
                announcements concerning us or our competitors, or the financial
                services
                industry;  ·
            our
                inability to meet any guidance or forward looking information, if
                provided;  ·
            the
                introduction or market acceptance of new service offerings by us
                or our
                competitors;  ·
            changes
                in security analysts’ financial
                estimates;  -6-
  ·
            changes
                in accounting principles;  ·
            sales
                of our Ordinary Shares by existing
                shareholders;  ·
            the
                loss of any of our key personnel; and  ·
            changes
                in the political conditions in Israel.  In
        the
        past, securities class action litigation has often been brought against
        companies following periods of volatility in the market prices of their
        securities. We may be the target of similar litigation in the future. Securities
        litigation could result in substantial costs and divert our management’s
        attention and resources, which could cause serious harm to our
        business.
  ***We
        are trending toward a lower percentage of license fees and a greater percentage
        in service revenues in our revenue models.***
  The
        combination of sales to major clients containing a significant services
        component to implement software globally, increases in sales where significant
        modifications are required to meet customer specific demands (“Solution Sales”)
        and increasing selection of our ASP hosted solution in lieu of our licensed
        solution, particularly with respect to our CASHplus software, may result
        in a
        change in the way our share value is viewed by the marketplace. Although
        we
        continue to believe that a solutions and hosting based revenue model has
        numerous advantages, particularly in recurring revenue and visibility into
        our
        future earnings, the marketplace may view our share price as a solutions
        based
        business in a different way than it views a license based business. This
        may
        lead to volatility in our share price.
  ***Future
        sales of our Ordinary Shares in the public market or issuances of additional
        securities could cause the market price for our Ordinary Shares to
        fall.***
  As
        of
        June 14, 2006, we had 15,123,858 Ordinary Shares outstanding, and, in addition,
        we have reserved up to 2,333,733 Ordinary Shares for issuance under our option
        plans. If a large number of our Ordinary Shares are sold, the price of our
        Ordinary Shares would likely decrease or if we continue to issue shares,
        convertible securities, warrants restricted shares and/or options the price
        of
        our Ordinary Shares may decrease.
  We
        may
        continue to issue restricted shares or options and the issuance of these
        securities could be dilutive to our shareholders. Future acquisitions involving
        the issuance of shares as part of the purchase price could result in dilution.
        Certain warrants or options, when issued, may require us to reflect appropriate
        charges in our financial statements at that time. See also “ *Any
        future acquisitions of companies or technologies may distract our management
        and
        disrupt our business.* ”
        below.
  ***Undetected
        defects may increase our costs and impair the market acceptance of our products
        and technology.***
  Our
        software products are complex and may contain undetected defects, particularly
        when first introduced or when new versions or enhancements are released.
        Testing
        of our products is particularly challenging because it is difficult to simulate
        the wide variety of customer environments into which our products are deployed.
        Despite testing conducted by us and our customers, some defects have been
        discovered after their commercial shipment. Our products are frequently more
        critical to our customers’ operations compared to other software solutions used
        by such customers, and as a result, our customers may have a greater sensitivity
        to product defects relating to our products.
  The
        finding of defects in current or future products and versions after the start
        of
        commercial shipment may result in:
  -7-
  ·
            a
                delay or failure of our products to achieve market
                acceptance;  ·
            adverse
                customer reaction;  ·
            negative
                publicity and damage to our reputation;  ·
            diversion
                of resources; and  ·
            increased
                service and maintenance costs.  Defects
        could also subject us to legal claims. Although our license agreements contain
        limitation of liability provisions, these provisions may not be sufficient
        to
        protect us against these legal claims. The sale and support of our products,
        as
        well as our professional services, may also expose us to product liability
        claims.
  ***Any
        future acquisitions of companies or technologies may distract our management
        and
        disrupt our business.***
  We
        have
        in the past acquired certain assets of Sterling Commerce and CheckFree Holdings
        Corporation, as well as all of the stock of Biveroni Batschelet Partners
        AG,
        Switzerland, Datasphere SA and Cashtech Solutions India Private Limited,
        and
        Radius Partners, Inc. and may in the future acquire or make investments in
        complementary businesses, technologies, services or products, if appropriate
        opportunities arise. We may also engage in discussions and negotiations with
        companies about our acquiring or investing in those companies’ businesses,
        products, services or technologies. We cannot make assurances that we will
        be
        able to identify future suitable acquisition or investment candidates, or
        if we
        do identify suitable candidates, that we will be able to make the acquisitions
        or investments on commercially acceptable terms or at all or that we will
        have
        sufficient available resources for such acquisitions or investments. If we
        acquire or invest in another company, we could have difficulty assimilating
        that
        company’s personnel, operations, customers, technology or products and service
        offerings into our own. The key personnel of the acquired company may decide
        not
        to work for us. These difficulties could disrupt our ongoing business, distract
        our management and employees, increase our expenses and adversely affect
        our
        results of operations. We may incur indebtedness or issue equity securities
        to
        pay for any future acquisitions. The issuance of equity securities could
        be
        dilutive to our existing shareholders.
  ***We
        have a limited operating history with respect to certain of our principal
        products, which makes it difficult to predict future results of
        operations.***
  From
        1999
        through 2002, we spent considerable time, effort and money developing our
        next
        generation software, including: PAYplus USATM, a funds transfer solution for use
        by banks, thrifts, and international agency banks operating in the United
        States, Global PAYplusTM funds transfer solution handling both local and global
        payments activity, PAYplus for CLS software used in foreign exchange settlements
        and CASHplus®, an Internet based cash management solution that has
        multi-currency capabilities. PAYplus USATM is now operating in approximately 160
        banks, PAYplus for CLS is currently operating in approximately 18 banks,
        and we
        have more recently begun to implement Global PAYplusTM and CASHplus®. This
        limited history of operations for our newer solutions and their delivery
        modes,
        makes it difficult to predict future results of operations.
  ***We
        may be unable to adequately protect our proprietary rights, which may limit
        our
        ability to compete effectively.***
  Our
        success and ability to compete are substantially dependent upon our internally
        developed technology. Other than our trademarks, our intellectual property
        consists primarily of proprietary or confidential information that is not
        subject to patent or similar protections. In general, we have relied on a
        combination of technical leadership, trade secret, copyright and trademark
        law
        and nondisclosure agreements to protect our proprietary know-how. Unauthorized
        third parties may attempt to copy or obtain and use the technology protected
        by
        those rights. Any infringement of our intellectual property could have a
        material adverse effect on our business, financial condition and results
        of
        operations. Policing unauthorized use of our products is difficult and costly,
        particularly in countries where the laws may not protect our proprietary
        rights
        as fully as in the United States.
  -8-
  We
        have
        placed, and in the future may place, our software source code in escrow.
        The
        software source code may, under specified circumstances, be made available
        to
        our customers. In certain limited instances, we have also provided our software
        source code directly to customers. This may increase the likelihood of
        misappropriation or other misuse of our software.
  Substantial
        litigation over intellectual property rights exists in the software industry.
        We
        expect that software products may be increasingly subject to third-party
        infringement claims as the functionality of products in different industry
        segments overlaps.
  We
        believe that many industry participants have filed or intend to file patent
        and
        trademark applications covering aspects of their technology. We cannot be
        certain that they will not make a claim of infringement against us based on our
        products and technology. Any claims, with or without merit, could:
  ·
            be
                expensive and time-consuming to defend;  ·
            cause
                product shipment and installation delays;  ·
            affect
                the decision by prospective customers to enter into agreements with
                us;  ·
            divert
                management’s attention and resources; or  ·
            require
                us to enter into royalty or licensing agreements to obtain the right
                to
                use a necessary product or component.  If
        we are
        required to enter into royalty or licensing agreements, such agreements may
        not
        be available on acceptable terms, if at all. Therefore, a successful claim
        of
        product infringement against us and our failure or inability to license the
        infringed or similar technology at all or to license the infringed or similar
        technology for reasonable commercial terms, could have a material adverse
        effect
        on our business, financial condition and results of operations.
  ***We
        utilize software from third parties. If we cannot continue using that software
        on commercially reasonable terms, we would have to spend additional capital
        to
        redesign our existing software.***
  We
        utilize off-the-shelf third-party software products to optimize the performance
        of our products. Our business would be disrupted if functional versions of
        this
        software were either no longer available to us or no longer offered to us
        on
        commercially reasonable terms. In either case, we would be required to spend
        additional capital to either redesign our software to function with alternate
        third-party software or develop these components ourselves. If this third-party
        software were either no longer available to us or no longer offered to us
        on
        commercially reasonable terms, we might be forced re-engineer our current
        or
        future product offerings and the commercial release of our products could
        be
        delayed, which could materially adversely affect our business, financial
        condition and results of operations.
  -9-
  ***Government
        regulatory policy for the financial services industry affects our
        business.***
  Our
        current and prospective customers, which include state and federally chartered
        banks and savings and loan associations, operate in markets that are subject
        to
        extensive and complex regulation. While we are not ourselves directly subject
        to
        this regulation, our products and services must be designed to work within
        the
        regulatory constraints under which our customers operate. The inability of
        our
        products and services to work properly within the regulatory framework may
        have
        a material adverse effect on our business, financial condition and results
        of
        operations.
  **Risks
        Related to Our Location in Israel**
  It
        may be
        difficult to effect service of process and enforce judgments against directors,
        officers and experts in Israel.
  We
        are
        organized under the laws of the State of Israel. Many of our executive officers
        and directors named in this annual report are nonresidents of the United
        States,
        and a substantial portion of our assets and the assets of these persons are
        located outside the United States. Therefore, it may be difficult to enforce
        a
        judgment obtained in the United States against us or any of those persons.
        It
        may also be difficult to enforce civil liabilities under United States federal
        securities laws in actions initiated in Israel.
  ***Political,
        economic and military conditions in Israel and the Middle East as a whole,
        could
        negatively impact our business.***
  Political,
        economic and military conditions in Israel have a direct influence on us
        because
        one of our significant research and development facilities and one of our
        executive offices is located there. Any major hostilities involving Israel
        or
        the interruption or curtailment of trade between Israel and its present trading
        partners could adversely affect our operations. We cannot assure you that
        ongoing hostilities related to Israel will not have a material adverse effect
        on
        our business or on our share price. Several Arab countries still restrict
        business with Israeli companies and these restrictions may have an adverse
        impact on our operating results, financial condition or the expansion of
        our
        business. We could be adversely affected by restrictive laws or policies
        directed towards Israel and Israeli businesses. The future of peace efforts
        between Israel and its Arab neighbors is uncertain. Since October 2000, there
        has been a significant deterioration in Israel’s relationship with the
        Palestinian Authority, including a series of armed clashes between Israel,
        the
        armed forces of the Palestinian Authority, and terrorist organizations, and
        acts
        of terror have been committed inside Israel. Also, the recent war in Iraq
        led by
        coalition forces and the short and long term consequences of such war may
        negatively impact our business. The local situation has been exacerbated
        by the
        recent election of representatives of the Hamas movement to a majority of
        seats
        in delegates in the Palestinian Legislative Council. All indications are
        that
        there is no short term relief in sight for these problems.
  Generally,
        all male adult citizens and permanent residents of Israel under the age of
        54
        are, unless exempt, obligated to perform up to 36 days of military reserve
        duty
        annually. Additionally, all Israeli residents of this age are subject to
        being
        called to active duty at any time under emergency circumstances. Some of
        our
        officers and employees are currently obligated to perform annual reserve
        duty.
        Although we have operated effectively under these requirements since we began
        operations, we cannot assess the full impact of these requirements on our
        workforce or business if political and military conditions should change,
        and we
        cannot predict the effect on us of any expansion or reduction of these
        obligations.
  ***We
        may be adversely affected if the rate of inflation in Israel exceeds the
        rate of
        devaluation of the new Israeli shekel against the
        dollar.***
  Most
        of
        our revenues are in dollars or are linked to the dollar, while a portion
        of our
        expenses, principally salaries and the related personnel expenses, are in
        new
        Israeli Shekels, or NIS. As a result, we are exposed to the risk that the
        rate
        of inflation in Israel will exceed the rate of devaluation of the NIS in
        relation to the dollar or that the timing of this devaluation lags behind
        inflation in Israel. This would have the effect of increasing the dollar
        cost of
        our operations. In 1999 and in 2000, while the rate of inflation was low,
        there
        was a devaluation of the dollar against the NIS, and in 2001 the rate of
        devaluation of the NIS against the dollar exceeded the rate of inflation.
        In
        2002, the devaluation of the NIS against the dollar was similar to the rate
        of
        inflation. In 2003, the NIS gained in value against the dollar while the
        rate of
        inflation was negative. During 2004, the valuation of NIS against the dollar
        was
        stable. In 2005, the NIS devalued against the dollar at a greater rate than
        inflation. We cannot predict any future trends in the rate of inflation in
        Israel or the rate of devaluation of the NIS against the dollar. If the dollar
        cost of our operations in Israel increases, our dollar-measured results of
        operations will be adversely affected.
  -10-
  ***The
        tax benefits available to us from government programs may be discontinued
        or
        reduced at any time, which would likely increase our
        taxes.***
  We
        have
        received Government grants in the past and currently receive tax benefits
        under
        Israeli government programs. To maintain our eligibility for these programs
        and
        benefits, we must continue to meet specified conditions. Some of these programs
        restrict our ability to transfer particular technology outside of Israel.
        If we
        fail to comply with these conditions in the future, the benefits received
        could
        be canceled and we could be required to refund any payments previously received
        under these programs or pay increased taxes. The government of Israel has
        reduced the benefits available under these programs recently and these programs
        and tax benefits may be discontinued or reduced in the future.
  ***Under
        current Israeli law, we may not be able to enforce covenants not to compete
        and
        therefore may be unable to prevent our competitors from benefiting from the
        expertise of some of our former employees.***
  We
        currently have non-competition agreements with our employees. These agreements
        prohibit our employees, if they cease working for us, from directly competing
        with us or working for our competitors. Recently, Israeli courts have required
        employers seeking to enforce non-compete undertakings of a former employee
        to
        demonstrate that the competitive activities of the former employee will harm
        one
        of a limited number of material interests of the employer which have been
        recognized by the courts, such as the secrecy of a company’s confidential
        commercial information or its intellectual property. If we cannot demonstrate
        that harm would be caused to us, we may be unable to prevent our competitors
        from benefiting from the expertise of our former employees.
  ***The
        government grants we have received for research and development expenditures
        restrict our ability to manufacture products and transfer technologies outside
        of Israel and require us to satisfy specified
        conditions.***
  From
        time
        to time we have received royalty-bearing grants from the Office of the Chief
        Scientist of the Ministry of Industry and Trade of the Government of Israel
        (“OCS”). The terms of these grants prohibit us from manufacturing products or
        transferring technologies developed using these grants outside of Israel
        without
        special approvals. Even if we receive approval to manufacture these products
        outside of Israel, we may be required to pay increased royalties, up to 300%
        of
        the grant amount plus interest, depending on the manufacturing volume that
        is
        performed outside of Israel. The technology developed with these grants may
        not
        be transferred to third parties, including in the context of an acquisition
        of
        our company, without the prior approval of a governmental committee under
        the
        Research and Development Law, and may not be transferred to non-residents
        of
        Israel without such approval. These restrictions may impair our ability to
        outsource manufacturing or engage in similar arrangements for those products
        or
        technologies. In addition, if we fail to comply with any of the conditions
        imposed by the OCS, we may be required to refund any grants previously received,
        together with interest and penalties.
  In
        2002,
        the Research and Development Law was amended to, among other things, enable
        companies applying for grants from the OCS to seek prior approval for conducting
        manufacturing activities outside of Israel without being subject to increased
        royalties. However, this amendment will not apply to any of our existing
        grants.
        In addition, the amendment provides that one of the factors to be taken into
        consideration by the OCS in deciding whether to approve a grant application
        is
        the percentage of the manufacturing of the relevant product that will be
        conducted outside of Israel. Accordingly, should we seek additional grants
        from
        the OCS in connection with which we also seek prior approval for manufacturing
        products outside of Israel, we may not receive such grant or may receive
        a grant
        in an amount that is less than the amount we sought.
  -11-
  ***Our
        United States investors could suffer adverse tax consequences if we are
        characterized as a passive foreign investment company.***
  Although
        we believe that we were not a passive foreign investment company in 2005,
        we
        cannot assure you that the IRS will agree with our position. We would be
        a
        passive foreign investment company if (i) 75% or more of our gross income
        in a
        taxable year, including our pro rata share of the gross income of any company treated
        as a corporation for U.S. Federal income tax purposes ,
        U.S. or
        foreign, in which we are considered to own directly
        or indirectly 25% or more of the
        shares by value, is passive income, or (ii) the value of our assets average
        quarterly our the taxable year, including our pro rata share of the assets
        of
        any company treated
        as a corporation for U.S. Federal income tax purposes  in
        which
        we are considered to own directly
        or indirectly 25% or more of the
        shares by value, in a taxable year that produce, or are held for the production
        of, passive income is at least 50%. Passive income includes interest, dividends,
        royalties, rents and annuities. If we are or become a passive foreign investment
        company, our U.S. investors could be subject to adverse tax consequences,
        including:
  ·
            being
                taxed at ordinary income tax rates on gain from the sale or other
                disposition of our Ordinary Shares(and on certain distributions on our Ordinary Shares);  ·
            being
                subject to interest on the tax liability resulting from the sale
                or other
                disposition of our Ordinary Shares (and on certain distributions
                on such
                shares) as if the gain from such sale or such distribution had been
                recognized ratably over the U.S. investors’ holding period and subject to
                the highest ordinary income tax rates in effect in the year to which
                allocated; and  ·
            being
                denied the normally-available increase in tax basis to fair market
                value
                for Ordinary Shares acquired from
                decedents.  For
        additional information, see Item 10E, “Additional Information —
Taxation.”
  **ITEM
                  4.**
                **INFORMATION
                    ON THE COMPANY.**
  A.
              **History
                  and Development of the
                  Company**
  Both
        our
        legal and commercial name is Fundtech Ltd. We were incorporated in Israel
        in
        1993 under the Israeli Companies Ordinance (New Version), 1983 (the “Companies
        Ordinance”), as a private limited company, under the name of “Fundtrust
        Technologies Limited”. The principal legislation under which we operate is the
        Israeli Companies Law, 5759-1999 as amended (the “Companies Law”), which
        replaced most of the provisions of the Companies Ordinance effective as of
        May
        1, 2000.
  Our
        registered office is located at 12 Ha’hilazon Street, 5th Floor, Ramat-Gan,
        Israel 52522, and our telephone number is 972-3-611-6500.
  Our
        name
        was changed to “Fundtech Ltd.” in June 1994. Our primary business at that time
        was the automation of payments for community banks. In 1998, we acquired
        the
        assets of the cash management division of CheckFree Holdings Corporation.
        In
        1999, we acquired the assets of the cash management division of Sterling
        Commerce as well as 100% of the stock of Biveroni Batschelet Partners AG,
        Switzerland (“BBP”), which connects banks to the Central Bank of Switzerland for
        the processing and settlement of payments, securities trading and settlement.
        In
        2004, we acquired 100% of the stock of Datasphere SA (“Datasphere”) and Cashtech
        Solutions India Private Limited (“Cashtech”). In 2005, we acquired 100% of the
        stock of Radius Partners, Inc. (“Radius Partners”).
  -12-
  On
        March
        13, 1998, we completed our initial public offering and our Ordinary Shares
        began
        trading on The NASDAQ National Market. As part of the offering, we issued
        3,450,000 Ordinary Shares in consideration of net proceeds of approximately
        $41,710,500.
  On
        August
        19, 2003 our Ordinary Shares began trading on the Tel-Aviv Stock Exchange
        in
        Israel, and we became a dual listed company.
  Capital
        expenditures consisting primarily of purchases of property and equipment
        were
        $2.1 million, $4.3 million and $5.4 million during the years ended December
        31,
        2003, 2004 and 2005, respectively. We neither purchased nor owned any real
        property during this same period. We acquired all of the capital stock of
        Datasphere and Cashtech during 2004 for a total of $4.8 million and all of
        the
        capital stock of Radius Partners during 2005 for a total of $2.6
        million.
  Capital
        expenditures for the year ending December 31, 2006 are expected to be
        approximately $5.6 million, of which $4.5 million will be spent in the United
        States and $1.1 million will be expended outside the United States, primarily
        by
        BBP. We anticipate financing these capital expenditures with our own
        funds.
  B.
              **Business
                  Overview**
  We
        are a
        leading provider of end-to-end financial transaction processing software
        solutions for financial institutions. These solutions are grouped into five
        broad categories: payment processing, foreign exchange settlement processing,
        financial messaging, cash management and securities settlement straight through
        processing products. The first three categories are transaction processing
        solutions, which enable banks to automate the payment and settlement processes
        and provide real-time transaction processing capabilities to financial
        institutions and their customers. The fourth category, cash management products
        enable corporate clients to communicate with their financial institutions
        for
        the purpose of initiating payments, making inquiries and managing their
        activities with the financial institutions. The final category securities
        post-trade settlement, is a multi-asset global trade management solution
        that
        consolidates and automates a broker/dealer’s middle office
        operations.
  We
        acquired our ACCESS BankingTM products in April 1998, BBP, our Swiss subsidiary,
        in June 1999 and our banker products in September 1999. Our major products
        include ACCESS BankingTM, CASHplus®, PAYplus USATM, PAYplus for CLSTM, Global
        PAYplusTM, Recovery Services for disaster recovery service bureau solutions and
        related services. We acquired Datasphere through BBP in August 2004 and Cashtech
        in November 2004. BBP and Datasphere have sold their products and services
        to
        approximately 180 customers for the purpose of accessing the S.W.I.F.T.
        financial messaging network. Cashtech offers a suite of cash management products
        named CashWeb, CashIn and TransactCentral. Radius Partners is an STP (“straight
        through processing”) solutions provider to the securities industry. Radius
        offers two STP products named TRADEplus and TRADEplus Data Manager.
  *Industry
        Background*
  The
        increasing volume of global commerce as well as the widespread adoption of
        new
        banking technologies has led to dramatic increases in both the number of
        transactions consummated through electronic payment systems and the need
        for
        timely delivery of financial information. As a result, financial institutions
        are seeking more efficient methods of offering payment, settlement and cash
        management services.
  -13-
  The
        following trends continue to drive demand for our products and services in
        this
        dynamic market environment: an increasing need for centralized payment and
        treasury functions; global adoption of real-time gross settlement; migration
        to
        Internet-based solutions; growth in electronic commerce; consolidation in
        the
        financial services industry; and increased regulatory requirements imposed
        on
        banks.
  We
        believe that several market trends and the current environment are favorable
        to
        our products and services. Specifically, we focus on the following trends
        and
        market conditions:
  ·
            continued
                expansion of Internet-enabled functions such as real-time information
                on
                financial positions and transactions;  ·
            new
                and expanded regulatory requirements on banks especially in the areas
                of
                interdiction and anti-money laundering, and reporting
                purposes;  ·
            greater
                emphasis on risk mitigation in areas such as liquidity management
                and
                contingency and recovery capabilities;  ·
            a
                shift on the part of financial institutions to use outsourcing,
                application service providers and “white-labeling” in lieu of developing
                and managing their own IT activities;  ·
            continued
                spread of globalization that will require new tools for banks to
                manage
                24-hour trading and settlement, real-time information demands and
                end-to-end processing; and  ·
            demand
                from clients for simplified corporate banking relationship, which
                require
                banks to re-engineer customer facing
                systems.  *Products
        and Services*
  Our
        products and related services are designed to integrate all elements of the
        electronic payments cycle, including electronic funds transfer, and cash
        and
        treasury management. We believe that our products are among the most
        technologically advanced and cost-effective solutions in the electronic payments
        and banking industry. Our products facilitate all aspects of the electronic
        payments and banking cycle including payment initiation, electronic balance
        reporting, account reconciliation, real-time account balance verification
        and
        other sophisticated auditing and reporting functionality. In addition, our
        products offer feature-rich graphical user interfaces, enabling our customers
        to
        easily receive accurate and focused information concerning the status of
        electronic payment transactions and other cash management data.
  Our
        end-to-end solutions provide for remote initiation of transactions, efficient
        and automated processing of these transactions and settlement of the
        transactions at the central bank of the country of origin. We are one of
        the
        largest providers of services linking banks to networks, such as the Federal
        Reserve System in the United States that has approximately 7,500 banks on
        their
        FedLine system. On a global basis, we provide banks with the capability to
        link
        to the Society for Worldwide Financial Interbank Telecommunications
        (“S.W.I.F.T.”) network for communicating cross-border transactions. S.W.I.F.T.
        has over 7,000 banks in 200 countries. In addition to providing payment
        services, we are also a leading provider of settlement solutions that link
        banks
        to the CLS Bank’s Continuous Linked Settlement System (“CLS”). CLS is a system
        set up by the largest foreign exchange banks in the world to reduce foreign
        exchange settlement risk.
  -14-
 
 ***Payment
                  Solutions***
              ***Short
                  Description***PAYplus
                  USATM
              A
                  payments solution for banks operating in the United
                  States.Global
                  PAYplusTM
              A
                  solution for managing the global payments activities of large
                  multi-national banks and financial institutions that conduct business
                  in
                  multiple countries.OmniPAY
              A
                  payments hub that enables corporate clients to transmit a single
                  file of
                  mixed payments, thereby simplifying this process.IGTplus
              A payments
                and
                settlement solution which provides message broker services between
                financial institutions and S.W.I.F.T., SIC, SIS and FIX in
                Switzerland.Global
                  PAYplusTM Liquidity Manager
              Global
                  PAYplus Liquidity Manager provides banks with the ability to control
                  and
                  centralize all their liquidity management needs in one system,
                  ensuring
                  more efficient control and management of multi-currency, multi-bank
                  liquidity assets across bank accounts, clearing systems, and central
                  bank
                  channels.
 **PAYplus
        USATM**
  PAYplus
        USATM is a funds transfer solution used to connect a financial institution’s
        funds transfer room with the Federal Reserve’s FedWire system. This solution
        evolved from and replaces two older products, FEDplusTM and PAY$tarTM. Our target
        market includes all banks operating in the United States that do not need
        a
        global payment solution, including U.S.-based banks, thrifts, savings and
        loans
        and international agency banks operating in the United States.
  PAYplus
        USATM supports payment processing, risk management and regulatory compliance for
        U.S. financial institutions that utilize the Federal Reserve Bank’s FedWire
        system for high value payments. PAYplus USATM also offers the same
        functionalities for international multi-currency payments of international
        banks
        operating in the United States.
  PAYplus
        USATM provides financial institutions with complete funds transfer capacity at
        a
        substantially lower cost than other technologies. At the same time, it both
        reduces payments risk (through real-time updates of account balances by means
        of
        an on-line interface with the host computer) and improves customer service
        (through its comprehensive database containing relevant information about
        a
        transfer - from its creation to accounting and memo posting).
  **Global
        PAYplusTM**
  Our
        Global PAYplusTM provides institutions with a real-time global view of their
        payments activity. This multi-tiered system addresses the needs of both local
        and global payment processes. At the local level, Global PAYplusTM employs a
        client/server funds transfer payment system that supports both the local
        payment
        processing, and risk management and regulatory compliance for the local clearing
        systems. At the global level, Global PAYplusTM aggregates worldwide payment
        activity. Global PAYplusTM is a multi-platform system supporting both UNIX and NT
        that employs open technology standards. The system features end-to-end security
        and multi-currency capabilities.
  -15-
  **OmniPay**
  OmniPAY
        is a web-based, intelligent payments hub that processes mixed payments files
        using the bank’s existing payments infrastructure. By eliminating the “siloed”
approach of legacy systems, OmniPAY allows banks to offer clients highly
        automated and highly customized payments services that integrate with their
        enterprise resource planning (ERP) systems. Banks are able to deliver a new
        level of customer satisfaction and generate new service fee revenue from
        value-added services.
  **IGTplus**
  Our
        Swiss
        subsidiary markets IGTplus, a message broker application for financial messages.
        For financial institutions it comprises the interface to their central banking
        system. IGTplus processes payments, securities transactions or related orders
        and information to/from other financial institutions, clearing organizations,
        and central banks, among others, using straight through processing in order
        to
        provide faster, better quality service to customers and to reduce costs.
        The
        S.W.I.F.T., SIC (Swiss Interbank Clearing), SIS (Swiss Securities Clearing)
        and
        FIX (Stock Exchange & Broker) applications of IGTplus provide communication
        to/from these financial services with the option of manual investigations,
        exception handling and queries for liquidity information. Due to the high
        sensitivity and performance requirements inherent in this application, IGTplus
        is designed for very high throughput and 24x7 fully automated operation.
        The
        target markets are large banks, service centers and financial market
        infrastructures. Smaller
        financial institutions are served through the BBP Service Bureau, which operates
        IGTplus.
  **Global
        PAYplus Liquidity Manager**
  Global
        PAYplus Liquidity Manager (GLM) is a management and planning tool, that ensures
        more efficient control and management of multi-currency liquidity assets
        across
        the bank’s accounts and Real Time Gross Settlement channels. The system provides
        flexible functionality which allows the bank to centralize, monitor and control
        the management of liquidity. GLM provides Treasury personnel with accurate,
        online, and timely information to facilitate better decision-making and also
        can
        provide Treasury staff with efficient payment delivery and execution based
        upon
        up-to-date information. GLM interfaces with other systems within the bank
        to
        gather liquidity information, ensuring that a complete and accurate liquidity
        position is continuously available.
  ***Cash
                  Management Solutions***
              ***Short
                  Description***ACCESS
                  BankingTM
              A
                  solution designed to enable high end and mid-level financial institutions
                  to deliver comprehensive cash management services to their corporate
                  clients.CASHplus®
              An
                  Internet-based cash management solution designed for high end and
                  mid-level financial institutions.webBANKERTM
              A
                  fully integrated cash management solution designed primarily for
                  the
                  community bank market.CashWeb
              A
                  multi-currency Internet front end for cash management
                  systems.CashIn
              A
                  business engine supporting all forms of cash management services
                  utilized
                  primarily in India.TransactCentral
              A
                  fully integrated suite of cash management modules with a building
                  block
                  architecture, designed for large financial institutions requiring
                  significant customization.
  -16-
  **ACCESS
        BankingTM**
  Our
        ACCESS BankingTM solution is a client/server product that enables banks and other
        financial institutions to provide cash management services to their corporate
        clients. ACCESS BankingTM is targeted at the mid-to-large-size financial
        institutions. Through ACCESS BankingTM, clients can obtain balance history and
        intra-day reporting, manage check transactions, originate ACH (automated
        Clearing House) wire transfer payment transactions and initiate intra-bank
        account transfers. ACCESS BankingTM consists of a server located in the
        back-office of a bank and a remote access module located at the premises
        of the
        bank’s corporate client. Clients can interact with the bank’s ACCESS BankingTM
server remotely via the web, touch-tone telephone with voice response, teletype
        terminal emulation or facsimile transmission.
  **CASHplus®**
  The
        CASHplus® product, enables corporations to perform sophisticated cash management
        functions across accounts at multiple branches, in multiple currencies, and
        in
        multiple countries and regulatory environments. CASHplus® is designed to reduce
        the cost of delivering remote banking services through universal access and
        simplified maintenance and distribution of remote software.
  **webBANKERTM**
  web
        BANKERTM was designed for community banks - it’s cost-effective to operate and
        easy to set up and use. It offers the features needed to be competitive in
        the
        marketplace such as wire transfer. ACH origination with federal and state
        tax
        payments, compatibility with FEDLine Advantage, information reporting, cash
        concentration and disbursement. Fundtech offers this system on an installed
        or
        ASP basis.
  **CashWeb**
  Developed
        by our Cashtech subsidiary, this multi-currency Internet front-end program
        that
        offers a single-window interface for all types of cash management transactions.
        The software can also be customized to meet both client and country specific
        requirements.
  -17-
  **CashIn**
  Also
        developed by our Cashtech subsidiary, CashIn is a business
        engine equipped with features that support all cash management activities
        and
        products. The system handles basic clearing products like automated
        clearinghouse, wire clearing and other collection mechanisms. CashIn can
        also be
        customized to meet more complex client needs.
  **TransactCentral**
  TransactCentral is a
        component-based cash management platform that is designed to be highly
        customized by the bank’s in-house development staff. This rules-based system is
        built in Java (J2EE) and can be integrated into a highly complex bank
        infrastructure. TransactCentral enables financial institutions to offer their
        corporate customers the business benefits of tracking cash balances, monitoring
        payments and receivables and performing liquidity management
        functions.
  ***Settlement
                  Solutions***
              ***Short
                  Description***PAYplus
                  for CLSTM
              A
                  solution designed to allow its members, being the largest international
                  financial institutions, to fully participate in the CLS Bank
                  system.
  **PAYplus
        for CLSTM**
  PAYplus
        for CLSTM is an integrated solution that assists large foreign exchange trading
        banks in addressing the requirements of the CLS bank. PAYplus for CLSTM provides
        payments, treasury, reconciliation, interface and systems management controls
        that assist banks in meeting the necessary requirements. In addition, PAYplus
        for CLSTM provides such institutions full control and functionality for its
        foreign exchange trading relationships.
  ***Securities
                  Solutions***
              ***Short
                  Description***TRADEplusTM
              TRADEplus
                  is a multi-asset, global trade management solution that consolidates
                  and
                  automates a broker/dealer’s middle office operations.TRADEplus
                  Data Manager
              TRADEplus
                  Data Manager audits, controls and manages all of the customer,
                  account and
                  settlement instruction data necessary for institutional trade
                  processing.
  **TRADEplusTM**
  TRADEplus
        is a multi-asset, global trade management solution that consolidates and
        automates a broker/dealer’s middle office operations. Its advanced exceptions
        management capabilities allow users to detect and resolve trade issues in
        real
        time. Its rules engine ensures more efficient control and management of
        transactions across asset classes, offices, central services and clients.
        Its
        services oriented architecture provides scalability, simplifies enterprise
        integration, allows clients to quickly enable new external client and service
        connections and to automate trade operations for greater efficiency and client
        service. TRADEplus automates the trade process from the point of execution
        through booking and notification of settlement, delivering significant operating
        efficiencies and reducing complexity and costs. With TRADEplus, all trades
        of
        all asset classes are integrated through a streamlined and highly visible
        trade
        process - providing lower costs and greater control over global operations.
        With
        a global, cross-asset process, it is easier to deploy trade process enhancements
        and global operating procedures - enabling automated environment for today
        and
        the flexibility to adapt to business changes that the future will bring.
        Automation, control and visibility not only reduce cost and risk but also
        make
        it easier to provide top-notch client service to your institutional
        clients.
  -18-
  **TRADEplus
        Data Manager**
  TRADEplus
        Data Manager audits, controls and manages all of the customer, account and
        settlement instruction data necessary for institutional trade processing.
        Its
        real-time interfaces automatically access new and changed information from
        industry sources such as Omgeo ALERT and SWIFT. Its rules-based workflows
        efficiently covert inconsistent and inaccurate data into a trusted, high-quality
        source that can be relied upon for trade and back office process automation.
        In
        addition, TRADEplus Data Manager enriches trade messages as needed for timely
        and accurate settlement. With TRADEplus Data Manager, operations become more
        efficient, compliance requirements are properly addressed and
        inaccurate/inaccessible reference data issues are eliminated.
  ***ASP/Outsourcing
                  Solutions***
              ***Short
                  Description***Fundtech
                  Connect (ASP)
                -
                  for PAYplus USA
              An
                  Application Service Provider solution that provides the PAYplus
                  solution
                  to banks operating in the United StatesFundtech
                  Connect (ASP)
                -
                  for CASHplus
              An
                  ASP solution that provides the ACCESS solution to banks operating
                  in the
                  United States.Interbank
                  Gateway Services
              An
                  ASP solution that provides payment and settlement solutions to
                  banks in
                  Europe, primarily in Switzerland.Recovery
                  Services
              Disaster
                  recovery and contingency services for users of our
                  products.
  **Fundtech
        Connect - PAYplus USA and CASHplus**
  Fundtech
        Connect is an ASP solution available for all of our products. This service
        allows banks to have our solutions reside at our data center rather than
        requiring the bank to purchase the necessary hardware and software to host
        the
        solution in-house.
  **Interbank
        Gateway Services**
  Interbank
        Gateway Services is a set of electronic payments and securities application
        services provided by our service bureau in Switzerland. The Interbank Gateway
        Services provides a secure and reliable technology infrastructure, which
        enables
        financial institutions to initiate, process and support electronic payment
        transactions across a wide range of settlement systems. The service bureau’s
        customers are currently predominantly Swiss banks, but we intend to expand
        this
        offering into other areas of the world. In addition, we intend to continue
        expanding the application services offered by the service bureau in an effort
        to
        continue offering our bank customers the most complete set of electronic
        payment
        and e-commerce solutions available in the market.
  -19-
  ·  Interbank
        Gateway Services provides its services to smaller financial institutions
        using
        the IGTplus software to provide communication to/from S.W.I.F.T., SIC (Swiss
        Interbank Clearing), SIS (Swiss Securities Clearing) and FIX (Stock Exchange
        & Broker).
  **Recovery
        Services - Contingency Processing Centers**
  Recovery
        Services - Contingency Processing Centers were developed to respond to the
        need
        of our customers for a contingency back-up system for wire transfer operations
        (in accordance with government regulations). Recovery Services supports all
        of
        our U.S.-based product groups and we have centers in Jersey City, New Jersey,
        San Leandro, California and Norcross, Georgia.
  **Customers
        And Markets**
  Our
        scaleable products are sold to a wide array of financial institutions and
        large
        business enterprises.
  The
        markets for our products consist of the following end-users:
  ·  U.S.
        Banks - This group of customers is divided into three tiers. The top tier
        consists of approximately 100 banks, each with more than $10 billion of assets.
        The second tier consists of approximately 3,500 banks, each with over $100
        million in assets. The third tier consists of approximately 5,500 small banks,
        each with less than $100 million of assets.
  ·  Agency
        Banks and Branches of Foreign Banks located in the United States - These
        banks
        are located mainly in financial centers such as New York City, San Francisco,
        Los Angeles and Dallas.
  ·  Banks
        located outside of the United States - These banks are located in countries
        that
        have moved or will move into processing payments on a real time gross settlement
        basis.
  The
        back
        office processing in capital markets is complex and costly. For decades the
        securities industry has continually sought efficiency improvements through
        greater automation. This trend continues today and is accelerated by the
        expanding number of new investment vehicles and globalization of the markets.
        Fundtech sees an opportunity in the securities industry from leveraging its
        knowledge of back office processing at banks. Process improvements from
        automated transaction processing, error repair and routing are integral to
        Fundtech’s banking product line, and can be applied to the securities
        industry.
  During
        the period 2001 through 2004, we pursued a strategy of penetrating the top
        tier
        of global banks with our PAYplus for CLSTM product offering. The major foreign
        exchange trading banks worldwide, as well as central banks and regulators
        supported the creation of the CLS, a global system for providing foreign
        exchange, or “FX” or settlement services. CLS handles FX trades with a daily
        value of approximately two trillion U.S. dollars. We have been successful
        in
        obtaining a majority of the CLS contracts awarded form 2001 to thru present
        from
        banks including, inter alia, Australia and New Zealand Banking Group Ltd.,
        Bank
        of America, Bank of New York, Citibank, Commerzbank, Deutsche Bank, Dresdner
        Bank, National Australia Bank and Banco Bilboa Vizcaya Argentaria. We believe
        that this significant step forward will help us leverage our technology and
        offer those banks additional products in the future as evidenced by recent
        sales
        of Global PAYplusTM to two of the “top five” global banks.
  In
        2001,
        we entered into an agreement with a leading international financial institution
        whereby we agreed to license certain of our products, including PAYplus for
        CLSTM
and Global PAYplusTM, and perform various consulting and maintenance services in
        connection with the license of such products. During 2004, we were engaged
        by
        another major international financial institution which licensed Global PAYplusTM
and retained us to perform product customizations on its behalf. During 2005,
        we
        entered into an agreement with a major securities industry entity to license
        and
        develop a series of customizations for our TRADEplus software and to host
        the
        new software in our Atlanta ASP Center. For the year ended December 31, 2005,
        the total revenue derived from the bank customers was approximately $17.8
        million which represented approximately 24% of our 2005 revenue and the revenue
        derived from the securities customer was approximately $5.2 million which
        represented approximately 7.1% of our 2005 revenue. See Item 5A, “Operating and
        Financial Review and Prospects —Results of Operations— Major
        Customers.”
  -20-
  During
        the period 2003 though 2005, we made significant progress marketing our Global
        PAYplus software in Europe, which was reflected in agreements for software
        and
        services with Bank Cypress, Bank Austria (a member of the HVB Group), Banco
        Popular Espana and HSBC.
  Also
        during 2004, we acquired Datasphere and Cashtech and began the process of
        assimilating their products and services into our offerings. We acquired
        Radius
        Partners in 2005 and have begun to market its solutions through our securities
        division.
  Please
        see the table that presents our consolidated revenues according to the
        geographical regions to which such revenues are attributable in Item 5A,
        “Operating and Financial Review and Prospects —Results — Significant Revenue
        Information.”
  **Sales
        and Marketing**
  We
        sell
        our products and services primarily through our direct sales force. In the
        past
        we have relied more heavily on referrals from local distributors or independent
        marketing representatives. A few of our former distributors have changed
        their
        market focus and/or become our direct competitors. In response to this and
        other
        factors, we have grown our sales force to support our direct sales efforts.
        We
        have a dedicated sales staff in the United States, United Kingdom, Switzerland,
        India, and Singapore.
  Our
        marketing efforts include a variety of activities that promote our products
        including public relations, direct response marketing programs, and industry
        trade shows and conferences. In addition, we receive inquiries about our
        products directly through our corporate website.
  We
        maintain a working relationship with the Federal Reserve Bank in the United
        States to ensure that our products meet Federal Reserve requirements. We
        also
        maintain a working relationship with S.W.I.F.T., a utility for communication
        of
        global financial institutions payment and settlement instructions owned by
        the
        largest banks in the world. By ensuring that our solutions are
        S.W.I.F.T.-compliant, we are well positioned to offer payment and settlement
        solutions to international banks.
  **Software
        Development**
  We
        believe that our software development team provides a significant competitive
        advantage. The team is comprised of developers with experience in visual
        programming design and object-oriented software development of mission-critical
        applications. We also believe that this assembly of diverse technical expertise
        contributes to the highly integrated functionality of our products. Our ability
        to attract and retain highly qualified employees will be one of the principal
        determinants of our success in achieving technological leadership. The total
        software development staff consisted of 121 full-time employees on December
        31,
        2005. All of our payments products have been developed internally by our
        product
        development staff. Our cash management, BBP and securities products were
        initially developed by the personnel of the businesses we acquired (such
        personnel migrating to us with the acquired businesses), and have since
        continued to be developed by our product development staff. Some of these
        products are embedded, or bundled, with standardized software products developed
        by other companies. We believe significant investments in product development
        are required to remain competitive.
  -21-
  To
        ensure
        that our products are developed successfully, within their budgets and according
        to schedule, all of our products are sent through the following four distinct
        design and testing stages: (1) requirements descriptions are developed through
        consultation with prospective users to ensure that the product matches the
        user’s requirements; (2) an internal quality assurance team verifies the
        integrity of the product at each stage of development prior to beta testing;
        (3)
        beta testing data are used to evaluate the functionality of the products
        and
        their ability to perform under realistic conditions; and (4) a controlled
        group
        of users is polled regularly to identify any modifications that may be
        necessary. In addition, we work closely with current and potential end-users,
        our strategic partners and leaders in certain industry segments to identify
        market needs and define appropriate product requirements. Our employees also
        participate in numerous user focus groups to review product design. We have
        software development sites in Georgia, New Jersey, Massachusetts, Israel,
        Switzerland and India. We believe that separating development by geographic
        region allows for development to be in close proximity to the targeted market,
        while increasing our ability to attract development talent.
  **Customer
        Support**
  We
        believe that effective customer support in the software industry requires
        rapid,
        efficient and comprehensive installation of the product. Upon installation,
        we
        strive to provide superior customer support by solving problems quickly and
        providing customers with consistent, accurate and understandable technical
        information. We employ test scripts and bank production data to test our
        solutions and our products are shipped with back-up procedures installed.
        We
        recognize that timely solutions are essential for our mission-critical solutions
        in the event problems do arise. We emphasize responsiveness to our customers’
inquiries and offer telephonic support for the reporting of problems twenty-four
        hours a day. Customer inquiries range from production problems to user questions
        and hardware issues. In addition, we utilize Remote Access Services (RAS-Windows
        NT service) to enhance remote customer support. Certain of our marketing
        representatives and contractors also provide sales, service and technical
        support functions for our products to end-users in specific geographic
        territories.
  **Proprietary
        Rights**
  We
        rely
        upon a combination of trademarks, contractual rights, trade secret law,
        copyrights, nondisclosure agreements and technical measures to establish
        and
        protect our proprietary rights in our products and technologies. We also
        enter
        into non-disclosure and confidentiality agreements with our customers, employees
        and marketing representatives and with certain contractors with access to
        sensitive information. However, we have no registered patents and these measures
        taken by us may not be adequate to protect our technology from third-party
        infringement. In addition, our competitors may also independently develop
        technologies that are substantially equivalent or superior to ours. See the
        risk
        factor entitled “We may be unable to adequately protect our proprietary rights,
        which may limit our ability to compete effectively” in Item 3C
        above.
  **Competition**
  The
        industry in which we operate is highly competitive and evolving. Our competitors
        include, but are not limited to, BankServ, Logica PLC, Digital Insights,
        Inc.,
        Politzer & Haney, S1 Corporation, Fidelity Information Services, Banklink,
        TietoEnator, Sunguard, Smartstream Technologies, Transaction Systems Architects
        Inc., Dovetail and Clear2Pay. Furthermore, several large financial institutions
        have developed solutions internally which they have then marketed to other
        banks
        or implemented in banks that they have acquired. In order to maintain our
        competitive position, we must differentiate our products from the products
        of
        our competitors and successfully develop and introduce new products that
        meet
        the changing needs of our clients. See the risk factor entitled “We may not be
        able to compete successfully in the very competitive markets for our products”
in Item 3C above.
  -22-
  C.
              **Organizational
                  Structure**
  We
        are
        organized under the laws of the State of Israel. We are the parent company
        of
        our wholly-owned operating subsidiaries that are specified in the table
        below.
  **Name
                  of Subsidiary**
              ****
              **Country
                  of Incorporation/Organization**Fundtech
                  Corporation
              
              United
                  StatesFundtech
                  U.K. Limited
              
              United
                  KingdomFundtech
                  Australia Pty Limited
              
              AustraliaFundtech
                  International, LLC
              
              United
                  StatesBiveroni
                  Batschelet Partners AG
              
              SwitzerlandDatasphere
                  SA
              
              SwitzerlandCashtech
                  Solutions India Private Limited
              
              IndiaRadius
                  Partners, Inc.
              
              United
                  States
  D.
              **Property,
                  Plants and Equipment.**
  We
        do not
        own any real property. As of December 31, 2005, we leased office space as
        specified in the table below. The aggregate annual lease payments for our
        facilities during 2005 were approximately $2,319,000
  Location
              
              Approximate
                Aggregate
                  Square FeetRamat-Gan,
                  Israel
              
              13,000Burlington,
                  Massachusetts
              
              12,000Pembroke,
                  Massachusetts
              
              2,800Jersey
                  City, New Jersey
              
              25,800Carrollton,
                  Texas
              
              3,000San
                  Leandro, California
              
              6,700Norcross,
                  Georgia
              
              26,000Switzerland
              
              8,600United
                  Kingdom
              
              3,450India
              
              17,500
  -23-
 
 **ITEM
                    4A.**
                  **UNRESOLVED
                      STAFF COMMENTS**
 
 None
 
 **ITEM
                  5.**
                **OPERATING AND FINANCIAL REVIEW AND
                    PROSPECTS**
  YOU
        SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH ITEM
        3A
“SELECTED FINANCIAL DATA” AND OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND
        NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO
        HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN
        FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND
        UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS
        AND
        INTENTIONS. SEE “CAUTIONARY STATEMENT FOR FORWARD-LOOKING
        STATEMENTS.”
  **Overview**
  Fundtech
        is a leading provider of end-to-end financial transaction processing software
        solutions for financial institutions. These solutions are grouped into four
        broad categories: (i) payment processing and management; (ii) foreign exchange
        settlement processing, both of (i) and (ii) automating the payment and
        settlement processes and providing real-time transaction processing capabilities
        to financial institutions and their customers; (iii) cash management products,
        used by a bank’s corporate clients for initiating payments, making inquiries and
        managing their activities with their financial institution; and (iv) financial
        messaging products and services that enable banks to communicate with
        specialized networks such as the S.W.I.F.T. network.
  We
        derive
        our revenues principally from software licensing and from the provision of
        professional services. Professional services are derived from (i) providing
        maintenance services with respect to our software, (ii) installation and
        training services related to the software, (iii) services to enhance or
        customize the software for particular client needs, inclusive of requirements
        analysis, (iv) operating hosting service bureaus which process transactions
        or
        messages and provide cash management services to our clients or which operate
        client licensed applications on their behalf and (v) providing contingency
        and
        recovery services to our clients. See “Critical Accounting Policies” below for a
        discussion of how we account for these revenues and their associated
        costs.
  The
        demand for Fundtech products and services is influenced by a number of
        industry-wide factors:
  (i)  An
        increased focus on finding new sources of fee-based income, which currently
        account for almost half of banks’ revenues. This is largely the result of the
        increased competitiveness of their lending activities, which has resulted
        in
        lower profit margins;
  (ii)  An
        ongoing objective to lower operating costs through automation. This has become
        an even greater issue as new regulations such as the U.S. Patriot Act are
        requiring banks to perform additional complex analyses that significantly
        benefit from automation; and
  -24-
  (iii)  The
        competitive marketplace for corporate accounts that is continually innovating
        new services that are largely driven by new and more flexible
        technology.
  (iv)  The
        need
        to simplify banking relationships for corporate clients by eliminating “siloed”
processing systems.
  Fundtech’s
        products offer financial institutions new capabilities that address these
        major
        industry factors. Our software products automate transaction procedures and
        also
        allow clients of our customers both to initiate transactions and access
        information over the Internet rather than by contacting the customer’s staff.
        The server-based architecture of our software also allows cost reductions
        in
        comparison to mainframe based applications. The software permits customers
        to
        easily change fee parameters and offer new financial products without having
        to
        reprogram the software.
  PAYplus
        USATM is our United States funds transfer solution used to connect a financial
        institution’s funds transfer room with the Federal Reserve’s FedWire system and
        with the S.W.I.F.T. system. PAYplus USATM both reduces payments risk (through
        real-time updates of account balances by means of an on-line interface with
        the
        host computer) and improves customer service (through its comprehensive database
        containing relevant information about a transfer - from its creation to
        accounting and memo posting). Our target market for this product includes
        all
        banks operating in the United States that do not need a global payment solution.
        PAYplus USATM may be licensed or utilized through an ASP outsourcing arrangement
        where it is operated at our data center on behalf of the customer. We currently
        have approximately 130 customers operating PAYplus USATM in a live production
        environment.
  Our
        Global PAYplusTM software provides institutions with real-time global support of
        their multi-currency payments activity. Global PAYplusTM employs a client/server
        funds transfer payment system that supports the local payment processing
        and
        risk management and regulatory compliance for local clearing systems as well
        as
        worldwide payment activity. Global PAYplusTM supports both UNIX and NT and
        employs open technology standards. The system features end-to-end security
        and
        multi-currency capabilities. Global PAYplus is being marketed to larger
        multinational banks. It is also being marketed to large financial institutions
        who wish to use it for low value, bulk payments processing.
  Our
        CASHplus® product, which is our newest Internet-based cash management product,
        enables corporations to perform sophisticated cash management functions across
        accounts at multiple branches, in multiple currencies and in multiple countries
        and regulatory environments. CASHplus® is designed to reduce the cost of
        delivering remote banking services through universal access and simplified
        maintenance and distribution of remote software. CASHplus® may be licensed or
        utilized through our ASP outsourcing arrangement where it is operated at
        our
        data center on behalf of the customer. Banks using CASHplus can create unique
        versions of the software that address the specific needs of the multiple
        market
        segments they serve. This feature enables banks to reduce their operating
        costs
        by replacing numerous cash management systems with a single platform, as
        well as
        to better serve the needs of their customers.
  Our
        Cashtech subsidiary markets its CashIn, CashWeb and TransactCentral cash
        management software products to financial institutions throughout Southeast
        Asia. Its multi-currency, Internet-enabled products are highly customizable
        and
        we are currently evaluating how best to extend the marketing of these products
        to new geographies.
  PAYplus
        for CLSTM is an integrated solution that assists large foreign exchange trading
        banks in addressing the requirements of the CLS bank. PAYplus for CLSTM provides
        payments, treasury, reconciliation, interface and systems management controls
        that assist banks in meeting the CLS Bank’s requirements. In addition, PAYplus
        for CLSTM provides such institutions with full control and functionality for
        their foreign exchange (“FX”) trading relationships. CLS member banks are the
        primary customers for this software.
  -25-
  Our
        BBP
        subsidiary operates a service bureau in Switzerland providing Interbank Gateway
        Services, a set of electronic payments and securities application services.
        Interbank Gateway Services provide secure and reliable technology
        infrastructure, which enables financial institutions to initiate, process
        and
        support electronic payment transactions across a wide range of settlement
        solutions. The service bureau’s services include connection to the Central Bank
        of Switzerland for the processing and settlement of bank-to-bank e-payments,
        the
        processing and settlement of bank-to-bank Euro-denominated e-payments,
        electronic trading and settlement of securities transactions through online
        access SECOM, Switzerland’s securities trading and settlement system and
        connection to the S.W.I.F.T. network for the processing and settlement of
        international bank-to-bank e-payments. The IGTplus software utilized to provide
        these services is also available on a license basis.
  While
        we
        are confident about the match of our products to the current trends in financial
        IT, we note that the cautious IT spending environment within the financial
        services industry during the period 2001-2002 resulted in decreased revenues
        for
        IT companies operating in that sector. In response, we adopted three
        restructuring plans during the second quarter of 2001 and the third and fourth
        quarters of 2002.
  In
        2001,
        a plan consisted of employee termination benefits associated with the
        involuntary termination of 89 employees 71 research and development and
        professional services employees, 13 administrative employees and 5 sales
        and
        marketing employees) and the sublet of portions of existing office space.
        As
        part of the plan, we also consolidated aspects of our Dallas operations into
        our
        existing Atlanta operations in order to improve efficiency and eliminate
        duplicate costs.
  In
        2002,
        two plans consisted of employee termination benefits associated with the
        involuntary termination of 78 employees (61 research and development and
        professional services employees, 12 administrative employees and 5 sales
        and
        marketing employees) and the closure and sublet of portions of existing office
        space.
  Our
        restructuring plans in 2001 and 2002 significantly impacted our results of
        operations in those years. All restructuring plans were substantially completed
        by February 2003. We began to realize the benefits of the plan in 2001 and
        continued to see such benefits during 2002 as evidenced by the reduction
        in the
        total sum of maintenance and services costs, research and development costs
        (including capitalized development costs), selling and marketing costs and
        general and administrative costs (together, “Certain Costs”). Certain Costs
        declined from $16.4 million in the second and third quarters of 2001 to $14.0
        million in the fourth quarter of 2001 and continued to decline to $12.4 million,
        $12.5 million, $11.9 million and $10.9 million in the first, second, third
        and
        fourth quarters of 2002, respectively. Certain Costs stabilized in 2003 at
        $10.6
        million, $10.9 million, $10.7 million and $11.0 million in the first, second,
        third and fourth quarters, respectively. Certain Costs for 2004 increased
        to
        $11.6 million, $12.2 million, $12.3 million and 15.3 million in the first,
        second, third and fourth quarters, respectively. Certain Costs for 2005
        increased to $15.5 million, $16.0 million, $16.5 million and $16.5 million
        in
        the first, second, third and forth quarters, respectively. These Certain
        Costs
        increases were necessitated by our improving revenues during this same
        period.
  We
        are
        currently marketing new products which have been developed since 2001,
        particularly Global PAY plus and CASHplus. This development work contributed
        heavily to the operating losses during 2001 and 2002. During 2003, we were
        able
        to dedicate more of our efforts to marketing these new products, resulting
        in a
        reduction in our research and development expenses and an increase in revenues.
        During 2004, we continued to heavily market these products and have seen
        a
        corresponding increase in both revenues and backlogs (signed contracts for
        which
        the software has not yet been fully delivered and/or ASP contracts which
        are
“pre-production” and not yet operational). Our development focus with respect to
        these products is now on upgrades to add new functionality, new interfaces
        to
        the products and performance enhancements in conjunction with out customer
        implementations.
  During
        2006, Certain Costs are expected to rise as we add staff, necessitated by
        our
        improving revenue.
  -26-
  While
        we
        note that spending on technology in the financial services industry increased
        during the period 2003 through 2005, and is expected to continue to grow
        in
        2006, it is difficult to predict if this trend will continue as well as the
        extent of the impact that it may have on our future revenues or results of
        operations. Notwithstanding this increase in spending, we have seen and expect
        to see a significant percentage of spending on maintaining and upgrading
        so-called “legacy systems” that are currently in place with our customers, or
        internally developed “in-house” solutions rather than on the acquisition of new
        externally developed systems such as those we market.
  **Acquisition
        of Businesses and Certain Assets**
  In
        August
        of 2004, BBP completed the acquisition of Datasphere SA from its shareholders.
        Datasphere provides software linking IBM systems to the S.W.I.F.T. alliance
        platform and also provides consulting services to financial institutions
        related
        to their clearing and settlement requirements. The cash consideration of
        $1
        million was paid from our working capital.
  In
        November 2004, the Company acquired all outstanding shares of India-based
        Cashtech Solutions India Private Limited (“Cashtech”) a leading provider of cash
        management software and services throughout Southeast Asia for an aggregate
        purchase price of approximately $3.8 million. Cashtech’s products are targeted
        to large banks that seek highly customized applications and prefer a
        component-based approach in order to integrate with their complex
        infrastructure. Cashtech has sales offices in Singapore and Tokyo.
  The
        acquisition of Cashtech enhances the Company’s cash management product line with
        products that are well suited for non-US markets, as well as extending the
        Company’s geographic coverage into the Asia Pacific market.
  Under
        the
        terms of the acquisition agreement, Fundtech will pay an additional amount
        of up
        to $3.7 million in cash over the subsequent three years, contingent upon
        the
        financial performance of Cashtech. We paid additional amounts of $991,000
        in
        2005 and $126,000 in 2006 based on achieved performance milestones, of which
        $697,000 was accounted for in 2005 and $126,000 accounted for in 2006, and
        capitalized additional acquisitions costs of $62,000 in 2005. Further payments
        of $1,044,000 will be made in 2006 based on Cashtech’s financial performance,
        which was already accounted for in 2005.
  In
        October of 2005, the Company acquired all of the outstanding shares of Radius
        Partners, Inc. (“Radius”). The purchase price was $1.75 million of which $1.5
        million was paid in cash and $250,000 was paid in the form of forgiveness
        of
        prepaid fees (“Initial Consideration”). Of the $1.5 million cash consideration
        $1.25 million was paid at the closing and an additional $250,000 was paid
        60
        days after the closing date. Additional cash consideration will be paid if
        and
        when certain conditions are met between the acquisition date and December
        21,
        2011, which may amount to an additional $3 million payable.
  **Critical
        Accounting Policies**
  The
        operating and financial condition review is based upon our consolidated
        financial statements, which were prepared in accordance with US GAAP. The
        preparation of these financial statements requires us to make estimates and
        judgments that affect the reported amounts of assets, liabilities, revenues
        and
        expenses, and related disclosure of contingent assets and liabilities. We
        evaluate these estimates on an on-going basis. We base our estimates on our
        historical experience and on various other assumptions that we believe to
        be
        reasonable under the circumstances, the results of which form the basis for
        making judgments about the carrying values of assets and liabilities that
        are
        not readily apparent from other sources. Actual results may differ from these
        estimates under different assumptions or conditions.
  -27-
  We
        believe that application of the following critical accounting policies entails
        the more significant judgments and estimates used in the preparation of our
        Consolidated Financial Statements.
  *Revenues.* Our
        revenues are generated from licensing the rights to use our software products
        directly to end-users, sales of professional services, including consulting,
        implementation and training. We also provide hosting services, contingency
        and
        recovery services, as well as maintenance and sales of hardware.
  Revenue
        from software license agreements are recognized when all criteria outlined
        in
        Statement of Position (SOP) 97-2 “Software Revenue Recognition” (as amended)
        (“SOP 97-2”) are met. Therefore, revenue from license fees is recognized when
        persuasive evidence of an agreement exists, delivery of the product has
        occurred, no significant obligations with regard to implementation remain,
        the
        fee is fixed or determinable and collectibility is probable.
  Where
        software arrangements involve multiple elements, revenue is allocated to
        each
        element based on vendor specific objective evidence (“VSOE”) of the relative
        fair values of each element in the arrangement. Our VSOE used to allocate
        the
        sales price to services and maintenance is based on the price charged when
        these
        elements are sold separately.
  We
        usually provide a warranty period to our customers of up to three months
        at no
        extra charge. As of December 31, 2005 and 2004, the provision for warranty
        cost
        is immaterial.
  Revenue
        from software licenses that require significant customization, integration
        and
        installation are recognized based on SOP 81-1 “Accounting for Performance of
        Construction-Type and Certain Production-Type Contracts,” using contract
        accounting on the percentage-of-completion method, based on the relationship
        of
        actual labor costs incurred, to total labor costs estimated to be incurred
        over
        the duration of the contract. In recognizing revenues based on the
        percentage-of-completion method, we estimate time to completion with revisions
        to estimates reflected in the period in which changes become known. If we
        do not
        accurately estimate the resources required or the scope of work to be performed,
        or do not manage our projects properly within the planned periods of time
        or
        satisfy our obligations under the contracts, then future services margins
        may be
        significantly and negatively affected or losses on existing contracts may
        need
        to be recognized.
  Arrangements
        that include professional services are evaluated to determine whether those
        services are essential to the functionality of other elements of the
        arrangement. When services are considered essential, revenue under the
        arrangement is recognized using contract accounting. When services are not
        considered essential, the revenue allocable to the software services is
        recognized as the services are performed.
  Revenue
        from maintenance is recognized over the life of the maintenance
        agreement.
  *Receivables* .
        Our
        trade receivables primarily include amounts due from banks and large financial
        institutions. An allowance for doubtful accounts is determined for those
        specific amounts that we believe are not likely to be collected. We perform
        ongoing credit evaluations of our customers and in judging the probability
        of
        collection of receivables we continuously monitor collection and payments
        from
        our customers and maintain a provision for any specific customer collection
        issues that we have identified. For some customers, typically those with
        whom we
        have long-term relationships, we may grant extended payment terms. If the
        financial situation of any of our customers were to deteriorate, resulting
        in an
        impairment of their ability to pay the indebtedness they incur with us, an
        additional provision for doubtful accounts might be required.
  -28-
  *Software
        Capitalization.* SFAS No.
        86 “Accounting for the Costs of Computer Software to be Sold, Leased or
        Otherwise Marketed” requires capitalization of certain software development
        costs subsequent to the establishment of technological feasibility. Based
        on our
        product development process, technological feasibility is established upon
        completion of a detailed program design.
  Our
        costs
        incurred between completion of the detailed program design for the Global
        PAYplusTM product and the point at which the product was ready for general
        release has been capitalized. As of December 31, 2001, we capitalized
        development costs totaling $7,876,000 in aggregate. In 2002 we started
        amortizing the capitalized development costs and we did not capitalize any
        additional development costs. The 2003, 2004 and 2005 amortization costs
        relating to the capitalized development costs totaled $1,576,000, $1,576,000
        and
        $1,576,000, respectively.
  *Long-Lived
        Assets* .
        We
        assess the impairment of long-lived assets whenever events or changes in
        circumstances indicate that the carrying value may not be recoverable. Factors
        we consider important which could trigger an impairment review include the
        following:
  ·
            significant
                decrease in the market price of a long-lived asset or asset
                group;  ·
            significant
                adverse change in the extent or manner in which a long-lived asset
                or
                asset group is being used or in its physical
                condition;  ·
            significant
                adverse change in legal factors or in the business climate that could
                affect the value of a long-lived asset or asset group, including
                an
                adverse action or assessment by a
                regulator;  ·
            accumulation
                of costs significantly in excess of the amount originally expected
                for the
                acquisition of a long-lived asset or asset
                group;  ·
            current
                period operating or cash flow loss combined with a history of operating
                or
                cash flow losses or a projection or forecast that demonstrates continuing
                losses associated with the use of a long-lived asset or asset group;
                and  ·
            current
                expectation that, more likely than not, a long-lived asset or asset
                group
                will be sold or otherwise disposed of significantly before the end
                of its
                previously estimated useful life.  We
        determine the recoverability of long-lived assets based on an estimate of
        undiscounted future cash flows resulting from the use of the asset and its
        eventual disposition. This estimation process is highly subjective and involves
        significant management judgment. Determination of impairment loss from
        long-lived assets and certain identifiable intangible assets to be disposed
        of
        are reported at the lower of carrying amount or fair value less costs to
        sell.
  *Valuation
        of Goodwill* .
        We
        assess the impairment of goodwill on an annual basis, and potentially more
        frequently if events or changes in circumstances indicate that the carrying
        value may not be recoverable. Factors we consider important which could trigger
        an impairment review include the following:
  ·
            significant
                underperformance relative to expected historical or projected future
                operating results;  ·
            significant
                changes in the manner of our use of the acquired assets or the strategy
                for our overall business; and  ·
            significant
                negative industry or economic trends.  -29-
  When
        we
        determine that the carrying value of goodwill may not be recoverable based
        upon
        the existence of one or more of the above indicators of impairment, we measure
        this impairment based on a projected discounted cash flow. We did not record
        an
        impairment charge based on our reviews in 2004 and 2005. If our estimates
        or the
        related assumptions change in the future, we may be required to record
        impairment charge on goodwill to reduce its carrying amount to its estimated
        fair value.
  Share
        Based Payments .
        In
        December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share Based
        Payments" ("SFAS 123(R)"). This Statement is a revision of FASB Statement
        No.
        123, "Accounting for Stock-Based Compensation", which supersedes APB Opinion
        No.
        25, "Accounting for Stock Issued Employees" and its authoritative
        interpretations.
  SFAS
        123(R) establishes standards for the accounting for transactions in which
        an
        entity exchanges its equity instruments for goods or services; focuses primarily
        on accounting for transactions in which an entity obtains employee and director
        services in share-based payment transactions; and does not change the accounting
        guidance for share-based payment transactions with parties other than
        employees.
  SFAS
        123(R) eliminates the alternative to use APB 25's intrinsic value method
        of
        accounting that was provided in SFAS 123 as originally issued and requires
        companies to measure the cost of employee services received in exchange for
        an
        award of equity instruments based on the grant-date fair value of the award.
        The
        fair-value-based method in this Statement is similar to the fair-value-based
        method in SFAS 123 in most respects. The costs associated with the awards
        will
        be recognized over the period during which an employee is required to provide
        service in exchange for the award (usually the vesting period).
  The
        grant-date fair value of employee share options and similar instruments will
        be
        estimated using option-pricing models adjusted for the unique characteristics
        of
        those instruments (unless observable market prices for the same or similar
        instruments are available). If an equity award is modified after the grant
        date,
        incremental compensation cost will be recognized in an amount equal to the
        excess of the fair value of the modified award over the fair value of the
        original award immediately before the modification.
  The
        provisions of SFAS 123(R) apply to all awards which will vest after January
        1,
        2006 and to awards modified, repurchased, or cancelled after that date. When
        initially applying the provisions of SFAS 123(R), in the first quarter of
        2006,
        the Company will be required to elect between using either the "modified
        prospective method" or the "modified retrospective method". Under the modified
        prospective method, the Company would be required to recognize compensation
        cost
        for all awards granted after the adoption of SFAS 123(R) and for the unvested
        portion of previously granted awards that are outstanding on that date. Under
        the modified retrospective method, the Company would be required to restate
        its
        previously issued financial statements to recognize the amounts previously
        calculated and reported on a pro forma basis, as if the original provisions
        of
        SFAS 123 had been adopted. Under both methods, it is permitted to use either
        a
        straight line or an accelerated method to amortize the cost as an expense
        for
        awards with graded vesting. We have elected to use the “modified prospective
        method” in applying the provisions of SFAS 123(R).
  Management
        has recently commenced identifying the potential future impact of applying
        the
        provisions of SFAS 123(R), including each of its proposed transition methods,
        yet is currently unable to fully quantify the effect of this Standard on
        the
        Company's future financial position and results of operations in accordance
        with
        U.S. GAAP. Nonetheless, it is expected that the adoption of SFAS 123(R) will
        increase the stock-based-award expenses the Company is to record in the future
        in comparison to the expenses recorded under the guidance currently applied
        by
        the Company.
  -30-
  A.  **Operating
        Results**
  The
        following table sets forth for the periods indicated the percentage of revenues
        represented by each of the items in our statement of operations:
  Year
                  Ended December 31,2003
              
              2004
              
              2005Revenues:Software
                  license fees
              
              
              27.8
              %
              
              28.0
              %
              
              22.2
              %Maintenance
                  and service fees
              
              
              71.4
              
              
              71.5
              
              
              77.7Hardware
                  sales
              
              
              0.8
              
              
              0.5
              
              
              0.1Total
                  revenues
              
              
              100.0
              
              
              100.0
              
              
              100.0Operating
                  Expenses:Software
                  license costs
              
              
              1.0
              
              
              1.1
              
              
              0.7Maintenance
                  and service costs
              
              
              37.6
              
              
              39.3
              
              
              40.2Hardware
                  Costs
              
              
              0.6
              
              
              0.5
              
              
              0.1Research
                  and development
              
              
              20.4
              
              
              19.1
              
              
              18.1Selling
                  and marketing, net
              
              
              21.0
              
              
              19.1
              
              
              17.8General
                  and administrative
              
              
              14.0
              
              
              12.4
              
              
              12.8Amortization
                  of capitalized softwaredevelopment
                  costs
              
              
              3.3
              
              
              2.7
              
              
              2.1Amortization
                  of other acquired intangibleassets
              
              
              2.0
              
              
              1.7
              
              
              1.6Provision
                  for doubtful accounts
              
              
              0.7
              
              
              0.5
              
              
              0.7Total
                  operating expenses
              
              
              100.7
              
              
              96.2
              
              
              94.1Operating
                  income (loss)
              
              
              (0.7
              )
              
              3.8
              
              
              5.9Financial
                  income, net
              
              
              1.4
              
              
              1.2
              
              
              1.5Income
                  before income taxes
              
              
              0.7
              
              
              5.0
              
              
              7.4Income
                  taxes
              
              
              0.6
              
              
              0.8
              
              
              1.6Net
                  income
              
              
              0.1
              %
              
              4.2
              %
              
              5.8
              %
   -31-
  **Significant
        Revenue, Segment and Earnings Information**
  The
        following table presents our consolidated revenues (in thousands) according
        to
        the geographical regions to which such revenues are
        attributable:
 **2003**
                
                **2004**
                
                **2005****Total
                    Revenues**
                
                **Percentage**
                
                **Total
                    Revenues**
                
                **Percentage**
                
                **Total
                    Revenues**
                
                **Percentage**Israel
                
                $
                115
                
                
                0.3
                
                $
                62
                
                
                0.1
                
                $
                149
                
                
                0.2U.S.A.
                
                
                28,908
                
                
                60.7
                
                
                31,920
                
                
                54.5
                
                
                39,948
                
                
                53.6Switzerland
                
                
                8,865
                
                
                18.6
                
                
                10,425
                
                
                17.8
                
                
                11,666
                
                
                15.7Other
                
                
                9,726
                
                
                20.4
                
                
                16,130
                
                
                27.6
                
                
                22,703
                
                
                30.5$
                47,614
                
                
                100.0
                %
                $
                58,537
                
                
                100.0
                %
                $
                74,466
                
                
                100.0
                %
 Segment
        Information :
  2003
              
              2004
              
              2005Cash
                  Mgmt. Revenue
              
              $
              11,365
              
              $
              13,416
              
              $
              16,454Operating
                  income (loss)
              
              
              1,249
              
              
              201
              
              
              (503
              )Payments
                  Revenue
              
              
              26,972
              
              
              33,870
              
              
              44,898Operating
                  income
              
              
              4,827
              
              
              8,229
              
              
              11,753BBP
                  Revenue
              
              
              9,277
              
              
              11,251
              
              
              13,112Operating
                  income (loss)
              
              
              106
              
              
              600
              
              
              1,061
 
 Segment
        Information (in thousands) :
  While
        Cash Management revenues continued to grow from 2002 to 2004, operating income
        has been adversely impacted by the costs associated with the launch of the
        new
        CASHplus product. Payments revenues and operating income are primarily related
        to strong sales and installations of PAYplus USA and Global PAYplus leading
        to
        both increased license fees and services revenues. BBP revenue and operating
        income have steadily increased due to the implementation of IGTplus. License
        and
        services fee trends are discussed more fully in the year to year comparisons
        below.
  **Major
        Customers**
  We
        derived approximately 18% of our annual revenues from the license, consulting
        and maintenance service fees earned in connection with an agreement with
        a
        leading international financial institution in 2003. We derived approximately
        14% of our annual revenues from this major customer in 2004. See Item 4B,
        “Information on the Company — Business Overview - Customers and Markets.” For
        the year ended December 31, 2005, the total revenue derived from the bank
        customer and a second leading financial institution was approximately $17.8
        million, which represented approximately 24% of our 2005 annual revenue.
        The
        revenue derived from a new securities customer was approximately $5.2 million
        which represented approximately 7.1% of our 2005 annual revenue. A failure
        of
        any of these institutions to enter into new orders or proceed with existing
        orders could have a material adverse effect on our business, financial condition
        and results of operations.
  -32-


**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**




*Revenues* .




**Variance****2004**
            
            **2005**
            
            **Increase**
            ****
            %Total
                Revenues
            
            $
            58,537,000
            
            $
            74,466,000
            
            $
            15,929,000
            
            
            27.2
            %





The
      increase in revenues was primarily attributable to (i) revenues related to
      our
      new securities initiative which generated $5,245; and (ii) revenues from our
      global PAYplus implementation with our two major clients which increased by
      $7,696; (iii) increased Cashtech revenues of $4,262, primarily related to
      project fees. The increase in revenues was primarily attributable to increased
      large project and services work in the payments, securities, and Cashtech
      businesses. Payments grew by 17% or $5.7million, primarily from HSBC
      project-related services. Securities revenue contributed $4.0 million growth
      from Omgeo project revenue. Cashtech contributed $5.0mm to the overall revenue
      growth.





*Software
      License Fees.* Software
      license fees consist of revenues derived from software license agreements we
      enter into with our customers. A comparison between our 2004 and 2005 software
      license fees is as follows:




**Variance****2004**
            
            **2005**
            
            **Increase**
            
            **%**Software
                License Fees
            
            $
            16,395,000
            
            $
            16,523,000
            
            $
            128,000
            
            
            0.8
            %




Our
      revenue growth was primarily related to project work for our three major clients
      for which license fees were either previously billed or billable at a future
      date. In addition, we have noted a shift in sales of our CASHplus product which
      is indicating a trend away for licensing and toward hosting services. For this
      reason, the growth in software license fees was not proportional to the growth
      in revenues. See also *Maintenance
      and Services Fees* immediately below.




*Maintenance
      and Services Fees* .
      Maintenance and services fees include revenues derived from maintenance
      contracts, installation and training fees, bureau fees, consulting fees,
      certification fees and related items. We generally receive a contract for
      maintenance and services at the time a contract for the license is entered.
      A
      comparison between our 2004 and 2005 maintenance and services fees is as
      follows:




**Variance****2004**
            
            **2005**
            
            **Increase**
            
            **%**Maintenance
                and Services Fees
            
            $
            41,827,000
            
            $
            57,849,000
            
            $
            16,022,000
            
            
            38.3
            %




The
      increase in fees relates to (i) increases in maintenance fees payable for newly
      installed banks of $3.2 million; (ii) increases in the fees related to
      customizations and product installations, particularly with respect to three
      major clients, which increases totaled $10.4 million; and (ii) and increases
      in
      hosting fees totaling $2.5 million.




-33-




*Hardware
      Sales* .
      Hardware sales consist of the reselling of third-party hardware in connection
      with the licensing and installation of our software. A comparison between our
      2004 and 2005 hardware sales is as follows:




**Variance****2004**
            
            **2005**
            
            **Decrease**
            ****
            **%**Software
                License Costs
            
            $
            315,000
            
            $
            94,000
            
            
            ($221,000
            )
            
            (70
            %)




We
      continue to de-emphasize sales of hardware to our customers. Much of the
      hardware upon which our products run can be obtained directly from the
      manufacturer rendering the margins on this brokering activity unattractive.
      The
      decrease in hardware sales was attributable to a decrease in the number of
      transactions in which our customers also purchased hardware through
      us.




*Software
      License Costs* .
      Software license costs consist primarily of royalty payments and other costs
      related to product media, duplication, manuals, shipping and third party
      embedded software costs. A comparison between our 2004 and 2005 software license
      costs is as follows:




**Variance****2004**
            
            **2005**
            
            **Decrease**
            ****
            **%**Software
                License Costs
            
            $
            626,000
            
            $
            522,000
            
            
            ($104,000
            )
            
            (16.6
            %)




The
      software license costs relate to third-party embedded software utilized by
      our
      newer CASHplus and Global PAYplus environments. With fewer license fees
      generated, as noted in *Software
      License Fees* above,
      three was a corresponding decline in software license costs.




*Amortization
      of Capitalized Software Development Costs* .
      A
      comparison between our 2004 and 2005 amortization of capitalized software
      development costs is as follows:




**Variance****2004**
            
            **2005**
            
            **Decrease**
            ****
            **%**Amortization
                of Capitalized Software Development Costs
            
            $
            1,576,000
            
            $
            1,575,000
            
            
            ($1,000
            )
            
            (0.1
            %)




This
      reflects the amortized capitalized software development costs in connection
      with
      our Global PAYplus product. The variance was not significant.




-34-




*Amortization
      of Other Acquired Intangible Assets* .
      A
      comparison between our 2004 and 2005 amortization of other acquired intangible
      assets is as follows:




**Variance****2004**
            
            **2005**
            
            **Increase**
            ****
            **%**Amortization
                of Other Acquired Intangible Assets
            
            $
            966,000
            
            $
            1,154,000
            
            $
            188,000
            
            
            19.5
            %




The
      increase in amortization resulted from exchange rate differences for assets
      related to BBP plus (i) the effects of a full year’s amortization of the
      Datasphere and Cashtech acquisition assets and (i) initial amortization of
      the
      Radius Partners acquisition assets.




*Maintenance
      and Services Costs* .
      Maintenance and services costs consist primarily of personnel costs, telephone
      support costs and other costs related to the provision of maintenance, service
      bureau and professional services. A comparison between our 2004 and 2005
      services costs is as follows:




**Variance****2004**
            
            **2005**
            
            **Increase**
            ****
            **%**Maintenance
                and Services Costs
            
            $
            23,001,000
            
            $
            29,947,000
            
            $
            6,946,000
            
            
            30.2
            %




Maintenance
      costs increased by $478,000, directly related to the impact of additional
      staffing required to handle a $3.2 million increase in maintenance
      revenues *.* Services
      costs increased by $6.1 million, primarily related to the number personnel
      assigned to Global PAYplus and securities projects. Hosting costs were flat,
      as
      (i) costs had been incurred in previously years which related to current year
      revenues and (ii) we are achieving economies of scale relevant to the number
      of
      hosted customers. Others services costs increased by $411,000 for expenses
      billed to the client.




*Hardware
      Costs* .
      Hardware costs consist primarily of our cost of computer hardware resold to
      our
      customers. A comparison between our 2004 and 2005 hardware costs is as
      follows:




**Variance****2004**
            
            **2005**
            
            **Decrease**
            ****
            **%**Hardware
                Costs
            
            $
            266,000
            
            $
            80,000
            
            
            ($186,000
            )
            
            (69.9
            %)




The
      reduction in costs is commensurate with the decrease in hardware sales
      previously noted.




-35-




*Software
      Development* .
      Software development expenses are related to the development of new products,
      enhancement of existing products and testing of products. A comparison between
      our 2004 and 2005 software development expenses is as follows:




**Variance****2004**
            
            **2005**
            
            **Increase**
            ****
            **%**Software
                Development
            
            $
            11,171,000
            
            $
            13,480,000
            
            $
            2,309,000
            
            
            20.7
            %




We
      did
      not capitalize any software development costs in 2005 or 2004, since the time
      period during which costs could have been capitalized from the point of
      technological feasibility until the time of general product release was very
      short, and consequently, these costs were expensed as incurred as the amounts
      that could have been capitalized were not material to our financial position.
      The increase in costs is primarily due to the addition in staff in the United
      States and Israel to handle change orders for our major clients, staff added
      in
      the United States to handle enhancements to our securities software and projects
      as well as Cashtech staff added to accommodate their revenue
      growth.




*Selling
      and Marketing* .
      A
      comparison between our 2004 and 2005 selling and marketing expenses is as
      follows:




**Variance****2004**
            
            **2005**
            
            **Increase**
            ****
            %Selling
                and Marketing
            
            $
            11,193,000
            
            $
            13,182,000
            
            $
            1,939,000
            
            
            17.8
            %




The
      increase in selling and marketing expenses was principally due to (i) an
      increase in compensation expense including commissions and addition of Cashtech;
      $1.6 million related to the 27.2% revenue growth achieved; and (ii) increases
      in
      the costs travel, promotional, and infrastructure expense of $369
      thousand.




*General
      and Administrative* .
      A
      comparison between our 2004 and 2005 general and administrative expenses is
      as
      follows:




**Variance****2004**
            
            **2005**
            
            **Increase**
            ****
            **%**General
                and Administrative
            
            $
            7,254,000
            
            $
            9,557,000
            
            $
            2,303,000
            
            
            31.7
            %




This
      increase is due to increased staff costs in the U.S. and Switzerland and the
      addition of Cashtech administrative personnel.




*Provision
      for Doubtful Accounts* .
      Management’s assessment for uncertainties of outstanding debts collectibility is
      reflected in our provision for doubtful accounts. A comparison between our
      2004
      and 2005 provision for doubtful accounts is as follows:




-36-




**Variance****2004**
            
            **2005**
            
            **Increase**
            
            **%**Provision
                for Doubtful Accounts
            
            $
            269,000
            
            $
            552,000
            
            $
            283,000
            
            
            105.2
            %




The
      increase in the provision for doubtful accounts reflects greater customer
      specific provisions in 2005 coupled with the settlement of previously accrued
      matters resulting in the accounts no longer being deemed doubtful of
      collection.




*Financial
      Income, Net* .
      A
      comparison between our 2004 and 2005 financial income, net is as
      follows:




**Variance****2004**
            
            **2005**
            
            **Increase**
            
            **%**Financial
                Income, net
            
            $
            727,000
            
            $
            1,085,000
            
            $
            358,000
            
            
            49.2
            %




The
      increase of the net financial income is primarily due to a increase in our
      cash
      of $3.0 million and the increasing interest and dividend rates we earned on
      our
      cash, cash equivalents and marketable securities.




*Income
      Taxes* .
      A
      comparison between our 2004 and 2005 income taxes is as follows:




**Variance****2004**
            
            **2005**
            
            **Increase**
            
            **%**Income
                Taxes
            
            $
            475,000
            
            $
            1,166,000
            
            $
            691,000
            
            
            145.5
            %




Increasing
      profits in India coupled with continued profitability of our Swiss subsidiary
      resulted in an increased tax liability.




**Year
      Ended December 31, 2004 Compared to Year Ended December 31,
      2003**




*Revenues* .




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Total
                Revenues
            
            $
            47,614
            
            $
            58,537
            
            $
            10,923
            
            
            22.9
            %





The
      increase in revenues was primarily attributable to (i) new CASHplus sales
      inclusive of billable enhancement requests and installed hosting services
      solutions which increased revenues by $1.7 million; (ii) revenues from launch
      of
      Global PAYplus in the United States, inclusive of a new major bank, strong
      sales
      of PAYplus for CLS and PAYplus USA solutions in both license and hosting
      services solution form which increased revenues by $5.9 million; (iii) increased
      service fees related to BBP’s IGTplus implementation which increased revenues by
      $2.0 million; and (iv) a new securities services initiative which generated
      $1.3
      million in new revenues.




-37-




*Software
      License Fees.* Software
      license fees consist of revenues derived from software license agreements we
      enter into with our customers. A comparison between our 2003 and 2004 software
      license fees is as follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Software
                License Fees
            
            $
            13,236,000
            
            $
            16,395,000
            
            $
            3,159,000
            
            
            23.9
            %




The
      increase was attributable to increasing market awareness and acceptance of
      the
      Company’s new product offerings as well as increased spending on the part of the
      IT departments of financial institutions. The notable aspects are (i) increased
      CASHplus sales which increased fees by $705,000; the launch of Global PAYplus
      in
      the United States and the continued strong sales of PAYplus USA which increased
      which increased fees by $2.6 million; offset by a decline in license fees of
      BBP
      of ($170,000).




*Maintenance
      and Services Fees* .
      A
      comparison between our 2003 and 2004 maintenance and services fees is as
      follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Maintenance
                and Services Fees
            
            $
            34,011,000
            
            $
            41,827,000
            
            $
            7,816,000
            
            
            23
            %




The
      increase in fees relates to (i) increases in maintenance fees payable for newly
      installed banks of $2.3 million; (ii) increases in the fees related to
      customizations and product installations, particularly with respect to two
      major
      clients, which increases totaled $4.1 million; and (ii) an offset due to a
      decline in fees from hosting services of ($1.1 million).




*Hardware
      Sales* .
      A
      comparison between our 2003 and 2004 hardware sales is as follows:




**Variance****2003**
            
            **2004**
            
            **Decrease**
            
            **%**Hardware
                Sales
            
            $
            367,000
            
            $
            315,000
            
            
            ($52,000
            )
            
            (14.2
            %)




The
      decrease in hardware sales is attributable to a decrease in the number of
      transactions in which our customers also purchased hardware through
      us.




-38-


*Software
      License Costs* .
      A
      comparison between our 2003 and 2004 software license costs is as
      follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Software
                License Costs
            
            $
            493,000
            
            $
            626,000
            
            $
            133,000
            
            
            27
            %




The
      increase in costs is due to a increase in third-party embedded software utilized
      by our newer CASHplus and Global PAYplus environments. The combination of
      additional embedded software and more licenses granted caused the increase
      noted.




*Amortization
      of Capitalized Software Development Costs* .
      A
      comparison between our 2003 and 2004 amortization of capitalized software
      development costs is as follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Amortization
                of Capitalized Software Development Costs
            
            $
            1,576,000
            
            $
            1,576,000
            
            $
            0.00
            
            
            0.0
            %




This
      reflects the amortized capitalized software development costs in connection
      with
      our Global PAYplus product. The variance was not significant.




*Amortization
      of Other Acquired Intangible Assets* .
      A
      comparison between our 2003 and 2004 amortization of other acquired intangible
      assets is as follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Amortization
                of Other Acquired Intangible Assets
            
            $
            940,000
            
            $
            966,000
            
            $
            26,000
            
            
            2.8
            %




The
      increase in amortization resulted from exchange rate differences for assets
      related to BBP plus the effects of the Datasphere and Cashtech
      acquisitions.




*Maintenance
      and Services Costs* .
      A
      comparison between our 2003 and 2004 maintenance and services costs is as
      follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Maintenance
                and Services Costs
            
            $
            17,901,000
            
            $
            23,001,000
            
            $
            5,100,000
            
            
            28.5
            %




-39-




Maintenance
      costs declined by ($867,000), which we attribute to the impact of staff
      reductions previously implemented as described above *.* Services
      costs increased by $3.5 million, primarily related to the number personnel
      assigned to Global PAYplus and PAYplus USA engagements. Hosting costs increased
      $2.2 million due to staffing increases and related infrastructure costs related
      to the set-up phase of newly sold contracts.




*Hardware
      Costs* .
      A
      comparison between our 2003 and 2004 hardware costs is as follows:




**Variance****2003**
            
            **2004**
            
            **Decrease**
            
            **%**Hardware
                Costs
            
            $
            306,000
            
            $
            266,000
            
            
            ($40,000
            )
            
            (13.1
            %)




The
      reduction in costs is commensurate with the decrease in hardware sales
      previously noted.




*Software
      Development* .
      A
      comparison between our 2003 and 2004 software development is as
      follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Software
                Development
            
            $
            9,690,000
            
            $
            11,171,000
            
            $
            1,481,000
            
            
            15.3
            %




We
      did
      not capitalize any software development costs in 2004 or 2003, since the time
      period during which costs could have been capitalized from the point of
      technological feasibility until the time of general product release was very
      short, and consequently, these costs were expensed as incurred as the amounts
      that could have been capitalized were not material to our financial position.
      The increase in costs is primarily due to the addition of 32 staff in the United
      States and Israel to handle new engagements and projects as well as the 174
      Cashtech staff added by acquisitions, prorated for a partial year from the
      acquisition date. We also experienced an increase in consulting fees payable
      of
      $525,000 which related to work on new software customization
      projects.




*Selling
      and Marketing* .
      A
      comparison between our 2003 and 2004 selling and marketing expenses is as
      follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Selling
                and Marketing
            
            $
            9,998,000
            
            $
            11,193,000
            
            $
            1,195,000
            
            
            12.0
            %




The
      increase in selling and marketing expenses was principally due to (i) an
      increase in commissions of $526,000 related to the 23% revenue growth achieved;
      and (ii) increases in the costs associated with trade shows and the annual
      user
      conference which totaled $200,000.




-40-




*General
      and Administrative* .
      A
      comparison between our 2003 and 2004 general and administrative expenses is
      as
      follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**General
                and Administrative
            
            $
            6,678,000
            
            $
            7,254,000
            
            $
            576,000
            
            
            8.6
            %




This
      increase was due to the addition of five U.S. administrative personnel and
      23
      Cashtech administrative personnel.




*Provision
      for Doubtful Accounts* .
      A
      comparison between our 2003 and 2004 provision for doubtful accounts is as
      follows:




**Variance****2003**
            
            **2004**
            
            **Decrease**
            
            **%**Provision
                for Doubtful Accounts
            
            $
            350,000
            
            $
            269,000
            
            
            ($81,000
            )
            
            (23.1
            %)




The
      decrease in the provision for doubtful accounts reflected the settlement of
      previously accrued matters resulting in the accounts no longer being deemed
      doubtful of collection.




*Financial
      Income, Net* .
      A
      comparison between our 2003 and 2004 financial income, net is as
      follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Financial
                Income, net
            
            $
            671,000
            
            $
            727,000
            
            $
            56,000
            
            
            8.3
            %




The
      increase of the net financial income was primarily due to a increase in the
      interest and dividend rates we earned on our cash, cash equivalents and
      marketable securities.




*Income
      Taxes* .
      A
      comparison between our 2003 and 2004 income taxes is as follows:




**Variance****2003**
            
            **2004**
            
            **Increase**
            
            **%**Income
                Taxes
            
            $
            286,000
            
            $
            475,000
            
            $
            189,000
            
            
            66.1
            %




The
      elimination of a deferred tax asset and increasing profits, both in Switzerland,
      resulted in an increased tax liability.




-41-




B.  **Liquidity
      and Capital Resources.**




We
      have
      financed our operations primarily through the sale of equity securities in
      the
      amount of approximately $139.7 million including net proceeds from the 1998
      initial public offering in the amount of approximately $29.0 million, proceeds
      from the follow-on 1999 public offering in the amount of approximately $92.3
      million and grants from the Government of Israel, Office of the Chief Scientist
      to fund new product development. In addition, we raised $1,363,000 from the
      exercise of employee options in 2005. As of December 31, 2005, working capital
      was $49.9 million, which included cash and cash equivalents, short term deposits
      and marketable securities of $49.6 million. Working capital has increased from
      December 31, 2004 primarily due to shorter maturities in our marketable
      securities investments resulting in the move from long-term to
      short-term.




*Cash
      flows from operations.* Net
      cash
      provided by operating activities amounted to $10.3 million for the year ended
      December 31, 2005 as compared to net cash provided by operating activities
      of
      $7.6 million for the year ended December 31, 2004. This increase of $2.7 million
      was primarily due to an increase in profitability plus an increase in deferred
      revenues due to accelerated collection of 2006 maintenance, a decrease in trade
      receivables, net, offset by an increase in accounts receivable and prepaid
      expenses.




*Cash
      flows from investing activities.* Net
      cash
      used in investing activities amounted to $3.3 million for the year ended
      December 31, 2005 as compared to $8.1 million for the year ended December 31,
      2004. During the year ended December 31, 2005, proceeds from marketable
      securities amounted to $21.0 million compared to $27.0 million for the year
      ended December 31, 2004 while investments in marketable securities amounted
      to
      $16.0 million in 2005 as compared to $26.0 million in the year ended December
      31, 2004. We invested $2.0 million net of cash acquired to purchase our Radius
      Partners subsidiary and to pay additional amounts as per the terms of the
      acquisition agreement with Cashtech. Purchases of property and equipment
      increased $1.1 million to $5.4 million for the year ended December 31, 2005
      from
      $4.3 million for the year ended December 31, 2004. We believe our capital
      expenditure program is sufficient to maintain our current level and quality
      of
      operations. We review our capital expenditures program periodically and modify
      it as required to meet current needs. For 2006, our anticipated capital
      expenditures are $5.7 million - See Item 4A.




*Cash
      flows from financing activities.* Net
      cash
      provided by financing activities was $1.4 million for the year ended December
      31, 2005 as compared to $0.5 million for the year ended December 31, 2004.
      The
      decrease was primarily due a decrease in proceeds from the issuance of share
      capital and exercise of stock options.




On
      February 21, 2002, the Company’s Board of Directors authorized the purchase of
      up to one million of our Ordinary Shares from time to time on the open market.
      By December 31, 2003, the Company had purchased a total of 21,500 shares. No
      shares were purchased during 2004 and 2005. On June 4, 2006, the Company's
      Board
      of Directors authorized to utilize up to $20 million to purchase Ordinary Shares
      from time to time on the open market. By June 13, 2006, the Company had
      purchased a total of 76,215 shares at a cost of $769 thousand.




We
      believe that cash and cash equivalents and marketable securities will provide
      adequate financial resources to finance our current and planned future
      operations for at least the next 12 months. However, in the event that we make
      one or more acquisitions for consideration consisting of all or a substantial
      part of our available cash, we might be required to seek external debt or equity
      financing for such acquisition or acquisitions or to fund subsequent
      operations.




**Effective
      Corporate Tax Rate**




Our
      development facility in Israel has been granted “Approved Enterprise” status
      under Israel’s Law for the Encouragement of Capital Investments. We have
      derived, and expect to continue to derive, a portion of our income from Approved
      Enterprise investments. The Company has elected the alternative benefits
      program, which provides for a waiver of grants in return for tax exemptions.
      Pursuant thereto, the income of the Company derived from the Approved Enterprise
      program is tax-exempt for two years commencing with the year it first earns
      taxable income relating to each expansion program, and subject to Israeli
      corporate taxes at the reduced rate of 10% to 25%, for an additional eight
      years.




-42-




We
      completed our investment in accordance with its initial approval enterprise
      program on November 27, 1997. Income derived from this program was tax exempt
      for two years commencing in 1998 and will be subject to the reduced tax rates
      for eight years ending in 2005 (subject to an adjustment based upon the foreign
      investors’ ownership in us). In 1998, we received approval for our first
      expansion program. In 2000, we received approval for our second expansion
      program and in July 2004 we received approval for our third expansion program.
      Income derived from the expansion programs will be tax-exempt for a period
      of
      two years and will be subject to a reduced tax rate, as mentioned above, for
      an
      additional period of eight years. The period of benefits for these programs
      has
      not yet commenced since no income has been derived from the programs. The period
      of tax benefits detailed above is subject to limits of 12 years from the year
      of
      commencement of production, or 14 years from the date of granting the approval,
      whichever is earlier. See “Note 14b - Income Taxes” for additional
      information.




At
      December 31, 2005, we had net operating loss (“NOL”) carryforwards of
      approximately $50.3 million and $23.3 million in the United States and in
      Israel, respectively. The U.S. NOL carryforwards begin to expire in 2010 through
      2025 and the Israeli NOL carryforwards have no expiration. See Note 12 to the
      Consolidated Financial Statements.




C.  **Research
      and Development, Patents and Licenses, etc.**




During
      2005, $13.5 million in current expense charges was made related to the
      development of our software with no capitalized costs. During 2004 and 2003,
      $11.2 million and $9.7 million, respectively, in current expense charges were
      made with no capitalized costs for our software. There were no Office of the
      Chief Scientist grants in 2003, 2004 or 2005.




D.  **Trend
      Information.**




Our
      trends are disclosed above in the Overview of this Item 5, “Operating and
      Financial Review and Prospects”.




E.  **Off-Balance
      Sheet Arrangements**




We
      have
      no off-balance sheet arrangements.




F.  **Tabular
      Disclosure of Contractual Obligations**




The
      following table of our material contractual obligations as of December 31,
      2005,
      summarizes the aggregate effect that these obligations are expected to have
      on
      our cash flows in the periods indicated:




**Payments
                Due by Period**
              **(in
                thousands)****Contractual
                Obligations**
            
            **Total**
            ****
            **Less
                than**
              **1
                year**
            ****
            **1-3**
              **years**
            ****
            **3-5**
              **years**
            ****
            **More
                than**
              **5
                years**Operating
                leases
            
            $
            10,399
            
            $
            2,087
            
            $
            3,991
            
            $
            2,169
            
            $
            2,152






-43-





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




**A.** **Directors
      and Senior Management.**




The
      following table lists the names and ages of the current directors and executive
      officers:




**NAME**
            
            **AGE**
            
            **POSITION**Gideon
                Argov
            
            49
            
            Chairman
                of the Board of DirectorsReuven
                Ben Menachem
            
            45
            
            Chief
                Executive Officer, DirectorYaffa
                Krindel
            
            51
            
            DirectorGeorge
                M. Lieberman
            
            63
            
            DirectorStanley
                Stern
            
            49
            
            DirectorGil
                Weiser
            
            64
            
            DirectorBen-Zion
                Zilberfarb
            
            56
            
            DirectorJoseph
                J. Aulenti
            
            60
            
            Senior
                Vice President, General Counsel and SecretaryYoram
                Bibring
            
            48
            
            Chief
                Financial OfficerJoseph
                P. Mazzetti
            
            65
            
            Executive
                Vice President, Corporate DevelopmentMichael
                Sgroe
            
            50
            
            President
                & Chief Operating Officer







**Gideon
      Argov** was
      elected Chairman of the Board of Directors in July 2003. Mr. Argov is currently
      serving as the Managing Director, Operations of Parthenon Capital, a private
      equity partnership based in Boston, Massachusetts. Prior to joining Parthenon
      Capital, between 1991 and 2000, Mr. Argov served as Chairman, CEO and President
      of Kollmorgen Corporation, a global leader in industrial automation specializing
      in electronic motion control and servo systems, located in Waltham,
      Massachusetts. Presently, he serves on the boards of Mykrolis Corporation and,
      Interlire Brands and Helix Technologies. Mr. Argov has earned an M.B.A. from
      Stanford University, as well as a B.A. in Economics from Harvard
      University.




**Reuven
      Ben Menachem** ,
      a
      co-founder of Fundtech, has served as the Chief Executive Officer and as a
      director of the Company since its inception in April 1993. He served as Chairman
      of the Board of Directors of the Company from August 1998 to July 2003. Before
      founding the Company, Mr. Ben Menachem was employed at Logica Data Architects,
      a
      funds transfer software provider located in Waltham, Massachusetts from 1986
      until 1992, most recently as a Technical Director and a Product Manager. From
      January 1984 until June 1986, Mr. Ben Menachem served as Director of Banking
      Systems at Manof Communications Systems, a middleware software provider located
      in Tel Aviv, Israel. Prior to joining Manof, Mr. Ben Menachem served as a senior
      programmer/analyst in the Israeli Air Force.




**Yaffa
      Krindel** was
      elected as a director on February 12, 2004. She is currently serving as a
      partner in the Herzlia, Israel office of STAR Ventures, a private venture
      capital partnership headquartered in Munich, Germany. Ms. Krindel joined Star
      Ventures in 1997 as the managing partner of Star Ventures in Israel. Before
      joining STAR Ventures, between 1992 and 1996, Ms. Krindel served as CFO and
      VP
      Finance of Lannet Data Communications Ltd., then a publicly traded company
      in
      NASDAQ (now part of Avaya Inc. - NYSE: AV), a leader in data communication
      systems for the enterprise market, then located in Tel Aviv. From 1993 to 1997
      she served as CFO of BreezeCOM Ltd. (now part of Alvarion Ltd. - NASDAQ: ALVR),
      a premier provider of solutions based on Point-to-Multipoint (PMP) Broadband
      Wireless Access headquartered in Tel Aviv. Prior to joining Lannet, Ms. Krindel
      held several executive positions in companies and banks in Israel. Ms. Krindel
      currently serves on the boards of OrSense Ltd., Trivnet Inc., Negevtech Ltd.,
      Siano Mobile Silicon Inc., Alfy Inc. and Broadlight Incorporated. Ms. Krindel
      has earned an M.B.A. from Tel Aviv University and a B.A. in Economics and
      Japanese Studies from the Hebrew University in Jerusalem.




-44-




**Stanley
      Stern** has
      served as a director of Fundtech since July 2003. Since 2004, Mr. Stern has
      served as Head of Investment Banking of Oppenheimer & Co. Inc. in New York,
      New York. Prior to joining Oppenheimer & Co. Inc., Mr. Stern served as the
      Head of Investment Banking of C.E. Unterberg, Towbin in New York, New York
      from
      2002 to 2004. Prior to joining C.E. Unterberg, Towbin, from 2000 to 2003, Mr.
      Stern served as Managing Director of the U.S.A. and a member of the Board of
      Directors and Investment Committee for STI Ventures, a global venture capital
      firm. From 1981 to 2000, he was a partner with Oppenheimer & Co., Inc. and
      CIBC/Oppenheimer in a number of roles including Head of Technology Investment
      Banking. He is a member of the Board of Directors for Zen Research PLC,
      Interregnum PLC, Diamond.com and the EON Company. Mr. Stern has earned degrees
      from Harvard University Graduate School of Business and City University of
      New
      York.




**Gil
      Weiser** has
      served as a director of Fundtech since July 2000 and as a director of BBP,
      the
      Company’s wholly owned Swiss subsidiary since May 2001. Beginning in 2000 to the
      present, Mr. Weiser has served as Chairman or Director of various Israeli
      high-tech companies. In addition, Mr. Weiser has served as a director of the
      Tel
      Aviv Stock Exchange from 2003 until 2004. From 2000 until 2001, Mr. Weiser
      served as the Vice Chairman of Orama, an Israeli/U.S. merchant bank located
      in
      Tel Aviv, Israel. From 1995 until 2000, Mr. Weiser served as the General Manager
      of Hewlett Packard (Israel), a distributor of Hewlett Packard products and
      services located in Tel Aviv, Israel. From 1993 until 1995, Mr. Weiser served
      as
      President and Chief Executive Officer of Fibronics International Inc., a
      worldwide provider of network solutions. From 1976 until 1993, Mr. Weiser served
      as Managing Director of Digital Corp. Israel. Mr. Weiser has and continues
      to
      hold significant public positions including Chairman of the Multinational
      Companies Forum and Vice Chairman of the Israeli Management Center. Presently
      he
      serves as Chairman of the Executive Board of Haifa University, one of the
      leading institutions of higher education in Israel and is a member of the Israel
      High-Tech Association Executive Committee. Mr. Weiser holds a Bachelors degree
      from the Technion in Haifa, Israel and a Masters from the University of
      Minnesota in Minneapolis.




***Currently
      Serving External Directors under the Companies Law***




**George
      M. Lieberman** has
      served as a director of Fundtech since 1998 and as an external director since
      2000. Mr. Lieberman has more than 30 years of IT management and development
      experience across a broad spectrum of industries. He regularly serves as CEO
      of
      companies at the request of their venture investors. Mr. Lieberman is currently
      CEO of Enforsys Inc., a law enforcement workflow management system company,
      and
      a senior advisor to WebScreen Ltd., a network security company. Mr. Lieberman
      was the CEO of Pragmatic Vision Inc. and of Gen3 Partners, subsequent to its
      merger with Pragmatic Vision, until December 2003. Mr. Lieberman was the Chief
      Information Officer of Wit Capital Group, a pioneer Internet investment banking
      firm until April 2000. Prior to January 1999, he held a number of positions
      at
      Merrill Lynch & Co., including First Vice President of Technology Strategy
      and Planning, where he participated in setting the Merrill Lynch and Co.
      Internet financial services strategy. He was also on the advisory board of
      the
      Technology Mezzanine Funding group that oversees the venture technology
      investment for the firm’s own account. Additionally, he was a member of the
      Merrill Lynch Technology Advisory Board for the Global Technology Research
      Department. Prior to joining Merrill Lynch, Mr. Lieberman developed major
      systems projects at many financial industry companies including Citibank and
      ADP. Mr. Lieberman holds advanced degrees in Industrial Engineering and
      Operations Research. Mr. Lieberman is the current Chairman of the Corporate
      Advisory Board of The Institute for Technology and Enterprise, at the
      Polytechnic University of New York. He holds two computer related
      patents.




-45-




**Ben-Zion
      Zilberfarb** has
      served as an external director since his election to the Board of Directors
      in
      January 2002. Dr. Zilberfarb has served as a Professor of Economics since 1988
      and head of the A. Meir Center for Banking since the fall of 2000, at Bar-Ilan
      University located in Ramat-Gan, Israel. He is Edmond de Rothschild Professor
      of
      Global Asset Management at Netanya Academic College, Israel. Dr. Zilberfarb
      also
      served as the Director General of the Ministry of Finance from March 1998 until
      July 1999 and as Chairman of the Board of Euro-Trade Bank from March 2000 until
      April 2001. Dr. Zilberfarb has served on various government committees since
      1982, including most recently, as a member of the committee to privatize El
      Al
      Airlines, and as a member of the U.S. Israel Bi-national Science Foundation.
      From January 1989 until February 1998, Dr. Zilberfarb served as the Chairman
      of
      the Investment Committee of Bank Leumi Provident Funds, a mutual fund located
      in
      Tel Aviv, Israel and as a consultant to several other financial institutions
      and
      several government and regulatory authorities including the Israel Securities
      Authority and the Bank of Israel. Dr. Zilberfarb served as Chairman of the
      Board
      of Directors of Karnit Insurance Co. from 1998 until 2002. Recently, he had
      been
      on the Board of Directors of Partner Communications and chairman of the
      investment committee of Clal Gemel (provident funds and study funds of Clal
      Insurance Company). Presently he is on the Board of Israel Discount Bank, Brimag
      Digital Age, and Deleq Co. Dr. Zilberfarb has earned a Ph.D. in Economics from
      the University of Pennsylvania and both an M.A. and a B.A. in Economics from
      Bar-Ilan University.




**Senior
      Management**




**Joseph
      Aulenti** was
      appointed Senior Vice President, General Counsel and Secretary of Fundtech
      on
      October 1, 2002. Mr. Aulenti previously served as Associate General Counsel
      since joining Fundtech in August 2001. Prior to joining Fundtech, Mr. Aulenti
      was engaged in private practice representing IT companies from October 2000
      until August 2001. From May 1995 until October 2000, Mr. Aulenti served as
      Senior Vice President and Chief Legal Officer of Century Technology Group,
      Inc.,
      a privately held technology solutions provider located in Falls Church,
      Virginia. From 1991 to 1995, Mr. Aulenti served as Senior Vice President -
      Group
      Counsel of Fiserv, Inc., a leading provider of banking technology solutions
      located in Milwaukee, Wisconsin. Mr. Aulenti was Senior Vice President and
      General Counsel of Citicorp Information Resources, Inc., a leading financial
      IT
      solutions provider located in Stamford, Connecticut from January 1986 until
      it
      was acquired by Fiserv in June 1991. Mr. Aulenti graduated from the Catholic
      University of America with a B.A., holds a M.Sc. from the University of
      Bridgeport and a J.D. from Fordham University.




**Yoram
      Bibring** has
      served as Chief Financial Officer since joining Fundtech in September 2001.
      Prior to joining Fundtech, Mr. Bibring served from April 1999 until May 2001
      as
      Chief Financial Officer of ViryaNet, a provider of software solutions to the
      workforce management market, located in Southborough, Massachusetts. From
      November 1998 until April 1999, Mr. Bibring served as a Financial Consultant
      for
      ViryaNet and others. Prior to joining ViryaNet, Mr. Bibring served from February
      1998 until November 1998 as Chief Financial Officer of Americash, Inc., a
      leading operator of e-cash platforms located in New York, New York, which was
      sold to American Express. Prior to joining Americash, from January 1990 until
      January 1998, Mr. Bibring was employed by Geotek Communications, a wireless
      communications service provider located in Montvale, New Jersey, where he served
      initially as Chief Financial Officer and then as the President of its
      International Division. Mr. Bibring’s financial career also includes several
      years in public accounting in Israel and the United States. He holds a B.A.
      in
      Accounting and Economics from Tel-Aviv University and is a certified public
      accountant in both Israel and the United States.




**Joseph
      P. Mazzetti** joined
      Fundtech in November 1994 and is currently serving as Executive Vice President
      Corporate Development. Prior to joining Fundtech, Mr. Mazzetti was employed
      from
      1992 to 1994 as an Executive Vice President at PRT Corp., a software consulting
      company located in New York City. From 1984 to 1992, Mr. Mazzetti was employed
      at Logica Data Architects, a global consulting and systems integration firm
      located in Waltham, Massachusetts, where he held the position of Executive
      Vice
      President of the Financial Products Group with responsibility for the funds
      transfer, message switching and asset/liability product lines. Mr. Mazzetti
      has
      more than 30 years of experience in IT in the public and private sectors with
      concentration in the banking and financial institutions market. Mr. Mazzetti
      holds a M.Sc. in Industrial Engineering from Stevens Institute of Technology
      and
      a B.S. in Physics from Georgetown University.




-46-




**Michael
      Sgroe** has
      served as President and Chief Operating Officer of Fundtech since April 2004.
      Prior to that time Mr. Sgroe held positions as Chief Operating Officer,
      President of U.S. Products & Operations and Senior Vice President and
      General Manager of the U.S. Payments Division since joining Fundtech in May
      2000. Before joining Fundtech, Mr. Sgroe was employed for over 16 years at
      Chase
      Manhattan Bank, where he served as Vice President with responsibility for
      developing and deploying high-performance solutions for the bank’s Payments and
      Cash Management businesses. During this period, Mr. Sgroe also served as Chief
      Information Officer and Vice President of Technology and Operations for the
      e-Procurement solutions provider Metiom, an e-commerce start-up with an equity
      ownership position held by Chase Manhattan Bank. Mr. Sgroe began his career
      in
      1979 at Morgan Guaranty Trust, where he held assignments both in New York and
      in
      London. **** Mr.
      Sgroe
      holds a B.A. in Anthropology from the City University of New York.




**B.** **Compensation.**




We
      have
      entered into an employment agreement with Reuven Ben Menachem, which provides
      for annual review of his compensation by the Compensation Committee and Board
      of
      Directors. Mr. Ben Menachem’s compensation as a director of the Company is also
      subject to shareholder approval. Mr. Ben Menachem’s agreement also provides for
      a notification period in the event the agreement is terminated without
      cause.




In
      addition, Gil Weiser, a member of the Board of Directors, received $2,200 per
      month during 2005 to provide consulting services and to serve as the Chairman
      of
      the Executive Committee of BBP, our indirectly wholly owned Swiss subsidiary.
      This agreement was not renewed for 2006. See Item 7B below for “Related Party
      Transactions.”




The
      aggregate remuneration we paid for the year ended December 31, 2005 to our
      directors and executive officers as a group was $1,828,400 in salaries and
      bonuses, inclusive of the retainer payments to directors as described below.
      In
      addition, certain officers are provided a car allowance that totaled $40,100
      for
      2005. There were no amounts set aside or accrued to provide for pension,
      retirement or similar benefits to our directors and executive
      officers.




In
      December of 2005, the shareholders approved payment of an annual retainer of
      $25,000 to non-employee directors for future annual periods, beginning January
      1, 2006, payable on a quarterly basis of $6,250 per quarter, provided that
      any
      such quarterly payment for any non-employee director shall be contingent upon
      such director participating in 75% or more of the Board of Directors and
      committees meetings (in which such non-employee director is a member) held
      during such quarter. In addition, shareholders approved that the Chairman of
      the
      Board of Directors shall be entitled to an additional annual payment of $25,000,
      payable on a quarterly basis of $6,250 per quarter, and the Chairman of the
      Audit Committee of the Board of Directors (provided that such Chairman is not
      an
      external director under the Companies Law) shall be entitled to an additional
      annual payment of $5,000 payable on a quarterly basis of $1,250 per quarter,
      provided that any such quarterly payment(s) for any non-employee director shall
      be contingent upon such director participating in 75% or more of the Board
      of
      Directors and committees meetings (in which such non-employee director is a
      member) held during such quarter.




All
      directors are reimbursed for their reasonable expenses for each Board of
      Directors meeting attended. For our external directors, such reimbursement
      is
      made in accordance with the applicable provisions of the Companies Law. For
      additional information, please see the discussion set forth under “External
      Directors,” in subsection C of this Item 6.




-47-




**Directors
      Compensation**




The
      sole
      compensation paid directors for attending meetings of the Board of Directors
      or
      committee meetings of the Board of Directors is the retainer described above.
      We
      also reimburse directors for their reasonable travel expenses. Subject to
      shareholder approval for each of the proposed grants, directors also receive
      options to purchase Ordinary Shares or restricted share grants as noted
      below.




**Option
      or Restricted Share Grants in Last Fiscal Year**




During
      2005, options to purchase 10,000 Ordinary Shares in aggregate were granted
      to
      our executive officers. The weighted average exercise price of these options
      was
      $10.01 per share for the executive officers, with vesting semi-annually over
      a
      four year period. Executive officers options were granted under the 1999
      Employee Option Plan. Options granted under the 1999 Employee Option Plan expire
      ten years from the date of grant. In addition, grants of restricted stock
      totaling 103,331 were made to our directors and executive officers under the
      terms of the 2005 International Share Option and Restricted Share Incentive
      Plan
      and the 2005 Israeli Share Option and Restricted Share Incentive Plan (the
      2005
      Plans”). Director shares vest quarterly over a one-year period, and executive
      management shares vest semi-annually over a three-year term. The share price
      on
      the grant date for the director shares was $10.37 per share. The share price
      on
      the grant date for the executive management shares was $10.37 per
      share.




**C.** **Board
      Practices.**




The
      following table sets forth certain information concerning our current directors
      and executive officers:




**Name**
            
            **Current
                Office(s) Held**
            
            **Commencement
                of Office**
            
            **Termination/Renewal
                Date of Office**Gideon
                Argov (2)(4)(5)
            
            Chairman
            
            July
                22, 2003
            
            2006
                Annual MeetingReuven
                Ben Menachem
            
            Chief
                Executive Officer, Director
            
            October
                28, 2002
            
            2006
                Annual MeetingStanley
                Stern (2)(3)
            
            Director
            
            July
                22, 2003
            
            2006
                Annual MeetingYaffa
                Krindel (2)(3)
            
            Director
            
            February
                12, 2004
            
            2006
                Annual MeetingGil
                Weiser (2)(4)(5)
            
            Director
            
            October
                28, 2002
            
            2006
                Annual MeetingGeorge
                M. Lieberman (1)(2)(3)(4)(5)(6)
            
            Director
            
            November
                30, 2000
            
            2006
                Annual MeetingBen-Zion
                Zilberfarb (1)(2)(3)(7)
            
            Director
            
            January
                31, 2002
            
            2007
                Annual MeetingJoseph
                Aulenti
            
            Senior
                Vice President, General Counsel and Secretary
            
            October
                1, 2002
            
            Not
                ApplicableYoram
                Bibring
            
            Chief
                Financial Officer
            
            September
                6, 2001
            
            Not
                ApplicableJoseph
                P. Mazzetti
            
            Executive
                Vice President, Corporate Development
            
            June
                1, 2001
            
            Not
                ApplicableMichael
                Sgroe
            
            President
                & Chief Operating Officer
            
            June
                1, 2001
            
            Not
                Applicable




(1)
      External Director under the Companies Law.




(2)
      NASDAQ Independent Director.




(3)
      Member of the Audit Committee.




-48-




(4)
      Member of the Compensation Committee.




(5)
      Member of the Nominating Committee.




(6)
      Mr.
      Lieberman was elected for a second and final three year term as an external
      director on December 18, 2003.




(7)
      Mr.
      Zilberfarb was elected for a second and final three year term as an external
      director on December 21, 2004.




Our
      Articles of Association (the “Articles of Association”), provide that, unless
      otherwise resolved by a resolution of the General Meeting, our Board of
      Directors shall consist of not less than five and not more than seven directors.
      Officers serve at the discretion of the Board of Directors.




Prior
      to
      every annual meeting, the Board of Directors selects a panel of between five
      and
      seven persons to be proposed to the shareholders of Fundtech for election as
      directors. Such individuals, if elected, serve as directors until the next
      annual meeting. The above does not apply to the nomination of “external”
directors under the Companies Law, as explained below. Except for such nominees,
      no panel of candidates for a directorship may be proposed at an annual meeting
      unless shareholders holding at least 10% of our issued and outstanding shares
      who are entitled to attend and vote at a meeting deliver to Fundtech a proper
      notice in writing, stating that such shareholders intend to propose candidates
      for such directorships instead of the nominees proposed by the Board of
      Directors. The directors, other than the “external” directors under the
      Companies Law, are elected by a resolution at every annual meeting, for a term
      of office which shall end upon the convening of the first annual shareholder
      meeting held after the date of their election.




The
      Articles of Association provide that a director may appoint, by written notice
      to Fundtech, any individual to serve as an alternate director, subject to the
      provisions of the Companies Law. Any of our residing directors can-not serve
      an
      as alternate director for any of the other directors. Any alternate director
      shall have all of the rights and obligations of the appointing director except
      the power to appoint an alternate for himself or herself. Unless the period
      or
      scope of any such appointment is limited by the appointing director, such
      appointment is effective for all purposes and for a period of time concurrent
      with the term of the appointing director.




We
      have
      no service contracts in place with any of our directors in their capacity as
      such that provide for benefits upon termination of their services as
      directors.




**External
      Directors**




Under
      the
      Companies Law, companies incorporated under the laws of Israel whose shares
      have
      been offered to the public in or outside of Israel (i.e., public companies)
      are
      required to appoint two independent or “external” directors to their Board of
      Directors. A person may not be appointed as an external director if the person
      or the person’s relative, partner, employer or any entity under such person’s
      control, has, as of the date of the person’s election as an external director,
      or had, during the two years preceding such election, any affiliation with
      the
      company, any person or entity controlling the company or any entity controlled
      by the company or by this controlling entity. The term “affiliation”
includes:




·
            an
                employment relationship;




·
            business
                or professional relationship maintained on a regular
                basis;




·
            control;
                and/or




-49-




·
            service
                as an office holder.




A
      person
      may not serve as an external director if the person’s other duties or
      responsibilities create, or may create, a conflict of interest with the person’s
      responsibilities as an external director or may adversely impact such person’s
      ability to serve as an external director.




Under
      recent amendments to the Companies Law, at least one of the external directors
      serving on a company’s board of directors is
      required to have “ financial
      expertise” and the other
      external director or directors are required to have
“professional expertise.”  In
      Company Law Regulations, the Minister of Justice elaborates on the terms
“expertise in finance and accounting” as follows:





·
            An
                expert in the field of finance and accounting is one who, as a result
                of
                education, experience and qualification, possesses an understanding
                in the
                field of business, which enables him to comprehend financial reports
                and
                allows him to manage discussions regarding the method in which such
                information should be displayed.





·
            One
                has professional qualifications if he possesses one of the following;
                an
                academic degree in one of the following fields: economics, business,
                accounting, law, public administration, or, another academic degree,
                or
                has completed an alternative form of higher education, all in the
                professional area in which the companydeals
                or in an area relevant to the position, or, has five years experience
                in
                one, or at least two years in two, of the following; a senior position
                in
                the field of business administration in a company, a senior position
                in
                public service or in a senior position in the same field as the
                company.




Under
      the
      Companies Law, each committee which is authorized to exercise one of the
      functions of the Board of Directors is required to include at least one external
      director. The term of an external director is three years and may be extended
      by
      the shareholders for an additional three-year term.




Until
      the
      lapse of two years from termination of service as director, a company may not
      engage an external director to serve as an office holder and cannot employ
      or
      receive services from that person, either directly or indirectly, including
      through a corporation controlled by that person.




The
      majority of the shareholders in a general meeting must elect the external
      directors. Such majority must either include at least one-third (1/3) of the
      shares of non-controlling shareholders voting on the matter, or the total shares
      of non-controlling shareholders voting against the election may not represent
      more than one percent (1%) of the voting rights in the company.




George
      Lieberman and Ben-Zion Zilberfarb currently serve as “external” directors within
      the meaning prescribed by the Companies Law. Mr. Lieberman’s second and final
      term of office ends after the 2006 Annual Shareholder Meeting. Mr. Zilberfarb’s
      second and final term of office ends after the 2007 Annual Shareholder
      Meeting.




**Independent
      Directors**




The
      Ordinary Shares are listed for quotation on The NASDAQ National Market and
      are
      subject to the rules of The NASDAQ National Market applicable to quoted
      companies. Under The NASDAQ rules, we are required to appoint a sufficient
      number of independent directors for them to constitute a majority. The
      independence standard under the NASDAQ rules excludes any person (i) who is
      an
      officer or employee of the Company or its subsidiaries, or (ii) that the board
      of directors believes has a relationship that would interfere with such
      individual’s independent judgment as a director. Additional circumstances that
      preclude an individual from serving as an Independent Director are set forth
      in
      the NASDAQ rules, including, with certain limited exceptions, receipt by a
      director or his/her immediate family of consulting compensation in excess of
      $60,000 per annum. Gideon Argov, Yaffa Krindel, George Lieberman, Stanley Stern,
      Gil Weiser and Ben-Zion Zilberfarb qualify as independent directors and meet
      the
      independence standard of the NASDAQ rules.




-50-


**Audit
        Committee**
  Pursuant
        to the Companies Law, the Board of Directors of a public company must appoint
        an
        Audit Committee. The Audit Committee must be comprised of at least three
        directors, including all of the external directors elected as such in accordance
        with the requirements of the Companies Law. The Audit Committee may not include
        the chairman of the Board of Directors, any director we employ or any director
        who provides significant services to us on a regular basis or a controlling
        shareholder or his relative. The roles of our audit committee under the
        Companies Law include identifying irregularities in the management of the
        company’s business and approving related party transactions as required by
        law.
  Under
        the
        NASDAQ rules, we are required to form an audit committee consisting of at
        least
        three independent directors. In addition, NASDAQ requires that the members
        of
        the audit committee (a) not have any relationship to the company that may
        interfere with the exercise of their independence, and (b) must be financially
        literate.
  Under
        the
        NASDAQ rules and the Sarbanes-Oxley Act, the audit committee (i) has the
        sole
        authority and responsibility to select, evaluate, and, where appropriate,
        replace the company’s independent auditors, (ii) is directly responsible for the
        appointment, compensation and oversight of the work of the independent auditors
        for the purpose of preparing its audit report or related work, and (iii)
        is
        responsible for establishing procedures for (A) the receipt, retention and
        treatment of complaints received by the company regarding accounting, internal
        accounting controls or auditing matters, and (B) the confidential, anonymous
        submission by employees of the company of concerns regarding questionable
        accounting or auditing matters. The audit committee is required to consult
        with
        management but may not delegate these responsibilities.
  In
        addition to such functions as the audit committee may have under the Companies
        Law or under the NASDAQ rules, the primary purpose of our audit committee
        is to
        assist the board of directors in fulfilling its responsibility to oversee
        management’s conduct of the financial reporting process, the systems of internal
        accounting and financial controls and the annual independent audit of the
        company’s financial statements. The audit committee reviews with management and
        our outside auditors the audited financial statements included in our Annual
        Report on Form 20-F and our interim quarterly financial results.
  The
        audit
        committee must observe the independence of our external auditors and has
        the
        authority and responsibility to nominate for shareholder approval, evaluate
        and,
        where appropriate, recommend the replacement of our external auditors. In
        addition, the Audit Committee is responsible for pre-approving all services
        provided to us by our external auditors.
  In
        discharging its oversight role, our audit committee is empowered to investigate
        any matter brought to its attention with full access to all books, records,
        facilities and personnel of our company and the power to retain outside counsel,
        auditors or other experts for this purpose. The audit Committee has a separate
        budget to fund its retention of such outside assistance. The audit committee
        has
        also adopted a charter in accordance with the rules of the NASDAQ National
        Market.
  The
        members of the Audit Committee for the fiscal year ended December 31, 2005
        were
        Stanley Stern, Chairman, George Lieberman, Ben-Zion Zilberfarb and Yaffa
        Krindel. Ms. Krindel qualifies as a financial expert under the Sarbanes-Oxley
        Act of 2002. We do not anticipate a change in committee composition during
        2006.
  -51-
  **Compensation
        Committee**
  The
        members of the Compensation Committee for the fiscal year ended December
        31,
        2005 were George Lieberman, Chairman, Gideon Argov and Gil Weiser. No member
        of
        the Compensation Committee is an officer or employee of the Company and each
        is
        an independent director. The responsibilities of the Compensation Committee
        include administering our stock plans and approving the compensation of our
        executive officers. We do not anticipate a change in committee composition
        during 2006.
  **Nominating
        Committee**
  In
        accordance with NASDAQ rules, a Nominating Committee was established in 2004.
        Its members are Gil Weiser, Chairman, Gideon Argov and George Lieberman.
        The
        Nominating Committee is responsible for making recommendations with respect
        to
        (i) the nomination by the Board of Directors of qualified candidates to serve
        as
        our Directors, (ii) Board committee assignments and (iii) chair appointments.
        The Nominating Committee has adopted a charter, as well as policies and
        procedures governing its activities. The committee has also adopted and
        published policies and procedures governing communications from shareholder
        or
        other interested parties to the board of directors. We do not anticipate
        a
        change in committee composition during 2006.
  **Duties
        Under the Companies Law**
  The
        Companies Law codifies the fiduciary duties that an “office holder,” including
        directors and executive officers, owe to a company. An office holder’s fiduciary
        duties consist of a duty of care and a duty of loyalty. The duty of care
        requires an office holder to act with the same level of skill with which
        a
        reasonable office holder in the same position would act under the same
        circumstances. This includes a duty to use reasonable means to obtain
        information on the advisability of a given action brought for such office
        holder’s approval or performed by him by virtue of his position, and all other
        significant information pertaining to such action. The duty of loyalty requires
        an office holder to act in good faith and for the company’s benefit, and
        includes avoiding any conflict of interest between the office holder’s position
        in the company and any other position held by him or his personal affairs,
        avoiding any competition with the company, avoiding exploiting any business
        opportunity of the company in order to receive personal advantage for himself
        or
        others and revealing to the company any information or documents relating
        to the
        company’s affairs which the office holder has received due to his position as an
        office holder. Under the Companies Law, all arrangements as to compensation
        of
        office holders who are not directors require approval of the Board of Directors,
        in certain cases with the prior approval of the Audit Committee, and, with
        respect to indemnification and insurance of these office holders, also require
        Audit Committee approval. Arrangements regarding the compensation of directors,
        regardless of whether to be paid in such director’s position as a director or
        employee of the Company, require the approval of the Audit Committee, Board
        of
        Directors and shareholders.
  **Internal
        Auditor**
  Under
        the
        Companies Law, the Board of Directors of a public company must appoint an
        internal auditor proposed by the audit committee. The duty of the internal
        auditor is to examine, inter alia, whether the company’s conduct complies with
        applicable law and orderly business procedure. The internal auditor may
        participate in all audit committee meetings and has the right to demand that
        the
        chairman of the audit committee convene a meeting. Under the Companies Law,
        the
        internal auditor may not be an interested party, an office holder or a relative
        of any of the foregoing, nor may the internal auditor be the company’s
        independent accountant or its representative. The Companies Law defines the
        term
“interested party” to include a person who holds 5% or more of the company’s
        outstanding share capital or voting rights, a person who has the right to
        appoint one or more directors or the general manager, or any person who serves
        as a director or as the general manager. We have appointed BKR Yarel, Haguel
        & Co., as the internal auditor.
  -52-
  **The
        NASDAQ National Market**
  Our
        Ordinary Shares are listed for quotation on The NASDAQ National Market and
        we
        are subject to the rules of The NASDAQ National Market applicable to listed
        companies. Under the NASDAQ rules companies quoted on NASDAQ are required
        to
        have a majority of independent directors. NASDAQ rules further require the
        appointment of a Compensation Committee which is comprised solely of independent
        directors and which is responsible for setting and approving salaries for
        the
        directors and for the executive officers of the company and a Nominating
        Committee which is comprised solely of independent directors and which is
        responsible for the selection of directors and for communications with
        shareholders on the subject of shareholder nominations. Gideon Argov, Yaffa
        Krindel, George Lieberman, Stanley Stern, Gil Weiser and Ben-Zion Zilberfarb
        and
        qualify as independent directors under the current NASDAQ National Market
        requirements, but Mr. Weiser would not be considered independent under the
        Audit
        Committee standards.
  **Disclosure
        Committee**
  A
        Disclosure Committee consisting solely of company employees was established
        in
        2004 under the auspices of the Audit Committee to assist the Chief Executive
        Officer and Chief Financial Officer with monitoring developments within the
        Company and with the preparation of annual and quarterly reports. The committee
        is chaired by the General Counsel and has members from the finance, operations
        and marketing departments as well as from our BBP and Cashtech subsidiaries.
        Meetings are held not less than quarterly. The committee has also adopted
        and
        published policies and procedures governing its activities. The Charter of
        the
        Committee was approved by the Audit Committee. No directors serve on the
        committee.
  **D.** **Employees.**
  The
        following table summarizes the main category of activity and geographic location
        of our employees as of December 31, 2005:
  **Software
                  Development**
              
              **Operations**
              
              **Sales
                  and Marketing**
              
              **Administration**
              
              **Total
                  Employees**United
                  States
              
              74
              
              95
              
              28
              
              27
              
              224Israel
              
              17
              
              59
              
              2
              
              1
              
              79Switzerland
              
              14
              
              21
              
              8
              
              8
              
              51United
                  Kingdom
              
              0
              
              11
              
              5
              
              1
              
              17Australia
              
              0
              
              2
              
              0
              
              0
              
              2India
              
              16
              
              180
              
              9
              
              28
              
              233606
 
 We
        consider ourselves to have good relations with our employees and have never
        experienced a labor dispute, strike or work stoppage. Our employees are not
        represented by a labor union.
  None
        of
        our employees is a party to a collective bargaining agreement with us. However,
        we are subject to certain provisions of collective bargaining agreements
        among
        the Government of Israel, the Histadrut (General Federation of Labor in Israel)
        and the Coordinating Bureau of Economic Organizations (including the
        Industrialists’ Association) that are applicable to our Israeli employees by
        virtue of expansion orders of the Israeli Ministry of Labor and Welfare.
        In
        addition, Israeli labor laws are applicable to all of our employees in Israel.
        Those provisions and laws principally concern the length of the workday,
        minimum
        daily wages for workers, procedures for dismissing employees, determination
        of
        severance pay and other conditions of employment. Under these provisions,
        the
        wages of most of our employees are automatically adjusted based on changes
        in
        the Israeli consumer price index. The amount and frequency of these adjustments
        are modified occasionally.
  -53-
  As
        a
        general practice, although not legally required, we contribute funds on behalf
        of most of our full-time employees in Israel to an individual insurance policy
        known as “Managers’ Insurance.” This policy provides a combination of savings
        plan, insurance and severance pay benefits to the insured employee, provides
        for
        payments to the employee upon retirement or death and secures severance pay,
        if
        any, to which the employee is legally entitled upon termination of employment.
        The remaining part of this obligation is presented on our balance sheet as
        a
        provision for severance pay. See Note 2(l) to the Consolidated Financial
        Statements.
  Our
        Cashtech subsidiary, as required by Indian regulations, provides a severance
        payment to any employee who resigns after working for five years with Cashtech.
        This obligation, whose
        valuations are carried out by an independent actuary, is
        reflected on the Cashtech balance sheet.
  We
        have
        to comply with various labor and immigration laws throughout the world,
        including laws and regulations in Israel, the United Kingdom, Switzerland,
        Australia, Singapore and India. Compliance with these laws has not been a
        material burden for us. If the number of our employees increases over time,
        our
        compliance with these regulations could become more burdensome.
  **E.** **Share
        Ownership.**
  ***Security
        Ownership of Directors and Senior Management and Certain Key
        Employees***
  As
        of
        June 14, 2006, the aggregate number of our Ordinary Shares beneficially owned
        by
        our directors, senior managers and certain key employees was as
        follows:
  Owner:
              No.
                  of Ordinary Shares:Gideon
                  Argov
              Beneficially
                  owns less than one percent.Reuven
                  BenMenachem
              466,219
                  (3.1%)George
                  M. Lieberman
              Beneficially
                  owns less than one percent.Stanley
                  Stern
              Beneficially
                  owns less than one percent.Gil
                  Weiser
              Beneficially
                  owns less than one percent.Ben-Zion
                  Zilberfarb
              Beneficially
                  owns less than one percent.Yaffa
                  Krindel
              Beneficially
                  owns less than one percent.Joseph
                  J. Aulenti
              Beneficially
                  owns less than one percent.Yoram
                  Bibring
              Beneficially
                  owns less than one percent.
  -54-
  Joseph
                  P. Mazzetti
              Beneficially
                  owns less than one percent.Michael
                  Sgroe
              Beneficially
                  owns less than one percent.Leslie
                  Bertha
              Beneficially
                  owns less than one percent.Carlo
                  Frey
              Beneficially
                  owns less than one percent.Gil
                  Gadot
              Beneficially
                  owns less than one percent.Uri
                  Melzer
              Beneficially
                  owns less than one percent.Moti
                  Porath
              Beneficially
                  owns less than one percent.
  Beneficial
        ownership by a person, as of a particular date, assumes the exercise of all
        options and warrants held by such person that are currently exercisable or
        are
        exercisable within 60 days of such date and all restricted shares that will
        be
        released from any vesting schedule within 60 days of such date. No director
        is
        affiliated with a Major Shareholder.
  As
        of
        June 14, 2006, options to purchase up to 1,210,125 Ordinary Shares granted
        to
        our directors, senior managers and certain key employees were outstanding
        under
        our option plans. The weighted average exercise price of these options was
        $7.90
        per share. From these options, options to purchase 34,375 Ordinary Shares
        granted to our directors and executive employees are exercisable or will
        become
        exercisable within 60 days of June 14, 2006.
  As
        of
        June 14, 2006, we had 41 shareholders of record.
  **Equity
        Compensation Plans**
  Fundtech
        had established two plans for granting share options to our employees and
        one
        plan for granting share options to our directors: the Fundtech Limited 1997
        Israeli Share Option Plan for the Employees of Fundtech Ltd. (the “1997 Plan”);
        the Fundtech Ltd. 1999 Employee Option Plan (the “1999 Option Plan”); and the
        Fundtech Ltd. Directors’ Option Plan (the “Directors’ Option Plan,” and together
        with the 1997 Plan and the 1999 Option Plan, the “Company Option Plans”). The
        1997 Plan has expired. On December 21, 2005, the shareholders approved the
        adoption of two new equity plans, the 2005 International Share Option and
        Restricted Share Incentive Plan and the 2005 Israeli Share Option and Restricted
        Share Incentive Plan (the “2005 Plans”), which are discussed below.
  Pursuant
        to the Company Option Plans, a total of 3,592,815 options were allocated
        for
        grant to employees and directors of Fundtech and its subsidiaries, and an
        equal
        number of Ordinary Shares have been reserved for issuance upon the exercise
        of
        such options. As of December 20, 2005, 2,407,521 of these options were
        outstanding, 663,306 of these options had been exercised, and 521,988 options
        remain available to be granted.
  ***1997
        Stock Option Plan***
  The
        1997
        Plan was adopted in December 1997. The options granted under the 1997 Plan
        expire five years from the date of grant and vest as determined by the
        Compensation Committee or the Board of Directors at the time of the grant,
        generally over a period of four years. As of December 20, 2005, 1,376,747
        Ordinary Shares were reserved and allocated to the 1997 Plan of
        which 1,376,747 options have been exercised. By authorization of the
        shareholders granted on October 28, 2002, 491,814 options were transferred
        to
        the 1999 Plan and no options remain available.
  -55-
  ***1999
        Stock Option Plan***
  The
        1999
        Option Plan was adopted in September 1999. The Compensation Committee or
        the
        Board of Directors determines the vesting period and expiration period for
        options granted under the 1999 Option Plan at the time of the grant. The
        options
        generally vest over a period of four years from the date of grant. As of
        December 20, 2005, 3,155,815 Ordinary Shares were reserved and allocated
        to the
        1999 Option Plan. Of the 3,155,815 options available for grant under the
        1999
        Option Plan, as of December 20, 2005, 2,131,521 options were outstanding
        and
        232,306 options had been exercised. By authorization of the shareholders
        granted
        on December 20, 2005, 391,988 options were transferred to the 2005 Share
        Option
        and Restricted Share Incentive Plans and no options remain
        available.
  ***Directors’
        Option Plan***
  The
        Directors’ Option Plan was adopted in May 1998. The Compensation Committee or
        the Board of Directors determines the vesting period and expiration period
        for
        options granted under the Directors’ Option Plan at the time of the grant. The
        options granted under the Directors’ Option Plan generally vest over a period
        between one and two years and expire five years from the date of grant. By
        authorization of the shareholders granted on December 20, 2005, 130,000 options
        were transferred to the 2005 Share Option and Restricted Share Incentive
        Plans
        and no options remain available.
  ***Offer
        To Exchange/Tender Offer***
  In
        June
        2002 we commenced a voluntary stock option exchange program for our employees.
        Under the program participating employees were given the opportunity to have
        unexercised stock options previously granted to them cancelled, and to receive
        replacement options at a future date. Replacement options were granted at
        a
        ratio of one new option for each one option cancelled (provided that the
        grantees were still employed by the Company on the date of the new grant),
        at an
        exercise price equal to the fair market value of our Ordinary Shares on the
        date
        of the re-grant.
  Pursuant
        to the terms of the offer, 1,025,700 options were cancelled on July 16, 2002.
        We
        granted the 969,311 replacement options on January 17, 2003.
  ***2005
        Share Option and Restricted Share Incentive Plans***
  On
        December 21, 2005, the shareholders of the Company approved the adoption
        of the
        2005 International Share Option and Restricted Share Incentive Plan and the
        2005
        Israeli Share Option and Restricted Share Incentive Plan (collectively, the
        “2005 Plans”). The 2005 Plans did not increase the maximum number of the
        Company's Ordinary Shares that may be issued under the Company's option plans.
        Rather, the Company transferred the aggregate number of un-granted Ordinary
        Shares as of the date on which the 2005 Plans are adopted, then reserved
        for
        issuance under the Company’s 1999 Employee Stock Option Plan and the Director’s
        Option Plan (the “Previous Plans”) to the 2005 Plans. Any options that remain
        available for grants under the Previous Plans are now available for subsequent
        grants of awards under the 2005 Plans. In addition, if any outstanding award
        under the Previous Plans should, for any reason, expire, be canceled or be
        forfeited without having been exercised in full, the shares subject to the
        unexercised, canceled or terminated portion of such award shall become available
        for subsequent grants of awards under the 2005 Plans. The cumulative number
        of
        such shares that may be so issued under the 2005 Plans, inclusive of any
        award
        or grant under the Previous Plans, may not exceed 3,592,815 shares. Grants
        under
        the 2005 Plans vest over periods of between one and four years. As of June
        14,
        2006, 187,201 restricted shares had been granted under the 2005
        Plans.
  -56-
  ***Administration
        of Our Plans***
 
 The
        Compensation Committee of the Board of Directors administers our plans. Under
        the plans, options or restricted shares to purchase our Ordinary Shares may
        be
        granted to the officers, directors, employees or consultants of the Company
        or
        of any of our subsidiaries. Under the plans, the Compensation Committee of
        the
        Board of Directors shall determine the exercise price of options. The Board
        of
        Directors also determines the vesting schedule of the options and restricted
        shares.
 
 **ITEM
        7.** **MAJOR
        SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.**
  **A.** **Major
        Shareholders.**
  The
        following table summarizes information about the beneficial ownership of
        our
        outstanding Ordinary Shares as of June 14, 2006, for each person or group
        that
        we know owns 5% or more of our Ordinary Shares.
  We
        determine beneficial ownership of shares under the rules of the Securities
        and
        Exchange Commission and include any Ordinary Shares over which a person
        exercises sole or shared voting or investment power, or of which a person
        has
        the right to acquire ownership at any time within 60 days. Applicable percentage
        ownership in the table set forth below is based on 15,123,858 Ordinary
        Shares outstanding as of June 14, 2006.
 
 **NAME
                  OF BENEFICIAL OWNER**
              
              **NUMBER
                  OF SHARES BENEFICIALLY**
                **OWNED**
              
              **PERCENTAGE
                  BENEFICIALLY OWNED**Clal
                  Industries and Investments Ltd.(1)
              
              
              5,350,761
              
              
              35.4
              %Cannell
                  Capital LLC(2)
              
              
              2,280,800
              
              
              15.1
              %FMR
                  Corp. (3)
              
              
              847,800
              
              
              5.6
              %All
                  directors and executive officers as a group (11 persons)
              
              
              1,244,500
              
              
              8.2
              %
 
  1.
              Clal
                  Industries and Investments Ltd., or “Clal”, is an Israeli corporation and
                  is controlled by IDB Development Corporation Ltd., or “IDBD”, which, in
                  turn, is controlled by IDB Holding Corporation, or “IDBH”, all of which
                  companies are considered part of the IDB group.
  Based
        upon publicly available information, as at March 1, 2006, IDBH is controlled
        by
        a group comprised of: (i) Ganden Investments I.D.B. Ltd., or “Ganden”, a private
        Israeli company controlled by Nochi Dankner (who is the chairman of IDBH,
        IDBD
        and Clal) and his sister Shelly Bergman, which holds 31.02% of the equity
        of and
        voting power in IDBH; (ii) Manor Investments - IDB Ltd., or “Manor”, a private
        Israeli company controlled by Ruth Manor (whose husband, Isaac Manor, and
        their
        son, Dori Manor, are directors of IDBH, IDBD and Clal), which holds 10.34%
        of
        the equity of and voting power in IDBH; and (iii) Avraham Livnat Investments
        (2002) Ltd., or “Livnat”, a private Israeli company controlled by Avraham Livnat
        (one of whose sons, Zvi Livnat, is a director and executive vice president
        of
        IDBH, deputy chairman of IDBD and a director and co-chief executive officer
        of
        Clal, and another son, Shay Livnat, is a director of IDBD and Clal), which
        holds
        10.34% of the equity of and voting power in IDBH. Ganden, Manor and Livnat,
        owning in the aggregate approximately 51.70% of the equity of and voting
        power
        in IDBH, entered into a Shareholders Agreement relating, among other things,
        to
        their joint control of IDBH, the term of which is until May 19, 2023. In
        addition, (a) Ganden Holdings Ltd., the parent company of Ganden, holds 11.35%
        of the equity of and voting power in IDBH; (b) Ganden holds a further 6.71%
        of
        the equity of and voting power in IDBH; (c) Manor Holdings B.A. Ltd., the
        parent
        company of Manor, holds 0.03% of the equity of and voting power in IDBH;
        (d)
        Avraham Livnat Ltd., the parent company of Livnat, holds 0.04% of the equity
        of
        and voting power in IDBH; and (e) Ms. Bergman owns, through a private company
        which is wholly owned by her, approximately 7.23% of the equity and voting
        power
        of IDBH.
  -57-
  
  Based
        on
        the foregoing, IDBH (by reason of its control of IDBD), Ganden, Manor and
        Livnat
        (by reason of their control of IDBH), Mr. Dankner, Ms. Bergman, Ms. Manor
        and
        Mr. A. Livnat (by reason of their control, respectively, of Ganden, Manor
        and
        Livnat) may be deemed to share the power to vote and dispose: (i) with IDBD
        (by
        reason of its control of Clal), and Clal, of the Fundtech shares held by
        Clal;
        and (ii) with IDBD, of the Fundtech shares held by IDBD.
  2.
              As
                  of June 14, 2006 beneficial ownership consisted of 2,280,800 Ordinary
                  Shares held by investment advisory clients who have granted Cannell
                  Capital LLC, for which J. Carlo Cannell is the Managing Member,
                  with
                  discretionary authority to buy, sell and vote shares. Shares are
                  held by
                  The Anegada Master Fund Limited (505,220 Ordinary Shares); The
                  Cuttyhunk
                  Fund Limited (535,366 Ordinary Shares); Tonga Partners, L.P. (802,792
                  Ordinary Shares); TE Cannell Portfolio, LLC (437,422 Ordinary Shares).
                  The
                  address of Cannell Capital LLC is 150 California Street, Fifth
                  Floor, San
                  Francisco, CA 94111. Cannell Capital LLC formerly held 17.4% of
                  our
                  Ordinary Shares. Based on information set forth on a Schedule 13G/A
                  filed
                  February 15, 2006 by Cannell Capital
                  LLC.
  3.
              As
                  of June 14, 2006 beneficial ownership consisted of 847,800 Ordinary
                  Shares
                  held by investment advisory clients who have granted Fidelity Management
                  & Research Company, for which Edward C. Johnson 3d and FMR Corp.,
                  through its control of Fidelity each have the authority to buy,
                  sell and
                  vote shares.
  14,999,276
        of our Ordinary Shares (of which 13,534,001 are in CEDE account) constituting
        90% of our Ordinary Shares are held by record holders located in the United
        States. 28 record holders are located in the United States. We have determined
        that in excess of 60% of our Ordinary Shares are beneficially owned by
        non-United States persons.
  During
        the period between December 31, 2003 and June 14, 2006 Clal Industries and
        Investments Ltd. has purchased 132,540 Ordinary Shares increasing its percentage
        ownership from 31.19% to its present 35.4%. Cannell Capital LLC first reported
        purchasing Ordinary Shares in 2002. Cannell’s ownership was reported at
        2,527,826 (17.4%) on December 31, 2003, but declined to 2,280,800 (15.1%)
        as of
        June 14 2006. FMR Corp. first reported the purchase of 1,317,700 Ordinary
        Shares
        in May 2005, decreasing to 847,800 as of June 14, 2006.
  Our
        major
        shareholders do not have voting rights that differ from those of our other
        shareholders.
  -58-
 
  **B.** **Related
        Party Transactions.**
  Gil
        Weiser, a member of the Board of Directors, received $2,200 per month to
        provide
        consulting services and serve as the Chairman of the Executive Committee
        of BBP,
        our indirectly wholly owned Swiss subsidiary. This consulting agreement expires
        each year in March, unless extended by the Audit Committee or unless previously
        terminated by either party upon thirty (30) days advanced written notice
        to the
        other. This agreement was approved by the Audit Committee, the Board of
        Directors and the shareholders. The agreement expired in March 2006 and has
        not
        been renewed.
  **Insurance**
  We
        have
        obtained directors and officers liability insurance for the benefit of our
        office holders and intend to continue to maintain such coverage and pay all
        premiums thereunder to the fullest extent permitted by the Companies Law.
        Under
        the Companies Law, an Israeli company may not exempt an office holder from
        liability for a breach of his duty of loyalty, but may exempt in advance
        an
        office holder from his liability to the company, in whole or in part, for
        a
        breach of his duty of care.
  Our
        Articles of Association provide that, subject to the provisions of the Companies
        Law, we may enter into a contract for the insurance of the liability of any
        of
        our office holders for acts which he or she performed in his or her capacity
        as
        an office holder in relation to:
  ·
            a
                breach of his/her duty of care to us or to another
                person;  ·
            a
                breach of his/her duty of loyalty to us, provided that the office
                holder
                acted in good faith and had reasonable cause to assume that his/her
                act
                would not prejudice our interests; or  ·
            a
                financial liability imposed upon him/her in favor of another
                person.  **Indemnification**
  We
        previously undertook to undertake to indemnify in advance our directors and
        office holders for the breach of his or her duty of care to the fullest extent
        permitted by the Companies Law, and have entered into indemnification agreements
        with our directors.
  Under
        Section 260(B) of the Companies Law, a company is entitled to undertake in
        advance to indemnify an office holder for the breach of his or her duty of
        care,
        provided that the articles of association of the company permit such
        indemnification in advance and further provided that such indemnification
        shall
        be limited to the type of events that, in the discretion of the Board of
        Directors of the company, may be anticipated at such time of undertaking
        and
        that such undertaking shall be limited to an amount which the Board of Directors
        deems reasonable in light of the applicable circumstances. These are
        specifically limited in their scope by Section 263 of the Companies Law,
        which
        provides that a company may not indemnify an office holder nor enter into
        an
        insurance contract which would provide coverage for any liability incurred
        as a
        result of the following: (a) a breach by the office holder of his fiduciary
        duty
        unless he acted in good faith and had a reasonable basis to believe that
        the act
        would not prejudice the company; (b) a breach by the office holder of his
        duty
        of care if such breach was done intentionally or recklessly; (c) any act
        or
        omission done with the intent to derive an unlawful personal benefit; or
        (d) any
        fine levied against such office holder. In addition, under Section 259 of
        the
        Companies Law a company may exempt an office holder from his duty of care
        to the
        company, in whole or in part and subject to the limitations of Section 263
        of
        the Companies Law described above, provided that such actions are authorized
        by
        the company’s articles of association.
  -59-
  **Fees
        and Reimbursement of Expenses for Members of the Board of
        Directors.**
  Our
        members of the Board of Directors are entitled to compensation and reimbursement
        of expenses for their services to the Company. See Item 6B above.
  **C.** **Interests
        of Experts and Counsel.**
  ***Not
        applicable.***
  **ITEM
        8.** **FINANCIAL
        INFORMATION.**
  **A.** **Consolidated
        Financial Statements and Other Financial Information.**
  The
        following Consolidated Financial Statements of Fundtech Ltd. and its
        subsidiaries for the years ended December 31, 2003, 2004 and 2005, together
        with
        the report of the independent auditors thereon, are presented under Item
        18 of
        this report:
  Report
        of
        Independent Auditors
  Consolidated
        Balance Sheets
  Consolidated
        Statements of Operations
  Statements
        of Changes in Shareholders’ Equity
  Consolidated
        Statements of Cash Flows
  Notes
        to
        Consolidated Financial Statements
  **Legal
        Proceedings**
  We
        are
        not a party to any litigation or legal proceeding of a material nature, either
        in Israel or abroad, and are not aware of any other pending or threatened
        litigation that we believe may have a material adverse effect on us or our
        business.
  **Dividend
        Distribution Policy**
  We
        have
        never declared or paid dividends to our shareholders.  We
        intend
        to retain all future earnings for use in the development of our business
        and do
        not anticipate paying cash dividends in the foreseeable future. If we declare
        cash dividends, they could be taxable to the recipient. Because we have received
        benefits under the Law for the Encouragement of Capital Investments, 1959,
        as
        amended (the “Investment Law”), payment of cash dividends during the exemption
        period granted under the Investment Law will subject that portion of our
        income
        derived from the Approved Enterprise status granted to us under the Investment
        Law to Israeli taxes to which the income would not otherwise be subject.
        We
        intend to reinvest the amount of the tax-exempt income derived from our
“Approved Enterprises” status permanently and not to distribute such income as
        dividends.
  Under
        the
        Israeli Companies Law, dividends may be paid by an Israeli company only out
        of
        its profits, as defined in such law. Under the Companies Law, a company’s Board
        of Directors has the general authority to distribute dividends to the
        shareholders out of profits referred to above, and a company may determine
        in
        its Articles of Association that dividends may be approved: (i) by the general
        meeting, following a recommendation of the Board of Directors (the shareholders
        may reduce, but not increase, the dividends recommended by the Board of
        Directors), (ii) by the Board of Directors, after the shareholders have approved
        the maximum amount of dividends which may be distributed and (iii) in any
        other
        manner detailed in a company’s Articles of Association, provided that the
        company’s Board of Directors shall determine that such distribution complies
        with the provisions of the Companies Law. In the event we pay dividends,
        it is
        anticipated that any dividends paid to non-residents of Israel would be paid
        in
        NIS.
  -60-
  **B.** **Significant
        Changes.**
  None
  **ITEM
        9.** **THE
        OFFER AND LISTING.**
  **Market
        Price Information**
  Our
        Ordinary Shares are quoted on The NASDAQ National Market under the symbol
        “FNDT”. The following table sets forth, for the periods indicated, the high and
        low closing sales prices for the Ordinary Shares:
  **HIGH**
              
              **LOW**2001
              
              
              18.13
              
              
              3.422002
              
              
              5.24
              
              
              3.282003
              
              
              8.58
              
              
              3.302004
              
              
              9.90
              
              
              6.262005
              
              
              11.23
              
              
              8.092004First
                  Quarter
              
              
              9.90
              
              
              7.17Second
                  Quarter
              
              
              7.97
              
              
              7.01Third
                  Quarter
              
              
              8.08
              
              
              6.26Fourth
                  Quarter
              
              
              8.76
              
              
              6.442005First
                  Quarter
              
              
              10.97
              
              
              8.09Second
                  Quarter
              
              
              10.59
              
              
              9.90Third
                  Quarter
              
              
              11.08
              
              
              9.45Fourth
                  Quarter
              
              
              11.23
              
              
              9.612006First
                  Quarter
              
              
              12.11
              
              
              10.11
  **Most
                  recent six months**December
                  2005
              
              
              10.55
              
              
              9.93January
                  2006
              
              
              12.11
              
              
              10.27February
                  2006
              
              
              11.95
              
              
              10.11March
                  2006
              
              
              12.05
              
              
              10.15April
                  2006
              
              
              12.94
              
              
              11.69May
                  2006
              
              
              12.23
              
              
              10.47
  -61-
  On
        June
        14, 2006, the last closing sale price of the Ordinary Shares, as reported
        by the
        NASDAQ National Market, was $10.58 per share. As of June 14, 2006, we had
        41
        shareholders of record. We believe that the number of beneficial owners of
        the
        Ordinary Shares is approximately 1,217.
  Since
        August 19, 2003, our Ordinary Shares have also been listed on the Tel Aviv
        Stock
        Exchange under the symbol “FNDT”. The following table sets forth, for the
        periods indicated, the high and low closing sales prices in NIS of our Ordinary
        Shares on the Tel Aviv Stock Exchange.
  **HIGH**
              
              **LOW**2003
              
              
              NIS
                  38.90
              
              
              NIS
                  28.692004
              
              
              46.38
              
              
              28.392004First
                  Quarter
              
              
              NIS
                  46.38
              
              
              NIS
                  32.04Second
                  Quarter
              
              
              36.05
              
              
              32.15Third
                  Quarter
              
              
              36.01
              
              
              28.59Fourth
                  Quarter
              
              
              38.27
              
              
              28.712005First
                  Quarter
              
              
              NIS47.66
              
              
              NIS36.1Second
                  Quarter
              
              
              46.47
              
              
              43.00Third
                  Quarter
              
              
              50.77
              
              
              43.91Fourth
                  Quarter
              
              
              50.37
              
              
              45.36**Most
                  recent six months**December
                  2005
              
              
              NIS48.99
              
              
              NIS46.1January
                  2006
              
              
              58.36
              
              
              46.87February
                  2006
              
              
              56.9
              
              
              47.43March
                  2006
              
              
              56.81
              
              
              46.98April
                  2006
              
              
              58.52
              
              
              53.98May
                  2006
              
              
              56.46
              
              
              47.89
 
  As
        of
        June 14, 2006, the exchange rate of the NIS to the U.S. Dollar was $1=NIS
        4.494.
   -62-
  **ITEM
        10.** **ADDITIONAL
        INFORMATION.**
  **A.** **Share
        Capital.**
  ***Not
        Applicable.***
  **B.** **Memorandum
        and Articles of Association.**
  **Company’s
        objectives**
  The
        Company’s objectives, as set forth in our Articles of Association, are to carry
        on any business and do any act which is not prohibited by law. We may also
        make
        contributions of reasonable sums to worthy purposes even if such contributions
        are not made on the basis of business considerations.
  **Directors**
  Any
        director is entitled to vote in a meeting of our Board of Directors, except
        that
        a director who has a personal interest in an “extraordinary transaction” (as
        defined below), which is considered at a meeting of our Board of Directors,
        may
        not be present at this meeting or vote on this matter. An “extraordinary
        transaction” is defined in the Companies Law as a transaction that is either (i)
        not in the ordinary course of business; (ii) not on market terms; or (iii)
        that
        is likely to have a material impact on the Company’s profitability, assets or
        liabilities.
  A
        quorum
        at a meeting of our Board of Directors shall be constituted by the presence
        in
        person, by alternate or by telephone or similar communication equipment,
        of a
        majority of the directors then in office who are lawfully entitled to
        participate and vote at the meeting.
  If
        within
        one-half hour (or within such longer time not to exceed one (1) hour, as
        the
        Chairman of the meeting, at his discretion, may decide) from the time appointed
        for the convening of the board meeting, a quorum is not present, the board
        meeting shall stand adjourned to the same day in the next week at the same
        time
        and place (unless such day shall fall on a public holiday either in Israel
        or
        the United States, in which case the meeting will be adjourned to the first
        day,
        not being a Friday, Saturday or Sunday, which follows such public holiday).
        If,
        at such adjourned board meeting, a quorum is not present within half an hour
        from the time appointed for holding the meeting, the directors present, in
        person, by alternate or by telephone or similar communication equipment who
        are
        lawfully entitled to participate and vote at such meeting, shall be a
        quorum.
  Our
        business is managed by the Board of Directors, which may exercise all such
        company powers and perform on our behalf all such acts as are not, by the
        Companies Law or by our Articles of Association, required to be exercised
        or
        performed through a general meeting of our shareholders. Our Articles of
        Association provide that the Board of Directors may from time to time, at
        its
        discretion, cause us to borrow or secure the payment of any sum or sums of
        money
        for the Company’s purposes, and may secure or provide for the repayment of such
        sum or sums in such manner, at such times and upon such terms and conditions
        as
        it deems fit, and, in particular, by the issuance of bonds, perpetual or
        redeemable debentures, debenture stock, or any mortgages, charges, or other
        securities on the undertaking of the whole or any part of our property, both
        present and future, including its uncalled or called but unpaid capital for
        the
        time being.
  There
        is
        no age limit as to the ability of individuals to serve as members of our
        Board
        of Directors.
  A
        director is not required to hold our shares as a condition to his nomination
        or
        election as a director.
  -63-
  **Rights
        attached to our shares**
  All
        dividends shall be declared by our Board of Directors and paid in proportion
        to
        the amount paid up on account of the nominal value of the Ordinary Shares
        in
        respect of which the dividend is being paid. As regards to Ordinary Shares
        not
        fully paid throughout the period in respect of which the dividend is paid,
        dividends in respect thereto shall be apportioned and paid pro rata according
        to
        amounts deemed under our Articles of Association to be paid up on account
        of the
        nominal value of such shares during any portion or portions of the period
        in
        respect of which the dividend is paid.
  Under
        our
        Articles of Association, every shareholder who is present, in person, by
        proxy,
        or by written ballot or is deemed under the Companies Law to be present at
        a
        general meeting of the shareholders, shall be entitled to one vote for each
        Ordinary Share of which he or she is the holder.
  The
        distribution of dividends is under the discretion of our Board of Directors,
        which is under no obligation to distribute dividends to our shareholders
        out of
        the Company’s profits.
  Upon
        liquidation, all available surplus, after payments of all debts, shall be
        distributed to our shareholders on a pro-rata basis.
  **Changes
        of rights attached to our shares**
  Changes
        to the rights attached to our Ordinary Shares require the approval of
        shareholders present, in person, by proxy, or by written ballot, or deemed
        under
        the Companies Law to be present, holding greater than fifty percent (50%)
        of the
        total voting power attached to the Ordinary Shares whose holders were present,
        in person, by proxy, or by written ballot, or deemed under the Companies
        Law to
        be present, at such general meeting, and voted thereon. If, at any time,
        the
        share capital of the Company is divided into different classes of shares,
        the
        right attached to any class (unless otherwise provided by the terms of issue
        of
        the shares of that class) may be varied only upon consent of a separate general
        meeting of the holders of the shares of that class and the provisions of
        our
        Articles of Association relating to general meetings shall apply to every
        such
        separate general meeting. The enlargement of an authorized class of shares,
        or
        the issuance of additional shares thereof out of the authorized and unissued
        share capital, shall not be deemed to vary, modify or abrogate the rights
        attached to previously issued shares of such class or of any other class
        of
        shares.
  **General
        Meetings**
  We
        are
        required to hold an annual general shareholders meeting once in every calendar
        year within a period of not more than fifteen (15) months after the last
        preceding annual general shareholders meeting. All general shareholders meetings
        other than the annual general shareholders meeting are deemed to be special
        shareholders meetings. Our Board of Directors may call for a general meeting
        whenever it sees fit, and, under the Companies Law, is required to call a
        general meeting upon a demand in writing by (i) a shareholder or shareholders
        holding at least 5% of the outstanding shares and 1% of the voting rights
        in the
        company or (ii) a shareholder or shareholders holding at least 5% of the
        voting
        rights in the company. Subject to applicable law and regulations, prior notice
        of at least 21 days of any general shareholders meeting, specifying the place,
        date and hour of the meeting, shall be given to the shareholders of the Company.
        No business shall be transacted at any general shareholders meeting unless
        a
        quorum is present when the meeting proceeds to business. For all purposes,
        the
        quorum shall not be less than two (2) shareholders present in person, or
        by
        proxy, or deemed by the Companies Law to be present at such meeting, holding,
        in
        the aggregate, at least, thirty-three and one-third percent (33 1/3%) of
        the
        voting rights in our issued share capital. If, within half an hour from the
        time
        appointed for the meeting, a quorum is not present (or within such longer
        time
        not exceeding one hour as the Chairman of the meeting may decide), the meeting,
        if convened upon the requisition of the shareholders, shall be dissolved;
        in any
        other case, it shall stand adjourned to the same day in the next week at
        the
        same place and time (unless such day shall fall on a public holiday either
        in
        Israel or the United States, in which case the meeting will be adjourned
        to the
        first day, not being a Friday, Saturday or Sunday, which follows such public
        holiday), or any other day, hour and/or place as the directors shall notify
        the
        shareholders. If a quorum is not present at the second meeting within half
        an
        hour from the time appointed for the meeting, any two shareholders present
        personally or by proxy or any other valid instrument, shall constitute a
        quorum,
        and shall be entitled to deliberate and to resolve in respect of the matters
        for
        which the meeting was convened.
  -64-
  **Ownership
        of Our Shares**
  Our
        Articles of Association and the laws of the State of Israel do not restrict
        in
        anyway the ownership or voting of our shares by non-residents of
        Israel.
  **Change
        of Control**
  Our
        Articles of Association do not contain specific provisions intended to delay,
        defer or prevent a change of control.
  The
        Companies Law provides that the acquisition of shares in a public company
        on the
        open market (i.e., from other shareholders of the company) must be made by
        means
        of a tender offer if, as a result of the acquisition, the purchaser would
        become
        a 25% shareholder of the public company. The rule does not apply if there
        already is another 25% shareholder of the public company. Similarly, the
        law
        provides that an acquisition of shares in a public company must be made by
        means
        of a tender offer if, as a result of the acquisition, the purchaser would
        become
        a 45% shareholder of the public company, unless there already is another
        45%
        shareholder of the public company.
  If,
        following any acquisition of shares, the purchaser would hold 90% or more
        of the
        shares of the public company that acquisition must be made by means of a
        tender
        offer for all of the target company’s shares. An acquirer who wishes to
        eliminate all minority shareholders of the public company must do so by means
        of
        a tender offer and acquire 95% of all shares not held by or for the benefit
        of
        the acquirer prior to the acquisition. However, in the event that the tender
        offer to acquire that 95% is not successful, the acquirer may not acquire
        tendered shares if by doing so the acquirer would own more than 90% of the
        shares of the target company.
  **C.** **Material
        Contracts.**
  We
        have
        no material contracts that have been entered into outside the ordinary course
        of
        business in the past two years.
  **D.** **Exchange
        Controls.**
  Until
        May
        1998, Israel imposed restrictions on transactions in foreign currency. These
        restrictions affected our operations in various ways, and also affected the
        right of non-residents of Israel to convert into foreign currency amounts
        they
        received in Israeli currency, such as the proceeds of a judgment enforced
        in
        Israel. Despite these restrictions, foreign investors who purchased shares
        with
        foreign currency were able to repatriate in foreign currency both dividends
        (after deduction of withholding tax) and the proceeds from the sale of the
        shares. In 1998, the Israeli currency control regulations were liberalized
        significantly, as a result of which Israeli residents generally may freely
        deal
        in foreign currency and non-residents of Israel generally may freely purchase
        and sell Israeli currency and assets. There are currently no Israeli currency
        control restrictions on remittances of dividends on the Ordinary Shares or
        the
        proceeds from the sale of the shares; however, legislation remains in effect
        pursuant to which currency controls can be imposed by administrative action
        at
        any time.
  -65-
  Neither
        our Memorandum of Association nor our Articles of Association nor the laws
        of
        the State of Israel restrict in any way the ownership or voting of Ordinary
        Shares by non-residents of Israel.
  **E.** **Taxation.**
  **United
        States Federal Income Tax Considerations**
  Subject
        to the limitations described herein, the following discussion summarizes
        the
        material United States federal income tax consequences to a U.S. Holder of
        our
        Ordinary Shares. A “U.S. Holder” means a holder of our Ordinary Shares who
        is:
  ·
            a
                citizen or resident of the United States;  ·
            a
                corporation (or other entity taxable as a corporation) created or
                organized in the United States or under the laws of the United States
                or
                any political subdivision thereof;  ·
            an
                estate, the income of which is subject to United States federal income
                tax
                regardless of its source; or  ·
            a
                trust, (i) if, in general a court within the United States is able
                to
                exercise primary supervision over its administration and one or more
                U.S.
                persons have the authority to control all of its substantial decisions,
                or
                (ii) that has in effect a valid election under applicable U.S. Treasury
                regulations to be treated as a U.S.
                person.  This
        discussion considers only U.S. Holders that will own their Ordinary Shares
        as
        capital assets (generally, for investment) and does not purport to be a
        comprehensive description of all of the tax considerations that may be relevant
        to each person’s decision to purchase Ordinary Shares.
  This
        discussion is based on current provisions of the Internal Revenue Code of
        1986,
        as amended (the “Code”), current and proposed Treasury regulations promulgated
        thereunder, and administrative and judicial decisions as of the date hereof,
        all
        of which are subject to change, possibly on a retroactive basis. This discussion
        does not address all aspects of United States federal income taxation that
        may
        be relevant to any particular U.S. holder in light of such Holder’s individual
        circumstances. In particular, this discussion does not address the potential
        application of the alternative minimum tax or United States federal income
        tax
        consequences to shareholders that are subject to special treatment, including
        Holders that:
  ·
            are
                broker-dealers or insurance companies;  ·
            are
                regulated investment companies or real estate investment
                trusts;  ·
            have
                elected mark-to-market accounting;  ·
            are
                tax-exempt organizations or retirement
                plans;  ·
            are
                financial institutions or “financial services
                entities”;  ·
            hold
                Ordinary Shares as part of a straddle, “hedge” or “conversion transaction”
                with other investments;  ·
            acquired
                their shares upon the exercise of employee stock options or otherwise
                as
                compensation;  -66-
  ·
            hold
                their shares through partnerships or other pass-through
                entities;  ·
            are
                grantor trusts;  ·
            are
                certain former citizens or long-term residents of the
                U.S.;  ·
            own
                directly, indirectly or by attribution at least 10% of our voting
                power;
                or  ·
            have
                a functional currency that is not the U.S.
                dollar.  In
        addition, this discussion does not address any aspect of state, local or
        non-United States tax laws or the possible application of United States federal
        gift or estate taxes.
  **Each
        holder of Ordinary Shares is advised to consult such person’s own tax advisor
        with respect to the specific tax consequences to such person of purchasing,
        holding or disposing of our Ordinary Shares, including the applicability
        and
        effect of federal, state, local and foreign income tax and other tax laws
        in
        such person’s particular circumstances.**
  **Taxation
        of Ordinary Shares**
  *Taxation
        of Dividends Paid On Ordinary Shares.* A U.S.
        Holder will be required to include in gross income as ordinary dividend income
        the amount of any distribution paid on Ordinary Shares, including any Israeli
        taxes withheld from the amount paid, on the date the distribution is received
        to
        the extent the distribution is paid out of our current or accumulated earnings
        and profits as determined for United States federal income tax purposes.
        Distributions in excess of such earnings and profits will be applied against
        and
        will reduce the U.S. Holder’s basis in our Ordinary Shares and, to the extent in
        excess of such basis, will be treated as gain from the sale or exchange of
        our
        Ordinary Shares. The dividend portion of such distributions generally will
        not
        qualify for the dividends received deduction available to
        corporations.
  Distributions
        of current or accumulated earnings and profits paid in foreign currency to
        a
        U.S. Holder (including any Israeli taxes withheld therefrom) generally will
        be
        includible in the income of a U.S. Holder in a U.S. dollar amount calculated
        by
        reference to the exchange rate on the day the distribution is received. A
        U.S.
        Holder that receives a foreign currency distribution and converts the foreign
        currency into U.S. dollars subsequent to receipt will have foreign exchange
        gain
        or loss based on any appreciation or depreciation in the value of the foreign
        currency against the U.S. dollar, which will generally be U.S. source ordinary
        income or loss.
  The
        maximum U.S. federal income tax rate on certain qualified dividends paid
        to
        non-corporate U.S. Holders through 2010 is currently 15% and subject to U.S.
        ordinary tax rates thereafter. This reduced rate generally will not apply,
        however, to dividends paid by us if we are treated as a passive foreign
        investment company in the year the dividends are paid or in the prior year,
        or
        if certain holding period or other requirements are not met. See the discussion
        below under the heading “Passive Foreign Investment Company Status.” U.S.
        Holders are urged to consult their own tax advisors regarding the U.S. federal
        income tax rate that will be applicable to their receipt of any dividends
        paid
        with respect to Ordinary Shares .
  U.S.
        Holders will have the option of claiming the amount of any Israeli income
        taxes
        withheld on a dividend distribution either as a deduction from gross income
        or
        as a dollar-for-dollar credit against their United States federal income
        tax
        liability. Individuals who do not claim itemized deductions, but instead
        utilize
        the standard deduction, may not claim a deduction for the amount of the Israeli
        income taxes withheld, but such amount may be claimed as a credit against
        the
        individual’s United States federal income tax liability. The amount of foreign
        income taxes that may be claimed as a credit in any year is subject to complex
        limitations and restrictions, which must be determined on an individual basis
        by
        each shareholder. These limitations include, among others, rules that limit
        foreign tax credits allowable with respect to specific classes of income
        to the
        United States federal income taxes otherwise payable with respect to each
        such
        class of income. The total amount of allowable foreign tax credits in any
        year
        cannot exceed the U.S. Holder’s regular U.S. tax liability for the year
        attributable to foreign source taxable income. A U.S. Holder will be denied
        a
        foreign tax credit with respect to Israeli income tax withheld from a dividend
        received on the Ordinary Shares if such U.S. Holder has not held the Ordinary
        Shares for at least 16 days of the 31-day period beginning on the date which
        is
        15 days before the ex-dividend date with respect to such dividend, or to
        the
        extent such U.S. Holder is under an obligation to make related payments with
        respect to substantially similar or related property. Any days during which
        a
        U.S. Holder has substantially diminished its risk of loss on the Ordinary
        Shares
        are not counted toward meeting the required 16 day holding period. Distributions
        of current or accumulated earnings and profits will be foreign source income
        for
        United States foreign tax credit purposes ;
        however, special rules will apply if we are a “United States-owned foreign
        corporation.” In that case, distributions of current or accumulated earnings and
        profits will be treated as U.S.-source and foreign-source income in proportion
        to our earnings and profits in the year of the distribution allocable to
        U.S.
        and foreign sources. We will be treated as a “United States-owned foreign
        corporation” as long as stock representing 50% or more of the voting power or
        value of our shares is owned, directly or indirectly, by United States persons.
        Israeli withholding taxes allocable to the portion of our distributions treated
        as from U.S. sources under these rules may not be creditable against a U.S.
        Holder’s U.S. federal income tax liability on such portion .
  -67-
  *Taxation
        of the Disposition of Ordinary Shares.* Upon the
        sale, exchange or other disposition of our Ordinary Shares, a U.S. Holder
        will
        recognize capital gain or loss in an amount equal to the difference between
        such
        U.S. Holder’s basis in such Ordinary Shares, which is usually the cost of such
        shares, and the amount realized on the disposition. A U.S. Holder that uses
        the
        cash method of accounting calculates the U.S. dollar value of the proceeds
        received on the sale as of the date that the sale settles, while a U.S. Holder
        that uses the accrual method of accounting is required to calculate the value
        of
        the proceeds of the sale as of the “trade date,” unless such U.S. Holder has
        elected to use the settlement date to determine its proceeds of sale. Capital
        gain from the sale, exchange or other disposition of Ordinary Shares held
        more
        than one year is long-term capital gain, and is eligible for a reduced rate
        of
        taxation for individuals. Individual
        U.S. Holders currently are subject to a maximum rate of 15% on long-term
        capital
        gains for taxable years beginning on or before December 31, 2010 and generally
        subject to a maximum capital gain rate of 20% thereafter. Gains
        recognized by a U.S. Holder on a sale, exchange or other disposition of Ordinary
        Shares will be treated as United States source income for United States foreign
        tax credit purposes. A loss recognized by a U.S. Holder on the sale, exchange
        or
        other disposition of Ordinary Shares is allocated to U.S. source income. Under
        the
        income tax treaty between the United States and Israel (the “Tax Treaty”), gain
        derived from the sale, exchange or other disposition of ordinary shares by
        a
        holder who qualifies as a resident of the United States and is entitled to
        claim
        the benefits under the Tax Treaty, and who sells the ordinary shares within
        Israel, may be treated as foreign-source income for U.S. foreign tax credit
        purposes. The
        deductibility of a capital loss recognized on the sale, exchange or other
        disposition of Ordinary Shares is subject to limitations. A U.S. Holder that
        receives foreign currency upon disposition of Ordinary Shares and converts
        the
        foreign currency into U.S. dollars subsequent to the settlement date or trade
        date (whichever date the taxpayer was required to use to calculate the value
        of
        the proceeds of sale) will have foreign exchange gain or loss based on any
        appreciation or depreciation in the value of the foreign currency against
        the
        U.S. dollar, which will generally be U.S. source ordinary income or
        loss.
  *Anti-Deferral
        Regimes.* Notwithstanding the above rules regarding distributions and dispositions,
        special rules may apply to some U.S. Holders (or to the direct or indirect
        beneficial owners of some non-U.S. Holders) if one or more anti-deferral
        regimes
        discussed below are applicable. The rules regarding each of these regimes,
        as
        well as their interaction with each other, are complex, and holders should
        consult their tax advisers with respect to any impact these regimes may have
        on
        the tax consequences of their ownership of our shares.
  *Controlled
        Foreign Corporation Status.* If more
        than 50% of the voting power of all classes of our stock or the total value
        of
        the stock of our company is owned, directly or indirectly, by U.S. Holders,
        each
        of whom own after applying rules of attribution 10% or more of the total
        combined voting power of all classes of our stock, we would be treated as
        a
“controlled foreign corporation” or “CFC” under Subpart F of the Code. This
        classification would bring into effect many complex rules including the required
        inclusion in income by such 10% U.S. Holders of their pro rata share of our
        “Subpart F income” (as defined by the Code) and our earnings invested in “U.S.
        property” (as defined by Section 956 of the Code). In addition, under Section
        1248 of the Code if we are considered a CFC at any time during the five year
        period ending with the sale or exchange of our Ordinary Shares, gain from
        the
        sale or exchange of our Ordinary Shares by such 10% U.S. Holders is treated
        as
        ordinary dividend income to the extent of our earnings and profits attributable
        to the stock sold or exchanged. If we were a CFC, we would not be a passive
        foreign investment company, as discussed below, with regard to any such 10%
        U.S.
        Holder. Because of the complexity of Subpart F, and because we may never
        be a
        CFC, a more detailed review of these rules is beyond of the scope of this
        discussion.
  -68-
  *Passive
        Foreign Investment Company Status.* We would
        be a passive foreign investment company if (i) 75% or more of our gross income
        in a taxable year, including our pro rata share of the gross income of any
        company treated  as
        a
        corporation for U.S. Federal income tax purposes, U.S. or foreign, in which
        we
        are considered to own directly or indirectly 25% or more of the shares by
        value,
        is passive income, or (ii) the value of our assets averaged quarterly over
        the
        taxable year, including our pro rata share of the assets of any company treated
        as a corporation for U.S. Federal income tax purposes in which we are considered
        to own directly or indirectly 25% or more of the shares by value, that produce,
        or are held for the production of, passive income is at least 50%. As discussed
        below, we believe that we were not a PFIC for 2005.
  If
        we
        were a PFIC, each U.S. Holder would (unless it made one of the elections
        discussed below on a timely basis) be taxable on gain recognized from the
        disposition of Ordinary Shares (including gain deemed recognized if the Ordinary
        Shares are pledged as security for a loan) and upon receipt of certain
        distributions with respect to Ordinary Shares as if such income had been
        recognized ratably over the U.S. Holder’s holding period for the Ordinary
        Shares. The U.S. Holder’s income for the current taxable year would include (as
        ordinary income) amounts allocated to the current year and to any period
        prior
        to the first day of the first taxable year for which we were a PFIC. Tax
        would
        also be computed at the highest ordinary income tax rate in effect for each
        other period to which income is allocated, and an interest charge on the
        tax as
        so computed would also apply. Additionally, if we were a PFIC, U.S. Holders
        who
        acquire our Ordinary Shares from decedents (other than certain nonresident
        aliens) dying before 2010 would be denied the normally-available step-up
        in
        basis for such shares to fair market value at the date of death and, instead,
        would have a tax basis in such shares equal to the decedent’s basis, if
        lower.
  As
        an
        alternative to the tax treatment described above, a U.S. Holder could elect
        to
        treat us as a “qualified electing fund” (a “QEF”), in which case the U.S. Holder
        would be taxed currently on its pro rata share of our ordinary earnings and
        net
        capital gain (subject to a separate election to defer payment of taxes, which
        deferral is subject to an interest charge). Special rules apply if a U.S.
        Holder
        makes a QEF election after the first year in its holding period in which
        we are
        a PFIC. We have agreed to supply U.S. Holders with the information needed
        to
        report income and gain under a QEF election if we are a PFIC. As another
        alternative to the tax treatment described above, a U.S. Holder could elect
        to
        mark our shares to market annually, recognizing as ordinary income or loss
        each
        year an amount equal to the difference as of the close of the taxable year
        between the fair market value of our shares and the shareholder’s adjusted basis
        in the shares. Losses would be allowed only to the extent of net mark-to-market
        gain previously included in income by the U.S. Holder.
  Based
        on
        our income, assets, market capitalization and discussions with our advisors,
        we
        believe that we were not a passive foreign investment company for our tax
        year
        ended December 31, 2005. However, there can be no assurance that the United
        States Internal Revenue Service will not challenge this conclusion. The tests
        for determining PFIC status are applied annually and it is difficult to make
        accurate predictions of future income and assets, and our market capitalization
        which are relevant to this determination. Accordingly, there can be no assurance
        that we will not become a PFIC in 2006 or in subsequent years. U.S. Holders
        who
        hold Ordinary Shares during a period when we are a PFIC (whether we were
        determined to be a PFIC in 2005, 2004 or any earlier year) will be subject
        to
        the foregoing rules, even if we cease to be a PFIC, subject to certain
        exceptions for U.S. Holders who made a QEF election or the mark-to-market
        election.
  -69-
  Although
        a U.S. Holder normally is not permitted to make a retroactive QEF election
        for a
        foreign corporation, a retroactive election may be made for a taxable year
        of
        the U.S. Holder (the “retroactive election year”) if the U.S. Holder (i)
        reasonably believed that, as of the date the QEF election was due, the foreign
        corporation was not a PFIC for its taxable year that ended during the
        retroactive election year and (ii) filed and complied with a protective
        statement with respect to the foreign corporation, applicable to the retroactive
        election year, in which the U.S. Holder described the basis for its reasonable
        belief and extended the period of limitation on the assessment of taxes
        determined under Sections 1291 through 1298 of the Code with respect to the
        foreign corporation (PFIC related taxes) for all taxable years of the
        shareholder to which the protective statement applies. U.S. Holders should
        consult their tax advisors regarding the advisability of filing a protective
        statement.
  **U.S.
        Holders are urged to consult their tax advisors about the PFIC rules, including
        eligibility for and the manner and advisability of making, the QEF election
        (or
        a protective QEF election) or the mark-to market election.**
  *Tax
        Consequences for Non-U.S. Holders of Ordinary Shares*
  Except
        as
        described in “Information Reporting and Back-up Withholding” below, a non-U.S.
        Holder of Ordinary Shares will not be subject to U.S. federal income or
        withholding tax on the payment of dividends on, and the proceeds from the
        disposition of, Ordinary Shares, unless:
  ·
            such
                item is effectively connected with the conduct by the non-U.S. Holder
                of a
                trade or business in the United States and, in the case of a resident
                of a
                country which has a treaty with the United States, such item is
                attributable to a permanent establishment or, in the case of an
                individual, a fixed place of business, in the United States;
                or  ·
            the
                non-U.S. Holder is an individual who holds the Ordinary Shares as
                a
                capital asset and is present in the United States for 183 days or
                more in
                the taxable year of the disposition and certain other requirements
                are
                met.  *Information
        Reporting and Back-up Withholding*
  U.S.
        Holders (other than exempt recipients such as corporations) generally are
        subject to information reporting requirements with respect to dividends paid
        in
        the United States on, and proceeds from the disposition of, Ordinary Shares.
        Under the Code, a U.S. Holder may be subject, under certain circumstances,
        to
        backup withholding at a rate of up to 28% with respect to such dividends
        or
        disposition proceeds paid on our unless the holder provides proof of an
        applicable exemption or correct taxpayer identification number and otherwise
        complies with applicable requirements of the backup withholding
        rules.
  A
        holder
        of Ordinary Shares who does not provide a correct taxpayer identification
        number
        may be subject to penalties imposed by the IRS. Amounts withheld under the
        backup withholding rules are not an additional tax and may be refunded or
        credited against the holder’s federal income tax liability, provided the
        required information is furnished to the IRS.
  Non-U.S.
        Holders generally are not subject to information reporting or back-up
        withholding with respect to dividends paid on, or the proceeds from the
        disposition of, Ordinary Shares, provided that such non-U.S. Holder provides
        a
        taxpayer identification number, certifies to its foreign status, or otherwise
        establishes an exemption.
  **Israeli
        Income Tax Considerations**
  The
        following is a summary of the current tax structure applicable to companies
        in
        Israel, with special reference to its effect on us. The following also contains
        a discussion of certain Israeli Government programs benefiting us. To the
        extent
        that the discussion is based on new tax legislation that has not been subject
        to
        judicial or administrative interpretation, there can be no assurance that
        the
        views expressed in the discussion will be accepted by the tax authorities
        in
        question. The discussion is not intended, and should not be construed, as
        legal
        or professional tax advice and is not exhaustive of all possible tax
        considerations.
  -70-


**General
      Corporate Tax Structure**




Israeli
      companies are currently subject to corporate tax at the rate of 31%. Until
      December 31, 2003, the regular tax rate applicable to income of companies was
      36%. In June 2004 and in July 2005, the "Knesset" (Israeli parliament) passed
      amendments to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004
      and (No. 147), 2005 respectively, which determined, among other things, that
      the
      corporate tax rate is to be gradually reduced to the following tax rates: 2004
      -
      35%, 2005 - 34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and 2010 and
      thereafter - 25%.




**Law
      for the Encouragement of Industry (Taxes), 1969**




We
      believe that we currently qualify as an industrial company within the definition
      of the Law for the Encouragement of Industry (Taxes), 1969, generally referred
      to as the Industry Encouragement Law, which provides several tax benefits for
      industrial companies. An industrial company is defined as a company resident
      in
      Israel, at least 90% of the income of which in a given **tax** year
      exclusive of income from specified government loans, capital gains, interest
      and
      dividends, is derived from an industrial enterprise owned by it. An industrial
      enterprise is defined as an enterprise whose major activity in a given tax
      year
      is industrial production activity.




Under
      the
      Industry Encouragement Law, industrial companies are entitled to a number of
      corporate tax benefits, including:




·
              deduction
                  of purchase of know-how and patentsand/or
                  right to use a patentover an eight-year period;




·
            the
                right to elect, under specified conditions, to file a consolidated
                tax
                return with additional related Israeli industrial companies and an
                industrial holding company;




·
            accelerated
                depreciation rates on equipment and buildings;
                and




·
            Expenses
                related to a public offering on the Tel Aviv stock exchange and as
                of
                1.1.2003 on recognized stock markets outside of Israel, are deductible
                in
                equal amounts over three years.




Under
      some tax laws and regulations, an industrial enterprise may be eligible for
      special depreciation rates for machinery, equipment and buildings. These rates
      differ based on various factors, including the date the operations begin and
      the
      number of work shifts. An industrial company owning an approved enterprise
      may
      choose between these special depreciation rates and the depreciation rates
      available to the approved enterprise.




Eligibility
      for benefits under the Industry Encouragement Law is not subject to receipt
      of
      prior approval from any governmental authority.




Even
      though we believe that we currently qualify as an industrial company within
      the
      definition of the Industry Encouragement Law, we cannot assure you that the
      Israeli tax authorities will agree that we qualify, or, if we qualify, that
      we
      will continue to qualify as an industrial company or that the benefits described
      above will be available to us in the future.




**Law
      for the Encouragement of Capital Investments, 1959**




**Tax
      benefits prior the 2005 amendment**




The
      Law
      for the Encouragement of Capital Investments, 1959, (the “Investments Law”),
      provides that a proposed capital investment in eligible facilities may, upon
      application to the Investment Center of the Ministry of Industry and Commerce
      of
      the State of Israel, be designated as an approved enterprise. The Investment
      Center bases its decision as to whether or not to approve an application, among
      other things, on the criteria set forth in the Investments Law and regulations,
      the then prevailing policy of the Investment Center, and the specific objectives
      and financial criteria of the applicant. Each certificate of approval for an
      approved enterprise relates to a specific investment program delineated both
      by
      its financial scope, including its capital sources, and by its physical
      characteristics, e.g *.* ,
      the
      equipment to be purchased and utilized pursuant to the program.




-71-




The
      Investments Law provides that an approved enterprise is eligible for tax
      benefits on taxable income derived from its approved enterprise programs. The
      tax benefits under the Investments Law also apply to income generated by a
      company from the grant of a usage right with respect to know-how developed
      by
      the approved enterprise, income generated from royalties, and income derived
      from a service which is auxiliary to such usage right or royalties, provided
      that such income is generated within the approved enterprise’s ordinary course
      of business. If a company has more than one approval or only a portion of its
      capital investments are approved, its effective tax rate is the result of a
      weighted average of the applicable rates. The tax benefits under the Investments
      Law are not, generally, available with respect to income derived from products
      manufactured outside of Israel. In addition, the tax benefits available to
      an
      approved enterprise are contingent upon the fulfillment of conditions stipulated
      in the Investments Law and regulations and the criteria set forth in the
      specific certificate of approval, as described above. In the event that a
      company does not meet these conditions, we would be required to refund the
      amount of tax benefits, plus a consumer price index linkage adjustment and
      interest.




The
      Investments Law also provides that an approved enterprise is entitled to
      accelerated depreciation on its property and equipment that are included in
      an
      approved enterprise program in the first five years of using the
      equipment.




Taxable
      income of a company derived from an approved enterprise is subject to corporate
      tax at the maximum rate of 25%, rather than the regular corporate tax rate,
      for
      the benefit period.




A
      company
      may elect to receive an alternative route of benefits. Under the alternative
      route of benefits, a company’s undistributed income derived from the approved
      enterprise will be exempt from corporate tax for a period of between two and
      ten
      years from the first year the company derives taxable income under the program,
      depending on the geographic location of the approved enterprise within Israel,
      and such company will be eligible for a reduced tax rate for the remainder
      of
      the benefits period **.** This
      period is ordinarily seven years commencing with the year in which the approved
      enterprise first generates taxable income, and is limited to 12 years from
      commencement of production or 14 years from the date of approval, whichever
      is
      earlier.




A
      company
      that has elected the alternative route of benefits, that subsequently pays
      a
      dividend out of income derived from the approved enterprise during the tax
      exemption period will be subject to corporate tax in respect of the amount
      distributed, including any taxes thereon, at the rate which would have been
      applicable had it not elected the alternative route of benefits, generally
      10%-25%, depending on the percentage of the company’s ordinary shares held by
      foreign shareholders. The dividend recipient is subject to withholding tax
      at
      the rate of 15% applicable to dividends from approved enterprises, if the
      dividend is distributed during the tax exemption period or within twelve years
      thereafter. The company must withhold this tax at source.




Subject
      to applicable provisions concerning income under the alternative route of
      benefits, dividends paid by a company are considered to be attributable to
      income received from the entire company and the company’s effective tax rate is
      the result of a weighted average of the various applicable tax rates, excluding
      any tax-exempt income. Under the Investments Law, a company that has elected
      the
      alternative route of benefits is not obliged to distribute retained profits,
      and
      may generally decide from which year’s profits to declare dividends. We
      currently intend to reinvest any income derived from our approved enterprise
      program and not to distribute such income as a dividend.




**Foreign
      Investors’ Company (“FIC”)**




A
      company
      that has an approved enterprise program is eligible for further tax benefits
      if
      it qualifies as a foreign investors’ company. A foreign investors company is a
      company which more than 25% of its share capital and combined share and loan
      capital is owned by non-Israeli residents. A company that qualifies as a foreign
      investors’ company and has an approved enterprise program is eligible for tax
      benefits for a ten-year benefit period. As specified above, depending on the
      geographic location of the approved enterprise within Israel, income derived
      from the approved enterprise program may be entitled to the
      following:




-72-




·
            Exemption
                from tax on its undistributed income up to ten
                years.




·
            An
                additional period of reduced corporate tax liability at rates ranging
                between 10% and 25%, depending on the level of foreign (i.e., non-Israeli)
                ownership of our shares.Those tax rates and the related levels of foreign investment are
                as set
                forth in the following table:




**Rate
                of**
              **Reduced
                Tax**
            
            **Reduced
                Tax Period**
            
            **Tax
                Exemption Period**
            
            **Percent
                of**
              **Foreign
                Ownership**25
            
            5
                years
            
            10
                years
            
            0-25%25
            
            8
                years
            
            10
                years
            
            25-48.99%20
            
            8
                years
            
            10
                years
            
            49-73.99%15
            
            8
                years
            
            10
                years
            
            74-89.99%10
            
            8
                years
            
            10
                years
            
            90-100%




The
      twelve years limitation period for reduced tax rate of 15% on dividend from
      the
      approved enterprise does not apply to foreign investor’s Company.




**Tax
      benefits under the 2005 Amendment**




A
      recent
      amendment to the Law, which has been officially published effective as of April
      1, 2005 (the "Amendment") has changed certain provisions of the Law. The
      Amendment includes revisions to the criteria for investments qualified to
      receive tax benefits as an Approved Enterprise. The Amendment also, applies
      to
      new investment programs and investment programs commencing after 2004, and
      does
      not apply to investment programs approved prior to December 31, 2004. However,
      a
      company that was granted benefits according to section 51 of the Investment
      Law
      would not be allowed to commence production for a period of 3 years from the
      date of approval.




Our
      company will continue to enjoy its current tax benefits in accordance with
      the
      provisions of the Investment Law prior to its revision, but if our company
      is
      granted any new benefits in the future they will be subject to the provisions
      of
      the amended Investment Law. Therefore, the following discussion is a summary
      of
      the Investment Law prior to its amendment as well as the relevant changes
      contained in the new legislation.




The
      Amendment simplifies the approval process: according the Amendment, only
      Approved Enterprises receiving cash grants require the approval of the
      Investment Center. The Investment Center will be entitled, to approve such
      programs only until December 30, 2007.




The
      Amendment does not apply to benefits included in any certificate of approval
      that was granted before the Amendment came into effect, which will remain
      subject to the provisions of the Investment Law as they were on the date of
      such
      approval.




Tax
      benefits are available under the Amendment to production facilities (or other
      eligible facilities), which are generally required, among others, to derive
      more
      than 25% of their business income from export (referred to as a “Benefited
      Enterprise”). In order to receive the tax benefits, the Amendment states that
      the company must make an investment in the Benefited Enterprise exceeding a
      certain percentage or 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 the 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 or a minimum amount of
      the
      company’s production assets before the expansion.




-73-




The
      duration of tax benefits is subject to a limitation of the earlier of 7 to
      10
      years from the Commencement Year, or 12 years from the first day of the Year
      of
      Election. Please note that the year’s limitations also apply to the exemption
      period. The tax benefits granted to a Benefited Enterprise are determined,
      as
      applicable to its geographic location within Israel, according to one of the
      following new tax routes, which may be applicable to us:




·
            Similar
                to the currently available alternative route, exemption from corporate
                tax
                on undistributed income for a period of two to ten years, depending
                on the
                geographic location of the Benefited Enterprise within Israel, and
                a
                reduced corporate tax rate of 10% to 25% for the remainder of the
                benefits
                period, depending on the level of foreign investment in each year.
                Benefits may be granted for a term of seven to ten years, depending
                on the
                level of foreign investment in the company. If the company pays a
                dividend
                out of income derived from the Benefited Enterprise during the tax
                exemption period, such income will be subject to corporate tax at
                the
                applicable rate (10%-25%) in respect of the gross amount of the dividend
                that we may distribute. The company is required to withhold tax at
                the
                source at a rate of 15% from any dividends distributed from income
                derived
                from the Benefited Enterprise; and




·
            A
                special tax route, which enables companies owning facilities in certain
                geographical locations in Israel to pay corporate tax at the rate
                of 11.5%
                on income of the Benefited Enterprise. The benefits period is ten
                years.
                Upon payment of dividends, the company is required to withhold tax
                at
                source at a rate of 15% for Israeli residents and at a rate of 4%
                for
                foreign residents.




Generally,
      a company that is Abundant in Foreign Investment (as defined in the Investments
      Law) is entitled to an extension of the benefits period by an additional five
      years, depending on the rate of its income that is derived in foreign
      currency.




The
      Amendment changes the definition of “foreign investment” in the Investments Law
      so that the definition now requires a minimal investment of NIS 5.0 million
      by
      foreign investors. Furthermore, such definition now also includes the purchase
      of shares of a company from another shareholder; provided that the company’s
      outstanding and paid-up share capital exceeds NIS 5.0 million. Such changes
      to
      the aforementioned definition will take effect retroactively from
      2003.




The
      Amendment will apply to approved enterprise programs in which the year of
      election under the Investments Law is 2004 or later, unless such programs
      received approval from the Investment Center on or prior to December 31, 2004,
      in which case the Amendment provides that terms and benefits included in any
      certificate of approval already granted will remain subject to the provisions
      of
      the law as they were on the date of such approval.




As
      a
      result of the amendment, tax-exempt income generated under the provisions of
      the
      new law, will subject the Company to taxes upon distribution or liquidation
      and
      the Company may be required to record deferred tax liability with respect to
      such tax-exempt income.




We
      have
      three approved enterprises. We elected to participate in the alternative
      benefits program. Since March 1998, following our initial public offering in
      the
      United States, we have been a “foreign investors’ company,” as defined by the
      Investment Law and we are therefore entitled to a ten year period of benefits
      (instead of a seven-year period), for enterprises approved after March 1998.
      The
      period of benefits of our approved enterprises will expire during the period
      2004 through 2014, and is conditioned upon maintaining our approved enterprise
      status. There can be no assurance that the current benefit program will continue
      to be available or that we will continue to qualify for such
      benefits.




-74-




A
      company
      that has elected to participate in the alternative benefits program and that
      subsequently pays a dividend out of the income derived from the approved
      enterprise during the tax exemption period will be subject to corporate tax
      in
      respect of the amount distributed (including withholding tax thereon) at the
      rate that would have been applicable had the company not elected the alternative
      benefits program (generally 10% - 25%). The dividend recipient is taxed at
      the
      reduced withholding tax rate of 15%, applicable to dividends from the approved
      enterprises if the dividend is distributed within 12 years after the benefits
      period or other rate provided under a treaty. The withholding tax rate will
      be
      25% after such period. In the case of a company with a foreign investment level
      (as defined by the Investment Law) of 25% or more, the 12-year limitation on
      reduced withholding tax on dividends does not apply. Tax should be withheld
      by
      the company at source, regardless of whether the dividend is converted into
      foreign currency.




Our
      approved enterprise program and the tax benefits thereunder may not continue
      in
      the future at their current levels or at any level. The termination or reduction
      of these tax benefits would likely increase our taxes. The amount, if any,
      by
      which our taxes would increase will depend upon the rate of the tax increase,
      the amount of any tax benefit reduction, and the amount of any taxable income
      that we may earn in the future.




**Taxation
      under Inflationary Conditions**




The
      Income Tax (Inflationary Adjustments) Law, 1985 (the “Inflationary Adjustments
      Law”), was designed to neutralize the erosion of capital investments in business
      and to prevent tax benefits resulting from deduction of inflationary expenses.
      This law applies a supplementary set of inflationary adjustments to the normal
      taxable profits computed under regular historical cost principles.




The
      Inflationary Adjustments Law introduced a special tax adjustment for the
      preservation of equity based on changes in the Israeli CPI, whereby certain
      corporate assets are classified broadly into fixed (inflation-resistant) assets
      and non-fixed assets. Where a corporation’s equity exceeds the depreciated cost
      of fixed assets, a tax deduction that takes into account the effect of the
      annual rate of inflation on such excess is allowed (up to a ceiling of 70%
      of
      taxable income for companies in any single year, with the unused portion carried
      forward on a linked basis, without limit). If the depreciated cost of fixed
      assets exceeds shareholders’ equity, then such excess, multiplied by the annual
      inflation rate, is added to taxable income.




Under
      the
      Inflationary Adjustments Law, results for tax purposes are measured in real
      terms, in accordance with changes in the Israeli CPI. We are taxed under this
      law. The discrepancy between the change in (1) the Israeli CPI and (2) the
      exchange rate of Israeli currency in relation to the dollar, may in future
      periods cause significant differences between taxable income and the income
      measured in dollars as reflected by our financial statements (which are measured
      in dollars). In addition, subject to certain limitations, depreciation of fixed
      assets and losses carried forward are adjusted for inflation on the basis of
      changes in the Israeli CPI.




**Withholding
      and Capital Gains Taxes Applicable to Non-Israeli
      Shareholders**




The
      State
      of Israel imposes income tax on nonresidents of Israel on income accrued or
      derived from sources in Israel or received in Israel. These sources of income
      include passive income such as dividends, royalties and interest, as well as
      non-passive income from services rendered in Israel. We are required to withhold
      income tax at the rate of 25%, or 15% for dividends of income generated by
      an
      approved enterprise, on all distributions of dividends other than bonus shares
      (stock dividends), unless a different rate is provided in a treaty between
      Israel and the shareholder’s country of residence. Under the income tax treaty
      between the United States and Israel, the maximum tax on dividends paid to
      a
      holder of Ordinary Shares who is a U.S. resident (as defined in the treaty)
      is
      25%.




-75-




**Capital
      Gains Taxes on Sales of our Ordinary Shares**




Israeli
      law generally imposes a capital gains tax on the sale of any capital assets
      by
      residents of Israel, as defined for Israeli tax purposes, and on the sale of
      assets located in Israel, including shares in Israeli companies, by both
      residents and non-residents of Israel, unless a specific exemption is available
      or unless a tax treaty between Israel and the shareholder’s country of residence
      provides otherwise. The law distinguishes between real gain and inflationary
      surplus. The inflationary surplus is a portion of the total capital gain which
      is equivalent to the increase of the relevant asset’s purchase price which is
      attributable to the increase in the Israeli consumer price index or, in certain
      circumstances, a foreign currency exchange rate, between the date of purchase
      and the date of sale. The real gain is the excess of the total capital gain
      over
      the inflationary surplus.




Generally, until
      the
      2006 tax year, capital gains tax was imposed on Israeli resident individuals at
      a rate
      of 15% on real gains derived on or after January 1, 2003, from the sale of
      shares in, among others, Israeli companies publicly traded on the NASDAQ
      Exchange or on a recognized stock exchange or regulated market in a country
      that
      has a treaty for the prevention of double taxation with Israel. This tax rate
      was contingent upon the shareholder not claiming a deduction for financing
      expenses in connection with such shares (in
      which
      case the gain was generally be taxed at a rate of 25%) ,
      and did
      not apply to: (i) the sale of shares to a relative (as defined in the
      Israeli Income Tax Ordinance); (ii) the sale of shares by dealers in securities;
      (iii) the sale of shares by shareholders that report in accordance with the
      Inflationary Adjustments Law (that
      were taxed at corporate tax rates for corporations and at marginal tax rates
      for
      individuals) ;
      or (iv)
      the sale of shares by shareholders who acquired their shares prior to an initial
      public offering (that may be subject to a different tax arrangement).




As
      of
      January 1, 2006, the tax rate applicable to capital gains derived from the
      sale
      of shares, whether listed on a stock market or not, is 20%, retroactive from
      January 1, 2003, for Israeli individuals, unless such shareholder claims a
      deduction for financing expenses in connection with such shares, in which case
      the gain will generally be taxed at a rate of 25%. Additionally, if such
      shareholder is considered a “material shareholder” at any time during the
      12-month period preceding such sale, i.e., such shareholder holds directly
      or
      indirectly, including with others, at least 10% of any means of control in
      the
      company, the tax rate shall be 25%. Israeli companies are subject to the
      Corporate Tax rate on capital gains derived from the sale of shares, unless
      such
      companies were not subject to the Adjustments Law (or certain regulations)
      at
      the time of publication of the aforementioned amendment to the Tax Ordinance
      that came into effect on January 1, 2006, in which case the applicable tax
      rate
      is 25%. However, the foregoing tax rates do not apply to: (i) dealers in
      securities; and (ii) shareholders who acquired their shares prior to an initial
      public offering (that may be subject to a different tax
      arrangement).




The
      tax
      basis of publicly shares acquired prior to January 1, 2003 will be determined
      in
      accordance with the average closing share price in the three trading days
      preceding January 1, 2003. However, a request may be made to the tax authorities
      to consider the actual adjusted cost of the shares as the tax basis if it is
      higher than such average price.




Non-Israeli
      residents are exempt from Israeli capital gains tax on any gains derived from
      the sale of shares of Israeli companies publicly traded on a recognized stock
      exchange or regulated market outside of Israel, provided however that such
      capital gains are not derived from a permanent establishment in Israel, such
      shareholders are not subject to the Adjustments Law, and such shareholders
      did
      not acquire their shares prior to an initial public offering. However,
      non-Israeli corporations will not be entitled to such exemption if an Israeli
      resident (i) has a controlling interest of 25% or more in such non-Israeli
      corporation, or (ii) is the beneficiary or is entitled to 25% or more of the
      revenues or profits of such non-Israeli corporation, whether directly or
      indirectly.




In
      some
      instances where our shareholders may be liable to Israeli tax on the sale of
      their ordinary shares, the payment of the consideration may be subject to the
      withholding of Israeli tax at the source.




-76-




Pursuant
      to the Convention Between the government of the United States of America and
      the
      government of Israel with Respect to Taxes on Income, as amended (the
“U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares
      by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies
      as a resident of the United States within the meaning of the U.S.-Israel Tax
      Treaty and (iii) is entitled to claim the benefits afforded to such person
      by
      the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli
      capital gains tax. Such exemption will not apply if (i) such Treaty U.S.
      Resident holds, directly or indirectly, shares representing 10% or more of
      our
      voting power during any part of the 12-month period preceding such sale,
      exchange or disposition, subject to certain conditions, or (ii) the capital
      gains from such sale, exchange or disposition can be allocated to a permanent
      establishment in Israel. In such case, the sale, exchange or disposition of
      ordinary shares would be subject to Israeli tax, to the extent applicable;
      however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would
      be
      permitted to claim a credit for such taxes against the U.S. federal income
      tax
      imposed with respect to such sale, exchange or disposition, subject to the
      limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel
      Tax
      Treaty does not relate to U.S. state or local taxes.




Israel
      presently has no estate or gift tax.




F.
            **Dividends
                and Paying Agents.**




***Not
      Applicable.***




G.         
              ****
            **Statement
                by Experts.**




***Not
      Applicable.***




H.
              **Documents
                  on Display.**




We
      are
      subject to the informational requirements of the Securities Exchange Act of
      1934, as amended, applicable to foreign private issuers and fulfill the
      obligation with respect to such requirements by filing reports with the
      Securities and Exchange Commission. You may read and copy any document we file
      with the Securities and Exchange Commission without charge at the Securities
      and
      Exchange Commission’s public reference room at 100 F Street, NE., Washington,
      D.C. 20549. Copies of such material may be obtained by mail from the Public
      Reference Branch of the Securities and Exchange Commission at such address,
      at
      prescribed rates. Additionally, copies of this material may be obtained from
      the
      Securities and Exchange Commission’s website at http://www.sec.gov. Please call
      the Securities and Exchange Commission at l-800-SEC-0330 for further information
      on the public reference room.




As
      a
      foreign private issuer, we are exempt from the rules under the Exchange Act
      prescribing the furnishing and content of proxy statements, and our officers,
      directors and principal shareholders are exempt from the reporting and
“short-swing” profit recovery provisions contained in Section 16 of the Exchange
      Act. In addition, we are not be required under the Exchange Act to file periodic
      reports and financial statements with the Securities and Exchange Commission
      as
      frequently or as promptly as U.S. companies whose securities are registered
      under the Exchange Act. A copy of each report submitted in accordance with
      applicable U.S. law is available for public review at our principal executive
      offices.




I.
            **Subsidiary
                Information.**




***Not
      Applicable.***






-77-




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




We
      do not
      utilize financial instruments for trading purposes and hold no derivative
      financial instruments that could expose us to significant market risk.




**ITEM
                12.**
              **DESCRIPTION
                  OF SECURITIES OTHER THAN EQUITY
                  SECURITIES.**




***Not
      Applicable.***




**PART
      II**




**ITEM
                13.**
              **DEFAULTS,
                  DIVIDEND ARREARAGES AND
                  DELINQUENCIES.**




***None.***




**ITEM
                14.**
              **MATERIAL
                  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                  PROCEEDS.**




***Not
      Applicable.***




**ITEM
                15.**
              **CONTROLS
                  AND PROCEDURES.**




(a)  Disclosure
      Controls and Procedures.




Our
      Chief
      Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible
      for establishing and maintaining our disclosure controls and procedures. These
      controls and procedures were designed to ensure that information relating to
      us
      and our subsidiaries required to be disclosed in the reports that we file under
      the Securities Exchange Act of 1934 is recorded, processed, summarized and
      reported within the time periods specified in the rules and forms of the SEC.
      We
      evaluated these disclosure controls and procedures under the supervision of
      our
      CEO and CFO as of December 31, 2005. Based on this evaluation, our CEO and
      CFO
      concluded that our disclosure controls and procedures are effective in timely
      alerting them to information required to be disclosed in our periodic reports
      to
      the SEC.




(b)
      Changes in Internal Control Over Financial Reporting




There
      were no changes in the Company’s internal control over financial reporting that
      occurred during the year ended December 31, 2005 that have materially affected,
      or are reasonably likely to materially affect, the Company’s internal control
      over financial reporting.




**ITEM
                16.**
              **[RESERVED]**




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




Our
      Board
      of Directors has determined that the Company has at least one audit committee
      financial expert, Yaffa Krindel, serving on our Audit Committee. Ms. Krindel
      is
      also an independent director.




-78-




**ITEM
      16B.**  **CODE
      OF ETHICS**




The
      Company has adopted a written code of ethics that applies to all Company
      employees, including the Company’s principal executive officer, principal
      financial officer and principal accounting officer. Our Code of Ethics was
      filed
      as an exhibit to our Form 20-F, for the year ended December 31,
      2003.




Our
      Code
      of Ethics is also posted on our website at http://www.fundtech.com or you may
      request a copy, at no cost, by writing to or telephoning us as
      follows:




12
      Ha’hilazon Street, 5th Floor


Ramat-Gan,
      Israel


Tel#.
      011-972-3-611-6500




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




In
      the
      annual meeting held on December 21, 2005, our shareholders re-appointed
      Brightman Almagor & Co., a member of Deloitte Touche Tohmatsu to serve as
      our independent auditors for the 2005 fiscal year.




Deloitte
      Touche Tohmatsu billed the following fees to us for professional services in
      each of the last two fiscal years:




Year
                Ended December 31,2005
            
            2004Audit
                fees
            
            $
            232,500
            
            $
            164,600Audit
                related fees
            
            
            14,600
            
            
            79,200Tax
                fees [a]
            
            
            10,500
            
            
            —Other
                fees
            
            
            —
            
            
            4,000Total
            
            $
            257,600
            
            $
            247,800





[a]  Amount
      represents tax fees for a subsidiary of Fundtech Ltd. Tax fees for Fundtech
      Ltd.
      are included in audit fees under a fixed fee arrangement.





**AUDIT
      FEES**




Audit
      fees are the aggregate fees associated with the annual audit and reviews of
      the
      Company’s quarterly interim financial results submitted on Form 6-K, and
      consultations on various accounting issues.




-79-




**AUDIT-RELATED
      FEES**




Audit-related
      services principally include due diligence examinations as well as assistance
      with the requirements of the Sarbanes-Oxley Act of 2002 and related SEC
      regulations that are not reasonably related to the performance of the audit
      or
      review of our financial statements and are not reported under Audit Fees.




**TAX
      FEES**




Tax
      fees
      are the aggregate fees associated with professional services rendered for tax
      compliance, tax advice on actual or contemplated transactions and tax planning
      such assistance with tax audits and tax advice.




**ALL
      OTHER FEES**




In
      fiscal
      2005, there were no Other Fees paid.




**AUDIT
      COMMITTEE’S PRE-APPROVAL POLICIES AND PROCEDURES**




Our
      audit
      committee is responsible for the oversight of our independent auditor’s work.
      The audit committee’s policy is to pre-approve all audit and non-audit services
      provided by our independent auditors. These services may include audit services,
      audit-related services, tax services and other services, as described above.
      The
      audit committee sets forth the basis for its pre-approval in detail, listing
      the
      particular services or categories of services which are pre-approved, and
      approving a specific budget for such services. Additional services may be
      pre-approved by the audit committee on an individual basis. Once services have
      been pre-approved, our independent auditors and our management team report
      to
      the audit committee on a periodic basis regarding the extent of services
      actually provided in accordance with the applicable pre-approval, and regarding
      the fees for services performed. In fiscal 2005, the Company’s Audit Committee
      approved all of the services provided by our independent auditor.




**ITEM
      16D.**  **EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES**




***Not
      Applicable.***




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




**Issuer
      Purchases of Equity Securities**




**Period**
            
            **(a)
                Total Number of Shares (Or Units) Purchased**
            
            **(b)
                Average Price Paid per Share (or Units)**
            
            **(c)
                Total Number of Shares (or Units) Purchased as Part of Publicly Announced
                Plans or Programs**
            
            **(d)
                Maximum Number (or Approximate Dollar Value) of Shares (or Units)
                that May
                Yet Be Purchased Under the Plans or Programs****February****2005**
            
            **79,872**
            
            **9.97**
            
            **Not
                Applicable**
            
            **Not
                Applicable**


-80-





**Period**
            
            **(a)
                Total Number of Shares (Or Units) Purchased**
            
            **(b)
                Average Price Paid per Share (or Units)**
            
            **(c)
                Total Number of Shares (or Units) Purchased as Part of Publicly Announced
                Plans or Programs**
            
            **(d)
                Maximum Number (or Approximate Dollar Value) of Shares (or Units)
                that May
                Yet Be Purchased Under the Plans or Programs****March****2005**
            
            **8,250**
            
            **$5.00(1)**
            
            **Not
                Applicable**
            
            **Not
                Applicable****May****2005**
            
            **1,352,590**
            
            **$8.98(2)**
            
            **Not
                Applicable**
            
            **Not
                Applicable****September****2005**
            
            **5,000**
            
            **$5.00(1)**
            
            **Not
                Applicable**
            
            **Not
                Applicable**




(1)  Represents
      exercises of stock options at option price of $5.00 per share.


(2)  Includes
      stock options exercised at an option price of $5.7 9 per
      share.




**PART
      III**




**ITEM
                17.**
              **FINANCIAL
                  STATEMENTS.**




***Not
      Applicable.***




**ITEM
                18.**
              **FINANCIAL
                  STATEMENTS.**




The
      Financial Statements required by this item are found at the end of this Annual
      Report, beginning on page F-1.




**ITEM
                19.**
              **EXHIBITS.******




The
      exhibits filed with or incorporated into this annual report are listed on the
      index of exhibits below.


**EXHIBIT****NUMBER**
              
              **DESCRIPTION
                  OF EXHIBIT**1.1
              
              Amended
                  Memorandum of Association of Registrant(1)1.2
              
              Amended
                  and Restated Articles of Association of Registrant(1)2.1
              
              Form
                  of Ordinary Share Certificate(1)2.2
              
              Form
                  of Registration Rights(1)
 
  -81-
 
 **EXHIBIT****NUMBER**
              
              **DESCRIPTION
                  OF EXHIBIT**4.1
              
              Fundtech
                  Ltd. December 1997 Israeli Share Option Plan (English
                  summary)(1)4.2
              
              Fundtech
                  Ltd. 1999 Employee Option Plan(3)4.3
              
              Fundtech
                  Ltd. Directors Option Plan(4)4.4
              
              Employment
                  Agreement between Reuven Ben Menachem and Fundtech Corporation,
                  dated
                  November 25, 1997(2)4.5
              
              Lease
                  Agreement for Cashtech’s facility in Bombay, India(8)4.6
              
              Lease
                  Agreement relating to Fundtech’s Facility in Ramat-Gan, Israel (English
                  summary)(2)4.7
              
              Lease
                  Agreement relating to Fundtech’s Facility in Norcross,
                  Georgia(2)4.8
              
              Lease
                  Agreement relating to Fundtech’s Facility in Jersey City, New
                  Jersey(5)4.9
              
              Lease
                  Agreement relating to Fundtech’s Facility in Burlington,
                  Massachusetts(5)4.10
              
              Fundtech
                  Ltd. 2005 International Share Option and Restricted Share Incentive
                  Plan(7)4.11
              
              Fundtech
                Ltd. 2005
                Israeli Share Option and Restricted Share Incentive Plan(7)8
              
              Subsidiaries
                  of Registrant*11
              
              Code
                  of Ethics(6)12.1
              
              Certification
                  of the Chief Executive Officer of the Company in accordance with
                  Section
                  302 of the Sarbanes-Oxley Act of 2002*12.2
              
              Certification
                  of the Chief Financial Officer of the Company in accordance with
                  Section
                  302 of the Sarbanes-Oxley Act of 2002*13.1
              
              Certification
                  of the Chief Executive Officer of the Company in accordance with
                  Section
                  906 of the Sarbanes-Oxley Act of 2002*13.2
              
              Certification
                  of the Chief Financial Officer of the Company in accordance with
                  Section
                  906 of the Sarbanes-Oxley Act of 2002*15.1
              
              Consent
                  of Brightman Almagor &
Co.*




(1) Previously
      filed as an exhibit to the Registrant’s Registration Statement on Form F-1, as
      amended, dated March 13, 1998, and incorporated herein by
      reference.




(2)
            Previously
                filed as an exhibit to the Registrant’s Report on Form 10-K, dated March
                30, 1999, and incorporated herein by
                reference.




-82-




(3)
            Previously
                filed as an annex to the Registrant’s Proxy Statement, dated August 23,
                1999.




(4)
            Previously
                filed as Exhibit to the Registrant’s Registration Statement on Form S-8,
                as amended (Commission Registration No. 333-9380), and incorporated
                herein
                by reference.




(5)
            Previously
                filed as an exhibit to the Registrant’s Report on Form 20-F, dated June
                11, 2003, and incorporated herein by
                reference.




(6)
            Previously
                filed as an exhibit to the Registrant’s Report on Form 20-F, dated June
                29, 2004, and incorporated herein by
                reference.




(7)
            Previously
                filed as an annex to the Registrant’s Proxy Statement, filed on November
                30, 2005.




(8)
            Previously filed as an exhibit
                to the
                Registrant’s Report on Form 20-F, dated May 27, 2005, and incorporated
                herein by reference.




*  Filed
      herewith.


-83-


**FUNDTECH
      LTD.**





**CONSOLIDATED
      FINANCIAL STATEMENTS**





**DECEMBER
      31, 2005**








-84-


**FUNDTECH
      LTD.**





**CONSOLIDATED
      FINANCIAL STATEMENTS**





**INDEX**








**A.****Report
                of Independent Registered Public Accounting Firm**
            F-1**Consolidated
                Financial Statements:****B.****Balance
                Sheets**as
                of December 31, 2005 and 2004
            F-2**C.****Statements
                of Operations**for
                the years ended December 31, 2005, 2004 and 2003
            F-3**D.****Statements
                of Shareholders’ Equity**for
                the years ended December 31, 2005, 2004 and 2003
            F-4
                - F-5**E.****Statements
                of Cash Flows**for
                the years ended December 31, 2005, 2004 and 2003
            F-6
                - F-7**F.****Notes
                to Consolidated Financial Statements**
            F-8
                - F-28









REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





**To
      the Shareholders of**


**Fundtech
      Ltd.**




We
      have
      audited the accompanying consolidated balance sheets of Fundtech Ltd.
      ("the Company") and its subsidiaries as of **** December 31,
      2005 and 2004 and the related statements of operations, changes in shareholders'
      equity and comprehensive income, and cash flows for each of the three years
      in
      the period ended December 31, 2005. These financial statements are the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement.  The
      company is not required to have, nor were we engaged to perform, an audit of
      its
      internal control over financial reporting. Our audit includes consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      also
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements present fairly, in all material
      respects, the consolidated financial position of the Company and its
      subsidiaries as of December 31, 2005 and 2004 and the consolidated results
      of
      their operations and their consolidated cash flows for each of the three years
      in the period ended December 31, 2005, in conformity with U.S. generally
      accepted accounting principles.





**Brightman
      Almagor & Co.**





**Certified
      Public Accountants**


**A
      member firm of Deloitte Touche Tohmatsu**





Tel
      Aviv,
      Israel


March
      19,
      2006


F-1




**FUNDTECH
      LTD.**


**CONSOLIDATED
      BALANCE SHEET**


**(In
      thousands)**





**December
                31,****2005**
            
            **2004****ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            30,807
            
            $
            23,360Short
                term investments
            
            
            216
            
            
            -Marketable
                securities (Note 4)
            
            
            18,576
            
            
            13,070Trade
                receivables (net of allowance for doubtful accounts of $ 1,663
              and
                $ 1,287 at December 31, 2005 and 2004, respectively) (Note
                5)
            
            
            17,262
            
            
            17,588Other
                accounts receivable and prepaid expenses
            
            
            2,601
            
            
            1,765**Total
                current assets**
            
            
            69,462
            
            
            55,783Marketable
                securities (Note 4)
            
            
            -
            
            
            9,591Severance
                pay fund
            
            
            871
            
            
            676Long-term
                deposits
            
            
            734
            
            
            924Prepaid
                expenses
            
            
            1,321
            
            
            1,352Property
                and equipment, net (Note 6)
            
            
            10,281
            
            
            8,204Goodwill
            
            
            17,655
            
            
            15,023Intangible
                assets, net (Note 7a)
            
            
            3,508
            
            
            3,784Capitalized
                software development, net (Note 7b)
            
            
            1,969
            
            
            3,544**Total
                assets**
            
            
            105,801
            
            
            98,881**LIABILITIES
                AND SHAREHOLDERS' EQUITY****CURRENT
                LIABILITIES**Trade
                payables
            
            $
            2,021
            
            $
            1,896Deferred
                revenues
            
            
            7,686
            
            
            8,204Accrued
                restructuring expenses
            
            
            336
            
            
            445Employees
                and payroll accruals
            
            
            3,225
            
            
            2,673Other
                accounts payable and accrued expenses (Note 8)
            
            
            6,285
            
            
            4,648**Total
                current liabilities**
            
            
            19,553
            
            
            17,866Accrued
                severance pay
            
            
            981
            
            
            751Accrued
                restructuring expenses
            
            
            100
            
            
            281Other
                long term liabilities
            
            
            157
            
            
            178**Total
                liabilities**
            
            
            20,791
            
            
            19,076**SHAREHOLDERS'
                EQUITY**(Note 10)Share
                capital
            
            
            44
            
            
            43Additional
                paid-in capital
            
            
            144,226
            
            
            141,274Accumulated
                other comprehensive income (loss)
            
            
            (414
            )
            
            80Deferred
                compensation
            
            
            (1,590
            )
            
            -Accumulated
                deficit
            
            
            (57,168
            )
            
            (61,504
            )85,098
            
            
            79,893Treasury
                shares at cost, 21,500 shares as of December 31, 2005 and
                2004
            
            
            (88
            )
            
            (88
            )**Total
                shareholders' equity**
            
            
            85,010
            
            
            79,805**Total
                liabilities and shareholders’ equity**
            
            $
            105,801
            
            $
            98,881




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


F-2


**FUNDTECH
      LTD.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(In
      thousands)**





**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003****Revenues**(Note 2j)Software
                license fees
            
            $
            16,523
            
            $
            16,395
            
            $
            13,236Software
                hosting
            
            
            10,501
            
            
            8,034
            
            
            6,207Maintenance
            
            
            20,248
            
            
            17,072
            
            
            14,730Services
                fees
            
            
            27,100
            
            
            16,721
            
            
            13,074Hardware
                sales
            
            
            94
            
            
            315
            
            
            367**Total
                revenues**
            
            
            74,466
            
            
            58,537
            
            
            47,614**Operating
                Expenses**Software
                license costs
            
            
            522
            
            
            626
            
            
            493Amortization
                of capitalized software development costs
            
            
            1,575
            
            
            1,576
            
            
            1,576Amortization
                of other acquired intangible assets
            
            
            1,154
            
            
            966
            
            
            940Maintenance
                and services costs
            
            
            29,947
            
            
            23,001
            
            
            17,901Hardware
                costs
            
            
            80
            
            
            266
            
            
            306Research
                and development
            
            
            13,480
            
            
            11,171
            
            
            9,690Selling
                and marketing
            
            
            13,734
            
            
            11,462
            
            
            10,348General
                and administrative
            
            
            9,557
            
            
            7,254
            
            
            6,678**Total
                operating expenses**
            
            
            70,049
            
            
            56,322
            
            
            47,932Operating
                income (loss)
            
            
            4,417
            
            
            2,215
            
            
            (318
            )Financial
                income, net (Note 14)
            
            
            1,085
            
            
            727
            
            
            671Income
                before taxes on income
            
            
            5,502
            
            
            2,942
            
            
            353Taxes
                on income (Note 12)
            
            
            (1,166
            )
            
            (475
            )
            
            (286
            )Net
                income
            
            $
            4,336
            
            $
            2,467
            
            $
            67Basic
                earnings per share (Note 11)
            
            $
            0.29
            
            $
            0.17
            
            $
            -Diluted
                earnings per share (Note 11)
            
            $
            0.27
            
            $
            0.16
            
            $
            -




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




F-3


**FUNDTECH
      LTD.**


**CONSOLIDATED
      STATEMENTS OF**




**SHAREHOLDERS’
      EQUITY AND COMPREHENSIVE INCOME**




(In
      thousands)




**(except
        share data)**
  **Ordinary
                  shares**
              
              **Deferred
                shares**
              
              **Additional**
                **paid-in**
              
              **Treasury**
              
              **Deferred**
              
              **Accumulated
                        other comprehensive**
              
              **Accumulated**
              
              **Total**
                **comprehensive**
              
              **Total**
                **shareholders'****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **capital**
              
              **shares**
              
              **compensation**
              
              **income
                  (loss)**
              
              **deficit**
              
              **income**
              
              **equity**Balance
                  as of January 1, 2003
              
              
              14,321,452
              
              
              $43
              
              
              50,002
              
              
              $(*)
              
              $
              139,851
              
              
              $(88
              )
              
              $-
              
              
              $(602
              )
              $(64,038)
              
              
              
              
              $
              75,166Exercise
                  of stock options
              
              
              206,419
              
              
              -
              
              
              -
              
              
              -
              
              
              879
              
              
              -
              
              
              -
              
              
              -
              
              -
              
              
              -
              
              
              879Cancellation
                  of deferred shares
              
              
              
              
              
              -
              
              
              (50,002
              )
              
              (*)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              -
              
              
              -
              
              
              (*)
                  -Foreign
                  currency translation adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -422
              
              -
              
              $
              422
              
              
              422Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              67
              
              
              67
              
              
              67Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              489Balance
                  as of December 31, 2003
              
              
              14,527,871
              
              
              43
              
              
              -
              
              
              -
              
              
              140,730
              
              
              (88
              )
              
              -
              
              
              (180
              )
              (63,971)
              
              
              
              
              
              76,534Exercise
                  of stock options
              
              
              128,071
              
              
              -
              
              
              -
              
              
              -
              
              
              544
              
              
              -
              
              
              -
              
              
              -
              
              -
              
              
              -
              
              
              544Foreign
                  currency translation adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              260
              
              -
              
              $
              260
              
              
              260Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              2,467
              
              
              2,467
              
              
              2,467Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              2,727Balance
                  as of December 31, 2004
              
              
              14,655,942
              
              
              43
              
              
              -
              
              
              -
              
              
              141,274
              
              
              (88
              )
              
              -
              
              
              80
              
              (61,504)
              
              
              
              
              
              79,805


(*)  Represents
        an amount lower than $ 1.
  The
        accompanying notes are an integral part of the consolidated financial
        statements.




F-4


**FUNDTECH
        LTD.**
 **CONSOLIDATED
        STATEMENTS OF**
  **SHAREHOLDERS’
        EQUITY AND COMPREHENSIVE INCOME**
  (In
        thousands)
  **(except
        share data)**
 
 **Ordinary
                  shares**
              
              **Deferred
                  shares****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Additional
                  paid-in capital**
              
              **Treasury
                  shares**
              
              **Deferred**
                **stock-
                  based compensation**
              
              **Accumulated
                  other comprehensive income (loss)**
              
              **Accumulated
                  deficit**
              
              **Total
                  comprehensive Income**
              
              **Total**
                  **shareholders'**
                  **equity**Balance
                  as of December 31, 2004
              
              
              14,655,942
              
              
              $43
              
              
              -
              
              
              $-
              
              $
                  141,274
              
              
              $(88
              )
              
              $-
              
              
              $80
              
              
              $(61,504
              )
              
              $-
              
              
              $79,805Exercise
                  of stock options
              
              
              316,522
              
              
              1
              
              
              -
              
              
              -
              
              
              1,362
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              1,363Common
                  stock issued for restricted stock grant
              
              
              153,331
              
              
              -
              
              
              -
              
              
              -
              
              
              1,590
              
              
              -
              
              
              (1,590
              )
              
              -
              
              
              -
              
              
              
              
              
              -Foreign
                  currency translation adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (494
              )
              
              -
              
              
              (494
              )
              
              (494
              )Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,336
              
              
              4,336
              
              
              4,336Total
                comprehensive
                income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              3,842Balance
                  as of December 31, 2005
              
              
              15,125,795
              
              $
              44
              
              
              -
              
              $
              -
              
              $
              144,226
              
              $
              (88
              )
              $
              (1,590
              )
              $
              (414
              )
              $
              (57,168
              )
              
              
              
              $
              85,010
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-5
  **FUNDTECH
        LTD.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  (In
        thousands)
 
 **Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003**Cash
                  flows provided by operating activities:Net
                  income
              
              $
              4,336
              
              $
              2,467
              
              $
              67Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities (Appendix A):
              
              
              5,972
              
              
              5,182
              
              
              4,462Net
                  cash provided by operating activities
              
              
              10,308
              
              
              7,649
              
              
              4,529Cash
                  flows used for investing activities:Investments
                  in held-to-maturity marketable securities
              
              
              (16,440
              )
              
              (25,855
              )
              
              (14,369
              )Proceeds
                  from sale of held-to-maturity marketable securities
              
              
              20,490
              
              
              26,486
              
              
              6,822Acquisition
                  of subsidiaries, net of cash acquired (Appendix B)
              
              
              (1,973
              )
              
              (4,311
              )
              
              -Decrease
                  (Increase) in long-term lease deposits
              
              
              (20
              )
              
              (86
              )
              
              167Purchase
                  of property and equipment
              
              
              (5,390
              )
              
              (4,318
              )
              
              (2,108
              )Proceeds
                  from sale of property and equipment
              
              
              27
              
              
              24
              
              
              6Net
                  cash used for investing activities
              
              
              (3,306
              )
              
              (8,060
              )
              
              (9,482
              )Cash
                  flows provided by financing activities:Proceeds
                  from exercise of stock options, net
              
              
              1,363
              
              
              544
              
              
              879Repayment
                  of long-term debt
              
              
              -
              
              
              (82
              )
              
              -Net
                  cash provided by financing activities
              
              
              1,363
              
              
              462
              
              
              879Effect
                  of exchange rate on cash and cash equivalents
              
              
              (918
              )
              
              409
              
              
              403Increase
                  (decrease) in cash and cash equivalents
              
              
              7,447
              
              
              460
              
              
              (3,671
              )Cash
                  and cash equivalents at the beginning of the year
              
              
              23,360
              
              
              22,900
              
              
              26,571Cash
                  and cash equivalents at the end of the year
              
              $
              30,807
              
              $
              23,360
              
              $
              22,900Supplemental
                  disclosure of cash flows activities:Cash
                  paid during the year for:Interest
              
              $
              16
              
              $
              24
              
              $
              56Income
                  taxes
              
              $
              1,108
              
              $
              566
              
              $
              149
 
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-6
  **FUNDTECH
        LTD.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  (In
        thousands)
 **Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003****Appendix
                  A**-**Adjustments
                  to reconcile net income to net cash provided by operating
                  activities**:Depreciation
                  and amortization
              
              $
              5,836
              
              
              5,333
              
              $
              5,656Decrease
                  (increase) in trade receivables , net
              
              
              868
              
              
              (2,863
              )
              
              921Increase
                  in other accounts receivable and prepaid expenses
              
              
              (1,193
              )
              
              (725
              )
              
              (615
              )Increase
                  (decrease) in trade payables
              
              
              178
              
              
              717
              
              
              (300
              )Increase
                  in deferred revenues, employees and payroll accruals and other
                  accounts
                  payable and accrued expenses
              
              
              508
              
              
              3,150
              
              
              112Decrease
                  in accrued restructuring expenses
              
              
              (290
              )
              
              (605
              )
              
              (1,371
              )Accrued
                  severance pay, net
              
              
              35
              
              
              9
              
              
              13Accrued
                  interest on marketable securities
              
              
              34
              
              
              172
              
              
              8Other
              
              
              (4
              )
              
              (6
              )
              
              38$
              5,972
              
              $
              5,182
              
              $
              4,462**Appendix
                  B - Acquisition of subsidiaries, net of cash acquired: (see Note
                  3)**Working
                  capital deficiency, excluding cash and cash equivalents
              
              $
              (351
              )
              $
              (1,394
              )
              $
              -Long
                  term deposits
              
              
              6
              
              
              103
              
              
              -Property
                  and equipment
              
              
              38
              
              
              174
              
              
              -Developed
                  technology
              
              
              878
              
              
              873
              
              
              -Goodwill
              
              
              1,402
              
              
              4,555
              
              
              -$
              1,973
              
              $
              4,311
              
              $
              -
 
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
  F-7


**FUNDTECH
          LTD.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 (In
          thousands, except share and per share data)




**NOTE
      1** **-** **GENERAL
      OVERVIEW**





Fundtech
      Ltd., an Israeli corporation, and its subsidiaries (“the Company”), is a leading
      provider of software solutions and services that facilitate payments, settlement
      and cash management by enabling banks and their customers to electronically
      manage cash, process payments and transfer funds. The Company's client-server
      and Internet based systems automate the process of transferring funds among
      corporations, banks and clearance systems and enable businesses to manage global
      cash positions efficiently and in real-time.





The
      Company sells and supports its products mainly in the United States and
      Europe.





The
      Company operates in three business segments: Cash Management, Payments, and
      its
      Swiss subsidiary, Biveroni Batschelet Partners AG including its subsidiary Datasphere
      S.A (Collectively “BBP”).





The
      Company’s cash management solutions enable small, mid and large-tier financial
      institutions to deliver a complete set of cash management services through
      the
      Internet and other delivery channels. The Company’s payment solutions automate
      all aspects of the funds transfer, including foreign exchange, compliance,
      settlement and customer notification process, enabling
      straight-through-processing (STP) of transactions. BBP develops implements,
      maintains and operates systems for the automated processing and transport of
      data in the finance industry, primarily over the SWIFT Network. BBP also
      provides interbank gateway services. Its products include system solutions
      for
      interbank applications, as well as integration modules for host
      connections.





**NOTE
      2**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES**





The
      consolidated financial statements have been prepared in accordance with U.S.
      generally accepted accounting principles ("US GAAP").





**a.** **Use
      of estimates**





The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and accompanying notes.
      Actual results could differ from those estimates.





**b.** **Financial
      statements in U.S. dollars**





The
      majority of the revenues of Fundtech Ltd. and certain of its subsidiaries is
      generated in U.S. dollars ("dollar" or "dollars"). In addition, substantial
      portions of the Company’s costs are incurred in dollars. The Company believes
      that the dollar is the primary currency of the economic environment in which
      the
      Company operates. Thus, the functional and reporting currency of the Company
      is
      the dollar.




Accordingly,
      monetary accounts maintained in currencies other than the dollar are remeasured
      into dollars in accordance with Statement of Financial Accounting Standard
      No.
      52 "Foreign Currency Translation" ("SFAS No. 52"). All transaction gains and
      losses from the remeasurement of monetary balance sheet items are reflected
      in
      the statements of operations as financial income or expenses, as appropriate.
      The financial statements of foreign subsidiaries, whose functional currency
      is
      not the dollar, have been translated into dollars. Assets and liabilities have
      been translated using the exchange rates in effect at the balance sheet date.
      Statement of Operations amounts have been translated using the average exchange
      rate for the period. The resulting translation adjustments are reported in
      accumulated other comprehensive income (loss) in shareholders'
      equity.


F-8




**FUNDTECH
            LTD.**
 **NOTES
            TO FINANCIAL STATEMENTS**
 (In
            thousands, except share and per share data)


**NOTE
      2**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





**c.** **Principles
      of consolidation**





The
      consolidated financial statements include the accounts of Fundtech Ltd. and
      its
      subsidiaries, all of which are wholly-owned. Intercompany balances and
      transactions have been eliminated in consolidation.





**d.**  **Cash
      equivalents**





Cash
      equivalents include short-term, highly liquid investments that are readily
      convertible to cash, with original maturities of three months or
      less.





**e.**  **Marketable
      securities**





The
      Company accounts for its investments in marketable securities in accordance
      with
      SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
      Securities".





Management
      determines the appropriate classification of its investments in marketable
      debt
      and equity securities at the time of purchase and reevaluates such
      determinations at each balance sheet date. Held-to-maturity securities include
      debt securities for which the Company has the intent and ability to hold to
      maturity. Debt securities for which the Company does not have the intent or
      ability to hold to maturity would be classified as available-for-sale. The
      Company does not hold any equity securities classified as trading securities
      or
      available-for-sale.





As
      of
      December 31, 2005 and 2004 all marketable securities are designated as
      held-to-maturity and, accordingly, are stated at amortized cost. Interest income
      including the amortization of premium and discount are included in the
      consolidated statement of operations.





**f.**  **Property
      and equipment**




Property
      and equipment are stated at cost, net of accumulated depreciation. Depreciation
      is calculated by the straight-line method over the shorter of the lease period
      or the estimated useful lives of the assets, as follows:




**years**Office
                furniture and equipment
            6-17Computers
                and software
            3-5Motor
                vehicles
            6Leasehold
                improvements
            Over
                the term of the lease





The
      Company periodically assesses the recoverability of the carrying amount of
      property and equipment based on expected undiscounted cash flows. If an asset’s
      carrying amount is determined to be not recoverable, the Company recognizes
      an
      impairment loss based upon the difference between the carrying amount and the
      fair value of such assets, in accordance with SFAS No. 144 "Accounting for
      the
      Impairment or Disposal of Long-Lived Assets” ("SFAS No. 144").


F-9




**FUNDTECH
            LTD.**
 **NOTES
            TO FINANCIAL STATEMENTS**
 (In
            thousands, except share and per share data)


**NOTE
      2**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**







**g.**  **Software
      development costs**




The
      Company capitalizes software development costs in accordance with SFAS No.
      86
      "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
      Marketed" ("SFAS No. 86"). Capitalization of software development costs begins
      upon the establishment of technological feasibility, and continues up to the
      time the software is available for general release to customers. The
      establishment of technological feasibility and the ongoing assessment of the
      recoverability of these costs requires considerable judgment by management
      with
      respect to certain external factors including, but not limited to, anticipated
      future gross product revenue, estimated economic life and changes in software
      and hardware technology.







Capitalized
      software development cost is amortized on a product-by-product basis and begins
      when the product is available for general release to customers. Annual
      amortization is the greater of the amount computed using the ratio of current
      gross revenue for a product to the total of current and anticipated product
      revenue or the straight-line basis over the remaining economic useful life
      of
      the software, which is not more than five years.





**h.**  **Acquisition-related
      intangible assets**





The
      Company accounts for its business combinations in accordance with SFAS No.
      141
“Business Combinations” (“SFAS 141”) and the related acquired intangible assets
      and goodwill in accordance with SFAS No. 142 “Goodwill and Other Intangible
      Assets” (“SFAS 142”). SFAS 141 specifies the accounting for business
      combinations and the criteria for recognizing and reporting intangible assets
      apart from goodwill.





Acquisition-related
      intangible assets result from the Company's acquisitions of businesses accounted
      for under the purchase method and consist of the values of identifiable
      intangible assets including developed software products, distribution rights
      and
      trade names, as well as goodwill. Goodwill is the amount by which the
      acquisition cost exceeds the fair values of identifiable acquired net assets
      on
      the date of purchase. SFAS 142 requires that goodwill not be amortized but
      instead be tested for impairment in accordance with the provisions of SFAS
      142
      at least annually and more frequently upon the occurrence of certain events.
      Acquisition-related intangible assets are reported at cost, net of accumulated
      amortization. Identifiable intangible assets other than goodwill are amortized
      on a straight-line basis over their estimated useful lives of three to five
      years for developed software products and distribution rights, and seven years
      for trade-names.





**i.**  **Income
      taxes**




The
      Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
      for Income Taxes" ("SFAS No. 109"). This Statement prescribes the use of the
      liability method whereby deferred tax asset and liability account balances
      are
      determined based on differences between financial reporting and tax bases of
      assets and liabilities and are measured using the enacted tax rates and laws
      that will be in effect when the differences are expected to reverse. The Company
      provides a valuation allowance, if necessary, to reduce deferred tax assets
      to
      their estimated realizable value.


F-10


**FUNDTECH
        LTD.**
 **NOTES
        TO FINANCIAL STATEMENTS**
 (In
        thousands, except share and per share data)




**NOTE
      2**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





**j.**  **Revenue
      recognition**





The
      Company generates revenues from licensing the rights to use its software
      products directly to end-users, sales of professional services, including
      consulting, implementation and training. The Company also provides hosting
      services, contingency and recovery services, as well as maintenance and sales
      of
      hardware.





Revenue
      from software license agreements are recognized when all criteria outlined
      in
      Statement of Position 97-2 "Software Revenue Recognition" (as amended) (“SOP
      97-2”) are met. Therefore, revenue from license fees is recognized when
      persuasive evidence of an agreement exists, delivery of the product has
      occurred, no significant obligations with regard to implementation remain,
      the
      fee is fixed or determinable and collectibility is probable.





Where
      software arrangements involve multiple elements, revenue is allocated to each
      element based on vendor specific objective evidence ("VSOE") of the relative
      fair values of each element in the arrangement. The Company's VSOE used to
      allocate the sales price to services and maintenance is based on the price
      charged when these elements are sold separately.





The
      Company generally does not grant right-of-return to its customers. The Company
      generally provides a warranty period for three months. The provision for
      warranty as of December 31, 2005 is immaterial.




Revenue
      from software licenses that require significant customization, integration
      and
      installation are recognized based on SOP 81-1 "Accounting for Performance of
      Construction Type and Certain Production Type Contracts", using contract
      accounting on the percentage of completion method, based on the relationship
      of
      actual labor costs incurred, to total labor costs estimated to be incurred
      over
      the duration of the contract. Provisions for estimated losses on uncompleted
      contracts are made in the period in which such losses are first determined,
      in
      the amount of the estimated loss on the entire contract.




Arrangements
      that include professional services are evaluated to determine whether those
      services are essential to the functionality of other elements of the
      arrangement. When services are considered essential, revenue under the
      arrangement is recognized using contract accounting. When services are not
      considered essential, the revenue allocable to the software services is
      recognized as the services are performed.




Revenue
      from maintenance is recognized over the life of the maintenance
      agreement.




**k.**  **Severance
      pay**





Israeli
      employees are entitled to one month’s salary for each year of employment or a
      portion thereof. Accordingly, the Company’s liability for severance pay is
      calculated pursuant to Israeli severance pay law based on the most recent salary
      of the employees multiplied by the number of years of employment, as of the
      balance sheet date. The Company’s liability for all of its Israeli employees is
      fully provided for by monthly deposits with insurance policies and by an
      accrual. The value of these policies is recorded as an asset in the Company’s
      balance sheet.




The
      deposited funds include profits accumulated up to the balance sheet date. The
      deposited funds may be withdrawn only upon the fulfillment of the conditions
      pursuant to Israeli severance pay law or labor agreements. The value of the
      deposited funds is based on the cash surrender value of these policies,
      including profits which were immaterial for all periods presented.





Severance
      expenses for the years ended December 31, 2005, 2004 and 2003, amounted to
      approximately $ 283, $ 216 and $ 177, respectively.


F-11




**FUNDTECH
        LTD.**
 **NOTES
        TO FINANCIAL STATEMENTS**
 (In
        thousands, except share and per share data)




**NOTE
      2**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





**l.**  **Concentration
      of credit risks**





Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist principally of cash and cash equivalents, short-term bank deposits,
      marketable securities, trade receivables and long-term trade receivables. The
      Company's cash, cash equivalents and marketable securities are maintained with
      high-quality institutions, and the composition and maturities of investments
      are
      regularly monitored by management. Generally, these securities and deposits
      are
      traded in a highly liquid market, may be redeemed upon demand and bear minimal
      risk.





The
      Company’s marketable securities include corporate bonds and notes, Euro dollar
      bonds and asset-backed securities.





The
      trade
      receivables of the Company include banks and large financial institutions.
      The
      Company generally does not require collateral; however, in certain
      circumstances, the Company may require letters of credit, other collateral
      or
      additional guarantees. An allowance for doubtful accounts is determined with
      respect to those amounts that the Company has determined to be doubtful of
      collection. The Company performs ongoing credit evaluations of its customers
      (see Note 5).





The
      Company has no off-balance sheet concentration of credit risk such as foreign
      exchange contracts, option contracts or other foreign hedging
      arrangements.








**m.**  **Basic
      and diluted earnings per share**





Basic
      earnings per share is computed based on the weighted average number of ordinary
      shares outstanding during each year. Diluted earnings 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
      year, in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS No.
      128").





In
      2005,
      2004 and 2003, certain outstanding stock options have been excluded from the
      calculation of the diluted earnings per ordinary share because of the
      anti-dilutive effect. The total weighted average number of shares related to
      the
      outstanding options excluded from the calculations of diluted earnings per
      share
      were 54,000, 557,175 and 442,250 for the years ended December 31, 2005, 2004
      and
      2003, respectively (see Note 12).


F-12




**FUNDTECH
          LTD.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 (In
          thousands, except share and per share data)





**NOTE
      2**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





**n.**  **Stock-based
      compensation**





The
      Company accounts for employee and director stock-based compensation in
      accordance with Accounting Principles Board Opinion No. 25, “Accounting for
      Stock Issued to Employees” (“APB 25”) and in accordance with FASB Interpretation
      No. 44. Pursuant to these accounting pronouncements, the Company records
      compensation for stock options granted to employees and directors over the
      vesting period of the options based on the difference, if any, between the
      exercise price of the options and the market price of the underlying shares
      at
      that date. See below for pro forma disclosures required in accordance with
      SFAS
      No. 123, “Accounting for Stock-Based Compensation” (“SFAS No.123”), as amended
      by SFAS 148.




Pro
      forma
      Earning (Loss) Per Share According to SFAS 123 and SFAS 148:




For
      purposes of estimating fair value in accordance with SFAS 123, the Company
      utilized the Black-Scholes option-pricing model. The following assumptions
      were
      utilized in such calculations for the years 2005, 2004 and 2003 (all in weighted
      averages):





**2005**
            
            **2004**
            
            **2003**Risk-free
                interest rate
            
            
            3.86
            %
            
            3.24
            %
            
            2.69
            %Expected
                life of options
            
            
            5
                year
            
            
            4
                year
            
            
            4
                yearExpected
                volatility
            
            
            55.9
            %
            
            66.5
            %
            
            64
            %Expected
                dividend yield
            
            
            None
            
            
            None
            
            
            None





Had
      compensation cost for the Company’s stock option plans been determined based on
      fair value at the grant dates for all awards made in 2005, 2004 and 2003 in
      accordance with SFAS 123, as amended by SFAS 148, the Company’s pro forma
      earning per share would have been as follows:





**2005**
            
            **2004**
            
            **2003****Pro
                forma net income:**Net
                income for the year, as reported
            
            $
            4,336
            
            $
            2,467
            
            $
            67Add
                - stock-based compensation determined under APB-25
            
            
            -
            
            
            -
            
            
            -Deduct
                - stock-based compensation determined under SFAS 123
            
            
            (1,833
            )
            
            (1,610
            )
            
            (3,151
            )Pro
                forma net income (loss)
            
            $
            2,503
            
            $
            857
            
            $
            (3,084
            )Pro
                forma basic earnings (loss) per share
            
            $
            0.17
            
            $
            0.06
            
            $
            (0.21
            )Basic
                earnings per share as reported
            
            $
            0.29
            
            $
            0.17
            
            $
            -Pro
                forma diluted earnings (loss) per share
            
            $
            0.16
            
            $
            0.06
            
            $
            (0.21
            )Diluted
                earnings per share as reported
            
            $
            0.27
            
            $
            0.16
            
            $
            -





F-13




**FUNDTECH
          LTD.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 (In
          thousands, except share and per share data)




**NOTE
      2**  **-**  **SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)**





**o.**  **Fair
      value of financial instruments**





The
      following methods and assumptions were used by the Company in estimating its
      fair value disclosures for financial instruments:




-The
      carrying amounts of cash and cash equivalents, short-term bank deposits, trade
      receivables and trade payables approximate their fair value due to the
      short-term maturity of such instruments.





-The
      fair
      value of marketable securities is based on quoted market prices (see Note
      4).





**p.**  **Reclassification**





Certain
      amounts from prior years have been reclassified in order to conform to the
      2005
      financial statements presentation.





**q.**  **Impact
      of recently issued accounting standards**




In
      December 2004, the Financial Accounting Standards Board (FASB) issued
      SFAS No. 123(R). SFAS No. 123(R) requires employee
      share-based equity awards to be accounted for under the fair value method,
      and
      eliminates the ability to account for these instruments under the intrinsic
      value method prescribed by APB Opinion No. 25 and allowed under the
      original provisions of SFAS No. 123. SFAS No. 123(R)
      requires the use of an option pricing model for estimating fair value, which
      is
      then amortized to expense over the service periods. Had the Company adopted
      SFAS
      123(R) in prior periods, the impact of that standard would have approximated
      the
      impact of SFAS 123 as described in the disclosure of pro forma net income and
      income per share above. SFAS No. 123(R) allows for either prospective
      recognition of compensation expense or retrospective recognition. In the first
      quarter of 2006, the company began to apply the prospective recognition method
      and implemented the provisions of SFAS No. 123(R). In January 2005, the SEC
      issued SAB No. 107, which provides supplemental implementation guidance for
      SFAS
      No. 123(R). SFAS No. 123(R) will be effective for the Company beginning in
      the
      first quarter of fiscal 2006.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections.” SFAS No. 154 replaces APB Opinion No. 20. “Accounting
      Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial
      Statements.” SFAS No. 154 requires retrospective application to prior
      periods’ financial statements of changes in accounting principle, unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. The Company does not expect the adoption of SFAS
      No. 154 will have any material impact on its consolidated financial
      statements.




In
      November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1, “The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments” (“FSP 115-1 and 124-1”), which clarifies when an investment is
      considered impaired, whether the impairment is other than temporary, and the
      measurement of an impairment loss. It also includes accounting considerations
      subsequent to the recognition of an other-than-temporary impairment and requires
      certain disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. FSP 115-1 and 124-1 are effective for all
      reporting periods beginning after December 15, 2005. At December 31,
      2005, the Company had no unrealized investment losses that had not been
      recognized as other-than-temporary impairments in its available-for-sale
      securities. The Company does not anticipate that the implementation of these
      statements will have a significant impact on its financial position or results
      of operations.


F-14




**FUNDTECH
            LTD.**
 **NOTES
            TO FINANCIAL STATEMENTS**
 (In
            thousands, except share and per share data)




**NOTE
      3**  **-**  **RECENT
      ACQUISITION**





**a.**  In
      October 2005, the Company acquired all outstanding shares of Radius Partners,
      Inc. (“Radius”), a leading provider of straight through processing (STP)
      solutions to the global securities industry, located in Pembroke, Massachusetts,
      for an aggregate purchase price of $2,644. This includes $2,242 and $100 paid
      in
      cash directly to the shareholders in 2005 and 2006, respectively, $250 of
      liability to Fundtech that was converted to be part of the acquisition
      consideration and $52 of acquisition costs.





Radius
      provides software solutions and services that facilitate the matching and
      settlement of institutional trades. Radius’ business automation solutions
      provide financial institutions with the ability to improve operational
      efficiency, strengthen client relationships, securely increase transaction
      volumes and bring new products and services to market - quickly and profitably.
      By acquiring Radius, Fundtech adds domain knowledge and management depth in
      the
      securities processing arena




Under
      the
      terms of the acquisition agreement, Fundtech will pay additional amounts of
      up
      to $3.5 million in cash over the next six years, contingent upon the financial
      performance of Radius. As of December 31, 2005, the first milestone of $100
      has
      been achieved and was paid in February 2006.





This
      acquisition was accounted for in accordance with SFAS No.141 and SFAS No. 142,
      and the financial results of Radius have been included in the Company's
      financial statements beginning on the acquisition date.





The
      purchase price has been allocated on the basis of the estimated fair value
      of
      the assets purchased and the liabilities assumed. The excess of the purchase
      price over the fair value of the net tangible assets acquired has been
      attributed to other know-how and goodwill. The purchase price attributed to
      know-how is being amortized over its estimated useful life, which is 5 years.
      In
      accordance with SFAS No. 141 and SFAS No. 142, the purchase price attributed
      to
      goodwill is not amortized, but rather is subject to periodic impairment
      tests.





The
      allocation of fair value is as follows:





Working
                capital
            
            $
            576Long
                term deposits
            
            
            6Property
                and equipment
            
            
            38Know-how
            
            
            878Goodwill
            
            
            1,146$
            2,644





**b.**  In
      November 2004, the Company acquired all outstanding shares of India-based
      CashTech Solutions India Private Limited (“CashTech”) a leading provider of cash
      management software and services throughout Asia for an aggregate purchase
      price
      of $3,759 (including acquisition costs of $187). Cashtech’s products are
      targeted to large banks that seek highly customized applications and prefer
      a
      component-based approach in order to integrate with their complex
      infrastructure. CashTech has sales offices in Singapore and Tokyo.





The
      acquisition of Cashtech will enhance the Company’s cash management product line
      with products that are well suited for non US-markets, as well as extend the
      Company’s geographic coverage into the Asia Pacific market.


F-15




**FUNDTECH
        LTD.**
 **NOTES
        TO FINANCIAL STATEMENTS**
 (In
        thousands, except share and per share data)


**NOTE
        3**  **-**  **RECENT
        ACQUISITIONS (cont.)**
 
 Under
        the
        terms of the acquisition agreement, Fundtech will pay additional amounts
        of up
        to $3.7 million in cash over three years following the acquisition, contingent
        upon the financial performance of CashTech. Fundtech paid additional amounts
        of
        $991 and $126 in 2005 and 2006, respectively, based on achieved financial
        performance milestones, of which $697 and $126 were already accounted for
        in
        2004 and 2005 respectively, and capitalized additional acquisition costs
        of $62
        in 2005. Further payments of $1,004 will be made in 2006 based on Cashtech’s
        2005 financial performance, which were already accounted for in
        2005.
 
 This
        acquisition was accounted for in accordance with SFAS No. 141 and SFAS No.
        142,
        and the financial results of Cashtech have been included in the Company's
        financial statements beginning on the acquisition date.
 
 The
        purchase price has been allocated on the basis of the estimated fair value
        of
        the assets purchased and the liabilities assumed. The excess of the purchase
        price over the fair value of the net tangible assets acquired has been
        attributed to knowhow and goodwill. The purchase price attributed to knowhow
        is
        being amortized over its estimated useful lives, which is 5 years. In accordance
        with SFAS No. 141 and SFAS No. 142, the purchase price attributed to goodwill
        is
        not amortized, but rather is subject to periodic impairment test.
 
 The
        allocation of fair value is as follows:
 
 Working
                  capital deficiency,
              
              $
              (459
              )Long
                  term deposits
              
              
              95Property
                  and equipment
              
              
              153Know-how
              
              
              873Goodwill
              
              
              4,580$
              5,242
 
 **c.**
              In
                  October 2004, the Company acquired through BBP all outstanding
                  shares of
                  Datasphere S.A. (“Datasphere”), a Swiss provider of interbank clearing and
                  securities settlement systems in Europe based in Geneva for an
                  aggregate
                  purchase price of $973. This includes $200 paid in cash directly
                  to the
                  shareholders, $746 that was transferred to fund the working capital
                  of
                  Datasphere and $27 of acquisition costs. The acquisition will allow
                  the
                  Company to expand its product line to support mainframe-systems
                  as well as
                  expand its geographic reach to southern
                  Europe.
  This
        acquisition was accounted for in accordance with SFAS No.141 and SFAS No.
        142,
        and the financial results of Datasphere have been included in the Company's
        financial statements beginning on the acquisition date.
 
 The
        purchase price has been allocated on the basis of the estimated fair value
        of
        the assets purchased and the liabilities assumed. The excess of the purchase
        price over the fair value of the net tangible assets acquired has been
        attributed to goodwill. In accordance with SFAS No. 141 and SFAS No. 142,
        the
        purchase price attributed to goodwill is not amortized, but rather is subject
        to
        periodic impairment test.
   The
        allocation of fair value is as follows:
 
 Working
                  capital deficiency
              
              $
              (517
              )Long
                  term deposits
              
              
              8Property
                  and equipment
              
              
              21Goodwill
              
              
              1,461$
              973
  F-16
  **FUNDTECH
          LTD.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 (In
          thousands, except share and per share data)
  **NOTE
        4**  **-**  **MARKETABLE
        SECURITIES**
 
 A.Short-term
                  investments
              
              **December
                  31,****2005**
              
              **2004**Held
                  to maturity -Corporate
                  bonds
              
              $
              2,566
              
              $
              3,893Corporate
                  notes
              
              
              -
              
              
              553Euro-dollar
                  bonds
              
              
              6,928
              
              
              1,024Federal
                  Agency
              
              
              -
              
              
              1,004Taxable
                  auction securities
              
              
              9,082
              
              
              4,450Asset
                  backed securities
              
              
              -
              
              
              2,146$
              18,576
              
              $
              13,070Fair
                  value
              
              $
              18,514
              
              $
              13,023
 
 B.Long-term
                  investments
              
              **December
                  31,****2005**
              
              
              **2004**Held
                  to maturity -Corporate
                  bonds
              
              $
              -
              
              $
              2,664Federal
                  Agency
              
              
              -
              
              
              6,927$
              -
              
              $
              9,591Fair
                  value
              
              $
              -
              
              $
              9,490
 
 **NOTE
        5**  **-**  **TRADE
        RECEIVABLES**
  **December
                  31,****2005**
              
              **2004**Accounts
                  receivable, net of allowance for doubtful accounts
              
              $
              12,049
              
              $
              11,301Unbilled
                  receivables
              
              
              5,213
              
              
              6,287$
              17,262
              
              $
              17,588
  Management's
        assessment for uncertainties of outstanding debt collectibility resulted
        in
        doubtful accounts expenses of $552, $269 and $350 in the statement of operations
        for 2005, 2004 and 2003, respectively.
 
 **NOTE
        6**  **-**  **PROPERTY
        AND EQUIPMENT, NET**
  **December
                  31,****2005**
              
              **2004**Cost:Office
                  furniture and equipment
              
              $
              2,572
              
              $
              2,521Computers
                  and software
              
              
              23,235
              
              
              19,379Motor
                  vehicles
              
              
              193
              
              
              288Leasehold
                  improvements
              
              
              2,792
              
              
              2,18528,792
              
              
              24,373Accumulated
                  depreciation
              
              
              18,511
              
              
              16,169Net
                  book value
              
              $
              10,281
              
              $
              8,204
  F-17
 **FUNDTECH
            LTD.**
 **NOTES
            TO FINANCIAL STATEMENTS**
 (In
            thousands, except share and per share data)
  **NOTE
        7**  **-**  **INTANGIBLE
        ASSETS AND CAPITALIZED SOFTWARE DEVELOPMENT COST, NET**
 
 **December
                  31,****2005**
              
              **2004**a.Intangible
                  assetsCost:Developed
                  technology and know-how
              
              $
              5,992
              
              $
              5,114Customer
                  base
              
              
              3,461
              
              
              3,461Other
                  intangible assets
              
              
              58
              
              
              589,511
              
              
              8,633Accumulated
                  amortization
              
              
              (6,003
              )
              
              (4,849
              )Net
                  book value
              
              $
              3,508
              
              $
              3,784b.Capitalized
                  software developmentCost
              
              $
              7,876
              
              $
              7,876Accumulated
                  amortization
              
              
              (5,907
              )
              
              (4,332
              )Net
                  book value
              
              $
              1,969
              
              $
              3,544
 
 **NOTE
        8**  **-**  **OTHER
        ACCOUNTS PAYABLE AND ACCRUED EXPENSES**
 
 **December
                  31,****2005**
              
              **2004**Accrued
                  expenses
              
              $
              5,524
              
              $
              3,803Government
                  authorities
              
              
              761
              
              
              809Other
              
              
              -
              
              
              36$
              6,285
              
              $
              4,648
  **NOTE
        9**  **-**  **COMMITMENTS
        AND CONTINGENCIES**
 
 **a.**  **Lease
        commitments**
 
 The
        Company leases its facilities and vehicles under various operating lease
        agreements, which expire on various dates, the latest of which is in 2014.
        The
        minimum lease commitments under non-cancelable operating leases are as
        follows:
 
 **Year
                  ended December 31,**2006
              
              $
              2,0872007
              
              
              2,0552008
              
              
              1,9362009
              
              
              1,2322010
              
              
              9372011-2014
              
              
              2,152$
              10,399
   Total
        facilities lease expenses for the years ended December 31, 2005 , 2004 and 2003 ,
        were
        approximately $2,319, $1,771 and $1,905 (net of sublease rentals incurred
        of
        $280, $175, and $99), respectively.
  F-18
 **FUNDTECH
            LTD.**
 **NOTES
            TO FINANCIAL STATEMENTS**
 (In
            thousands, except share and per share data)
  **NOTE
        9**  **-**  **COMMITMENTS
        AND CONTINGENCIES (Cont.)**
 
 **b.**  **Guarantees:**
 
 1.  The
        Company has obtained a bank guarantee of $45 in connection with the Company's
        facilities operating lease agreement in Israel.
 
 2. The
        Company has obtained a bank guarantee of $424 for BBP as required by Swiss
        Law.
 
 3. The
        Company has obtained a bank guarantee of $120 in connection with participation
        in a tender in Israel.
  **NOTE
        10**  **-**  **SHAREHOLDERS’
        EQUITY**
 
 **a.**
              The
                  Ordinary shares of the Company are traded on the NASDAQ National
                  Market.
                  Since August 19, 2003 the shares of the Company are also traded
                  on
                  Tel-Aviv Stock Exchange market.
 
 **b.**
              The
                  Ordinary shares confer upon the holders the right to receive notice
                  to
                  participate and vote in general meetings of the Company and the
                  right to
                  receive dividends, if declared.
 
 **c.**  **Treasury
        shares:**
 
 On
        February 21, 2002, the Company’s Board of Directors authorized the Company to
        purchase up to one million ordinary shares of the Company from time to time
        on
        the open market. By December 31, 2005, the Company had purchased a total
        of
        21,500 shares.
 
 **d.**  **Stock
        -based compensation:**
 
 1.  On
        December 21, 2005, the shareholders of the Company approved two new equity
        plans, the 2005 Israeli Share Option and Restricted Share Plan and 2005
        International Share Option and Restricted Share Plan (the “2005 Plans”). 
No new shares were allocated to the 2005 Plans.  These plans replaced the
        Company's 1998 Director’s Stock Option Plan and the 1999 Employee Stock Option
        Plan (the “Old Plans”), and all shares available for grant under the Old Plans,
        inclusive of shares which are returned to the share pool due to terminations
        or
        expirations, are transferred to the 2005 Plans. A total of 3,592,815 shares
        is
        reserved for grants to employees and directors of the Company under the Old
        Plans and the 2005 Plans.
 
 2.  Pursuant
        to the Plans, as of December 31, 2005, an aggregate of 368,063 options of
        the
        Company are still available for future grants.
 
 3.  Each
        option granted under the Plans to employees expires not later than ten years
        from the date of the grant, except for grants to persons holding 10% or more
        of
        the Company’s stock, which expire in five years. Each option granted under the
        Plans to directors expires no later than five years from the date of grant.
        The
        options vest primarily over four years. Any options that are canceled or
        forfeited before expiration become available for future grants. Options granted
        to directors are vested over a one year period from their date of grant.
        The
        exercise price of the options granted under the plans may not be less than
        the
        nominal value of the shares into which such options are exercised.
  4.  In
        June
        2002, the Company commenced a voluntary stock option exchange program for
        its
        employees. Under the program participating employees were given the opportunity
        to have unexercised stock options previously granted to them cancelled, and
        to
        receive replacement options at a future date. Replacement options will be
        granted at a ratio of one new option for each option cancelled, at an exercise
        price equal to the fair market value of the Company's Ordinary Shares on
        the
        date of the re-grant.
 
 Pursuant
        to the terms of the offer, 1,025,700 options were cancelled on July 16, 2002.
        The Company granted the 969,311 replacement options on January 17,
        2003.
  F-19
 **FUNDTECH
            LTD.**
 **NOTES
            TO FINANCIAL STATEMENTS**
 (In
            thousands, except share and per share data)
  **NOTE
        10**  **-**  **SHAREHOLDERS’
        EQUITY (Cont.)**
 
 **e.**  **A
        summary of the Company's option activity under the Plans is as
        follows:**
 **Year
                      ended December 31,****2005**
                  
                  **2004**
                  
                  **2003****Weighted**
                  
                  
                  
                  **Weighted**
                  
                  
                  
                  **Weighted****average**
                  
                  
                  
                  **average**
                  
                  **Number**
                  
                  **Average****Number**
                  
                  **exercise**
                  
                  **Number**
                  
                  **exercise**
                  
                  **of**
                  
                  **Exercise****of
                      options**
                  
                  **Price**
                  
                  **of
                      options**
                  
                  **price**
                  
                  **options**
                  
                  **Price**Outstanding
                      at January 1
                  
                  
                  2,196,225
                  
                  $
                  5.65
                  
                  
                  2,114,087
                  
                  $
                  5.56
                  
                  
                  564,455
                  
                  $
                  6.68Granted
                  
                  
                  569,500
                  
                  
                  8.75
                  
                  
                  270,350
                  
                  
                  8.20
                  
                  
                  913,025
                  
                  
                  6.35Option
                      exchange program
                  
                  
                  -
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  969,311
                  
                  
                  4.02Exercised
                  
                  
                  (316,522
                  )
                  
                  4.30
                  
                  
                  (128,071
                  )
                  
                  4.11
                  
                  
                  (206,419
                  )
                  
                  3.92Forfeited/cancelled
                  
                  
                  (38,713
                  )
                  
                  13.96
                  
                  
                  (60,141
                  )
                  
                  16.91
                  
                  
                  (126,285
                  )
                  
                  7.06Outstanding
                      at December 31
                  
                  
                  2,410,490
                  
                  $
                  6.43
                  
                  
                  2,196,225
                  
                  $
                  5.65
                  
                  
                  2,114,087
                  
                  $
                  5.56Exercisable
                      options atDecember
                      31
                  
                  
                  1,403,054
                  
                  $
                  5.28
                  
                  
                  1,275,563
                  
                  $
                  4.76
                  
                  
                  1,069,421
                  
                  $
                  5.27
 
 The
        options outstanding as of December 31, 2005, have been separated into ranges
        of
        exercise price, as follows:
 
 **Options**
              
              **Weighted**
              
              
              
              **Options****Outstanding**
              
              **Average**
              
              **Weighted**
              
              **Exercisable**
              
              **Weighted****Ranges
                  of**
              
              **as
                  of**
              
              **Remaining**
              
              **Average**
              
              **as
                  of**
              
              **Average****Exercise**
              
              **December
                  31,**
              
              **Contractual**
              
              **Exercise**
              
              **December
                  31,**
              
              **Exercise****Price**
              
              **2005**
              
              **Life
                  (years)**
              
              **Price**
              
              **2005**
              
              **Price**$
                  3.55-5.00
              
              
              923,103
              
              
              6.5
              
              $
              4.00
              
              
              883,727
              
              $
              4.02$
                  5.79-8.53
              
              
              1,086,712
              
              
              8.1
              
              $
              7.21
              
              
              454,947
              
              $
              7.07$
                  8.70-10.52
              
              
              393,675
              
              
              9.3
              
              $
              8.89
              
              
              57,380
              
              $
              9.63$
                  13.25-13.25
              
              
              7,000
              
              
              3.8
              
              $
              14.88
              
              
              7,000
              
              $
              13.252,410,490
              
              
              7.7
              
              $
              5.65
              
              
              1,403,054
              
              $
              5.28
  All
        options granted during 2005, 2004 and 2003 were at an exercise price that
        is
        equal to the fair value of the stock at the grant date.
 
 On
        December 31, 2005, the Company had issued 153,331 restricted shares of ordinary
        stock to certain employees and directors under the 2005 Plans. These restricted
        shares vest over periods ranging from one year for the directors and three
        to
        four years for employees and are expensed using the straight-line method
        over
        the respective vesting period. The total deferred compensation cost as of
        December 31, 2005 is $1,590.
  **f.**  **Dividends**
 
 In
        the
        event that cash dividends are declared in the future, such dividends will
        be
        paid in NIS. The Company does not intend to pay cash dividends in the
        foreseeable future.
  F-20
  **FUNDTECH
          LTD.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 (In
          thousands, except share and per share data)
  **NOTE
        11**  **-**  **EARNINGS
        (LOSS) PER SHARE**
 
 The
        following table sets forth the computation of historical basic and diluted
        net
        earnings per share:
 **Year
                    ended December 31,****2005**
                
                **2004**
                
                **2003**Numerator:Net
                    income
                
                $
                4,336
                
                $
                2,467
                
                $
                67Numerator
                    for basic earnings per share -income
                    available to Ordinaryshareholders
                
                $
                4,336
                
                $
                2,467
                
                $
                67Numerator
                    for diluted net earnings pershare
                    - income available to Ordinaryshareholders
                    after assumed exercises
                
                $
                4,336
                
                $
                2,467
                
                $
                67Denominator:
                
                **Number
                    of shares**Denominator
                    for basic net earnings pershare
                    - weighted - average shares
                
                
                14,862,054
                
                
                14,590,310
                
                
                14,426,655Effect
                    of dilutive securities:Employee
                    stock options
                
                
                932,389
                
                
                679,853
                
                
                410,813Denominator
                    for diluted net earningsper
                    share
                
                
                15,794,443
                
                
                15,270,163
                
                
                14,837,468
 
 **NOTE
        12**  **-**  **INCOME
        TAXES**
 
 **a.**  **Measurement
        of taxable income under the Israeli Income Tax Law (Inflationary Adjustments),
        1985**
 
 The
        company is assessed for tax purposes on an unconsolidated basis. Fundtech
        Ltd.
        is assessed under the provisions of the Income Tax Law (Inflationary
        Adjustments), 1985, pursuant to which the results for the tax purposes are
        measured in Israeli currency in real terms in accordance with changes in
        the
        Israeli Consumer Price Index (“CPI”). Each of the subsidiaries is subject to the
        tax rules prevailing in the country of incorporation.
 
 **b.**  **Tax
        benefits under the Israeli Law for the Encouragement of Capital Investments,
        1959**


The
        Company has been granted in November 1995 the status of an "Approved
        Enterprise", under the Israeli Law for the Encouragement of Capital Investments,
        1959 (the "Investment Law") and the Company has elected the alternative benefits
        program, waiver of grants in return for tax exemptions. Pursuant thereto,
        the
        income of the Company derived from the "Approved Enterprise" program is
        tax-exempt for two years commencing with the year it first earns taxable
        income
        relating to each expansion program, and subject to corporate taxes at the
        reduced rate of 10% to 25%, for an additional eight years. The Company completed
        its investment according to certain of its first program on November 27,
        1997.
        Income derived from this program was tax exempt for two years commencing
        in 1998
        and will be subject to the reduced tax rates for eight years ending in 2005
        (subject to an adjustment based upon the foreign investors' ownership of
        the
        Company). In 1998, the Company received approval for its first expansion
        program. In 2000, the Company received approval for its second expansion
        program. Income derived from the expansion programs will be tax-exempt
  F-21
  **FUNDTECH
          LTD.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 (In
          thousands, except share and per share data)


**NOTE
        12**  **-**  **INCOME
        TAXES (Cont.)**
 
 for
        a
        period of two years and will be subject to a reduced tax rate as mentioned
        above
        for an additional period of eight years. The period of benefits for these
        programs has not yet commenced since no income was derived. In July 2004
        the
        company received approval for its third expansion program.. The period of
        tax
        benefits detailed above is subject to limits of 12 years from the year of
        commencement of production, or 14 years from the date of granting the approval,
        whichever is earlier.
 
 The
        tax-exempt profits that will be earned by the Company's "Approved Enterprise"
        can be distributed to shareholders, without imposing tax liability on the
        Company only upon the complete liquidation of the Company. As of December
        31,
        2005, retained earnings included approximately $ 4,034 in tax exempt income
        earned by the Company's "Approved Enterprise". The Company has decided to
        permanently reinvest its tax exempt income. Accordingly, no deferred income
        taxes have been provided on income attributable to the Company's "Approved
        Enterprise". If these retained tax-exempt profits are distributed in a manner
        other than in the complete liquidation of the Company, they would be taxed
        at
        the corporate tax rate applicable to such profits as if the Company had not
        elected the alternative tax benefits (currently between 10% to 25% for an
        "Approved Enterprise").
 
 The
        Investment Law also grants entitlement to claim accelerated depreciation
        on
        equipment used by the "Approved Enterprise" during five tax years.
 
 The
        entitlement to the above benefits is conditional upon the Company fulfilling
        the
        conditions stipulated by the above law, regulations published thereunder
        and the
        instruments 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.
 
 Income
        not eligible for “Approval Enterprise” benefits mentioned above is taxed at the
        regular rate of 34%. The regular Company tax rate is to be gradually reduced
        to
        30% until 2007 (32% in 2006 and 30% in 2007).
 
 **c.**  **Net
        operating losses carryforwards**
 
 As
        of
        December 31, 2005, the Company had approximately $23,316 of Israeli net
        operating loss carryforwards. The Israeli loss carryforwards have no expiration
        date.
   As
        of
        December 31, 2005, Fundtech Corporation had a U.S. federal net operating
        loss
        carryforward of approximately $50,316 that can be carried forward and
        offset against taxable income for 10-15 years and begin to expire in 2010
        through 2025. Utilization of U.S. net operating losses may be subject to
        substantial annual limitation due to the "change in ownership" provisions
        of the
        Internal Revenue Code of 1986 and similar state provisions. The annual
        limitation may result in the expiration of net operating losses before
        utilization.
  F-22
  **FUNDTECH
          LTD.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 (In
          thousands, except share and per share data)
 
 **NOTE
        12**  **-**  **INCOME
        TAXES (Cont.)**
 
 **d.** **Deferred
        income taxes**
 
 Deferred
        income taxes reflect the net tax effects of temporary differences between
        the
        carrying amounts of assets and liabilities for financial reporting purposes
        and
        the amounts used for income tax purposes.
 
 Significant
        components of the Company and its subsidiaries assets are as
        follows.
 
 **December
                  31,****2005**
              
              **2004**Deferred
                  tax assets:U.S.
                  net operating loss carryforwards
              
              $
              20,127
              
              $
              20,474Israel
                  net operating loss carryforwards
              
              
              2,331
              
              
              2,650Other
                  reserve and allowances
              
              
              3,586
              
              
              5,340Total
                  deferred tax assets before valuation allowance
              
              
              26,044
              
              
              28,464Valuation
                  allowance
              
              
              (26,044
              )
              
              (28,464
              )Balance
                  at the end of the year (all foreign)
              
              $
              -
              
              $
              -Deferred
                  tax liabilities:Deferred
                  taxes due to assets acquired and liabilitiesassumed
                  (all foreign)
              
              $
              -
              
              $
              -
  As
        of
        December 31, 2005, the Company and its subsidiaries have provided valuation
        allowances of approximately $26,044 in respect of deferred tax assets resulting
        from tax loss carryforwards and other temporary differences. Management
        currently believes that since the Company and its subsidiaries have a history
        of
        losses, it is more likely than not that the deferred tax regarding the loss
        carryforwards and other temporary differences will not be realized in the
        foreseeable future.
 
 **e.**  **Tax
        assessments**
 
 The
        Company received final tax assessments through the tax year ended December
        31,
        1999. Fundtech U.K. Ltd and BBP received final tax assessments through the
        tax
        year ended December 31, 2004. Cashtech received final tax assessments through
        the tax year ended March 31, 2000.
  F-23
  **FUNDTECH
          LTD.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 (In
          thousands, except share and per share data)
  **NOTE
        12**  **-**  **INCOME
        TAXES (Cont.)**
 
 **f.**  **Composition
        of income tax expenses**
 
 **Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003****Income
                  (loss) before taxes on income:**Domestic
              
              $
              (2,309
              )
              $
              (2,490
              )
              $
              (1,863
              )Foreign
              
              
              7,811
              
              
              5,432
              
              
              2,216$
              5,502
              
              $
              2,942
              
              $
              353**Income
                  tax provision (benefit) :**Current:Domestic
              
              $
              33
              
              $
              119
              
              $
              99Foreign
              
              
              1,133
              
              
              356
              
              
              1871,166
              
              
              475
              
              
              286Deferred:Domestic
              
              
              -
              
              
              -
              
              
              -Foreign
              
              
              -
              
              
              -
              
              
              --
              
              
              -
              
              
              -$
              1,166
              
              $
              475
              
              $
              286
 
 **g.**  **Theoretical
        taxes**
  The
        following is a reconciliation of the theoretical taxes on income assuming
        that
        all income is taxed at the ordinary rate applicable to Israeli companies
        and the
        actual taxes on income:
  **Year
                  ended December 31,****2
                  0 0 5**
              
              **2
                  0 0 4**
              
              **2
                  0 0 3**Income
                  before taxes on income
              
              $
              5,502
              
              $
              2,942
              
              $
              353Theoretical
                  tax on the above amount
              
              $
              1,871
              
              $
              1,030
              
              $
              127Tax
                  benefit arising from "Approved Enterprise"
              
              
              554
              
              
              968
              
              
              1,607Decrease
                  in valuation allowance
              
              
              (2,420
              )
              
              (1,184
              )
              
              (130
              )Adjustments
                  arising from differences in the basis of measurement for tax purposes
                  and
                  for financial reporting purposes
              
              
              905
              
              
              (236
              )
              
              (1,414
              )Other,
                  net
              
              
              256
              
              
              (103
              )
              
              96$
              1,166
              
              $
              475
              
              $
              286
  F-24
  **FUNDTECH
          LTD.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 (In
          thousands, except share and per share data)
  **NOTE
        13**  **-**  **OPERATING
        SEGMENT AND GEOGRAPHICAL INFORMATION**
 
 a.
              The
                  Company evaluates its business activities in accordance with the
                  provisions of SFAS No. 131 "Disclosure about Segments of an Enterprise
                  and
                  Related Information".
 
 The
        Company aligns itself into three operating business segments: Cash Management,
        Payments and BBP.
 
 The
        Company’s cash management solutions enable small, mid and large-tier financial
        institutions to deliver a complete set of cash management services through
        the
        Internet and other delivery channels. The Company’s payments solutions automate
        all aspects of the funds transfer, including foreign exchange settlement
        and
        customer notification process, enabling straight-through-processing (STP)
        of
        payments. BBP develops, implements, maintains and operates systems for the
        automatic processing and transport of data in the finance industry. BBP also
        provides interbank gateway services. Its products include system solutions
        for
        interbank applications, as well as integration modules for host connections.
        The
        Company's chief operating decision makers evaluate performance of each segment
        based on income (loss) from operations before restructuring expenses, interest
        expenses and income taxes.
 
 The
        Company does not identify or allocate its assets by operating segments as
        part
        of the assessment of segment performance.
 
 The
        following table sets forth the Company’s revenue and operating income (loss)
        from all reportable segments:
  **Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003**Cash
                  Management:Revenues
              
              $
              16,454
              
              $
              13,416
              
              $
              11,365Operating
                  income (loss)
              
              $
              (503
              )
              $
              201
              
              $
              1,249Payments:Revenues
              
              $
              44,898
              
              $
              33,870
              
              $
              26,972Operating
                  income (loss)
              
              $
              11,753
              
              $
              8,229
              
              $
              4,827BBP:Revenues
              
              $
              13,112
              
              $
              11,251
              
              $
              9,277Operating
                  income (loss)
              
              $
              1,061
              
              $
              600
              
              $
              (106
              )
  F-25
  **FUNDTECH
          LTD.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 (In
          thousands, except share and per share data)
  **NOTE
        13**  **-**  **OPERATING
        SEGMENT AND GEOGRAPHICAL INFORMATION (Cont.)**
 
 **b.**  Following
        is a reconciliation of the operating loss of the reportable segments to the
        data
        included in the consolidated financial statements:
  **Year
                  ended****December
                  31,****2005**
              
              **2004**
              
              **2003**Total
                  operating income (loss) of the reportable segments:
              
              $
              12,311
              
              $
              9,030
              
              $
              5,970Amounts
                  not allocated to segments:General
                  and administrative expenses
              
              
              6,186
              
              
              5,574
              
              
              5,326Marketing
                  expenses
              
              
              1,708
              
              
              1,241
              
              
              962Consolidated
                  operating income (loss)
              
              $
              4,417
              
              $
              2,215
              
              $
              (318
              )
  c **.**  **Geographic
        information:**
 
 The
        total
        revenues are attributed to geographic information, based on the customers'
        location.
 
 **Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003****Total
                  revenues**
              
              **Long
                  -lived Assets**
              
              **Total
                  revenues**
              
              **Long
                  -lived assets**
              
              **Total
                  revenues**
              
              **Long
                  -lived assets**Israel
              
              $
              149
              
              $
              1,073
              
              $
              62
              
              $
              910
              
              $
              115
              
              $
              674United
                  States
              
              
              39,948
              
              
              20,330
              
              
              31,920
              
              
              18,503
              
              
              28,908
              
              
              17,771Switzerland
              
              
              11,666
              
              
              8,417
              
              
              10,425
              
              
              9,221
              
              
              8,865
              
              
              8,185India
              
              
              1,020
              
              
              5,544
              
              
              292
              
              
              4,176
              
              
              -
              
              
              -United
                  Kingdom
              
              
              8,781
              
              
              101
              
              
              4,113
              
              
              14
              
              
              3,551
              
              
              58Others
              
              
              12,902
              
              
              3
              
              
              11,725
              
              
              7
              
              
              6,175
              
              
              10$
              74,466
              
              $
              35,468
              
              $
              58,537
              
              $
              32,831
              
              $
              47,614
              
              $
              26,698
 
 **d.**  **Major
        customers data as a percentage of total revenue:**
 
 **Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003**Customer
                  A
              
              
              10
              %
              
              14
              %
              
              18
              %Customer
                  B
              
              
              14
              %
              
              2
              %
              
              -
 
  F-26
  **FUNDTECH
            LTD.**
 **NOTES
            TO FINANCIAL STATEMENTS**
 (In
            thousands, except share and per share data)
  **NOTE
        14**  **-**  **FINANCIAL
        INCOME, NET**
  **Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003**Financial
                  expenses:Interest
                  and other
              
              $
              39
              
              $
              18
              
              $
              47Foreign
                  currency translation differences, net
              
              
              190
              
              
              128
              
              
              -229
              
              
              146
              
              
              47Financial
                  income:Interest
                  and other
              
              
              1,122
              
              
              795
              
              
              716Foreign
                  currency translation differences, net
              
              
              192
              
              
              78
              
              
              21,314
              
              
              873
              
              
              718$
              1,085
              
              $
              727
              
              $
              671
 
  F-27
  
 **SCHEDULE
        II**
 
 **FUNDTECH
        LTD.**
 **VALUATION
        AND QUALIFYING ACCOUNTS**
 
 **Year
                  ended December 31,****2005**
              
              **2004**
              
              **200****3**Allowance
                  for doubtful accounts at beginning of year
              
              $
              1,287
              
              $
              2,366
              
              $
              4,512Provision
              
              
              552
              
              
              269
              
              
              350Translation
                  adjustments
              
              
              (6
              )
              
              3
              
              
              4Accounts
                  receivable written off
              
              
              (169
              )
              
              (1,351
              )
              
              (2,500
              )Allowance
                  for doubtful accounts at end of year
              
              $
              1,664
              
              $
              1,287
              
              $
              2,366
   F-28
  SIGNATURE
 
 The
        registrant hereby certifies that it meets all of the requirements for filing
        on
        Form 20-F and that it has duly caused and authorized the undersigned to sign
        this annual report on its behalf.
  **FUNDTECH
                LTD.**By:
              /s/
                Reuven Ben MenachemReuven
                  Ben Menachem
                Chief
                  Executive OfficerDate: June 30, 2006