As
      filed
      with the Securities and Exchange Commission on June __, 2007







**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      20-F**




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




**OR**




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





**For
      the fiscal year ended**  **December
      31, 2006**




**OR**




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





**OR**




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





**For
      the transition period from __________ to __________**




**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:


Ordinary
                  Shares, NIS 0.01 Par Value
              Nasdaq
                  Global Market(Title
                  of each Class)
              (Name
                  of Exchange on which
                  Registered)




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




None




(Title
      of
      Class)




Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:




None




(Title
      of
      Class)









Indicate
      the number of outstanding shares of each of the issuer’s classes of capital or
      common stock as of the close of the period covered by the annual report:
      15,311,362




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




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 þ




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 þ No  ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. 
(Check one)




Large
      accelerated filer  ̈    Accelerated
      filer þ   Non-accelerated
      filer  ̈




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




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 þ










**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.
              11**ITEM
                  4A.**
              UNRESOLVED
                  STAFF COMMENTS
              23**ITEM
                  5.**
              OPERATING
                  AND FINANCIAL REVIEW AND PROSPECTS.
              24**ITEM
                  6.**
              DIRECTORS,
                  SENIOR MANAGEMENT AND EMPLOYEES.
              41**ITEM
                  7.**
              MAJOR
                  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
              53**ITEM
                  8.**
              FINANCIAL
                  INFORMATION.
              55**ITEM
                  9.**
              THE
                  OFFER AND LISTING.
              56**ITEM
                  10.**
              ADDITIONAL
                  INFORMATION.
              59**ITEM
                  11.**
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
              73**ITEM
                  12.**
              DESCRIPTION
                  OF SECURITIES OTHER THAN EQUITY SECURITIES.
              73**PART
                  II****ITEM
                  13.**
              DEFAULTS,
                  DIVIDEND ARREARAGES AND DELINQUENCIES.
              73**ITEM
                  14.**
              MATERIAL
                  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
                  PROCEEDS.
              73**ITEM
                  15T.**
              CONTROLS
                  AND PROCEDURES.
              73**ITEM
                  16.**
              [RESERVED]
              74**ITEM
                  16A.**
              AUDIT
                  COMMITTEE FINANCIAL EXPERT.
              74**ITEM
                  16B.**
              CODE
                  OF ETHICS.
              74**ITEM
                  16C**.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES.
              74**ITEM
                  16D.**
              EXEMPTIONS
                  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
              76**ITEM
                  16E.**
              PURCHASES
                  OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                  PURCHASERS.
              76**PART
                  II**I**ITEM
                  17.**
              FINANCIAL
                  STATEMENTS.
              76**ITEM
                  18.**
              FINANCIAL
                  STATEMENTS.
              76**ITEM
                  19.**
              EXHIBITS.
              76


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, 2006 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,
      2003
      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.




**2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****FINANCIAL
                DATA:**Total
                revenues
            
            $
            39,828
            
            $
            47,614
            
            $
            58,537
            
            $
            74,466
            
            $
            85,509Operating
                income (loss)
            
            
            (16,692
            )
            
            318
            
            
            2,215
            
            
            4,417
            
            
            2,731Net
                income (loss)
            
            
            (16,647
            )
            
            67
            
            
            2,467
            
            
            4,336
            
            
            3,751Basic
                earnings (loss) per share
            
            $
            (1.16
            )
            $
            0.00
            
            $
            0.17
            
            $
            0.29
            
            $
            0.25Diluted
                earnings (loss) per share
            
            $
            (1.16
            )
            $
            0.00
            
            $
            0.16
            
            $
            0.27
            
            $
            0.24Cash,
                cash equivalents, short-term bank deposits and short term
                investments
            
            $
            42,496
            
            $
            37,928
            
            $
            36,430
            
            $
            49,599
            
            $
            47,167Long-term
                marketable securities
            
            
            
            
            
            8,436
            
            
            9,591Working
                capital
            
            
            44,630
            
            
            41,183
            
            
            37,917
            
            
            49,909
            
            
            54,794Total
                assets
            
            
            89,380
            
            
            89,560
            
            
            98,881
            
            
            105,801
            
            
            112,063Shareholders’
                equity
            
            
            75,166
            
            
            76,534
            
            
            79,805
            
            
            85,010
            
            
            89,786




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 Global 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.*




**C.**
            **Reasons
                for the Offer and Use of
                Proceeds.**




*Not
      applicable.*




1




**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.*




**Risk
      Relating to Our Business**




***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, cash management and securities
      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 a contract with a large customer for the sale of one of our
      payments products and one for sale of our securities product. Sales to this
      customer represented 12%, 14%, and 14% or our revenues for 2006, 2005 and 2004
      respectively. We have also entered into a contract with another large customer
      for the sale of our securities product. Sales to this customer represented
      12%,
      10%, and 2% or our revenues for 2006, 2005 and 2004 respectively. 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
      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.




***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
      potential clients 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.




2




***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;




·
            our
                customers’ budget cycles;




·
            the
                timing of the release of new product
                upgrades;




·
            any
                lengthening of our sales cycle;




·
            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
                in Israel;




·
            consolidation
                of our customers; and




·
            currency
                fluctuations.




·
            changes
                in global economic conditions in general, and conditions in our industry
                and target markets in particular;




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 a 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.




3




***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;




·
            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., S1
      Corporation, Fidelity Information Services, Banklink, TietoEnator, Sunguard,
      Fiserv, Dovetail, GIFTS Software, Smartstream Technologies, Clear2Pay 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. A number 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.”




4




***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 and 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.




***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 45.5%
      of
      our total revenues in 2004, 46.4% of our total revenues in 2005 and 48.1% of
      our
      revenues in 2006 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;




·
            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.




***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 with the 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.




5




***We
      are trending toward a lower percentage of license fees and a greater percentage
      in service revenues in our revenue models, which tends to compress our margins
      and adversely affect our share price.***




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
      lower overall margins and 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.




***The
      market price of our Ordinary Shares may be volatile.***




The
      stock
      market in general, and particularly over the past six years, has experienced
      price and volume fluctuations. The market prices of securities of technology
      companies still suffer 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;




·
            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.




***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 15, 2007, we had 16,021,425 Ordinary Shares outstanding, and, in addition,
      we have reserved up to 199,590 Ordinary Shares for issuance under our share
      option and restricted share 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.




6




We
      may
      continue to issue restricted shares or stock 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:




·
            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, Switzerland and Cashtech Solutions India Private
      Limited, Radius Partners, Inc. and Prang GmbH, Germany, 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.




7


***We
      have a limited operating history with respect to certain of our principal
      products, which makes it difficult to predict future results of
      operations.***




We
      have
      spent considerable time, effort and money developing our next generation
      software. Over the period 2004-2006, Global PAYplusTM has been installed
      at **** 15
      banks and
      CASHplus® which is currently installed at or operating on behalf of 70 **** banks.
      This limited history of operations for our
      newest 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.




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.




8




***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.




***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. In July and August 2006,
      significant fighting took place between Israel and Hezbollah in Lebanon,
      resulting in rockets being fired from Lebanon up to 50 miles into Israel. There
      can be no assurance that the recent relative calm will continue. **** Also,
      the
      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, and
      by
      civil unrest between Hamas and Fatah, particularly in Gaza. 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.




9




***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. In 2006, the dollar devalued against the NIS while the inflation
      rate
      in Israel was negligible. 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.




***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.




***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.




10




***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 2006, we
      cannot assure you that the United States Internal Revenue Service 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 averaged
      quarterly over 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) 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) . For
      additional information, see Item 10E, “Additional Information — Taxation.” -
      United States Federal Income 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, Switzerland (“Datasphere”)
      and Cashtech Solutions India Private Limited (“Cashtech”). In 2005, we acquired
      100% of the stock of Radius Partners, Inc. (“Radius Partners”). In early 2007 we
      acquired 100% of the stock of Prang GMBH, Germany (“Prang”).




On
      March
      13, 1998, we completed our initial public offering and our Ordinary Shares
      began
      trading on The NASDAQ National Market (now the NASDAQ Global 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
      $4.3 million, $5.4 million and $5.2 million during the years ended December
      31,
      2004, 2005 and 2006, 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. Each
      of these transactions carried an “earn out” provision for which we have
      made payments totaling $1.4 million during 2006 and for which we forecast
      payments of $1.2 million in 2007 . We
      acquired all of the capital stock of Prang during 2007 for a total of
      approximately $5.2 millions plus an adjustment for 2006 undistributed profits
      which totaled $0.7 million. Under the “earn out” provisions of the acquisition
      agreement, we may be required to pay up to an additional approximately 4 million
      euros based on Prang’s performance between 2007 and 2010.




11




Capital
      expenditures for the year ending December 31, 2007 are expected to be
      approximately $7.8 million, of which $6.2 million will be spent in the United
      States and $1.6 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 150 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. Prang,
      acquired in early 2007, is a payments solution provider in Germany where it
      offers its Prang FTS solutions.




*Industry
      Background*




As
      global
      commerce continues to increase, and new banking technologies are adopted, there
      have been dramatic increases in both the number of transactions consummated
      through electronic payment systems and the need for timely delivery of financial
      information. Financial institutions continue to seek more efficient methods
      of
      offering payment, settlement and cash management services.




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; increased regulatory requirements imposed on banks,
      particularly in respect to initiatives in the European Union, a desire to
      accelerate top-line revenue growth in the form of additional fee income
      generating services, the need to lower operating costs, and to develop unique
      services that allow an institution to differentiate itself from its
      competitors.




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;




12




·
            new
                and expanded regulatory requirements on banks including, but not
                limited
                to, those in the areas of interdiction and anti-money laundering,
                faster
                payments, and Single European Payments Area
                (“SEPA”);




·
            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 establish strategic
                technology partnerships with a few key vendors in order 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;




·
            demand
                from clients for simplified corporate banking relationship, which
                require
                banks to re-engineer customer facing systems;
                and




·
            institutions
                seeking to unlock un-tapped value in their transaction banking
                franchises.




*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.




***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.Pan-European
              PAYplus
            
            A comprehensive
              solution to meet SEPA and Target 2 compliance.OmniPay
            
            A payments
              hub that
              enables corporate clients to transmit a single file of mixed payments,
              thereby simplifying this process.




13




IGTplus
            
            A payments
              and
              settlement solution which provides message broker services between
              financial institutions and S.W.I.F.T., SIC, SIS and SWX 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.




**Pan-European
      PAYplus**




Pan-European
      PAYplus is a product solution that provides a financial institution with the
      payment processing and liquidity management functionality required for handling
      Euro payments in the Single European Payments Area. Pan European PAYplus
      provides an integrated solution to meet SEPA high impact changes while
      maximizing STP and preserving income from existing payment operations.
      Pan-European PAYplus incorporates new technology embedded in the SEPA technical
      infrastructure (e.g. ISO 20022, SWIFT Cash Reporting). The product can be
      deployed on a stand-alone basis for banks to integrate within their existing
      payments infrastructure, or as an integrated component of Fundtech’s Global
      PAYplus payment solution.




**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.




14




**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 Exchanges [SWX, virt-x, other] & 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 may obtain the same functionality as they would obtain
      by
      acquiring a license by contracting for the services of the BBP Service Bureau,
      which operates IGT Plus on behalf of a number of such institutions.




**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.Transact
                Remit TM
            
            A
                powerful, web-based, international remittance transaction processing
                system, which automates the entire process of money transfer for
                a
                bank/financial institution.




15




**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 is 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.




**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.




**Transact
      Central**




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.




**Transact
      Remit**




Transact
      Remit ensures you meet your goal and your customers' requirements fully and
      satisfactorily. Transact Remit is a powerful, web-based, international
      remittance transaction processing system, which automates the entire process
      of
      money transfer for a bank/financial institution. It is also a highly customized
      solution that ensures speedy remittances from anywhere in the world to anywhere,
      without the usual transit losses.




16




Transact
      Remit is built using Transact Central, Cashtech’s robust, central financial
      application hosting platform and is unremitting in performance and
      delivery.




***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.TRADEplus
                Fixed Income
            
            TRADEplus
                Fixed income provides web based, straight through processing solutions
                that provides real-time Omgeo and FIX connectivity, as well as automated
                matching and intelligent routing by business area.TRADEplus
                Correspondent Clearing
            
            TRADEplus
                allows Correspondent Clearing firms to provide superior internet
                services
                to their clients.




**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.




17




**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.




**TRADEplus
      Fixed Income**




TRADEplus
      Fixed Income allows brokers to choose to process at the Trade level or Breakdown
      level. Trade level users send trades into TRADEplus that are matched against
      allocations received from OASYS, FIX or manual input. Exceptions are routed
      to
      the appropriate business area (e.g. MBS) based on trade inputs and routing
      rules. Matched trades auto-generate ACCEPTS back to OASYS. Mismatched trades
      are
      reviewed by users and can be amended, accepted or rejected. Breakdown level
      users receive allocations from OASYS (using one or more acronyms) and these
      allocations are routed to the appropriate business area based on allocation
      inputs and routing rules. Users accept or reject allocations online. Regardless
      of level, once the trade is accepted then the broker’s back office system can be
      updated via an automated FIX, MQ or File-based communication.





**TRADEplus
      Correspondent Clearing**




TRADEplus
      allows Correspondent Clearing firms to provide superior internet services to
      their clients. TRADEplus services include Trade Capture, Trade Matching,
      Allocations Processing, New Account Set Up and Verification, Account
      Maintenance, Account Inquiry, Trade Confirmation and Statement and Report
      Access. TRADEplus Portal enables Correspondent Clients to communicate with
      their
      Clearing firm through a custom view of these services that is designed to their
      specific business needs.




***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.




18




**SWIFT
      Services**




Corporate
                Connect
            
            Fundtech's
                service bureau is an efficient way for corporations to connect to
                their
                Banks via SWIFT.Message
                Converter
            
            A
                unique middleware solution allows users to convert proprietary messages
                into SWIFT and other standard messages.Compliance
                Filter
            
            The
                Compliance Filter monitors transaction flow based on the requirements
                of
                the OFAC (Office of Foreign Assets Control), Factiva, Worldcheck
                or other
                country specific standards.




**Corporate
      Connect**




Through
      Fundtech’s SWIFT Service Bureau, corporate entities now have access to a
      cost-effective connection to the SWIFT messaging network. The service is a
      complete interbank solution that is centrally operated, eliminating the need
      for
      significant investment in hardware or software. Installation is quick and
      relatively easy.




Both
      corporate entities and their banks will benefit by processing transactions
      in an
      STP environment, with fewer interfaces to enterprise resource planning (ERP)
      systems and other in-house applications. Fundtech’s SWIFT Service Bureau is the
      world’s largest, currently serving over 100 financial institutions. Corporate
      access to the SWIFTNet is made possible through SWIFT’s Member Administered
      Closed User Groups (MA-CUG).




**IGTplus
      Message Converter**




The
      IGTplus Message Converter is a unique middleware application specifically
      designed for the financial services industry. It allows financial institutions
      to convert proprietary messages into SWIFT and other standard messages and
      vice
      versa, saving time and reducing costs of conversion.




**IGTplus
      Compliance Filter**




IGTplus
      Compliance Filter provides online, real time protection. Every transaction
      is
      checked before it leaves or enters the bank system. It monitors transaction
      flow
      based on the requirements of the OFAC (Office of Foreign Assets Control),
      Factiva, Worldcheck or other country specific standards. The IGTplus Compliance
      Filter is available for SWIFT, SIC/euroSIC and SECOM.




**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.




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 (Financial
      Information Exchange) protocol.




19




**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 to or will move to processing payments on a real time gross
      settlement (RTGS) 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.




Since
      2001, we have 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
      three trillion U.S. dollars. We have been successful in obtaining a majority
      of
      the CLS contracts awarded from 2001 to the present time 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, Banco Bilboa Vizcaya Argentaria, ABN Amro Bank and Intesa
      Sanpaolo SpA. 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 sales of Global PAYplusTM to three 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, 2006,
      the total revenue derived from these bank customers was approximately $20.1
      million which represented approximately 24% of our 2006 revenue and the revenue
      derived from the securities customer was approximately $7.5 million which
      represented approximately 9% of our 2006 revenue. See Item 5A, “Operating and
      Financial Review and Prospects —Results of Operations— Major Customers.”




20




During
      the period 2003 though 2006, 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. In December 2006 and March 2007, we entered into
      agreements to license faster payments and Euroscheduler versions of Global
      PAYplusTM with Barclays Bank PLC and to perform services in connection with the
      licenses. The services are to be provided through a relationship with our
      alliance partner i-flex Solutions.




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. Likewise, we acquired Prang in early 2007. Prang has approximately
      50
      customers, primarily in Germany.




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. 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
      and
      thought leadership including public and industry analyst relations, direct
      response marketing programs, telemarketing lead generation and lead nurturing,
      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 134 full-time employees on December
      31,
      2006. 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.




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, India and Germany. 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.




21




**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 inclusive
      of
      virtual private networks, 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, Fiserv, GIFTS Software, 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.




**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
                StatesFundtech
                Germany, GmbH
            
            GermanyPrang
                GmbH
            
            Germany






22




**D.**
            **Property,
                Plants and Equipment.**




We
      do not
      own any real property. As of December 31, 2006, we leased office space as
      specified in the table below. The aggregate annual lease payments for our
      facilities during 2006 were approximately $2,487,000




**Location**
            
            **Approximate**
              **Aggregate
                Square Feet**Ramat-Gan,
                Israel
            
            13,000Burlington,
                Massachusetts
            
            12,000Pembroke,
                Massachusetts
            
            2,800Jersey
                City, New Jersey
            
            25,800Flower
                Mound, Texas
            
            400San
                Leandro, California
            
            6,700Norcross,
                Georgia
            
            26,000Switzerland
            
            8,600United
                Kingdom
            
            3,450India
            
            17,500Germany
            
            5,000





**ITEM 4A.**
                **UNRESOLVED
                    STAFF COMMENTS**





None




23




**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 five
      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; (iv) financial
      messaging products and services that enable banks to communicate with
      specialized networks such as the S.W.I.F.T. network; and (v) securities
      settlement straight through processing products.




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 and access to securities settlement
      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;




(iii)  The
      competitive marketplace for corporate accounts that is continually innovating
      new services that are largely driven by new and more flexible technology;
      and




(iv)  The
      need
      to simplify banking relationships for corporate clients by eliminating “siloed”
processing systems, that is, systems operating in a narrow or limited
      functionality spectrum.




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.




24




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.




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




During
      the period 2001 to 2003, we restructured in response to market conditions which
      resulted in a 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”). While Certain Costs declined during 2001 and 2002, they
      stabilized in 2003. 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. Certain Costs for 2006 increased to $17.8 million,
      $19.5
      million, $19.3 million and $20.1 million in the first, second, third and fourth
      quarter, respectively. These increases in Certain Costs were necessitated by
      our
      improving revenues during this same period. During 2007, Certain Costs are
      expected to rise as we add staff, necessitated by our improving revenue as
      well
      as by the continuing increase in projects involving a significant services
      component.




25




We
      are
      currently marketing new products which have been developed since 2001,
      particularly Global PAY plus and CASHplus. 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.




While
      we
      note that although spending on technology in the financial services industry
      increased during the period 2004 through 2006, and is expected to continue
      to
      grow in 2007, 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, we 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
      at 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 enhanced our cash management product line with products
      that are well suited for non-US markets, as well as extending our geographic
      coverage into the Asia Pacific market.




Under
      the
      terms of the acquisition agreement, we 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. A further payment
      of $1,130,000 was made in 2006 based on Cashtech’s financial performance, which
      was already accounted for in 2005. We also expect to make a payment of
      $1,004,000 in 2007 based on Cashtech’s financial performance, which was already
      accounted for in 2006.




In
      October of 2005, we 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 31, 2011, which
      may
      amount to an additional $3 million payable. During 2006, payments of $220,000
      were made based on and for 2005, and we anticipate that payments will be made
      in
      2007 in the amount of $200,000 based on and for 2006.




In
      February of 2007, we acquired all of the outstanding shares of Prang, GmbH.
      The
      purchase price was 4 million Euro which was paid in cash. Additional cash
      consideration in an amount of up to 4 million Euro will be paid if and when
      certain conditions related to the performance of Prang are met between the
      acquisition date and December 31, 2010.




26




**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.




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, 2006 and 2005, 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.




27




*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 2004, 2005 and 2006 amortization costs
      relating to the capitalized development costs totaled $1,575,000 for each
      year.




*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.




28




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 2005 and 2006. 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 123R”). 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
      123R
      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
      123R
      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 123R 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 123R, in the first quarter of 2006,
      we
      elected to use the “modified prospective method”. Under the modified prospective
      method, we was required to recognize compensation cost for all awards granted
      after the adoption of SFAS 123R and for the unvested portion of previously
      granted awards that are outstanding on that date.




Under
      the
      modified prospective method of adoption for SFAS No. 123R, the compensation
      cost
      recognized by us beginning in 2006 includes (a) compensation cost for all equity
      incentive awards granted prior to, but not yet vested as of January 1, 2006,
      based on the grant-date fair value estimated in accordance with the original
      provisions of SFAS No. 123, and (b) compensation cost for all stock-based
      compensation granted subsequent to January 1, 2006, based on the grant-date
      fair
      value estimated in accordance with the provisions of SFAS No. 123R. We use
      the
      straight-line attribution method to recognize stock-based compensation costs
      over the service period of the award. The share-based compensation resulting
      from the application of SFAS No. 123R resulted in charge of $2,487,000 in
      2006.




29


**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,****2004**
            
            **2005**
            
            **2006**Revenues:Software
                license fees
            
            
            28.0
            %
            
            22.2
            %
            
            15.9
            %Maintenance
                and service fees
            
            
            71.5
            
            
            77.7
            
            
            84.0Hardware
                sales
            
            
            0.5
            
            
            0.1
            
            
            0.1Total
                revenues
            
            
            100.0
            
            
            100.0
            
            
            100.0Operating
                Expenses:Software
                license costs
            
            
            1.1
            
            
            0.7
            
            
            0.7Maintenance
                and service costs
            
            
            39.3
            
            
            40.2
            
            
            40.6Hardware
                Costs
            
            
            0.5
            
            
            0.1
            
            
            0.1Research
                and development
            
            
            19.1
            
            
            18.1
            
            
            19.5Selling
                and marketing, net
            
            
            19.1
            
            
            17.8
            
            
            18.4General
                and administrative
            
            
            12.4
            
            
            12.8
            
            
            13.7Amortization
                of capitalized software
              development
                costs
            
            
            2.7
            
            
            2.1
            
            
            1.8Amortization
                of other acquired intangibleassets
            
            
            1.7
            
            
            1.6
            
            
            1.5Provision
                for doubtful accounts
            
            
            0.5
            
            
            0.7
            
            
            0.5Total
                operating expenses
            
            
            96.2
            
            
            94.1
            
            
            96.8Operating
                income (loss)
            
            
            3.8
            
            
            5.9
            
            
            3.2Financial
                income, net
            
            
            1.2
            
            
            1.5
            
            
            2.3Income
                before income taxes
            
            
            5.0
            
            
            7.4
            
            
            5.5Income
                taxes
            
            
            0.8
            
            
            1.6
            
            
            1.1Net
                income
            
            
            4.2
            %
            
            5.8
            %
            
            4.4
            %




We
      again
      note in particular the impact on net income of the application of SFAS No.
      123R
      resulted in charge of $2.5 million in 2006.




30


**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:




**2004**
              
              **2005**
              
              **2006**TotalRevenues
              
              Percentage
              
              Total
                  Revenues
              
              Percentage
              
              Total
                  Revenues
              
              PercentageIsrael
              
              $
              62
              
              
              0.1
              
              $
              149
              
              
              0.2
              
              $
              2,006
              
              
              2.3U.S.A.
              
              
              31,920
              
              
              54.5
              
              
              39,948
              
              
              53.6
              
              
              44,399
              
              
              51.9Switzerland
                India
                United
                  Kingdom
              
              
              10,425
                292
                4,114
              
              
              17.8
                0.5
                7.0
              
              
              11,666
                1,020
                8,781
              
              
              15.7
                1.4
                11.8
              
              
              11,471
                1,105
                14,469
              
              
              13.4
                1.3
                17.0Other
              
              
              11,724
              
              
              20.1
              
              
              12,902
              
              
              17.3
              
              
              12,059
              
              
              14.1$
              58,537
              
              
              100.0
              %
              $
              74,466
              
              
              100.0
              %
              $
              85,509
              
              
              100.0
              %




Segment
      Information **:**




**2004**
            
            **2005**
            
            **2006**Cash management
                revenue
            
            $
            13,416
            
            $
            16,454
            
            $
            21,660Operating
                income (loss)
            
            
            201
            
            
            (503
            )
            
            178Payments
                revenue
            
            
            33,870
            
            
            44,898
            
            
            54,705Operating
                income
            
            
            8,229
            
            
            11,753
            
            
            13,363BBP
                revenue
            
            
            11,251
            
            
            13,112
            
            
            13,870Operating
                income (loss)
            
            
            600
            
            
            1,061
            
            
            634





Segment
      Information (in thousands) **:**




While
      cash management revenues continued to grow from 2004 to 2006, 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 24% of our annual revenues, or approximately $20 million,
      from the license, consulting and maintenance service fees earned in connection
      with agreements with two leading international financial institutions in 2005.
      We derived approximately 24% of our annual revenues from these major customers
      in 2006 as well. See Item 4B, “Information on the Company — Business Overview -
      Customers and Markets.”




31


**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**




*Revenues* .




**Variance****2005**
            
            **2006**
            
            **Increase**
            
            **%**Total
                Revenues
            
            $
            74,466,000
            
            $
            85,509,000
            
            $
            11,043,000
            
            
            14.8
            %





The
      increase in revenues was primarily attributable to (i) revenues from our
      securities initiative that increased by $2.1 million, (ii) revenues from our
      global PAYplus implementation with three major clients which increased by $2.0
      million and (iii) revenues from cash management products which increased by
      $2.9
      million. Total payments business grew by 10% or $4.1 million, primarily from
      PAYplus USA business growth and new GPP clients. Total cash management business
      grew by 21% or $3.4 million primarily due to Cashtech growth. Securities revenue
      grew by 53% contributing $2.8 million growth primarily from project
      revenue.





*Software
      License Fees.* Software
      license fees consist primarily of revenues derived from software license
      agreements we enter into with our customers. A comparison between our 2005
      and
      2006 software license fees is as follows:




**Variance****2005**
            
            **2006**
            
            **Decrease**
            
            **%**Software
                License Fees
            
            $
            16,523,000
            
            $
            13,576,000
            
            
            ($2,947,000
            )
            
            (17.8
            %)




License
      fees for one large Global PAYplus client declined $3.6 million from 2005. In
      addition, we have noted a shift in sales of our CASHplus and PAYplus USA
      products that indicates a trend away from licensing and toward hosting services.
      See also *Maintenance
      and Services Fees* immediately below.




*Maintenance
      and Services Fees* .
      Maintenance and services fees include revenues derived from maintenance
      contracts, customizations and product installation, training, hosting, and
      consulting fees. We generally receive a contract for maintenance and services
      at
      the time a contract for software license is entered into. A comparison between
      our 2005 and 2006 maintenance and services fees is as follows:




**Variance****2005**
            
            **2006**
            
            **Increase**
            
            **%**Maintenance
                and Services Fees
            
            $
            57,943,000
            
            $
            71,933,000
            
            $
            13,990,000
            
            
            24.1
            %




The
      increase in fees primarily related 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 three
      major clients, that totaled $8.9 million; and (ii) and increases in hosting
      fees
      totaling $2.9 million.




*Hardware
      Sales.* We
      continue to de-emphasize sales of hardware to our customers. The total hardware
      sales for 2006 were immaterial. For the year ending December 31, 2006, the
      Company combined hardware sales with maintenance and service fees for 2006
      and
      conformed the 2005 presentation for comparative purposes.




32




*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 2005 and 2006 software license
      costs is as follows:




**Variance****2005**
            
            **2006**
            
            **Increase**
            
            **%**Software
                License Costs
            
            $
            522,000
            
            $
            604,000
            
            $
            82,000
            
            
            15.7
            %




The
      software license costs increased primarily related to third-party embedded
      software utilized by our newer CASHplus and Global PAYplus environments. Costs
      increased primarily for new implementations of hosted customers.




*Amortization
      of Capitalized Software Development Costs* .
      A
      comparison between our 2005 and 2006 amortization of capitalized software
      development costs is as follows:




**Variance****2005**
            
            **2006**
            
            **Decrease**
            
            **%**Amortization
                of Capitalized Software Development Costs
            
            $
            1,575,000
            
            $
            1,575,000
            
            
            -
            
            
            -




This
      reflects the amortized capitalized software development costs in connection
      with
      our Global PAYplus product.




*Amortization
      of Other Acquired Intangible Assets* .
      A
      comparison between our 2005 and 2006 amortization of other acquired intangible
      assets is as follows:




**Variance****2005**
            
            **2006**
            
            **Increase**
            
            **%**Amortization
                of Other Acquired Intangible Assets
            
            $
            1,154,000
            
            $
            1,275,000
            
            $
            121,000
            
            
            10.5
            %




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




*Maintenance
      and Services Costs* .
      Maintenance and services costs consist primarily of personnel and related
      expenses, voice and data expenses and other costs related to the provision
      of
      maintenance, hosting, and professional services. A comparison between our 2005
      and 2006 services costs is as follows:




**Variance****2005**
            
            **2006**
            
            **Increase**
            
            **%**Maintenance
                and Services Costs
            
            $
            30,027,000
            
            $
            34,726,000
            
            $
            4,699,000
            
            
            15.6
            %




Maintenance
      costs decreased by $833,000, directly related to headcount efficiencies in
      the
      support organizations *.* Services
      costs increased by $4.5 million, primarily related to the number personnel
      assigned to Global PAYplus and securities projects. Hosting costs increased
      by
      $361,000, commensurate with the increased number of hosted customers. Others
      services costs increased by $529,000, which are reimbursable expenses that
      will
      be billed back to customers.




33




*Hardware
      Costs.* The
      reduction in costs is commensurate with the decrease in hardware sales
      previously noted. For the year ending December 31, 2006, the Company has
      combined hardware costs with maintenance and service costs and conformed the
      2005 presentation for comparative purposes.




*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 2005 and 2006 software development expenses is as follows:




**Variance****2005**
            
            **2006**
            
            **Increase**
            
            **%**Software
                Development
            
            $
            13,480,000
            
            $
            16,710,000
            
            $
            3,230,000
            
            
            24.0
            %




We
      did
      not capitalize any software development costs in 2006 or 2005 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. 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, and to enhance our Global PAYplus
      product, staff added in the United States to handle enhancements to our cash
      management software and projects as well as Cashtech staff added to accommodate
      their revenue growth. The implementation of FASB 123R in 2006 accounted for
      $152,000.




*Selling
      and Marketing* .
      A
      comparison between our 2005 and 2006 selling and marketing expenses is as
      follows:




**Variance****2005**
            
            **2006**
            
            **Increase**
            
            **%**Selling
                and Marketing
            
            $
            13,182,000
            
            $
            15,324,000
            
            $
            2,142,000
            
            
            16.2
            %




The
      increase in selling and marketing expenses was primarily due to, (i) an increase
      in personnel and related expenses including commissions related to our revenue
      growth and, (ii) increases in travel, promotional, and infrastructure expense
      of
      $369,000. The implementation of FASB 123R in 2006 accounted for
      $504,000.




*Provision
      for Doubtful Accounts* .
      Management’s assessment for uncertainties of outstanding accounts receivable
      collectibility is reflected in our provision for doubtful accounts. A comparison
      between our 2005 and 2006 provision for doubtful accounts is as
      follows:




**Variance****2005**
            
            **2006**
            
            **Decrease**
            
            **%**Provision
                for Doubtful Accounts
            
            $
            552,000
            
            $
            430,000
            
            
            ($122,000
            )
            
            (22.1
            %)




The
      decrease in the provision for doubtful accounts reflects an increase confidence
      in customer collectibility in 2006. We determine write off provisions on a
      case
      by case basis.




34




*General
      and Administrative* .
      A
      comparison between our 2005 and 2006 general and administrative expenses is
      as
      follows:




**Variance****2005**
            
            **2006**
            
            **Increase**
            
            **%**General
                and Administrative
            
            $
            9,557,000
            
            $
            12,133,000
            
            $
            2,576,000
            
            
            27.0
            %




This
      increase is due to higher head count and related expenses $1.0 million or 19%
      in
      the U.S., Switzerland, India. The implementation of FASB 123R in 2006 attributed
      $1.6 million to the increase.




*Financial
      Income, Net* .
      A
      comparison between our 2005 and 2006 financial income, net is as
      follows:




**Variance****2005**
            
            **2006**
            
            **Increase**
            
            **%**Financial
                Income, net
            
            $
            1,085,000
            
            $
            1,984,000
            
            $
            899,000
            
            
            82.9
            %




The
      increase of the net financial income is primarily due to increasing interest
      that was earned on our cash, cash equivalents and marketable securities. To
      a
      lesser extent, a higher average cash balance added to the increase interest
      earned.




*Income
      Taxes* .
      A
      comparison between our 2005 and 2006 income taxes is as follows:




**Variance****2005**
            
            **2006**
            
            **Decrease**
            
            **%**Income
                Taxes
            
            $
            1,166,000
            
            $
            964,000
            
            
            ($202,000
            )
            
            (17.3
            %)




Cashtech’s
      effective tax rate was reduced in 2006 resulting in an overall decreased tax
      liability. This decrease was due, in part, to a reduction in tax rates in
      Japan..




**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 that generated $5.2 million, (ii) revenues from our
      global PAYplus implementation with our two major clients that increased by
      $7.7
      million and, (iii) revenues from cash management products increased by $4.3
      million. Payments grew by 17% or $5.7million, primarily from HSBC
      project-related services. Securities revenue contributed $4.0 million growth
      from Omgeo project revenue. Cash management contributed $5.0 million to the
      overall revenue growth.




35




*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. In addition, we have noted a shift in sales of our CASHplus product
      that indicates 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, customizations and product installation, training, hosting, and
      consulting fees. We generally receive a contract for maintenance and services
      at
      the time a contract for software license is entered into. 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 primarily 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 totaled $10.4 million; and (iii) increases in hosting
      fees
      totaling $2.5 million.




*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**
            
            **%**Hardware
                Sales
            
            $
            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.




36




*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 primarily relate to third-party embedded software
      utilized by our latest CASHplus and Global PAYplus environments. With fewer
      license fees generated, as noted in *software
      License Fees* above,
      there 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.




*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 and related
      expenses, voice and data expenses and other costs related to the provision
      of
      maintenance, hosting 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 achieved economies of scale relevant to the number of
      hosted customers. Others services costs increased by $411,000 for reimbursable
      expenses billed to the client.




37




*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.




*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 was 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 primarily due to (i) an increase
      in personnel and related expenses including commissions resulted in the 14.8%
      revenue growth achieved; and (ii) increases in travel, promotional, and
      infrastructure expenses.




38




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




**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




*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., Israel, India, and
      Switzerland.




*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 an increase in our
      cash
      of $3.0 million and the increasing interest that was 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.




**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 our 1998
      initial public offering in the amount of approximately $29.0 million, proceeds
      from our 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 $1,490,000 from the
      exercise of employee options in 2006. As of December 31, 2006, working capital
      was $54.8 million, which included cash and cash equivalents, short term deposits
      and marketable securities of $47.2 million. Working capital has not increased
      from December 31, 2005 primarily due to cash utilized in
      acquisitions.




39




*Cash
      flows from operations.* Net
      cash
      provided by operating activities amounted to $5.3 million for the year ended
      December 31, 2006 as compared to net cash provided by operating activities
      of
      $10.3 million for the year ended December 31, 2005. This decrease of $5.0
      million was primarily due to a decrease in profitability due to the adoption
      of
      SFAS 123R plus an increase in trade receivables, net, offset impact by an
      increase in deferred revenues due to accelerated collection of 2007
      maintenance.




*Cash
      flows from investing activities.* Net
      cash
      used in investing activities amounted to $6.2 million for the year ended
      December 31, 2006 as compared to $3.3 million for the year ended December 31,
      2005. During the year ended December 31, 2006, we invested $1.4 million to
      pay
      additional amounts as per the terms of the acquisition agreements with Radius
      Partners and Cashtech. Purchases of property and equipment decreased $0.2
      million to $5.2 million for the year ended December 31, 2006 from $5.4 million
      for the year ended December 31, 2005. 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 2007, our anticipated capital expenditures are $7.8 million
      -
      See Item 4A.




*Cash
      flows from financing activities.* Net
      cash
      used in financing activities was $1.8 million for the year ended December 31,
      2006 as compared to net cash provided by financing activities of $1.4 million
      for the year ended December 31, 2005. The decrease was primarily due to the
      purchase of Ordinary Shares in the amount of $3.3 million as noted below, offset
      in part by proceeds from the 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 the Company to utilize up to $20 million to purchase
      Ordinary Shares from time to time on the open market. By June 13, 2007, the
      Company had purchased a total of 320,883 shares at a cost of $3.3
      million.




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.




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.




40


At
      December 31, 2006, we had net operating loss (“NOL”) carryforwards of
      approximately $44.0 million and $32.6 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
      2006, $16.7 million in current expense charges was made related to the
      development of our software with no capitalized costs. During 2005 and 2004,
      $11.2 million and $13.5 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 2004, 2005 or 2006.




**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,
      2006,
      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
                yearsOperating
                leases
            
            $
            10,041
            
            $
            2,878
            
            $
            4,280
            
            $
            1,424
            
            $
            1,459




**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
            
            50
            
            Chairman
                of the Board of DirectorsReuven
                Ben Menachem
            
            46
            
            Chief
                Executive Officer, DirectorTsvi
                Gal
            
            47
            
            DirectorYaffa
                Krindel
            
            52
            
            DirectorStanley
                Stern
            
            50
            
            DirectorGil
                Weiser
            
            65
            
            DirectorBen-Zion
                Zilberfarb
            
            57
            
            DirectorJoseph
                J. Aulenti
            
            61
            
            Executive
                Vice President, General Counsel and SecretaryYoram
                Bibring
            
            49
            
            Executive
                Vice President, Chief Financial OfficerJoseph
                P. Mazzetti
            
            66
            
            Executive
                Vice President, Corporate DevelopmentMichael
                Sgroe
            
            51
            
            President
                & Chief Operating Officer




41





**Gideon
      Argov** was
      elected Chairman of the Board of Directors in July 2003. Mr. Argov is currently
      serving as the President and Chief Executive Officer of Entegris, Inc., a
      materials integrity management leader in high technology. From 2001 to November
      2004, he was 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 Entegris, Inc., Interline
      Brands, Inc. and X-Rite Inc. 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** has
      served as a director since February 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 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 on 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 and
      director 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 board of Syneron Medical, a publicly traded company
      (ELOS) and on the boards of the following private companies: Siano Mobile
      Silicon Inc., OrSense Ltd., Trivnet Inc., Negevtech Ltd. 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.




**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 serves
      as
      Chairman of the board of Tucows, Inc. 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 has served as director
      and
      chairman of the executive committee to BBP, the Company's Swiss subsidiary
      from
      2001 to 2006. Mr. Weiser presently serves as the CEO of Orsus solution since
      August 2006. He serves as director of various boards and has other affiliations
      with a number of other Israeli high-tech companies. Mr. Weiser served as a
      director of the Tel Aviv Stock Exchange from 2002 to 2004. He served as the
      Vice
      Chairman of Orama, an Israeli/U.S. merchant bank from 2000 to 2001. From 1976
      until 1993, Mr. Weiser served as Managing Director of Digital Israel, a wholly
      owned subsidiary of Digital Equipment Corporation located in Herzlia. From
      1993
      until 1995, Mr. Weiser served as President and Chief Executive Officer of
      Fibronics International Inc., a worldwide provider of network solutions located
      in Haifa, Israel. From early 1995 until the spring of 2000, Mr. Weiser served
      as
      the Managing director of Hewlett Packard (Israel) located in Tel Aviv and CMS
      -
      distributor of Hewlett Packard products and services. Mr. Weiser has and
      continues to hold significant public positions. He has served as Chairman of
      the
      Multinational Companies Forum and Vice Chairman of the Israeli Management Center
      and as Chairman of the Executive Board of Haifa University from 1994 to 2006.
      Mr. Weiser has earned a B.S.E.E. in Electrical Engineering from the Technion
      in
      Haifa as well as an M.S.E.E. in Electronics Computer Sciences from the
      University of Minnesota.




42




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




**Tsvi
      Gal** is
      currently serving as the Chief Technology Officer for Deutsche Bank Asset
      Management, a division of Deutsche Bank and one of the world’s largest
      investment management organizations based in New York, since October 2005.
      Prior
      to joining Deutsche Bank, from 2002 to October 2005, Mr. Gal was Chief
      Information Officer and Head of Business Development at Time Warner Music Group,
      an entertainment company, located in New York, NY. From 1999 to 2002, Mr. Gal
      served as President and Chief Operating Officer of AT&T’s ATT.COM, a web
      services, hosting and eCommerce company, located in Basking Ridge, New Jersey.
      Mr. Gal also served as Chief Technology Officer of Merrill Lynch in New York,
      NY, initiating the first major brokerage on-line trading system. Prior to
      Merrill Lynch, he served as Chief Information Officer of ABN AMRO North America
      in Chicago, Illinois and prior to this was Vice President of Technology at
      Wells
      Fargo in San Francisco, California where he was credited with developing the
      first Internet bank from 1986 to 1993. From 1996 to 2001, Mr. Gal served on
      the
      USA technology delegation, to the G7 conference of leading economy nations.
      He
      is the author of Distributed Computing Management book and serves on the Board
      of Directors at Expand, Cardean University, Sofmit and Dati and as an advisor
      to
      Rutgers University president. Mr. Gal earned a Graduate degree in Computer
      Science from Rutgers University and an MBA from Golden Gate
      University.




**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 General Counsel and Secretary of Fundtech on October 1, 2002 and
      named
      Executive Vice President in February, 2007. 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 Executive Vice President and 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.




43




**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.




**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
      and
      a severance payment in the event the agreement is terminated subsequent to
      a
      change of control.




The
      aggregate remuneration we paid for the year ended December 31, 2006 to our
      directors and executive officers as a group was $2,574,290 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 $54,177
      for
      2006. 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.




44




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.




**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
      2006, no options to purchase Ordinary Shares in aggregate were granted to our
      executive officers. Grants of restricted stock totaling 99,500 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 $11.85 per share. The share price on the grant date for
      the
      executive management shares was $11.85 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)(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)(4)
            
            Director
            
            February
                12, 2004
            
            2006
                Annual MeetingGil
                Weiser (2)(4)(5)
            
            Director
            
            October
                28, 2002
            
            2006
                Annual MeetingTsvi
                Gal (1)(2)(3)(5)(6)
            
            Director
            
            December
                14, 2006
            
            2009
                Annual MeetingBen-Zion
                Zilberfarb (1)(2)(3)(4)(7)
            
            Director
            
            January
                31, 2002
            
            2007
                Annual MeetingJoseph
                Aulenti
            
            Executive
                Vice President, General Counsel and Secretary
            
            October
                1, 2002
            
            Not
                ApplicableYoram
                Bibring
            
            Executive
                Vice President, 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.


45




(4)
      Member of the Compensation Committee.




(5)
      Member of the Nominating Committee.




(6)
      Mr.
      Gal was elected for a three year term as an external director on December 14,
      2006.




(7)
      Mr.
      Zilberfarb was elected for a second 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




·
            service
                as an office holder.




46




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.




Our
      external directors are required to possess professional qualifications as set
      forth in the regulations promulgated under the Companies Law. In addition,
      our
      board of directors is required to determine how many of our directors must
      have
      financial and accounting expertise. In determining such number, the board of
      directors must consider, among other things, the type and size of the company
      and the scope and complexity of its operations. The Companies Law provides
      that
      if we have an "audit committee financial expert" as defined by the SEC rules
      that has the requisite financial sophistication as defined by The NASDAQ Global
      Market rules and regulations and is independent within the meaning of the
      independent director standards of The NASDAQ Global Market and the SEC, then
      our
      external directors are only required to possess requisite professional
      qualifications.




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 initial term of an external director is three years, and he or
      she
      may be reelected to one additional term of three years by a majority vote at
      a
      shareholders' meeting; provided that external directors of an Israeli company
      whose securities are listed on certain non-Israeli stock exchanges or stock
      markets (including The NASDAQ Global Market) may be reelected for additional
      periods of up to three years each (beyond the first two three-year periods),
      in
      each case provided that (i) the audit committee and thereafter the board of
      directors confirm that, in light of the external director's expertise and
      special contribution to the work of the board of directors and its committees,
      the reelection for such additional period(s) is beneficial to the company,
      (ii)
      the reelection for each additional period is approved by the company's
      shareholders as described in the immediately preceding paragraph and (iii)
      the
      period of service of the external director in such office and the reasons of
      the
      audit committee and board of directors for the proposed reelection for an
      additional period are presented to the general meeting of shareholders prior
      to
      the shareholders' voting on the proposed reelection.




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.




Tsvi
      Gal
      and Ben-Zion Zilberfarb currently serve as “external” directors within the
      meaning prescribed by the Companies Law. Mr. Gal’s current term of office ends
      after the 2009 Annual Shareholder Meeting. Mr. Zilberfarb’s current term of
      office ends after the 2007 Annual Shareholder Meeting.




**Independent
      Directors**




The
      Ordinary Shares are listed for quotation on The NASDAQ and are subject to the
      rules of The NASDAQ Global 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, Tsvi Gal, Stanley Stern, Gil Weiser and Ben-Zion Zilberfarb qualify
      as
      independent directors and meet the independence standard of the NASDAQ
      rules.




47




**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, 2006
      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. For 2007, the Audit Committee will consist of Stanley Stern,
      Chairman, Tsvi Gal and Ben-Zion Zilberfarb. Dr. Zilberfarb has been designated
      as the financial expert under the Sarbanes-Oxley Act of 2002.




**Compensation
      Committee**




The
      members of the Compensation Committee for the fiscal year ended December 31,
      2006 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. For 2007, the Compensation Committee will consist of Yaffa
      Krindel, Chairman, Gil Weiser and Ben-Zion Zilberfarb.




48




**Nominating
      Committee**




In
      accordance with NASDAQ rules, a Nominating Committee was established in 2004.
      Its members during 2006 were 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. For 2007, the Nominating
      Committee will consist of Gil Weiser, Chairman, Gideon Argov and Tsvi
      Gal.




**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.




**The
      NASDAQ Global Market**




Our
      Ordinary Shares are listed for quotation on The NASDAQ Global Market and we
      are
      subject to the rules of The NASDAQ Global 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, Tsvi Gal, Stanley
      Stern, Gil Weiser and Ben-Zion Zilberfarb and qualify as independent directors
      under the current NASDAQ National Market requirements.




49




**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, 2006:




**Software
                Development**
            
            **Operations**
            
            **Sales
                and Marketing**
            
            **Administration**
            
            **Total
                Employees**United
                States
            
            72
            
            96
            
            36
            
            21
            
            225Israel
            
            29
            
            49
            
            2
            
            4
            
            84Switzerland
            
            17
            
            22
            
            8
            
            9
            
            56United
                Kingdom
            
            0
            
            5
            
            5
            
            0
            
            10Australia
            
            0
            
            2
            
            0
            
            0
            
            2India
            
            16
            
            244
            
            10
            
            23
            
            293670





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.




As
      a
      general practice, which became legally required in May 2006, 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, India and Germany. 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.




50




**E.**
            **Share
                Ownership.**




***Security
      Ownership of Directors and Senior Management and Certain Key
      Employees***




As
      of
      June 15, 2007, 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
            
            416,457
                (2.6%)Tsvi
                Gal
            
            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.Joseph
                P. Mazzetti
            
            Beneficially
                owns less than one percent.Michael
                Sgroe
            
            244,885
                (1.5%)




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 15, 2007, options to purchase up to 937,467 Ordinary Shares and 217,663
      Restricted Shares granted to our directors and senior managers were outstanding
      under our option and Restricted Share plans. The weighted average exercise
      price
      of the options was $7.87 per share. From these options and Restricted Shares,
      options to purchase 868,508 Ordinary Shares and 87,494 Restricted Shares granted
      to our directors and executive employees are exercisable or will become
      exercisable within 60 days of June 15, 2007.




As
      of
      June 15, 2007, we had 90 shareholders of record.


51




**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 and restricted shares
      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 31, 2006, 2,408,351
      of these options were outstanding, 951,176 of these options had been exercised,
      and 185,141 options remain available to be granted.




***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 21, 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 21, 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
      15,
      2007, 438,036 restricted shares had been granted under the 2005
      Plans.




52





***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 15, 2007, 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 16,021,425 Ordinary Shares
      outstanding as of June 15, 2007.




**NAME
                OF BENEFICIAL OWNER**
            
            **NUMBER
                OF SHARES BENEFICIALLY**
              **OWNED**
            
            **PERCENTAGE
                BENEFICIALLY OWNED**Clal
                Industries and Investments Ltd.(1)
            
            
            5,350,761
            
            
            33.4
            %Cannell
                Capital LLC(2)
            
            
            2,800,000
            
            
            17.5
            %All
                directors and executive officers as a group (11 persons)
            
            
            1,125,306
            
            
            7.0
            %




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.




53




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 15, 2007 beneficial ownership consisted of 2,800,000 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 (656,922 Ordinary Shares); The Cuttyhunk
                Fund Limited (500,000 Ordinary Shares); Tonga Partners, L.P. (1,023,695
                Ordinary Shares); TE Cannell Portfolio, LLC (619,383 Ordinary Shares).
                The
                address of Cannell Capital LLC is 150 California Street, Fifth Floor,
                San
                Francisco, CA 94111. Cannell Capital LLC formerly held 18.2% of our
                Ordinary Shares. Based on information set forth on a Schedule 13G/A
                filed
                February 15, 2007 by Cannell Capital
                LLC.




16,021,425
      of our Ordinary Shares (of which 14,051,880 are in CEDE account) constituting
      88% of our Ordinary Shares are held by record holders located in the United
      States. 30 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 14, 2004 and May 23, 2005 Clal Industries and
      Investments Ltd. has purchased 34,890 Ordinary Shares. However, its percentage
      ownership decreased from 36.3% to its present 33.5%. No additional shares have
      been purchased. 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, declined to 2,280,800 (15.1%) as of June 14 2006 and increased to
      2,800,000 (17.5%) by February 15, 2007.




Our
      major
      shareholders do not have voting rights that differ from those of our other
      shareholders.




**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.




54




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.




**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.




**B.**
            **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, 2004, 2005 and 2006, together
      with
      the report of the independent auditors thereon, are presented under Item 18
      of
      this report:




Report
      of
      Independent Auditors


55




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.




**B.**
            **Significant
                Changes.**




None






56


**ITEM
              9.**
            **THE
                OFFER AND LISTING.**




**Market
      Price Information**




Our
      Ordinary Shares are quoted on The NASDAQ Global 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**2002
            5.24
            
            3.282003
            8.58
            
            3.302004
            9.90
            
            6.262005
            11.23
            
            8.092006
            12.94
            
            8.722004Fourth
                Quarter
            8.76
            
            6.44


2005First
                Quarter
            10.97
            
            8.09Second
                Quarter
            10.59
            
            9.90Third
                Quarter
            11.08
            
            9.45Fourth
                Quarter
            11.23
            
            9.612006First
                Quarter
            12.11
            
            10.11Second
                Quarter
            12.94
            
            9.14Third
                Quarter
            10.31
            
            8.72Fourth
                Quarter
            12.60
            
            10.03


Most
                recent six monthsDecember
                2006
            12.60
            
            10.94Jan
                2007
            13.24
            
            11.33February
                2007
            14.45
            
            12.21March
                2007
            14.08
            
            13.18April
                2007
            15.76
            
            13.97May
                2007
            16.27
            
            14.63




57


On
      June
      15, 2007, the last closing sale price of the Ordinary Shares, as reported by
      the
      NASDAQ Global Market, was $14.63 per share. As of June 15, 2007, we had 39
      shareholders of record. We believe that the number of beneficial owners of
      the
      Ordinary Shares is approximately 1,841.




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
            
            28.392004Fourth
                Quarter
            38.27
            
            28.712005First
                Quarter
            NIS47.66
            
            NIS36.1Second
                Quarter
            46.47
            
            43.00Third
                Quarter
            50.77
            
            43.91Fourth
                Quarter
            50.37
            
            45.362006First
                Quarter
            NIS
                58.36
            
            NIS
                46.87Second
                Quarter
            58.88
            
            44.62Third
                Quarter
              Fourth
                Quarter
            47.89
              52.33
            
            39.21
              42.60Most
                recent six monthsDecember
                2006
            NIS
                52.33
            
            NIS
                46.33Jan
                2007
            55.99
            
            45.41February
                2007
            59.09
            
            53.78March
                2007
            58.79
            
            56.41April
                2007
            62.79
            
            59.50May
                2007
            63.33
            
            59.42




As
      of
      June 15, 2007, the exchange rate of the NIS to the U.S. Dollar was $1=NIS
      4.175.




58




**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.


59




**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 35 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.




60




**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.




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.




61




**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
      the
      purchase, ownership and disposition of our Ordinary Shares. A “U.S. Holder”
means a holder of our Ordinary Shares that is:




·
            an
                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 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. Certain aspects of U.S.
      Federal income taxation relevant to a holder of Ordinary Shares that is not
      a
      U.S. Holder (a “non-U.S. Holder”). are also discussed below.




If
      a
      partnership (or any other entity treated as a partnership for U.S. Federal
      income tax purposes) holds Ordinary Shares, the tax treatment of the partnership
      as a partner in such partnership will generally depend on the activities of
      the
      partnership. Such a partner or partnership should consult its advisor as to
      its
      tax consequences. 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 U.S. 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 Ordinary Shares upon the exercise of employee stock options
                or
                otherwise as compensation;




·
            are
                grantor trusts;




62




·
            are
                certain former citizen 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,
      owning 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 Distributions 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 non-U.S.
      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 non-U.S. 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 for taxable years beginning on or before December
      31,
      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 non-U.S. 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 non-U.S.
      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 non-U.S. 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 generally 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 .




63




*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 generally 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 generally 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 purchase, ownership or disposition 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 by such 10%
      U.S.
      Holders, gain from such sale or exchange of our Ordinary Shares generally is
      treated as ordinary dividend income to the extent of our earnings and profits
      attributable to the stock sold or exchanged. We do not believe that we are
      a
      CFC, but if we were to become 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.




64




*Passive
      Foreign Investment Company Status.* We would
      be a passive foreign investment company, or PFIC, 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 2006.




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 Ordinary 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 Ordinary Shares and the shareholder’s
      adjusted basis in the Ordinary 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, 2006. However, there can be no assurance that the United
      States Internal Revenue Service (“IRS”) 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 2007 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 2006, 2005 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.




Although
      a U.S. Holder normally is not permitted to make a retroactive QEF election
      for a
      foreign corporation, a retroactive QEF 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.**




65




*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 unless the U.S. Holder provides proof of an applicable
      exemption or correct taxpayer identification number and otherwise complies
      with
      applicable requirements of the backup withholding rules.




A
      U.S.
      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.




**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%.




66




**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.




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.




67




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:




·
            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
                Ownership25
            
            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%




68




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.




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




69




·
            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.




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.




70




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%.




**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).




71




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.




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.




72




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.***




**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
              15T.**
            **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, 2006. 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)  Management’s
      annual report on internal control over financial reporting




The
      Company’s management, under the supervision of its chief executive officer and
      its chief financial officer, is responsible for establishing and maintaining
      adequate internal controls over financial reporting for the Company and its
      subsidiaries. Based
      on
      the criteria for effective internal control over financial reporting established
      in *Internal
      Control—Integrated Framework* ,
      which
      was issued by the Committee of Sponsoring Organizations of the Treadway
      Commission, management has assessed the Company’s internal control over
      financial reporting as effective as of December 31, 2006.




73




This
      annual report does not include an attestation report of the company’s registered
      public accounting firm regarding internal control over financial reporting.
      Management’s report was not subject to attestation by the Company’s registered
      public accounting firm pursuant to temporary rules of the Securities and
      Exchange Commission that permit the company to provide only management’s report
      in this annual report.




(c)
      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, 2006 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, Ben-Zion Zilberfarb, serving on our Audit Committee. Dr.
      Zilberfarb is also an independent director.




**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, 2006, our shareholders re-appointed
      Brightman Almagor & Co., a member of Deloitte Touche Tohmatsu to serve as
      our independent auditors for the 2006 fiscal year.




74


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




Year
                Ended December 31,2006
            
            2005Audit
                fees
            
            $
            262,200
            
            $
            232,500Audit
                related fees
            
            
            42,100
            
            
            14,600Tax
                fees [a]
            
            
            7,000
            
            
            10,500All
                other fees
            
            
            600
            
            
            —Total
            
            $
            311,900
            
            $
            257,600





[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.




**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
      2006, Other Fees paid were immaterial.




**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 2006, the Company’s Audit Committee
      approved all of the services provided by our independent auditor.




75




**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(3)****May 2006**
            
            
            **24,881**
            
            **$**
            **4.019(2**
            **)**
            
            **Not
                Applicable**
            
            
            **Not
                Applicable****June
                2006**
            
            
            **76,215**
            
            
            **10.09(1**
            **)**
            
            **76,215**
            
            **$**
            **5,930,099.70****August
                2006**
            
            
            **111,594**
            
            
            **9.70(1**
            **)**
            
            **111,594**
            
            **$**
            **4,848,499.80****September
                2006**
            
            
            **4,130**
            
            
            **9.78(1**
            **)**
            
            **4,130**
            
            **$**
            **4,808,108.40****November
                2006**
            
            
            **107,444**
            
            
            **11.88(1**
            **)**
            
            **107,444**
            
            **$**
            **3,531,673.68****December
                2006**
            
            
            **15,000**
            
            **$**
            **5.00(2**
            **)**
            
            **Not
                Applicable**
            
            
            **Not
                Applicable**





(1)
            Represents ordinary
              share
              repurchases. (2)
            Represents purchases
              of shares
              through vested stock option exercises. (3)
            We
                have the right to petition the Tel Aviv District Court for approval
                to
                purchase an additional $13.3 million in shares, but as of this date
                have
                not taken
                such action.










**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)




76




**EXHIBIT**
              **NUMBER**
            
            **DESCRIPTION
                OF EXHIBIT**2.1
            
            Form
                of Ordinary Share Certificate(1)2.2
            
            Form
                of Registration Rights(1)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.




(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.




77









**FUNDTECH
      LTD.**





**CONSOLIDATED
      FINANCIAL STATEMENTS**





**DECEMBER
      31, 2006**








78








**FUNDTECH
      LTD.**





**CONSOLIDATED
      FINANCIAL STATEMENTS**





**INDEX**





PageA.**Report
                of Independent Registered Public Accounting Firm**
            
            
            1**Consolidated
                Financial Statements:**B.**Balance
                Sheets**as
                of December 31, 2006 and 2005
            
            
            2C.**Statements
                of Operations**for
                the years ended December 31, 2006, 2005 and 2004
            
            
            3D.**Statements
                of Shareholders' Equity**for
                the years ended December 31, 2006, 2005 and 2004
            
            
            4
                - 5E.**Statements
                of Cash Flows**for
                the years ended December 31, 2006, 2005 and 2004
            
            
            6
                - 7F.**Notes
                to Consolidated Financial Statements**
            
            
            8
                - 33





79





**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,
      2006 and 2005 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, 2006. 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, 2006 and 2005 and the consolidated results
      of
      their operations and their consolidated cash flows for each of the three years
      in the period ended December 31, 2006, 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
      12,
      2007




1


**FUNDTECH
      LTD.**




**CONSOLIDATED
      BALANCE SHEET**


**(In
      thousands)**





**December
                31,****2006**
            
            **2005****ASSETS****CURRENT
                ASSETS**Cash
                and cash equivalents
            
            $
            28,616
            
            $
            30,807Short
                term investments
            
            
            
            
            
            216Marketable
                securities (Note 4)
            
            
            18,551
            
            
            18,576Trade
                receivables (net of allowance for doubtful accounts of $ 1,078
              and
                $ 1,664 at December 31, 2006 and 2005, respectively) (Note
                5)
            
            
            25,058
            
            
            17,262Other
                accounts receivable and prepaid expenses
            
            
            2,608
            
            
            2,601**Total
                current assets**
            
            
            74,833
            
            
            69,462Severance
                pay fund
            
            
            1,221
            
            
            871Long-term
                deposits
            
            
            639
            
            
            734Prepaid
                expenses
            
            
            1,821
            
            
            1,321Property
                and equipment, net (Note 6)
            
            
            11,944
            
            
            10,281Goodwill
            
            
            18,979
            
            
            17,655Intangible
                assets, net (Note 7a)
            
            
            2,232
            
            
            3,508Capitalized
                software development, net (Note 7b)
            
            
            394
            
            
            1,969**Total
                assets**
            
            $
            112,063
            
            
            105,801**LIABILITIES
                AND SHAREHOLDERS' EQUITY****CURRENT
                LIABILITIES**Trade
                payables
            
            $
            2,444
            
            $
            2,021Deferred
                revenues
            
            
            7,567
            
            
            7,686Accrued
                restructuring expenses
            
            
            185
            
            
            336Employees
                and payroll accruals
            
            
            4,483
            
            
            3,225Other
                accounts payable and accrued expenses (Note 8)
            
            
            5,360
            
            
            6,285**Total
                current liabilities**
            
            
            20,039
            
            
            19,553Accrued
                severance pay
            
            
            1,399
            
            
            981Accrued
                restructuring expenses
            
            
            62
            
            
            100Other
                long term liabilities
            
            
            777
            
            
            157**Total
                liabilities**
            
            
            22,277
            
            
            20,791**SHAREHOLDERS'
                EQUITY**(Note 10)Share
                capital
            
            
            46
            
            
            44Additional
                paid-in capital
            
            
            146,611
            
            
            142,636Accumulated
                other comprehensive income (loss)
            
            
            (196
            )
            
            (414
            )Accumulated
                deficit
            
            
            (53,417
            )
            
            (57,168
            )93,044
            
            
            85,098Treasury
                shares at cost, 320,883 shares as of December 31, 2006
            
            
            (3,258
            )
            
            (88
            )**Total
                shareholders' equity**
            
            
            89,786
            
            
            85,010**Total
                liabilities and shareholders’ equity**
            
            $
            112,063
            
            $
            105,801


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




2


**FUNDTECH
      LTD.**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(In
      thousands)**





**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004****Revenues**(Note 2j)Software
                license fees
            
            $
            13,576
            
            $
            16,523
            
            $
            16,395Software
                hosting
            
            
            13,403
            
            
            10,501
            
            
            8,034Maintenance
            
            
            22,513
            
            
            20,248
            
            
            17,072Services
                fees
            
            
            36,017
            
            
            27,100
            
            
            16,721Hardware
                sales
            
            
            -
            
            
            94
            
            
            315**Total
                revenues**
            
            
            85,509
            
            
            74,466
            
            
            58,537**Operating
                Expenses**Software
                license costs
            
            
            604
            
            
            522
            
            
            626Amortization
                of capitalized software development costs
            
            
            1,576
            
            
            1,575
            
            
            1,576Amortization
                of other acquired intangible assets
            
            
            1,275
            
            
            1,154
            
            
            966Maintenance
                and services costs
            
            
            34,726
            
            
            29,947
            
            
            23,001Hardware
                costs
            
            
            -
            
            
            80
            
            
            266Research
                and development
            
            
            16,710
            
            
            13,480
            
            
            11,171Selling
                and marketing
            
            
            15,754
            
            
            13,734
            
            
            11,462General
                and administrative
            
            
            12,133
            
            
            9,557
            
            
            7,254**Total
                operating expenses**
            
            
            82,778
            
            
            70,049
            
            
            56,322Operating
                income
            
            
            2,731
            
            
            4,417
            
            
            2,215Financial
                income, net (Note 14)
            
            
            1,984
            
            
            1,085
            
            
            727Income
                before taxes on income
            
            
            4,715
            
            
            5,502
            
            
            2,942Taxes
                on income (Note 12f)
            
            
            (964
            )
            
            (1,166
            )
            
            (475
            )Net
                income
            
            $
            3,751
            
            $
            4,336
            
            $
            2,467Basic
                earnings per share (Note 11)
            
            $
            0.25
            
            $
            0.29
            
            $
            0.17Diluted
                earnings per share (Note 11)
            
            $
            0.24
            
            $
            0.27
            
            $
            0.16




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




3


**FUNDTECH
      LTD.**




**CONSOLIDATED
      STATEMENTS OF**


**SHAREHOLDERS’
      EQUITY AND COMPREHENSIVE INCOME**


**(In
      thousands)**


**(except
      share data)**




**Accumulated****Additional**
                
                
                
                **other**
                
                
                
                **Total**
                
                **Total****Ordinary
                    shares**
                
                **paid-in**
                
                **Treasury**
                
                **comprehensive**
                
                **Accumulated**
                
                **comprehensive**
                
                **shareholders'****Shares**
                
                **Amount**
                
                **capital**
                
                **shares**
                
                **income
                    (loss)**
                
                **deficit**
                
                **income**
                
                **equity**Balance
                    as of January 1, 2004
                
                
                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
                )
                
                
                
                
                79,805Exercise
                    of stock options
                
                
                316,522
                
                
                1
                
                
                1,362
                
                
                -
                
                
                -
                
                
                -
                
                
                
                
                
                1,363Common
                    stock issued for restricted stock grant
                
                
                153,331
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                
                
                
                -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
                
                $
                142,636
                
                $
                (88
                )
                $
                (414
                )
                $
                (57,168
                )
                
                
                
                $
                85,010


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





4





**FUNDTECH
      LTD.**




**CONSOLIDATED
      STATEMENTS OF**


**SHAREHOLDERS’
      EQUITY AND COMPREHENSIVE INCOME**


**(In
      thousands)**




**(except
      share data)**




**Accumulated****Additional**
              
              
              
              **other**
              
              
              
              **Total**
              
              **Total****Ordinary
                  shares**
              
              **paid-in**
              
              **Treasury**
              
              **comprehensive**
              
              **Accumulated**
              
              **comprehensive**
              
              **shareholders'****Shares**
              
              **Amount**
              
              **capital**
              
              **shares**
              
              **income
                  (loss)**
              
              **deficit**
              
              **Income**
              
              **equity**Balance
                  as of December 31, 2005
              
              
              15,125,795
              
              $
              44
              
              $
              142,636
              
              
              (88
              )
              $
              (414
              )
              $
              (57,168
              )
              
              
              
              $
              85,010Exercise
                  of stock options
              
              
              289,745
              
              
              1
              
              
              1,488
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,489Common
                  stock issued for restricted stock grant
              
              
              240,205
              
              
              1
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1Stock
                  based compensation
              
              
              
              
              
              
              
              
              2,487
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,487Foreign
                  currency translation adjustments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              218
              
              
              
              
              $
              218
              
              
              218Purchase
                  of Treasury shares
              
              
              
              
              
              
              
              
              
              
              
              (3,170
              )
              
              
              
              
              
              
              
              
              
              
              (3,170
              )Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,751
              
              
              3,751
              
              
              3,751Total
                  comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              3,969Balance
                  as of December 31, 2006
              
              
              15,655,745
              
              $
              46
              
              $
              146,611
              
              $
              (3,258
              )
              $
              (196
              )
              $
              (53,417
              )
              
              
              
              $
              89,786




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




5


**FUNDTECH
      LTD.**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(In
      thousands)**




**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Cash
                flows provided by operating activities:Net
                income
            
            $
            3,751
            
            $
            4,336
            
            $
            2,467Adjustments
                to reconcile net income to net cashprovided
                by operating activities (Appendix A):
            
            
            1,578
            
            
            5,972
            
            
            5,182Net
                cash provided by operating activities
            
            
            5,329
            
            
            10,308
            
            
            7,649Cash
                flows used for investing activities:Investments
                in held-to-maturity marketable securities
            
            
            (34,294
            )
            
            (16,440
            )
            
            (25,855
            )Proceeds
                from sale of held-to-maturity marketable securities
            
            
            34,352
            
            
            20,490
            
            
            26,486Acquisition
                of subsidiaries, net of cash acquired
              (Appendix
                B)
            
            
            (1,350
            )
            
            (1,973
            )
            
            (4,311
            )Increase
                in long-term lease deposits
            
            
            314
            
            
            (20
            )
            
            (86
            )Purchase
                of property and equipment
            
            
            (5,177
            )
            
            (5,390
            )
            
            (4,318
            )Proceeds
                from sale of property and equipment
            
            
            3
            
            
            27
            
            
            24Net
                cash used for investing activities
            
            
            (6,152
            )
            
            (3,306
            )
            
            (8,060
            )Cash
                flows provided by financing activities:Proceeds
                from exercise of stock options, net
            
            
            1,490
            
            
            1,363
            
            
            544Purchase
                of Treasury shares, at cost
            
            
            (3,170
            )
            
            -
            
            
            -Repayment
                of long-term debt
            
            
            (82
            )
            
            -
            
            
            (82
            )Net
                cash provided by financing activities
            
            
            (1,762
            )
            
            1,363
            
            
            462Effect
                of exchange rate on cash and cash equivalents
            
            
            394
            
            
            (918
            )
            
            409Increase
                (decrease) in cash and cash equivalents
            
            
            (2,191
            )
            
            7,447
            
            
            460Cash
                and cash equivalents at the beginning of the year
            
            
            30,807
            
            
            23,360
            
            
            22,900Cash
                and cash equivalents at the end of the year
            
            $
            28,616
            
            $
            30,807
            
            $
            23,360Supplemental
                disclosure of cash flows activities:Cash
                paid during the year for:Interest
            
            $
            12
            
            $
            16
            
            $
            24Income
                taxes
            
            $
            807
            
            $
            1,108
            
            $
            566




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




6


**FUNDTECH
        LTD.**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(In
        thousands)**





**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004****Appendix
                A**-**Adjustments
                to reconcile net income to net cash provided by operating
                activities**:Depreciation
                and amortization
            
            $
            6,450
            
            $
            5,836
            
            $
            5,333Decrease
                (increase) in trade receivables , net
            
            
            (7,658
            )
            
            868
            
            
            (2,863
            )Increase
                in other accounts receivableand
                prepaid expenses
            
            
            (387
            )
            
            (1,193
            )
            
            (725
            )Increase
                in trade payables
            
            
            407
            
            
            178
            
            
            717Increase
                in deferred revenues, employees andpayroll
                accruals and other accounts payable and accrued expenses
            
            
            2,906
            
            
            508
            
            
            3,150Decrease
                in accrued restructuring expenses
            
            
            (189
            )
            
            (290
            )
            
            (605
            )Accrued
                severance pay, net
            
            
            68
            
            
            35
            
            
            9Accrued
                interest on marketable securities
            
            
            (33
            )
            
            34
            
            
            172Other
            
            
            14
            
            
            (4
            )
            
            (6
            )$
            1,578
            
            $
            5,972
            
            $
            5,182**Appendix
                B****- Acquisition of subsidiaries, net of cash acquired: (see Note
                3)**Working
                capital deficiency, excludingcash
                and cash equivalents
            
            $
            -
            
            $
            (351
            )
            $
            (1,394
            )Long
                term deposits
            
            
            -
            
            
            6
            
            
            103Property
                and equipment
            
            
            -
            
            
            38
            
            
            174Developed
                technology
            
            
            -
            
            
            878
            
            
            873Goodwill
            
            
            1,350
            
            
            1,402
            
            
            4,555$
            1,350
            
            $
            1,973
            
            $
            4,311




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





7





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




Fundtech
      Ltd., an Israeli corporation, and its subsidiaries (“the Company”), is a leading
      provider of software solutions and services to financial institutions 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 worldwide.





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 re-measured
      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 re-measurement of monetary balance sheet items are reflected
      in
      the statements of operations as financial income or expenses, as
      appropriate.




8


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





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.**





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, 2006 and 2005 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




9




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





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").




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.





10





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





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.





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.




11




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




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, 2006, 2005 and 2004, amounted to
      approximately $ 418, $ 283 and $ 216, respectively.





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).





12


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





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
      2006,
      2005 and 2004, 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 7,000, 54,000 and 557,175 for the years ended December 31, 2006, 2005
      and
      2004, respectively (see Note 11).





n.
            Stock-based
                compensation





Effective
      January 1, 2006, the Company adopted the provisions of SFAS No. 123 (revised
      2004), “Share-Based Payment” (SFAS No. 123(R)). SFAS No. 123(R) requires
      employee share-based equity awards to be accounted for under the fair value
      method. Accordingly, stock-based compensation is measured at the grant date,
      based on the fair value of the award. Prior to January 1, 2006, the Company
      accounted for stock-based equity awards granted using the intrinsic value method
      prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for
      Stock Issued to Employees” (APB No. 25), and related interpretations, and
      provided the required pro forma disclosures prescribed by SFAS No. 123,
“Accounting for Stock-Based Compensation” (SFAS No. 123), as amended. The
      exercise price of options is equal to the Company share market price on the
      date
      of grant.




Under
      the
      modified prospective method of adoption for SFAS No. 123(R), the compensation
      cost recognized by the Company beginning in 2006 includes (a) compensation
      cost
      for all equity incentive awards granted prior to, but not yet vested as of
      January 1, 2006, based on the grant-date fair value estimated in accordance
      with
      the original provisions of SFAS No. 123, and (b) compensation cost for all
      stock-based compensations granted subsequent to January 1, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of SFAS No.
      123(R). The Company uses the straight-line attribution method to recognize
      stock-based compensation costs over the service period of the
      award.




13


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





The
      following table summarizes the effects of share-based compensation resulting
      from the application of SFAS No. 123(R):




**2006**
            
            **2005**
            
            **2004**Cost
                of revenue
            
            $
            219
            
            $
            -
            
            $
            -Research
                and development
            
            
            151
            
            
            -
            
            
            -Selling
                and marketing
            
            
            506
            
            
            -
            
            
            -General
                and administrative
            
            
            1,611
            
            
            -
            
            
            -Share-based
                compensation effects in income before taxes
            
            
            2,487
            
            
            -
            
            
            -Share-based
                compensation effects on basic earnings per common share
            
            $
            0.17
            
            $
            -
            
            $
            -Share-based
                compensation effects on diluted earnings per common share
            
            $
            0.16
            
            $
            -
            
            $
            -





Stock-based
      compensation recognized in 2006 as a result of the adoption of SFAS No. 123(R),
      as well as pro forma disclosures according to the original provisions of SFAS
      No. 123 for periods prior to the adoption of SFAS No. 123(R), use the
      Black-Scholes option pricing model for estimating the fair value of options
      granted under the Company’s equity plans. The weighted average assumptions that
      were used in calculating such values during 2006, 2005, and 2004, were based
      on
      estimates at the date of grant as follows:





14


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





n.
            Stock-based
                compensation ( Cont.)





**2006
                (*)**
            
            **2005**
            
            **2004**Risk-free
                interest rate
            
            
            -
            
            
            3.86
            %
            
            3.24
            %Expected
                life of options
            
            
            -
            
            
            5
                year
            
            
            4
                yearExpected
                volatility
            
            
            -
            
            
            55.9
            %
            
            66.5
            %Expected
                dividend yield
            
            
            -
            
            
            None
            
            
            None





(*)
      No
      options were granted during 2006.





Pro
      forma
      information required under SFAS No. 123(R) for periods prior to fiscal year
      2006, as if the Company had applied the fair value recognition provisions of
      SFAS No. 123 to options granted is as follows:





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




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.





15


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


· 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.
            Recent
                Accounting Pronouncements





FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
      Interpretation of FASB Statement No. 109” - In June 2006, the FASB issued
      FASB Interpretation No. 48 (“FIN-48”), “Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement No. 109.” The
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an entity's financial statements in accordance with SFAS No. 109, “Accounting for
      Income Taxes.” Specifically, FIN-48 prescribes a recognition threshold and a
      measurement attribute for the financial statement recognition and measurement
      of
      a tax position taken or expected to be taken.




The
      provisions of FIN-48 are effective for financial statements for fiscal years
      beginning after December 15, 2006. Accordingly, the Company is to adopt FIN-48
      on January 1, 2007. The adoption of FIN-48 is not expected to have a material
      effect on the Company’s financial position or results of
      operations.





SFAS
      No. 157, “Fair Value Measurements” - In September 2006, the FASB issued
      SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), which defines fair value,
      establishes a framework for measuring fair value and expands disclosures about
      fair value measurements. SFAS 157 applies whenever other accounting standards
      require or permit assets or liabilities to be measured at fair value.
      Accordingly, it does not expand the use of fair value in any new circumstances.
      Fair value under SFAS 157 is defined as the price that would be received to
      sell
      an asset or paid to transfer a liability in an orderly transaction between
      market participants at the measurement date. This Standard clarifies the
      principle that fair value should be based on the assumptions market participants
      would use when pricing an asset or liability. In support of this principle,
      SFAS
      157 establishes a fair value hierarchy that prioritizes the information used
      to
      develop those assumptions. The fair value hierarchy gives the highest priority
      to quoted prices in active markets and the lowest priority to unobservable
      data,
      for example, a reporting entity's own data. Under SFAS 157, fair value
      measurements would be separately disclosed by level within the fair value
      hierarchy. SFAS 157 is effective for fiscal years beginning after November
      15,
      2006. Accordingly,
      the Company is to adopt SFAS
      157 on
      January 1, 2007. The adoption of SFAS
      157 is not
      expected to have a material effect on the Company’s financial position or
      results of operations .





16




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





q.
            Recent
                Accounting Pronouncements(
                Cont.)





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS
      No. 159 permits companies to choose to measure certain financial
      instruments and certain other items at fair value. The standard requires that
      unrealized gains and losses on items for which the fair value option has been
      elected be reported in earnings. SFAS No. 159 is effective for the Company
      beginning in the first quarter of fiscal year 2008, although earlier adoption
      is
      permitted. The company is currently evaluating the impact that SFAS No. 159
      will have on its consolidated financial statements.




**NOTE
      3**  **-**  **ACQUISITIONS**





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 approximately
                $2,544. This includes $2,242 paid in cash directly to the shareholders,
                $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 $3,500 in cash over six years following the acquisition, contingent upon
      the
      financial performance of Radius. Fundtech paid an additional amount of $220
      in
      2006 based on achieved financial performance milestones of which $100 were
      already accounted for in 2005. Further payments of $200 will be made in 2007
      based on Radius 2006 financial performances, which were already accounted for
      in
      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.





17


**NOTE
      3**  **-**  **ACQUISITIONS** **(cont.)**





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
            
            
            1,466$
            2,964





b.
            In
                November 2004, the Company acquired all outstanding shares of India-based
                CashtechSolutions 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 cost 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.





Under
      the
      terms of the acquisition agreement, Fundtech will pay additional amounts of
      up
      to $3,700 in cash over three years following the acquisition, contingent upon
      the financial performance of Cashtech. Fundtech paid additional amounts of
      $991
      and $1,130 in 2005 and 2006, respectively, based on achieved financial
      performance milestones. Further payments of $1,004 will be made in 2007 based
      on
      Cashtech’s 2006 financial performance, which were already accounted for in
      2006.





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 know-how and goodwill. The purchase price attributed to know-how
      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.





18


**NOTE
      3**  **-**  **ACQUISITIONS** **(cont.)**





The
      allocation of fair value is as follows:





Working
                capital deficiency
            
            $
            (459
            )Long
                term deposits
            
            
            95Property
                and equipment
            
            
            153Know-how
            
            
            873Goodwill
            
            
            5,584$
            6,246





**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




19


**NOTE
      4**  **-**  **MARKETABLE
      SECURITIES**





Short-term
                investments**December
                31,****2006**
            
            **2005**Held
                to maturity -Corporate
                bonds
            
            $
            2,138
            
            $
            2,566Corporate
                notes
            
            
            409
            
            
            -Euro-dollar
                bonds
            
            
            511
            
            
            6,928Corporate
                Certificates of Deposit
            
            
            1,024
            
            
            -Federal
                Agency Issues
            
            
            511Taxable
                auction securities
            
            
            13,958
            
            
            9,082$
            18,551
            
            $
            18,576Fair
                value
            
            $
            18,420
            
            $
            18,514




**NOTE
      5**  **-**  **TRADE
      RECEIVABLES**




**December
                31,****2006**
            
            **2005**Accounts
                receivable, net of allowance for doubtful accounts
            
            $
            21,550
            
            $
            12,049Unbilled
                receivables
            
            
            3,508
            
            
            5,213$
            25,058
            
            $
            17,262


Management's
      assessment for uncertainties of outstanding debt collectibility resulted in
      doubtful accounts expenses of $430, $552 and $269 in the statement of operations
      for 2006, 2005 and 2004, respectively.





20


**NOTE
      6**  **-**  **PROPERTY
      AND EQUIPMENT, NET**




**December
                31,****2006**
            
            **2005**Cost:Office
                furniture and equipment
            
            $
            2,644
            
            $
            2,572Computers
                and software
            
            
            27,877
            
            
            23,235Motor
                vehicles
            
            
            292
            
            
            193Leasehold
                improvements
            
            
            3,007
            
            
            2,79233,820
            
            
            28,792Accumulated
                depreciation
            
            
            21,876
            
            
            18,511Net
                book value
            
            $
            11,944
            
            $
            10,281





**NOTE
      7**  **-**  **INTANGIBLE
      ASSETS AND CAPITALIZED SOFTWARE DEVELOPMENT COST, NET**





**December
                31,****2006**
            
            **20
                5**a.Intangible
                assetsCost:Developed
                technology and know-how
            
            $
            5,992
            
            $
            5,992Customer
                base
            
            
            3,461
            
            
            3,461Other
                intangible assets
            
            
            58
            
            
            589,511
            
            
            9,511Accumulated
                amortization
            
            
            (7,279
            )
            
            (6,003
            )Net
                book value
            
            $
            2,232
            
            $
            3,508b.Capitalized
                software developmentCost
            
            $
            7,876
            
            $
            7,876Accumulated
                amortization
            
            
            (7,482
            )
            
            (5,907
            )Net
                book value
            
            $
            394
            
            $
            1,969





**NOTE
      8**  **-**  **OTHER
      ACCOUNTS PAYABLE AND ACCRUED EXPENSES**





**December
                31,****2006**
            
            **2005**Accrued
                expenses
            
            $
            4,475
            
            $
            5,524Government
                authorities
            
            
            877
            
            
            761Other
            
            
            8
            
            
            -$
            5,360
            
            $
            6,285





21


**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,**2007
            
            
            2,8782008
            
            
            2,4922009
            
            
            1,7882010
            
            
            8942011-2014
            
            
            1,989$
            10,041





Total
      facilities lease expenses for the years ended December 31, 2006 , 2005 and 2004 ,
      were
      approximately $2,487, $2,319 and $1,771 (net of sublease rentals incurred of
      $0,
      $280, and $175), respectively.





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 $410 for BBP as required
                by Swiss
                Law.




**NOTE
      10**  **-**  **SHAREHOLDERS’
      EQUITY**





a.
            The
                Ordinary shares of the Company are traded on the NASDAQ Global Market
                and
                on the Tel-Aviv Stock Exchange.





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. As of December 31, 2006, the Company had purchased a total
      of
      320,883 shares.




22




**NOTE
      10**  **-**  **SHAREHOLDERS’
      EQUITY (Cont.)**




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, 2006, an aggregate of 185,141 shares
                of
                the Company are still available for future
                grants.





3.
            The
                Company began issuing restricted shares to certain employees and
                directors
                in the fourth quarter of 2005. Shares are issued on the date the
                restricted stock units vest, with employees being responsible for
                payment
                of any taxes due on the shares. The Company has the right to retain
                amounts sufficient to cover statutory withholding requirements related
                to
                grants. Grantees have ownership of shares, but shares may not be
                transferred and accrue no voting or other rights until they are issued
                upon vesting. As of December 31, 2006 the Company had issued 346,786
                restricted shares of ordinary stock of which 48,147 are vested.




4.
            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 and restricted shares vest primarily
                over
                four years. Any options or restricted shares that are canceled or
                forfeited before expiration become available for future grants. Options
                or
                restricted shares 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.




23


**NOTE
      10**  **-**  **SHAREHOLDERS’
      EQUITY (Cont.)**





e.
            A
                summary of the Company's option activity under the Plans is as
                follows:




**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004****Weighted**
            
            
            
            **Weighted**
            
            
            
            **Weighted****average**
            
            **Number**
            
            **average**
            
            **Number**
            
            **Average****Number**
            
            **exercise**
            
            **of**
            
            **exercise**
            
            **Of**
            
            **Exercise****of
                options**
            
            **Price**
            
            **options**
            
            **price**
            
            **options**
            
            **Price**Outstanding
                at January 1
            
            
            2,410,490
            
            $
            6.43
            
            
            2,196,225
            
            $
            5.65
            
            
            2,114,087
            
            $
            5.56Granted
            
            
            -
            
            
            
            
            
            569,500
            
            
            8.75
            
            
            270,350
            
            
            8.20Exercised
            
            
            (289,745
            )
            
            5.13
            
            
            (316,522
            )
            
            4.30
            
            
            (128,071
            )
            
            4.11Forfeited/cancelled
            
            
            (11,025
            )
            
            9.74
            
            
            (38,713
            )
            
            13.96
            
            
            (60,141
            )
            
            16.91Outstanding
                at December 31
            
            
            2,109,720
            
            $
            6.59
            
            
            2,410,490
            
            $
            6.43
            
            
            2,196,225
            
            $
            5.65Exercisable
                options atDecember
                31
            
            $
            1,555,172
            
            $
            5.93
            
            $
            1,403,054
            
            $
            5.28
            
            $
            1,275,563
            
            $
            4.76





The
      options outstanding as of December 31, 2006, 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**
            
            **2006**
            
            **Life
                (years)**
            
            **Price**
            
            **2006**
            
            **Price**$
                3.55-5.00
            
            
            722,925
            
            
            5.7
            
            
            4.01
            
            
            652,797
            
            
            4.01$
                5.79-8.53
            
            
            1,016,458
            
            
            6.9
            
            
            7.22
            
            
            747,766
            
            
            7.24$
                8.70-10.52
            
            
            363,337
            
            
            8.3
            
            
            9.84
            
            
            147,609
            
            
            9.76$
                13.25-13.25
            
            
            7,000
            
            
            2.8
            
            
            13.25
            
            
            7,000
            
            
            13.252,109,720
            
            
            6.7
            
            
            6.59
            
            
            1,555,172
            
            
            6.15




All
      options granted during 2005 and 2004 were at an exercise price that is equal
      to
      the fair value of the stock at the grant date.





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.




24


**NOTE
      11**  **-**  **EARNINGS
      PER SHARE**





The
      following table sets forth the computation of historical basic and diluted
      net
      earnings per share:





Year
                ended December 31,2006
            
            2005
            
            2004Numerator:Net
                income
            
            $
            3,751
            
            $
            4,336
            
            $
            2,467Numerator
                for basic earnings per share -income
                available to Ordinaryshareholders
            
            $
            3,751
            
            $
            4,336
            
            $
            2,467Numerator
                for diluted net earnings pershare
                - income available to Ordinaryshareholders
                after assumed exercises
            
            $
            3,751
            
            $
            4,336
            
            $
            2,467Denominator:
            
            Number
                of sharesDenominator
                for basic net earnings pershare
                - weighted - average shares
            
            
            14,879,241
            
            
            14,862,054
            
            
            14,590,310Effect
                of dilutive securities:Employee
                stock options
            
            
            971,552
            
            
            932,389
            
            
            679,853Denominator
                for diluted net earningsper
                share
            
            
            15,850,793
            
            
            15,794,443
            
            
            15,270,163





**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.
            Israeli
                Taxation





1.
            Corporate
                tax structure:





Taxable
      income of Israeli companies is subject to tax at the rate of 31% in 2006
      (“Regular Tax Rate”). This rate is to be gradually reduced to 25% until 2010
      (29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and
      thereafter).




25




**NOTE
      12**  **-**  **INCOME
      TAXES (Cont.)**





b.
            Israeli
                Taxation (Cont.)





2.
            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 2007
      (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. In 2005, under the Amendment to the Investment Law (see below for
      additional information), the company received approval for its 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 was derived. 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,
      2006, retained earnings included approximately $ 4,395 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
      such
      tax-exempt income is distributed in a manner other upon the complete liquidation
      of the Company, it would be taxed at the reduced corporate tax rate applicable
      to such profits (between 20%-25%) and an income tax liability of up to
      approximately $1,099 would be incurred as December 31, 2006.





On
      April
      1, 2005, an amendment to the Investment Law came into effect (“the Amendment”)
      and has significantly changed the provisions of the Investment Law. The
      Amendment limits the scope of enterprises which may be approved by the
      Investment Center by setting criteria for the approval of a facility as a
      Privileged Enterprise, such as provisions generally requiring that at least
      25%
      of the Privileged Enterprise’s income will be derived from
      export. Additionally, the Amendment enacted major changes in the manner in
      which
      tax benefits are awarded under the Investment Law so that companies no longer
      require Investment Center approval in order to qualify for tax benefits. In
      addition, the Investment Law 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.




26




**NOTE
      12**  **-**  **INCOME
      TAXES (Cont.)**





b.
            Israeli
                Taxation (Cont.)




As
      a
      result of the amendment, tax-exempt income generated under the provisions of
      the
      amended law, will subject the company to taxes upon dividend distribution or
      complete liquidation.





As
      of
      December 31, 2006, none of Fundtech's income was generated under the provision
      of the amendment.





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 Tax Rate.





c.
            Net
                operating losses carryforwards





As
      of
      December 31, 2006, the Company had approximately $32,572 of Israeli net
      operating loss carryforwards and approximately $6,426 capital loss
      carryforwards. The Israeli loss carryforwards have no expiration
      date.





As
      of
      December 31, 2006, Fundtech Corporation had U.S. federal net operating loss
      carryforward of approximately $44,023 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.




27


**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,****2006**
            
            **2005**Deferred
                tax assets:U.S.
                net operating loss carryforwards
            
            $
            17,609
            
            $
            20,127Israel
                net operating loss carryforwards
            
            
            3,257
            
            
            2,331Other
                reserve and allowances
            
            
            4,035
            
            
            4,327Total
                deferred tax assets
            
            
            24,901
            
            
            26,785Valuation
                allowance
            
            
            (22,866
            )
            
            (24,935
            )$
            2,035
            
            $
            1,850Deferred
                tax liabilities:Fixed
                assets and Intangible assets
            
            
            (2,035
            )
            
            (1,850
            )$
            -
            
            $
            -




The
      Company has provided valuation allowances in respect of deferred tax assets
      resulting from net operating loss carry forwards in Israel and for part of
      its
      net operating loss carry forwards in the US. Management
      currently believes that it is more likely than not that those deferred tax
      losses will not be realized in the foreseeable future.





e.
            Tax
                assessments





The
      Company received final tax assessments through the tax year ended December
      31,
      2000. Fundtech U.K. Ltd received final tax assessments through the tax year
      ended December 31, 2004. BBP received final tax assessment through the tax
      year
      ended December 31, 2005 Cashtech received final tax assessments through the
      tax
      year ended March 31, 2000.


28


**NOTE
      12**  **-**  **INCOME
      TAXES (Cont.)**





f.
            Composition
                of income tax expenses (Cont.)





**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004****Income
                (loss) before taxes on income:**Domestic
            
            $
            (7,305
            )
            $
            (2,309
            )
            $
            (2,490
            )Foreign
            
            
            12,020
            
            
            7,811
            
            
            5,432$
            4,715
            
            $
            5,502
            
            $
            2,942





**Income
                tax provision (benefit) :**Current:Domestic
            
            $
            106
            
            $
            33
            
            $
            119Foreign
            
            
            858
            
            
            1,133
            
            
            356964
            
            
            1,166
            
            
            475Deferred:Domestic
            
            
            -
            
            
            -
            
            
            -Foreign
            
            
            -
            
            
            -
            
            
            --
            
            
            -
            
            
            -$
            964
            
            $
            1,166
            
            $
            475




29


**NOTE
      12**  **-**  **INCOME
      TAXES (Cont.)**





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,****2006**
            
            **2005**
            
            **2004**Income
                before taxes on income
            
            $
            4,715
            
            $
            5,502
            
            $
            2,942Theoretical
                tax on the above amount
            
            $
            2,312
            
            $
            1,871
            
            $
            1,030Tax
                benefit arising from "Approved Enterprise"
            
            
            1,534
            
            
            554
            
            
            968Decrease
                in valuation allowance
            
            
            (2,069
            )
            
            (2,420
            )
            
            (1,184
            )Stock
                based compensation - nondeductible expenses
            
            
            (772
            )
            
            -
            
            
            -Adjustments
                arising from differences in the basis of measurement for tax purposes
                and
                for financial reporting purposes
            
            
            (44
            )
            
            905
            
            
            (236
            )Other,
                net
            
            
            3
            
            
            256
            
            
            (103
            )$
            964
            
            $
            1,166
            
            $
            475




30


**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 has 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,****2006**
            
            **2005**
            
            **2004**Cash
                Management:Revenues
            
            $
            21,660
            
            $
            16,454
            
            $
            13,416Operating
                income (loss)
            
            $
            178
            
            $
            (503
            )
            $
            201Payments:Revenues
            
            $
            54,705
            
            $
            44,898
            
            $
            33,870Operating
                income
            
            $
            13,363
            
            $
            11,753
            
            $
            8,229BBP:Revenues
            
            $
            13,870
            
            $
            13,112
            
            $
            11,251Operating
                income
            
            $
            634
            
            $
            1,061
            
            $
            600




31


**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,****2006**
            
            **2005**
            
            **2004**Total
                operating income of the reportable segments:
            
            $
            14,175
            
            $
            12,311
            
            $
            9,030Amounts
                not allocated to segments:Stock
                based compensation
            
            
            2,487
            
            
            -
            
            
            -General
                and administrative expenses
            
            
            6,798
            
            
            6,186
            
            
            5,574Marketing
                expenses
            
            
            2,159
            
            
            1,708
            
            
            1,241Consolidated
                operating income
            
            $
            2,731
            
            $
            4,417
            
            $
            2,215




c.
            Geographic
                information:





The
      total
      revenues are attributed to geographic information, based on the customers'
      location.





**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004****Long
                -**
            
            
            
            **Long
                -**
            
            
            
            **Long
                -****Total**
            
            **lived**
            
            **Total**
            
            **lived**
            
            **Total**
            
            **lived****revenues**
            
            **Assets**
            
            **revenues**
            
            **assets**
            
            **revenues**
            
            **assets**Israel
            
            $
            2,006
            
            $
            1,140
            
            $
            149
            
            $
            1,073
            
            $
            62
            
            $
            910United
                States
            
            
            44,399
            
            
            19,904
            
            
            39,948
            
            
            20,330
            
            
            31,920
            
            
            18,503Switzerland
            
            
            11,471
            
            
            8,230
            
            
            11,666
            
            
            8,417
            
            
            10,425
            
            
            9,221India
            
            
            1,105
            
            
            6,650
            
            
            1,020
            
            
            5,544
            
            
            292
            
            
            4,176United
                Kingdom
            
            
            14,469
            
            
            83
            
            
            8,781
            
            
            101
            
            
            4,113
            
            
            14Others
            
            
            12,059
            
            
            4
            
            
            12,902
            
            
            3
            
            
            11,725
            
            
            7$
            85,509
            
            $
            36,011
            
            $
            74,466
            
            $
            35,468
            
            $
            58,537
            
            $
            32,831





d.
            Major
                customers data as a percentage of total
                revenue:





**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Customer
                A
            
            
            12
            %
            
            10
            %
            
            14
            %Customer
                B
            
            
            12
            %
            
            14
            %
            
            2
            %




32




**NOTE
      14**  **-**  **FINANCIAL
      INCOME, NET**




**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Financial
                expenses:Interest
                and other
            
            $
            37
            
            $
            39
            
            $
            18Foreign
                currency translation differences, net
            
            
            188
            
            
            190
            
            
            128225
            
            
            229
            
            
            146Financial
                income:Interest
                and other
            
            
            2,043
            
            
            1,122
            
            
            795Foreign
                currency translation differences, net
            
            
            166
            
            
            192
            
            
            782,209
            
            
            1,314
            
            
            873$
            1,984
            
            $
            1,085
            
            $
            727





**NOTE
      15**  **-**  **SUBSEQUENT
      EVENTS**




In
      February 2007, the Company acquired all outstanding shares of Prang GmbH
      (“Prang”), a provider of payments software solutions located in Frankfurt,
      Germany, for an aggregate purchase price of approximately € 4 million in
      cash.





Under
      the
      terms of the acquisition agreement, Fundtech will pay additional amounts of
      up
      to € 4 million in cash over four years following the acquisition, contingent
      upon the financial performance of Prang.




This
      acquisition will be accounted for in accordance with SFAS No.141 and SFAS No.
      142.


33


**SCHEDULE**





**FUNDTECH
      LTD.**


**VALUATION
      AND QUALIFYING ACCOUNTS**





**Year
                ended December 31,****2006**
            
            **2005**
            
            **2004**Allowance
                for doubtful account at beginning of year
            
            $
            1,664
            
            $
            1,287
            
            $
            2,366Provision
            
            
            430
            
            
            552
            
            
            269Translation
                adjustments
            
            
            4
            
            
            (6
            )
            
            3Accounts
                receivable written off
            
            
            (1,020
            )
            
            (169
            )
            
            (1,351
            )Allowance
                for doubtful accounts at end of year
            
            $
            1,078
            
            $
            1,664
            
            $
            1,287




34


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 Officer





Date:
      June 29, 2007