UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





FORM
      20-F




**ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**


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


**Commission
      file number 000-30342**




**JACADA
      LTD.**


(Exact
      name of Registrant as specified in its charter)




**Israel**


(Jurisdiction
      of incorporation or organization)




**11
      Galgalei Haplada St.**


**P.O.
      Box 12175**


**Herzliya
      46722, Israel**


(Address
      of principal executive offices)




Securities
      registered or to be registered pursuant to Section 12(b) of the Act: **NONE**




Securities
      registered or to be registered pursuant to Section 12(g) of the Act: **Ordinary
      shares, par value**


**NIS
      0.01 per share**




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




Indicate
      the number of outstanding shares of each of the registrant’s classes of capital
      or common stock as of the close of the period covered by the Annual
      Report:




**19,619,806
      Ordinary Shares, par value NIS 0.01 per share**


Indicate
      by check mark if the registrant is a well known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


**oYes**
              **xNo**




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.


**oYes**
                **xNo**





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


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




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.


**xYes**
                **oNo**





Indicate
      by check mark which financial statement item the registrant has elected to
      follow.


oItem
                      17
                  xItem
                    18





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).


**oYes**
                  **xNo**





TABLE
      OF CONTENTS


Item
                1.
            IDENTITY
                OF DIRECTORS, SENIOR MANAGEMENT, AND
                ADVISERS
            2Item
                2.
            OFFER
                STATISTICS AND EXPECTED TIMETABLE
            2Item
                3.
            KEY
                INFORMATION
            2Item
                4.
            INFORMATION
                ON THE COMPANY
            11Item
                5.
            OPERATING
                AND FINANCIAL REVIEW AND
                PROSPECTS
            25Item
                6.
            DIRECTORS,
                SENIOR MANAGEMENT AND
                EMPLOYEES
            37Item
                7.
            MAJOR
                SHAREHOLDERS AND RELATED PARTY
                TRANSACTIONS
            44Item
                8.
            FINANCIAL
                INFORMATION
            45Item
                9.
            THE
                OFFER AND LISTING
            46Item
                10.
            ADDITIONAL
                INFORMATION
            49Item
                11.
            QUANTITATIVE
                AND QUALITATIVE DISCLOSURE ABOUT MARKET
                RISK
            64Item
                12.
            DESCRIPTION
                OF SECURITIES OTHER THAN EQUITY
                SECURITIES
            64Item
                13.
            DEFAULTS,
                DIVIDEND ARREARAGES AND
                DELINQUENCIES
            64Item
                14.
            MATERIAL
                MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
                AND USE OF PROCEEDS
            64Item
                15.
            CONTROLS
                AND PROCEDURES
            65Item
                16A.
            AUDIT
                COMMITTEE FINANCIAL EXPERT
            65Item
                16B.
            CODE
                OF ETHICS
            66Item
                16C.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            66Item
                16D.
            EXEMPTIONS
                FROM THE LISTING STANDARDS FOR AUDIT
                COMMITTEES
            67Item
                16E.
            PURCHASES
                OF EQUITY SECURITIES BY THE ISSUER AND
                AFFILIATED PURCHASERS
            67Item
                18.
            FINANCIAL
                STATEMENTS
            68Item
                19.
            EXHIBITS
            69







**FORWARD
      LOOKING STATEMENTS**




This
      Annual Report contains forward-looking statements. These statements include
      all
      statements that are not statements of historical fact regarding the intent,
      belief, or current expectations of the Company, its directors or its officers
      with respect to, among other things: (i) the Company’s financing plans; (ii)
      trends affecting the Company’s financial condition or results of operations; and
      (iii) the Company’s growth strategy and operating strategy (including the
      development of its products and services). The words “may,” “could,” “would,”
“will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and
      similar expressions or variations thereof are intended to identify
      forward-looking statements. Prospective investors are cautioned that any such
      forward-looking statements are not guarantees of future performance and involve
      risks and uncertainties, and that actual results may differ materially from
      those in the forward-looking statements as a result of various factors. The
      information contained in this Annual Report, particularly under the heading
      “Risk Factors,” identifies important factors that could cause such
      differences.




We
      have prepared our consolidated financial statements in U.S. dollars and in
      accordance with U.S. generally accepted accounting principles (GAAP). All
      references in this Annual Report to “dollars” or “$” are to U.S. dollars and all
      references to “NIS” are to New Israeli Shekels.




Amounts
      and percentages appearing in this Annual Report may not total due to
      rounding.









**Item
      1:****IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT, ADVISERS AND AUDITORS**




Not
      applicable.




**Item
      2:****OFFER
      STATISTICS AND EXPECTED TIMETABLE**




Not
      applicable.




**Item
      3:****KEY
      INFORMATION**


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




The
      following table sets forth selected financial data from our consolidated
      statements of operations and balance sheets for the periods indicated. The
      selected consolidated statement of operations data for the years ended December
      31, 2005, 2004 and 2003 and the selected consolidated balance sheet data as
      of
      December 31, 2005 and 2004 have been derived from our audited consolidated
      financial statements and the notes thereto included elsewhere in this Annual
      Report. These financial statements have been prepared in accordance with US
      GAAP. The consolidated statements of operations data for the year ended December
      31, 2002 and 2001, and the selected consolidated balance sheet data as of
      December 31, 2003, 2002 and 2001 are derived from audited consolidated financial
      statements that are not included herein. The following selected financial data
      are qualified by reference to and should be read in conjunction with the
      sections entitled “Item 5: Operating and Financial Review and Prospects” and
“Item 11: Quantitative and Qualitative Disclosures about Market Risk” and our
      consolidated financial statements and the notes thereto included elsewhere
      in
      the Annual Report.




2




**Year
                  ended****December 31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001**(In
                thousands, except per share and share data)**Consolidated
                  Statement of Operations Data:**Revenues:Software
                  and products
              
              $
              6,725
              
              $
              5,749
              
              $
              8,354
              
              $
              9,783
              
              $
              10,930Services
              
              
              3,650
              
              
              5,481
              
              
              4,704
              
              
              4,518
              
              
              8,986Maintenance
              
              
              9,567
              
              
              8,554
              
              
              7,504
              
              
              7,235
              
              
              5,630Total
                  revenues
              
              
              19,942
              
              
              19,784
              
              
              20,562
              
              
              21,536
              
              
              25,546Cost
                  of revenues:Software
                  and products
              
              
              1,309
              
              
              631
              
              
              846
              
              
              534
              
              
              615Services
              
              
              2,704
              
              
              3,341
              
              
              2,384
              
              
              3,115
              
              
              4,859Maintenance
              
              
              865
              
              
              1,143
              
              
              1,110
              
              
              1,247
              
              
              1,705Total
                  cost of revenues
              
              
              4,878
              
              
              5,115
              
              
              4,340
              
              
              4,896
              
              
              7,179Gross
                  profit
              
              
              15,064
              
              
              14,669
              
              
              16,222
              
              
              16,640
              
              
              18,367Operating
                  expenses:Research
                  and development
              
              
              4,094
              
              
              5,278
              
              
              5,308
              
              
              5,905
              
              
              6,351Sales
                  and marketing
              
              
              11,035
              
              
              10,507
              
              
              9,386
              
              
              9,450
              
              
              14,619General
                  and administrative
              
              
              5,723
              
              
              4,758
              
              
              4,714
              
              
              4,602
              
              
              5,679Non-recurring
                  charges
              
              
              -
              
              
              525
              
              
              -
              
              
              501
              
              
              2,846Total
                  operating expenses
              
              
              20,852
              
              
              21,068
              
              
              19,408
              
              
              20,458
              
              
              29,495Operating
                  loss
              
              
              (5,788
              )
              
              (6,399
              )
              
              (3,186
              )
              
              (3,818
              )
              
              (11,128
              )Financial
                  income, net
              
              
              830
              
              
              786
              
              
              1,037
              
              
              909
              
              
              2,337Net
                  loss
              
              $
              (4,958
              )
              $
              (5,613
              )
              $
              (2,149
              )
              $
              (2,909
              )
              $
              (8,791
              )Basic
                  net loss per share
              
              $
              (0.25
              )
              $
              (0.29
              )
              $
              (0.11
              )
              $
              (0.16
              )
              $
              (0.48
              )Weighted
                  average number of shares used in computing basic
                net
                  loss per share
              
              
              19,497,726
              
              
              19,282,800
              
              
              19,011,435
              
              
              18,710,105
              
              
              18,465,127Diluted
                  net loss per share
              
              $
              (0.25
              )
              $
              (0.29
              )
              $
              (0.11
              )
              $
              (0.16
              )
              $
              (0.48
              )Weighted
                  average number of shares used in computing dilutednet
                  loss per share
              
              
              19,497,726
              
              
              19,282,800
              
              
              19,011,435
              
              
              18,710,105
              
              
              18,465,127


**December
                31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001**(in
                thousands)**Consolidated
                Balance Sheet Data:**Cash
                and cash equivalents
            
            $
            3,461
            
            $
            3,552
            
            $
            9,845
            
            $
            15,319
            
            $
            5,982Cash
                and investments
            
            
            35,651
            
            
            37,613
            
            
            41,793
            
            
            41,382
            
            
            41,642Working
                capital
            
            
            10,748
            
            
            17,726
            
            
            12,170
            
            
            34,448
            
            
            39,625Total
                assets
            
            
            45,612
            
            
            49,230
            
            
            53,387
            
            
            54,018
            
            
            56,459Shareholders’
                equity
            
            
            34,475
            
            
            39,089
            
            
            44,504
            
            
            46,464
            
            
            48,588Dividends
                per share
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -




**Exchange
      Rates**




Not
      applicable.




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




Not applicable.




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




Not applicable.


3




**D.**  **Risk
      Factors**




*Readers
      are cautioned that an investment in Jacada is subject to a number of risks.
      Readers should consider carefully all information set forth herein and in
      particular the following risks in connection with an investment in
      Jacada:*




**Risks
      Related to Our Business**




***The
      revenue associated with our traditional products has declined and we expect
      that
      it may continue to decline. Since it has taken longer than we expected to
      generate increased revenue from our new Jacada Fusion and Jacada WorkSpace
      products, failure to increase revenues will result in increased losses and
      a
      material adverse effect on our business.*** Our
      revenues are derived from sales of our traditional products, Jacada Interface
      Server and Jacada HostFuse, and our new products, Jacada Fusion and Jacada
      WorkSpace, and related maintenance and professional services. The
      average selling price of our traditional products has declined over the past
      six
      years due to changes in our competitive environment, resulting in increased
      pricing pressures. We believe that this trend will continue. In
      addition, it has taken longer than we anticipated to generate increased sales
      of
      Jacada Fusion which we introduced in the second quarter of 2004 and of Jacada
      Workspace, which we introduced in the third quarter of 2005. As a result, the
      revenue gap between our declining traditional products revenue and the Jacada
      Fusion and Jacada WorkSpace revenue is larger than we originally thought. To
      the
      extent that revenues from our traditional products continue to decrease and
      revenues from Jacada Fusion and Jacada WorkSpace do not offset such loss of
      revenues, we will suffer increased losses. To the extent that these trends
      continue for a prolonged period, we may suffer a material adverse effect.





***Our
      introduction of Jacada Fusion*** ***and
      Jacada WorkSpace*** ***represents an attempt to enter a new market in which we have limited experience
      and failure to successfully penetrate this market would harm our results of
      operations.*** We
      introduced Jacada Fusion in the second quarter of 2004 and Jacada Workspace
      in
      the third quarter of 2005. We have elected to target corporate customer call
      centers, which we refer to as contact centers, for sales of these products
      because we believe there is a need for these products in this market. However,
      we have limited experience in this market. Our limited experience and knowledge
      regarding the contact center market may impede our ability to sell Jacada Fusion
      and Jacada Workspace and result in decreased revenues and increased losses.




***We
      do not have a proven business model for the contact center market; if our
      business model is inappropriate for this market and our estimations regarding
      the sales cycle for this market are incorrect, our efforts to successfully
      commercialize Jacada Fusion and Jacada WorkSpace may be harmed or we will
      experience a further delay in generating revenues from these products.*** Our
      business model for selling Jacada Fusion and Jacada WorkSpace is different
      than
      the business model we have used for our traditional products. To date we have
      had few deals in which we sold Jacada Fusion and Jacada WorkSpace and therefore
      we do not have enough experience to determine if our business model is correct
      and is appropriate for the generation either of new sales or follow-on sales.
      In
      the event that our chosen business model is inappropriate, we may need to modify
      our business model and adjust the manner in which we sell Jacada Fusion and
      Jacada WorkSpace in order to close subsequent transactions. If our business
      model is incorrect and must be adjusted, our revenues and expense levels may
      be
      adversely affected.




***We
      expect revenues from Jacada Fusion and Jacada Workspace, our contact center
      products to be concentrated in a few large orders and a small number of
      customers, meaning that the loss of a significant customer or a failure to
      make
      even a small number of such sales could harm our results of operations.*** Historically,
      revenues from our traditional products were generated from a relatively large
      number of sales to a wide number of customers. However, we expect that revenues
      from the Jacada
      Fusion and Jacada WorkSpace products
      will be derived from large orders from a small number of customers, which are
      not necessarily the same customers each year. Therefore, our revenues from Jacada
      Fusion and Jacada WorkSpace will be
      dependent on a limited number of significant customers. In 2005, our first
      full
      year of sales activity to contact centers, a sale to one customer accounted
      for
      approximately 22% of our total revenues. We cannot assure you that we will
      succeed in making repeat sales to this customer or that, even if we do make
      repeat sales to the customer that those sales will represent a substantial
      percentage of our revenues in the future. However, we do expect that a
      significant portion of our future revenues will continue to be derived from
      a
      relatively small number of customers. We also cannot assure you that other
      customers will purchase our products and services in the future. The failure
      to
      secure new key customers, the loss of key customers or the occurrence of
      significant reductions in sales from a key customer would cause our revenues
      to
      significantly decrease and make it significantly more difficult for us to become
      profitable.




4




***Because
      our products are complex and generally involve significant capital expenditures
      by customers, we may invest significant time and expense in trying to make
      a
      sale to a potential customer that ultimately chooses not to purchase our
      products*** *.* Our sales typically involve significant capital investment decisions by
      prospective customers, and often require us to expend a significant amount
      of
      time to educate prospective customers as to the benefits of our products. As
      a
      result, before purchasing our products, companies spend a substantial amount
      of
      time performing internal reviews and obtaining approvals. Many prospective
      customers have made significant investments in internally-developed or
      customized packaged solutions and would incur significant costs in switching
      to
      third-party products such as ours. Even if our products are effective, our
      target customers may not choose them for technical, cost, support or other
      reasons.




***Competition
      in the markets in which we compete is intense. If we are unable to compete
      effectively, the demand for, or the prices of, our products may be
      reduced.*** ** The
      markets in which we compete are extremely competitive and subject to rapid
      change. In our traditional business, we compete with companies that utilize
      varying approaches to enable existing software applications to be utilized
      over
      the Internet. These companies include AttachmateWRQ Corporation, IBM, Seagull
      Holding N.V., TIBCO Software, Inc. and webMethods, Inc. Our Jacada Fusion and
      Jacada WorkSpace products compete with other contact center solutions offered
      by
      Microsoft, Corizon Ltd. and Level 8 Systems. We expect additional competition
      from other established and emerging companies. Furthermore, our competitors
      may
      combine with each other and other companies may enter our markets by acquiring
      or entering into strategic relationships with our competitors.




In
      addition, many companies choose to deploy their own information technology
      personnel or utilize system integrators to write new code or rewrite existing
      applications in an effort to develop their own application integration or
      contact center solutions. As a result, prospective clients may decide against
      purchasing and implementing externally-developed solutions such as ours.




Many
      of our current and potential competitors have significantly greater financial,
      technical and marketing resources, greater name recognition and larger customer
      bases than we do. Our competitors may be able to develop products comparable
      or
      superior to ours; adapt more quickly than we do to new technologies, evolving
      industry trends or customer requirements; or devote greater resources than
      we do
      to the development, promotion and sale of products. Accordingly, we may not
      be
      able to compete effectively in our markets, competition may intensify and future
      competition may harm our business. ******




5




***In
      previous years, we experienced fluctuations in our annual and quarterly results
      of operations, which resulted, and may continue to result, in volatility in
      our
      share price.*** In
      previous years we have experienced, and may continue to experience, fluctuations
      in our quarterly results of operations, and we may likewise experience
      significant fluctuations in our annual results of operations.  Factors
      which have contributed and may in the future contribute to fluctuations in
      our
      results of operations include: general economic conditions, the size and timing
      of orders, including order deferrals, and subsequent shipments, market awareness
      and acceptance of new products, the capital spending patterns of our customers,
      customer concentration and the timing of our product introductions or
      enhancements or that of our competitors or providers of complementary products. Because
      of these and other factors, our quarterly revenues may fluctuate materially.
      Therefore, t he
      results
      of past periods should not be relied upon as an indication of our future
      performance.  It is likely that in some future periods, our operating
      results may again be below expectations of public market analysts or investors,
      which may cause our share price to decline.




***Fiscal
      year 2000 was our only profitable year, and we may not again achieve
      profitability.*** We
      have incurred net losses in each fiscal year since our inception except for
      fiscal 2000. To achieve and maintain profitability, we will need to increase
      revenues and contain expenses. We cannot assure you that our revenues will
      grow
      or that we will achieve or maintain profitability in the future. Our ability
      to
      increase revenues and maintain profitability will be affected by the other
      risks
      and uncertainties described in this section and in the sections entitled “Item
      5: Operating and Financial Review and Prospects” and “Item 11: Quantitative and
      Qualitative Disclosures about Market Risk.”




***The
      market price of our shares is volatile and the volume of the daily trading
      of
      our shares is very low; therefore you may not be able to resell your shares
      at
      or above the price you paid, or at all.*** ****** The
      risks described in this Item 3.D may adversely affect our share price. Our
      share
      price, like that of many technology companies, may be subject to volatility.
      If
      our share price decreases to below $1.00 per share and remains there for 30
      consecutive trading days, Nasdaq could initiate procedures to de-list our shares
      from the Nasdaq National Market and onto either the Nasdaq Small Cap Market
      or
      the OTC Bulletin Board. Furthermore, because of the low volume of daily trading
      in our shares, you may be unable to sell your shares in the market due to low
      or
      no demand for such shares.




***We
      must continue our significant investment in our sales and marketing efforts,
      including our indirect distribution channels, in order to increase market
      awareness of our products and to generate increased
      revenues*** .
      Significant continued investment in our sales and marketing efforts is essential
      to increase market awareness of our products and to generate increased revenues,
      especially in relation to Jacada Fusion and Jacada WorkSpace. Furthermore,
      we
      believe that our future success is dependent upon the expansion of our indirect
      distribution channels, consisting of our relationships with independent software
      vendors, software distributors, system integrators and partners. We currently
      have relationships with only a limited number of these parties.




Our
      future growth will be limited if:




·
            we
                fail to work effectively with our indirect distribution partners;




·
            we
                fail to increase the number of indirect distribution partners with
                which
                we have relationships;




·
            the
                business of one or more of our indirect distribution partners fails;
                or




6




·
            there
                is a decrease in the willingness or ability of our indirect distribution
                partners to devote sufficient resources and efforts to marketing
                and
                supporting our products.




If
      any of these circumstances occurs, we will have to devote substantially more
      resources to the sales, marketing, distribution, implementation and support
      of
      our products than we otherwise would, and our own efforts may not be as
      effective as those of our indirect distribution channels.




***Our
      revenues could be adversely affected if we fail to retain consultants and other
      technical service***  ***personnel*** *.* Sales
      of our Jacada Fusion and Jacada WorkSpace products to date have required advance
      sales activity involving consultants and post-sale customization and
      implementation. We rely on our staff of professional consultants and other
      technical service personnel to implement our solutions after purchases by our
      customers. Unless we are able to retain professional consultants and other
      technical service personnel or hire and train qualified consultants and other
      technical service personnel to replace those who leave us, it will be difficult
      for us to increase or possibly even maintain our present level of sales due
      to
      constraints on our capacity to implement sales.




***Our
      future growth will be adversely affected and our future operating results may
      be
      adversely affected if we fail to develop and introduce new products that address
      new markets or if our new products fail to achieve market acceptance.*** In
      order to achieve sales growth we will need to develop and introduce
      new products for new markets. In the second quarter of 2004, we announced the
      introduction of Jacada Fusion, our new solution that
      is
      designed to integrate different applications residing on host, Windows and
      Web-based platforms ,
      and allow non-invasive access to those applications through a single user
      interface. In the third quarter of 2005, we introduced Jacada WorkSpace, our
      new
      solution that
      is
      designed to be a single
      agent console that unifies customer interaction tools with a single access
      point
      to all the mission-critical applications required by the customer
      service representative to
      effectively complete a customer interaction.  We
      have elected to target corporate contact centers for sales of Jacada Fusion
      and
      Jacada Workspace because we believe there is a need for our products in this
      market. If the markets we decide to enter fail to develop or if we are unable
      to
      develop other new products successfully, our prospects for growth will suffer.
      In addition, our ability to develop and introduce new products requires us
      to
      invest significant resources in research and development and in the sales and
      marketing of a new product. If we fail to develop and market new products in
      new
      markets successfully, we may not be able to recover our research and development
      expenditures or our sales and marketing expenditures, which would adversely
      impact our operating results.




***We
      rely on our key personnel, whose knowledge of our business and technical
      expertise would be extremely difficult to replace*** *.* Our
      future success depends, to a certain degree, on the continued services of key
      management, as well as on our sales and technical personnel. The loss of
      services of any of our key management for any reason could have a material
      adverse effect on our business, financial condition and results of operations.
      We are also dependent on our ability to attract, retain and motivate highly
      skilled personnel. In the markets in which we recruit, competition for qualified
      personnel is intense. As a result, our ability to recruit and retain qualified
      candidates may be limited. In addition, our flat revenues in 2005 in relation
      to
      2004 may cause current employees to leave our company, which may have a material
      adverse effect on our business.




***We
      expect to be subject to increasing risks of international
      operations*** *.* Historically,
      we have marketed and sold our traditional products in North America and Europe.
      Currently we market and sell
      our
      products and services primarily in North America and the UK, from which areas
      we
      received approximately 99% of our total revenues for the year ended December 31, 2005. In 2005 we
      expanded our international operations in Europe and India. Managing these
      expanded operations requires significant management attention and financial
      resources. Further, we currently have limited experience in marketing and
      distributing our products in regions other than North America and Europe. Our
      inability to increase our worldwide operations successfully could adversely
      impact our business. In addition, exchange rate fluctuations between the dollar
      and foreign currencies may adversely affect us. Prior to 2003, we did not use
      currency exchange forward contracts and options to hedge the risks associated
      with fluctuations in foreign exchange rates. Although we did utilize currency
      exchange forward contracts to hedge the payments from our material Euro and
      GB
      Pound-denominated transactions in 2004 and 2005, some of our foreign
      currency-denominated revenues are still not hedged. Accordingly, we are still
      exposed to the risk that our revenues will decrease in the event that those
      foreign currencies strengthen against the dollar. In addition, as most of our
      sales are currently made in dollars, an increase in the value of the dollar
      could make our products less competitive in non-U.S. markets, thereby causing
      a
      reduction in our sales. See “- *Exchange
      rate fluctuations between the dollar and the NIS may negatively affect our
      earnings* ”
      for a discussion of risks associated with fluctuations in the dollar-NIS
      exchange rate.




7




***Our
      products may contain unknown defects that could harm our reputation, result
      in
      product liability or decrease market acceptance of our
      products*** *.* Our
      products may contain errors or defects, particularly when first introduced
      or
      when new versions or enhancements are released. Although we have not experienced
      any material software defects to date, defects could cause our customers to
      experience system failures. Our customers depend on our software for their
      critical systems and business functions. Any errors or defects could:




·
            damage
                our reputation;




·
            increase
                our product development costs;




·
            divert
                our product development resources;




·
            expose
                us to monetary damages;




·
            cause
                us to lose future sales; or




·
            delay
                or diminish market acceptance of our products.




Although
      we conduct extensive testing, we may not discover software defects that affect
      our products or enhancements until after they are sold. Furthermore, we are
      unable to test our products in each of the applications in which they are
      designed to work.




Certain
      of our products, contain technology that we acquired from third parties. Because
      we did not develop the technology ourselves, there may be errors in the
      technology of which we are not aware. In addition, our products are integrated
      with our customers’ networks and software applications. The sale and support of
      our products may expose us to the risk of product liability or warranty claims
      based on damage to these networks or applications caused by the technology
      we
      developed or the technology developed by a third party and acquired by us.
      In
      addition, the failure of our products to perform to customer expectations could
      give rise to warranty or other claims. Any of these claims, even if not
      meritorious, could result in costly litigation or divert management’s attention
      and resources. We may not have sufficient funds or insurance coverage to satisfy
      any or all liability that may be imposed upon us with respect to these claims.




8




***Our
      technology may be subject to infringement claims or may be infringed
      upon*** *.* Our
      success and ability to compete are substantially dependent upon our technology.
      Most of our intellectual property, other than our trademarks, consists of
      proprietary or confidential information that is not subject to patent or similar
      protection. Despite our efforts to protect our intellectual property rights,
      unauthorized third parties may attempt to copy or otherwise 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. Furthermore, 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.




Although
      we do not believe that our products infringe upon any patent, trademark or
      other
      intellectual property rights of others, we cannot be certain that one or more
      persons will not make a claim of infringement against us. Any claims, with
      or
      without merit, could:




·
            be
                expensive and time-consuming to defend;




·
            cause
                product shipment and installation delays;




·
            divert
                management’s attention and resources; or




·
            require
                us to enter into royalty or licensing agreements, which may not be
                available on acceptable terms, or may not be available at all.




A
      successful claim of product infringement against us or our failure or inability
      to license the infringed or similar technology could have a material adverse
      effect on our business, financial condition and results of operations.




**Risks
      Related to Our Location in Israel**




***Israeli
      courts might not enforce judgments rendered outside of
      Israel*** *.* We
      are incorporated under the laws of the State of Israel and we maintain
      significant operations in Israel. Certain of our officers and directors reside
      outside of the United States. Therefore, you might not be able to enforce any
      judgment obtained in the United States against us or any of such persons.
      Additionally, you might not be able to bring civil actions under United States
      securities laws if you file a lawsuit in Israel. We have been advised by our
      Israeli counsel that, subject to certain limitations, Israeli courts may enforce
      a final executory judgment of a United States court for liquidated amounts
      in
      civil matters after a hearing in Israel, provided that certain conditions are
      met. If a foreign judgment is enforced by an Israeli court, it will be payable
      in Israeli currency.




***Conditions
      in and around Israel could adversely affect our
      operations*** *.* Because
      our research and development facilities are located in Israel, we are directly
      influenced by the political, economic and military conditions affecting Israel.
      Since the establishment of the State of Israel in 1948, a number of armed
      conflicts have taken place between Israel and its Arab neighbors. Any major
      hostilities involving Israel or the interruption or curtailment of trade between
      Israel and its present trading partners could materially adversely affect our
      operations. Despite the negotiations towards peace between Israel and certain
      of
      its Arab neighbors, the future of these peace efforts is uncertain. From October
      2000 until recently, there was a significant increase in violence primarily
      in
      the West Bank and the Gaza Strip and negotiations between Israel and Palestinian
      representatives have ceased for periods of time. In
      January
      2006, Hamas, the Islamic Resistance Movement, won the majority of the seats
      in
      the Parliament of the Palestinian Authority. The election of a majority of
      Hamas-supported candidates is expected to be a major obstacle to relations
      between Israel and the Palestinian Authority. Hamas does not recognize Israel's
      right to exist as a state and Israel considers Hamas to be a terrorist
      organization. Accordingly, there
      can be no assurance that the recent calm and renewal of negotiations between
      Israel and Palestinian representatives will endure. Any renewed hostilities
      or
      other factors related to Israel could have a material adverse effect on us
      or on
      our business or adversely affect our share price.




9




Some
      of our officers and employees in Israel may be obligated to perform 45 days
      or
      more of military reserve duty annually and in some cases may be called upon
      to
      serve upon short notice. The absence of these employees for significant periods
      may cause us to experience operating difficulties. Additionally, a number of
      countries continue to restrict or ban business with Israel or Israeli companies,
      which may limit our ability to make sales in those countries.




***Exchange
      rate fluctuations between the dollar and the NIS may negatively affect our
      earnings*** *.* A
      substantial majority of our revenues and a substantial portion of our expenses
      are denominated in U.S. dollars. However, a significant portion of the expenses
      associated with our Israeli operations, including personnel and
      facilities-related expenses, are incurred in New Israeli Shekels (NIS).
      Consequently, inflation in Israel will have the effect of increasing the U.S.
      dollar cost of our operations in Israel, unless it is offset on a timely basis
      by a devaluation of the NIS relative to the U.S. dollar. We cannot predict
      any
      future trends in the rate of inflation in Israel or the rate of valuation of
      the
      NIS against the U.S. dollar. Although we began in 2003 to hedge partially
      against risks associated with fluctuations in the dollar-NIS exchange rate,
      if
      the dollar cost of our operations in Israel increases, our U.S. dollar-measured
      results of operations will still be adversely affected.




***Any
      failure to obtain the tax benefits from the State of Israel that we anticipate
      receiving could adversely affect our plans and
      prospects*** *.* Pursuant
      to the Law for the Encouragement of Capital Investments, 1959, the Israeli
      government has granted “Approved Enterprise” status to our existing capital
      investment programs under the Alternative Benefits Program. Consequently, we
      are
      eligible for certain tax benefits for the first several years in which we
      generate taxable income. However, we have not yet begun to generate taxable
      income for purposes of this law. Once we begin to generate taxable income,
      our
      financial results could suffer if our tax benefits are significantly
      reduced.




In
      order to receive tax benefits, we must comply with a number of conditions and
      criteria. If we fail to comply in whole or in part with these conditions and
      criteria, the tax benefits that we receive could be partially or fully canceled
      and we could be forced to refund the amount of the benefits we received,
      adjusted for inflation and interest. Although we believe that we have operated
      and will continue to operate in compliance with the required conditions, we
      cannot assure you that this will continue.




We
      cannot assure you that these tax benefits will be continued in the future at
      their current levels or at all. The termination or reduction of tax benefits
      could have a material adverse effect on our business, financial condition and
      results of operations. In
      addition, in March 2005, the law governing these tax benefits was amended
      to revise the criteria for investments that qualify for tax benefits
      as an approved enterprise. We cannot assure you that we will, in the
      future, be eligible to receive additional tax benefits under this
      law. In addition, in the event that we increase our activities outside the State
      of
      Israel, these activities generally will not be eligible for inclusion in Israeli
      tax benefit programs. Accordingly, our effective corporate tax rate could
      increase significantly in the future. ****




10




***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, or the OCS. T he
      transfer to a non-Israeli entity of technology developed with OCS funding,
      including pursuant to a merger or similar transaction, and the transfer of
      rights related to the manufacture of more than ten percent of a product
      developed with OCS funding are subject to approval by an OCS committee and
      to
      various conditions, including payment by us to the OCS of a percentage of the
      consideration paid to us or our shareholders in the transaction in which the
      technology is transferred. In connection with a merger or similar transaction,
      the amount payable would be a fraction of the consideration equal to the
      relative amount invested by the OCS in the development of the relevant
      technology compared to the total investment in our company, net of financial
      assets that we have at the time of the transaction, but in no event less than
      the amount of the grant. In addition, in the event that the committee believes
      that the consideration to be paid in a transaction requiring payment to the
      OCS
      pursuant to the provisions of the law described above does not reflect the
      true
      value of the technology or the company being acquired, it may determine an
      alternate value to be used as the basis for calculating the requisite payments.
      These restrictions may impair our ability to enter into agreements for those
      products or technologies, without OCS approval. In
      addition, if we fail to comply with any of the conditions imposed by the Office
      of the Chief Scientist, we may be required to refund any grants previously
      received, together with interest and penalties.




***Certain
      provisions of our articles of association and of Israeli law could delay, hinder
      or prevent a change in our control*** .
      Our articles of association contain provisions which could make it more
      difficult for a third party to acquire control of us, even if that change would
      be beneficial to our shareholders. For example, our articles of association
      provide that our board of directors is divided into three classes, each serving
      three-year terms. In addition, certain provisions of the Israeli Companies
      Law,
      which we refer to as the Companies Law, could also delay or otherwise make
      more
      difficult a change in control. The provisions of the Companies Law relating
      to
      mergers and acquisitions are discussed in greater detail in “Item 10.B:
      Memorandum and Articles of Association.”






***Our
      stock is traded on more than one stock exchange and this may result in price
      variations*** .
      Our stock is traded on the Nasdaq National Market and on the Tel Aviv Stock
      Exchange. Our stock is traded on these markets in different currencies (US
      dollars on Nasdaq and New Israeli Shekels on the Tel Aviv Stock Exchange) and
      at
      different opening times (notably, different time zones and public holidays;
      in
      addition, the Tel Aviv Stock Exchange is closed on Fridays and open on Sundays,
      while Nasdaq is open on Fridays and closed on Sundays). This means that our
      stock is often traded at a price differential on these two markets resulting,
      among other factors, from the different trading times and the differences in
      exchange rates.






**Item
      4:****INFORMATION
      ON THE COMPANY**


**A.**
              
              **History
                  and Development of the
                  Company**




Our
      legal and commercial name is Jacada Ltd. We were incorporated under the laws
      of
      the State of Israel in December 1990 as a limited liability company. On August
      9, 1999 we changed our name from Client/Server Technology Ltd. to Jacada Ltd.
      Our commercial name is Jacada .
      Our registered office in Israel is 11 Galgalei Haplada Street, Herzliya 46722
      Israel and our telephone number is 972-9-952-5900. Our agent in the United
      States is Oren Shefler, whose address is 400 Perimeter Center Terrace, Suite
      100, Atlanta, Georgia 30346. Our address on the Internet is http://www.jacada.com .
      The information on our website is not incorporated into this Annual Report.
      We
      operate under the Companies Law.




11




Since
      October 1999, our Ordinary Shares have been quoted on the Nasdaq National Market
      under the symbol “ *JCDA.* ”
      In addition, our Ordinary Shares have been quoted on the Tel Aviv Stock Exchange
      under the same symbol or its Hebrew equivalent since June 18, 2001. We develop,
      market and support software and solutions that help customers rapidly simplify
      and improve critical business processes without the need for long and expensive
      system replacement projects. Our traditional products enable businesses to
      Web-enable, modernize and integrate their existing software applications to
      better serve the needs of their users, customers and partners. Our new products,
      Jacada Fusion and Jacada WorkSpace, introduced in May 2004 and September 2005,
      respectively, target organizations that struggle to reduce operational costs
      and
      deliver high quality customer service due to the complexity of the customer
      service representative’s desktop. Our solutions provide our customers with a
      simplified interaction designed to improve the efficiency of the user and the
      experience of the user’s customer. ****




Typical
      users of our traditional products and services are medium to large businesses
      with sophisticated technology requirements. Some of the companies that have
      implemented or are implementing our traditional solutions include AIG, Bank
      of
      America, Caterpillar, Delta Air Lines, U.S. Department of Interior, The Federal
      Reserve Bank, Liberty Mutual Insurance, Manpower, Porsche Cars North America,
      Prudential Life Insurance Company, Raytheon, The Hartford and Tesoreria De
      La
      Securidad Social.




Typical
      users of the Jacada Fusion and Jacada WorkSpace products and services are medium
      to large businesses with inbound contact centers that typically have in excess
      of 100 agents (customer service representatives). Some of the companies that
      have purchased Jacada Fusion and Jacada WorkSpace products include Vodafone
      Limited, West  Telemarketing,
      LP and Cox Communications, Inc.




See
        Items 5 and 18 for a description of our capital expenditures for the past
        three
        fiscal years. We have made no divestitures during the same time period. In
        addition, we are not currently engaged in capital divestiture and our current
        capital expenditures are for computers, software and peripheral equipment. These
        capital expenditures are financed with our internal cash resources.




We
      are not aware of any public takeover offers by third parties in respect of
      our
      shares, and we have made no public takeover offers in respect of other
      companies’ shares during fiscal years 2004 and 2005.




**B.**
            
            **Business
              Overview**




**Industry
      Overview**




We
      have been operating in the application integration and web-enablement market
      for
      15 years. We refer to this market as our “Traditional Market.” In 2004, we
      introduced Jacada Fusion and elected to target corporate customer call centers.
      In the third quarter of 2005, we introduced Jacada WorkSpace, a solution
      specifically designed for the customer call center market. This represents
      a new
      market for us and we refer to it as the “Contact Center (CC) Market.”




12





***Traditional
      Market***




A
      significant number of the applications that are critical to companies in
      operating their businesses, including applications for customer account
      information, sales and inventory management, customer order information and
      manufacturing enterprise resource planning, are currently held in existing
      application environments such as those based on mainframes, Microsoft Windows
      servers and mini-computers. Applications for existing systems are typically
      complex and proprietary and tailored to the needs of a specific company. These
      applications were originally designed to be accessible only by a fixed network
      of users, principally employees. Furthermore, these applications have
      complicated user interfaces, which lack the flexibility and intuitiveness of
      today’s web user interfaces. Companies continue to rely heavily on and invest a
      significant amount of resources in existing applications and data.




Companies
      often seek to circumvent the limitations of their existing systems by utilizing
      the broad distribution potential of browser-enabled desktops and the Internet
      to
      grant employees, customers, suppliers and corporate partners easy access to
      applications and data. Additionally, as newer applications are implemented,
      there is an increasing need to integrate existing host-centric applications
      with
      these new systems easily.




Web-enabling,
      or integrating existing host-centric applications, may be accomplished by either
      completely rewriting the existing applications or by using technologies like
      ours to leverage those applications that exist today. Rewriting an application
      involves significant time and expense, as well as uncertain scheduling,
      budgeting and results. It may also render the skills and knowledge of a
      company’s information technology staff obsolete. Companies’ large investments in
      existing host-centric applications have created the need for a solution that
      enables application reuse without the costs, risks and time required to rewrite
      the application.




An
      effective solution to extend and integrate existing applications should:




·
            be
                able to be implemented rapidly;




·
            enable
                the deployment of a comprehensive solution that does not requireextensive
                custom programming;




·
            provide
                a flexible architecture that allows for the efficient incorporation
                of
                evolving technologies; and




·
            be
                able to operate on multiple platforms and support a variety ofapplications.




***Contact
      Center (CC) Market***




In
      today’s highly competitive markets, companies increasingly focus on the
      provision of customer service as a means of increasing customer satisfaction
      and
      customer retention rates. For most companies, the key organization involved
      in
      this effort is the company’s contact center, or call center, whose personnel are
      directly customer-facing.





To
      provide
      quality customer service, customer service representatives must be able to
      answer a customer’s questions quickly, handle any request the customer may have,
      and do so in an efficient and pleasant manner. One of the significant challenges
      in the provision of quality customer service is the complexity of the customer
      service representative desktop. This is due both to the number of software
      applications on the customer service representative’s computer desktop and to
      the complexity of the applications used on the desktop. Most customer service
      representatives must manage three or more applications on their desktop,
      including billing, inventory, delivery tracking, call tracking and customer
      relationship management, or CRM, applications, and many customer service
      representatives have six, eight, ten or more applications they must learn and
      manage.




13




The
      number
      of applications on the typical customer service representative desktop is
      increasing due to the broader range of services that organizations are demanding
      of contact centers and the desire for agents to resolve calls during the first
      contact with the customer. These applications are often a combination of
      Windows, web and host centric applications that are not integrated, and many
      of
      these applications have a unique user interface that customer service
      representatives must master to perform their jobs.





The
      complex customer service representative desktop results in:





·
            Long
                average call handle times, or AHT;




·
            Long
                and expensive training programs for the customer service
                representative;




·
            High
                customer service representative turnover;
                and




·
            Poor
                customer satisfaction and low customer
                retention.




**Our
      Solutions**




We
      develop, market and support software and solutions that help customers rapidly
      simplify and improve critical business processes without the need for long
      and
      expensive system replacement projects. Our traditional products enable
      businesses to Web-enable, modernize and integrate their existing software
      applications to better serve the needs of their users, customers and partners.
      Our new products, Jacada Fusion and Jacada Workspace simplify the desktop of
      the customer
      service representatives to reduce operational costs and improve the customer experience. Our solutions
      are designed to provide our customers with a simplified interaction to improve
      the efficiency of the user and the experience of the user’s
      customer.




***Benefits***




Our
      solutions for our traditional market and contact center market provide the
      following benefits:




·
            *Leverage
                Existing Information Technology Resources.*Our
                solutions permit companies to access their existing applications
                through
                browser-enabled desktops or over the Internet, and can integrate
                these
                existing applications with newer software implementations such as
                CRM
                solutions from companies such as Siebel Systems, Inc. and Amdocs.
                This
                eliminates the need to replace existing applications through
                time-consuming and expensive custom programming.




14




·
            *Allow
                Rapid Implementation.*We
                design our solutions to be implemented rapidly and to require minimal
                customization, which results in faster implementation than internally
                developed solutions.




·
            *Flexibility
                to Adapt to Evolving Business Needs*.
                We
                design our solutions to work effectively even as companies modify
                existing
                and add new applications in response to their evolving business needs.
                As
                companies program changes into their applications, our solutions
                automate
                the changes in the graphical user interface. The access to multiple
                platforms through one interface also allows companies to respond
                more
                quickly to customer demands and changes in the marketplace as new
                business
                rules and processes can be adopted through the single user interface
                without rewriting any code or data.




·
            *Reliability
                and Scalability*.
                Our solutions are designed to provide the reliability required for
                applications that are critical to the operation of businesses, and
                are
                easily scalable to accommodate additional users in response to evolving
                business needs.




Our
      solutions for the contact center market provide the following additional
      benefits:





·
            *Reducing
                average handle times*.
                Because Jacada Fusion products present users with a single interface
                through which applications are accessed, they eliminate the need
                to
                navigate through and between applications. Therefore they eliminate
                redundant data entry, cut keystrokes and streamline or even eliminate
                process steps, including time consuming call wrap-up processes, thereby
                generating greater efficiency. This enables increased first call
                resolution and significant reduction in average handle
                times.




·
            *Significantly
                reducing customer service representative**training
                costs*.
                By
                simplifying the customer service representative desktop and reducing
                the
                number of applications with which a customer service representative
                must
                interact, our contact center solution allows our customers to
                significantly reduce their customer service representative training
                costs.




·
            *Increasing
                revenue opportunities.*By
                reducing average handle times and making it easier for customer service
                representatives to access all the data needed to answer a customer’s
                question or complete a customer’s request, Jacada Fusion enables customer
                service representatives to perform increased sales activities, leading
                to
                potentially greater revenue
                opportunities.




·
            *Improving
                user and customer experience.*Reduced average handle times and increased first call resolution
                enable
                our customers to improve their customers’ experience, helping generate
                increased customer satisfaction and loyalty. The access to multiple
                platforms through one user-friendly interface also improves the experience
                of the customer service representative, leading to improved customer
                service representative morale and productivity.




15




**Products
      and Technology**




Our
      products include:




*Jacada* *Ò* *Interface Server.* Jacada
      Interface Server generates graphical user interfaces for mainframe and midrange
      software applications without requiring any change to the host applications.
      By
      generating Java or HTML graphical interfaces, Jacada Interface Server enables
      our customers to extend their host-centric applications and data to the Internet
      and their intranets without rewriting these applications. In addition, Jacada
      Interface Server provides the modern graphical features users expect from
      today’s applications. Jacada Interface Server also allows customers to enhance
      their applications to add functionality, integrate with other data sources
      and
      link to other Internet applications.




*Jacada* *Ò* *HostFuse (formerly known as Jacada Integrator)* .
      Jacada
      HostFuse is a software solution for integrating core host-centric business
      systems, including the data and processes in those systems, with multiple
      packaged applications, frameworks and client environments. We have established
      sales and marketing relationships in relation to our traditional market with
      Siebel Systems, Computer Associates, Oracle, and BEA to utilize Jacada HostFuse
      where a real-time, non-intrusive solution is required to integrate a
      host-centric application with its CRM or EAI solutions. Our customers get the
      benefits of on-line, real-time integration with back-office applications without
      rewriting any of their existing systems.




Jacada
      Interface Server and Jacada HostFuse are based on our following core technology
      components:





·
            *Jacada
                KnowledgeBase.*The
                Jacada KnowledgeBase is a set of sophisticated algorithms for analyzing
                and interpreting host-centric applications and converting patterns
                on
                those text-based applications into graphical user interface components.
                During the conversion process, the Automated Conversion Environment
                automatically matches all the patterns identified on the screen with
                pattern definitions in the KnowledgeBase. The KnowledgeBase then
                generates
                a new graphical user interface based on these pattern definitions.




·
            *Jacada
                Automated Conversion Environment (ACE).*In
                combination with the Jacada KnowledgeBase, ACE forms the powerful
                core of
                a solution that can quickly and easily generate graphical user interfaces
                for mainframe and mid-range software applications. This allows companies
                to extend their host-centric applications to the Internet through
                user
                interfaces that are graphical in nature and intuitive, as opposed
                to user
                interfaces that are comprised solely of text. Graphical user interfaces
                may be created using Java, HTML or ActiveX/Visual Basic. ACE allows
                users
                to customize the graphical user interface by changing colors, fonts,
                sizes
                and layout, as well as by adding or deleting functions or graphics.




16




·
            *MapMaker.*Jacada HostFuse includes our patented MapMaker graphical integration
                environment that enables the development of complex application
                integration solutions in an easy to use and understand modeling
                environment. It employs a rapid, component-based approach to legacy
                integration that requires no changes to the existing systems, saving
                time
                and eliminating complexity. MapMaker creates a map of the host application
                that consists of the application screens, the navigational information
                required to traverse through a sequence of screens, and the tags
                and
                fields included on each host application screen. This information
                is
                stored in Java class files produced within MapMaker that are implemented
                as Java services. Jacada HostFuse also provides a means for packaging
                MapMaker services as Enterprise
                JavaBeans.




*Jacada®
      Fusion.* Jacada
      Fusion, a bundling of three Jacada products: Jacada HostFuse (described above),
      Jacada WinFuse and Jacada WebFuse (both described below), is a non-invasive
      integration platform which can automate processes that involve different kinds
      of business application - whether traditional legacy ‘green screen’ mainframe
      applications, Windows client/server applications or newer web-based
      (browser-based) applications.




*Jacada®
      WinFuse.* Jacada WinFuse is a non-invasive integration solution that allows companies
      to
      web-enable and integrate their Microsoft Windows and client/server applications
      without modifying or changing anything in the existing application. Jacada
      WinFuse enables organizations to leverage their existing Windows client/server
      applications to automate business processes and seamlessly integrate and
      transfer data from one application to another. Jacada WinFuse can work with
      almost any 32-bit Windows application.




Jacada
      WinFuse web service-enables Windows client/server applications. Without changing
      anything in the original application, and without needing to access the source
      code, Jacada WinFuse enables organizations to automate interactions with their
      applications and “drive” the system as a user would, navigating a series of
      Windows forms, and inserting or retrieving data as required. Jacada WinFuse
      exposes these interactions as Web services that can be integrated into any
      J2EE
      or .NET composite application in a scalable and secure fashion.




17




By
      service-enabling any Windows-based application, Jacada WinFuse provides for
      the
      rapid adoption of service-oriented architectures (SOA), enabling IT to deliver
      new functionality as quickly as the business demands.




*Jacada®
      WebFuse.* Jacada WebFuse is a non-invasive solution for accessing and managing any
      HTML-based web application, for the purpose of integrating the data and
      processes in the application with other business processes. Jacada WebFuse
      offers an approach to integrating with Web applications by using the Web
      application user interface to quickly encapsulate the processes and data into
      web services, which can then be integrated with newly developed and existing
      applications. Jacada WebFuse services can be deployed in both J2EE and .NET
      environments.




Jacada
      WebFuse can be used for a wide variety of business applications that require
      access to single or multiple Web-based applications, or when there is no
      available means to directly access the data or business logic behind the Web
      system. Business scenarios that can benefit from Jacada WebFuse include
      integrating to enterprise portals, automating data collection from multiple
      third party web applications, and providing bi-directional access and update
      capability to internal thin-client applications from a newly implemented system
      such as a CRM application.




*Jacada®
      WorkSpace* .
      Jacada WorkSpace is a single agent console that unifies customer interaction
      tools and provides a single access point to all the mission-critical
      applications required by the customer service representatives  to
      effectively complete a customer interaction. Jacada WorkSpace delivers a wide
      range of capabilities that enable companies to freely implement optimal contact
      center processes and maximize customer service representative productivity.
      Jacada WorkSpace eliminates the inefficiency of the desktop maze by providing
      the agent with a single interface to access the multitude of disparate systems
      and resources needed to effectively perform his or her job. In addition, by
      using dynamic, role-based desktop controls, Jacada WorkSpace enables companies
      to transform product-specific or function-specific agents to ‘universal’ agents,
      maximizing agent productivity and reducing operational costs. Currently Jacada
      WorkSpace operates only on the BEA WebLogic platform.




**Professional
      Services**




Our
      professional services include training, consulting and support and maintenance
      services.




We
      provide our direct customers with consulting services to assist them with
      installing, integrating and implementing our products into their systems, and
      with managing and enhancing their utilization of our products on an ongoing
      basis. We also provide customer training services to assist them in learning
      how
      to use our products at our Atlanta, Georgia facility and other locations, with
      coursework related to various aspects of our products.




We
      bill for consulting services either on a fixed fee basis or by the hour plus
      out-of-pocket expenses, and for training services by the day plus out-of-pocket
      expenses. The majority of our trainers and consultants are located in the United
      States. Our distributors and other resellers typically provide training and
      consulting services directly to their customers, assisted by us as
      necessary.




Support
      and maintenance services are provided to our customers through agreements under
      which we provide technical support by telephone, fax, email and the Internet
      and
      provide updates, upgrades and fixes to our software products. We require our
      customers to purchase support and maintenance services for 12 months after
      the
      initial purchase of a software license, renewable annually thereafter. In
      addition, customers can elect optional services such as emergency coverage
      on a
      24 hours per day, seven days per week basis and dedicated technical account
      managers.




**Principal
      Markets**




Our
      principal markets are North America and Europe. **** We
      generate revenues from licensing our software products and solutions to
      customers and providing customers with training, consulting, and support and
      maintenance services. Software and product revenues constituted approximately
      33.7%, 29.1% and 40.6% of our total revenues for the years ended December 31,
      2005, 2004 and 2003, respectively, while service and maintenance revenues
      constituted approximately 66.3%, 70.9% and 59.4% of our total revenues,
      respectively, for the same periods. Software and product revenues generated
      from
      North American customers constituted approximately 12.9%, 21.9% and 30.6% of
      our
      total revenues for the years ended December 31, 2005, 2004 and 2003,
      respectively, while service and maintenance revenues generated from North
      American customers constituted approximately 48.7%, 58.9% and 49.4% of our
      total
      revenues, respectively, for the same periods. Software and product revenues
      generated from European customers constituted approximately 20.8%, 6.6% and
      9.2%
      of our total revenues for the years ended December 31, 2005, 2004 and 2003,
      respectively, while service and maintenance revenues generated from European
      customers constituted approximately 17.2%, 11.4% and 9.6% of our total revenues,
      respectively, for the same periods.




18




**Seasonality**




Not
      applicable.




**Sources
      and Availability of Raw Materials**





Not
      applicable.





**Sales
      and Marketing**




We
      sell our products through our direct sales force in North America and Europe,
      as
      well as through our indirect distribution channels, consisting of software
      distributors, independent software vendors, solution providers and system
      integrators. We also use indirect distribution channels in countries where
      we
      have no direct sales operations such as India and Latin America. As of December
      31, 2005, we had 48 people in our sales and marketing organization, representing
      a slight increase from 46 at December 31, 2004.




During
      2005 we made changes in our US sales staff as we believed that we needed persons
      with different skills and experience than those of our 2004 sales staff in
      order
      to sell our Fusion and WorkSpace products. As part of these changes, which
      were
      part of our effort to align our company behind our new products, we recruited
      a
      new Vice President of Sales for the North American market and 4 sales force
      members with experience in the call center market.




We
      continued to invest significantly in the establishment of indirect sales
      channels in 2005 in Europe and Asia. Among other things, we signed a
      distribution agreement with Avaya GlobalConnect Limited, a leading enterprise
      converged communication solutions provider in India. Our indirect distribution
      channels have capabilities that complement and augment our solutions and extend
      our market reach. In particular, independent software vendors often contribute
      industry-specific and application-specific expertise as well as large scale
      project management capabilities that enable us to address a broad range of
      vertical markets. Independent software vendors and system integrators often
      package or incorporate our products with their products or solutions. This
      enables us to create combined offerings that address specific needs,
      particularly for specific vertical markets, and provide more complete and
      tailored offerings.




Our
      marketing efforts are focused on developing greater awareness among target
      customers of our solutions and the benefits they can provide. We market our
      products and services online and through tradeshows and public relations
      activities. We have developed a wide range of collateral materials and sales
      tools that are used by both our direct sales force and indirect distribution
      channels. These materials include brochures, white papers, case studies, press
      releases and our Web site.




**Customers**




Our
      customers include end users to whom we sell our products and services directly,
      distributors and other intermediaries who either resell our products to end
      users or incorporate our products into their own product offerings and end
      users
      who purchase our products from such distributors and other intermediaries.
      Typical users of our products and services are medium to large businesses with
      sophisticated technology requirements.




19




Our
      customers use our solutions to rapidly and cost effectively improve high value
      business processes while leveraging their existing investments in application
      software. Some examples of customers’ uses of our products include:




·
            Insurance
                companies, which use our solutions to modernize their call center
                applications, Web-enable access to these applications for customers
                to
                update account information via the Internet, and integrate their
                customer
                information systems with CRM applications.




·
            Financial
                institutions, which use our solutions to provide real-time integration
                between Siebel Solutions (CRM) and existing back-office systems,
                eliminating redundant data entry, providing real-time data access
                and
                processing, and enhancing customer service and service
                levels.




·
            Automotive
                companies, which use our solutions to enhance the quality of their
                services by enabling dealers in their networks to utilize previously
                centralized sales and inventory management systems to locate and
                order
                cars and parts inventory.




·
            Retailers,
                which use our solutions to enable existing back-office software
                applications to be used to receive and process orders from customers
                and
                to send orders to suppliers via the Internet.




·
            Telecommunications
                providers, which use our solution to assist in streamlining their
                customer
                retention process and improve the productivity and efficiency of
                their
                call center.




·
            Call
                Center Outsourcers; which utilize our solutions to reduce their
                operational costs, as well as to provide better service for their
                customers and provide a differentiated service when they compete
                for new
                business.




**Research
      and Development**




We
      believe that strong product development is essential to our strategy of
      continuing to enhance and expand the capabilities of our products. We have
      invested significant time and resources in creating a structured process for
      undertaking all product development. This process involves several functional
      groups at all levels within our organization and is designed to provide a
      framework for defining and addressing the activities required to bring product
      concepts and development projects to market successfully. In addition, we have
      recruited and intend in the future to recruit key software engineers and
      developers with experience in Java, .Net, communications, expert systems,
      Windows internals and Internet technologies. Our
      research and development efforts, which include internal development as well
      as
      acquisition of technology components, are primarily focused on adding new
      products based on our expectations of future technologies and industry trends
      as
      well as on enhancing and adding functionality to our existing products.




20




Our
      research and development expenses were $4.1 million for the year ended December
      31, 2005, $5.3 million for the year ended December 31, 2004 and $5.3 million
      for
      the year ended December 31, 2003. As of December 31, 2005, 40 professionals
      were
      engaged in research and development activities, a decrease from 52 professionals
      at December 31, 2004. The decrease in 2005 research and development expenses
      resulted from our restructuring plan . See also “Item 5. Operating and Financial Review and Prospects, A. Operating
      Results, Total Operating Expenses.”




**Dependence
      on Patents and Licenses**




We
      are generally not dependent on any third party license or patent with respect
      to
      our technology or products. We hold two patents on portions of our technology.
      While we have an additional patent pending with respect to our technology,
      we
      believe that the failure to obtain such patent would not diminish our ownership
      rights in our technology or our software products.




**Competition**




The
      markets in which we compete are extremely competitive and subject to rapid
      change. We believe that the competitive factors affecting the markets for our
      products and services include:




·
            product
                functionality and features;




·
            availability
                of global support;




·
            existing
                vendor relationships;




·
            ease
                of product implementation;




·
            quality
                of customer support services;




·
            product
                reputation; and




·
            financial
                stability of vendors.




The
      relative importance of each of these factors depends upon the specific customer
      environment. Although we believe that our products and services currently
      compete favorably, we may not be able to maintain our competitive position
      against current and potential competitors. In addition, many companies choose
      to
      deploy their own information technology personnel or utilize system integrators
      to write new code or rewrite existing applications in an effort to develop
      new
      solutions. As a result, prospective customers may decide against purchasing
      and
      implementing externally developed and produced solutions such as ours.




In
      our traditional market, we compete with companies that utilize varying
      approaches to modernize, web-enable and integrate existing software
      applications. These companies include AttachmateWRQ Corporation, IBM, Seagull
      Holding N.V., TIBCO Software Inc. and webMethods, Inc. Our Jacada Fusion and
      Jacada WorkSpace products compete with other contact center solutions offered
      by
      Microsoft, Corizon and Level 8 Systems. We expect additional competition from
      other established and emerging companies. **** Furthermore,
      our competitors may combine with each other, or other companies may enter our
      markets by acquiring or entering into strategic relationships with our
      competitors.




21




**Material
      Effects of Government Regulation in Israel**




Pursuant
      to the Law for the Encouragement of Capital Investments, 1959, the Israeli
      government has granted “Approved Enterprise” status to our existing capital
      investment programs under the Alternative Benefits Program. Consequently, we
      are
      eligible for certain tax benefits for the first several years in which we
      generate taxable income. However, we have not yet begun to generate taxable
      income for purposes of this law. Once we begin to generate taxable income,
      our
      financial results could suffer if our tax benefits are significantly
      reduced.




In
      order to receive tax benefits, we must comply with a number of conditions and
      criteria. Although we believe that we have operated and will continue to operate
      in compliance with the required conditions, we cannot guarantee that this will
      continue. Once we generate taxable income, if we fail to comply in whole or
      in
      part with these conditions and criteria, the tax benefits that we receive could
      be partially or fully canceled and we could be forced to refund the amount
      of
      the benefits we received, adjusted for inflation and interest.




In
      March 2005, the law governing these tax benefits was amended to revise the
      criteria for investments that qualify for tax benefits as an approved
      enterprise.




The
      revised criteria include provisions generally requiring that at least 25% of
      the
      Approved Enterprise's income will be derived from export and that minimum
      qualifying investments in productive assets be made. Additionally, this
      amendment enacted major changes in the manner in which tax benefits are awarded
      under the Law for the Encouragement of Capital Investments, 1959, so that
      companies no longer require Investment Center approval in order to qualify
      for
      tax benefits. Rather, the year in which a company elects to commence its tax
      benefits is designated as the year of election (“Year of Election”). A company
      may choose its Year of Election by notifying the Israel Tax Authorities in
      connection with filings of its annual tax return or within 12 months after
      the
      end of the Year of Election, whichever is earlier, or by requesting an advance
      ruling from the Israel Tax Authorities no later than within six months after
      the
      end of the Year of Election.




We
      cannot assure you that we will, in the future, be eligible to receive
      additional tax benefits under this law. In addition, we cannot assure you that
      these tax benefits will be continued in the future at their current levels
      or at
      all. The termination or reduction of tax benefits could have a material adverse
      effect on our business, financial condition and results of operations. In
      addition, in the event that we increase our activities outside the State of
      Israel, these activities generally will not be eligible for inclusion in Israeli
      tax benefit programs. Accordingly, our effective corporate tax rate could
      increase significantly in the future.




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, or OCS. We have used these grants to develop portion of our technology.
      The State of Israel does not own proprietary rights in technology developed
      with
      OCS funding and there is no restriction on the export of products manufactured
      using technology developed with OCS funding. The technology developed with
      OCS
      funding is, however, subject to transfer restrictions, as described below.
      These
      restrictions may impair our ability to sell our technology assets or to
      outsource manufacturing and the restrictions continue to apply even after we
      have paid the full amount of royalties payable for the grants. In addition,
      the
      restrictions may impair our ability to consummate a merger or similar
      transaction in which the surviving entity is not an Israeli
      company.




22




The
      transfer to a non-Israeli entity of technology developed with OCS funding,
      including pursuant to a merger or similar transaction, and the transfer of
      rights related to the manufacture of more than ten percent of a product
      developed with OCS funding are subject to approval by an OCS committee and
      to
      the following conditions:




·
            *Transfer
                of Technology.*If
                the committee approves thetransfer of OCS-backed technology, such a transfer would be subject
                to the
                payment to the OCS of a portion of the consideration we receive for
                such
                technology. The amount payable would be a fraction of the consideration
                equal to the relative amount invested by the OCS in the development
                of
                such technology compared to our total investment in the technology,
                but in
                no event less than the amount of the grant. However, in the event
                that in
                consideration for our transfer of technology out of Israel we receive
                technology from a non-Israeli entity for use in Israel, we would
                not be
                required to make payments to the OCS if the approval committee finds
                that
                such transfer of non-Israeli technology would significantly increase
                the
                future return to the OCS.




·
            *Transfer
                of Manufacturing Rights.*The
                committee is authorized to approve transfers of manufacturing rights
                only
                if the transfer is conditioned upon either (1) payment of increased
                aggregate royalties, ranging from 120% to 300% of the amount of the
                grant
                plus interest, depending on the percentage of foreign manufacture
                or (2)a
                transfer of manufacturing rights into Israel of another product of
                similar
                or more advanced technology.




·
            *Merger
                or Acquisition.*If
                the committee approves a merger or similar transaction in which the
                surviving entity is not an Israeli company,such
                a transaction would be subject to the payment to the OCS of a portion
                of
                the consideration paid. The amount payable would be a fraction of
                the
                consideration equal to the relative amount invested by the OCS in
                the
                development of such technology compared to the total investment in
                the
                company, net of financial assets that the company has at the time
                of the
                transaction, but in no event less than the amount of the grant.




In
      the event that the committee believes that the consideration to be paid in
      a
      transaction requiring payment to the OCS pursuant to the provisions of the
      law
      described above does
      not
      reflect the true value of the technology or the company being acquired, it
      may
      determine an alternate value to be used as the basis for calculating the
      requisite payments.




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. 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.




**C.**
            
            **Organizational
              structure**





We
      own 100% of the stock in Jacada, Inc., a corporation organized under the laws
      of
      the state of Delaware, and 100% of the stock in Jacada (Europe) Limited, a
      company organized under the laws of England. Jacada (Europe) Limited owns 100%
      of the stock of Jacada Deutschland GmbH, a limited liability company organized
      under the laws of Germany.




23





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




As
      of December 31, 2005, our headquarters and principal administrative, research
      and development operations were located in approximately 13,000 square feet
      of
      leased office space in Herzliya, Israel. The lease expires in March 2007.




In
      the United States, we lease approximately 18,500 square feet in Atlanta,
      Georgia, which we utilize for marketing, sales, administration, service and
      technical support. The lease expires in June 2009, and we have the right to
      extend the lease for an additional five-year term. We also lease office space
      in
      Oakbrook, Illinois, Bellevue, Washington, Mellville, New York and Addison,
      Texas
      which we utilize for marketing and sales; these leases are not material.




In
      the UK, we lease approximately 800 square feet, which we utilize for sales,
      marketing and services. The lease expires in August 2007. In addition, we lease
      office space in Germany, which is utilized for sales and marketing activities.
      This lease is renewable on an annual basis and is not material.




24


**Item
      5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS******




**A.**
            
            **Operating
              Results**





We
      develop, market and support solutions that enable customers to rapidly simplify
      and improve critical business processes without the need for long and expensive
      system replacement projects. We also provide related professional services,
      including training, consulting, support and maintenance.




We
      were incorporated in December 1990. In March 1994, we shipped our first product.
      Until that time, our operations consisted primarily of research and development,
      recruiting personnel and raising capital. Since that time, we have continued
      to
      focus on these activities, as well as on building our sales and marketing
      presence, expanding and enhancing our product offerings, building relationships
      with third parties, and supporting and maintaining our product deployments
      in an
      expanding customer base.




We
      have been operating in the application integration and web-enablement market
      for
      15 years. We refer to this market as our “Traditional Market.” In 2004, we
      introduced Jacada Fusion and elected initially to target corporate customer
      call
      centers. In third quarter of 2005, we introduced a solution specifically for
      customer service representatives called Jacada WorkSpace. This represents a
      new
      market for us and we refer to it as the “call center market.”




***Revenues*** ****




We
      derive our revenues from license fees for our software products, including
      software products that require significant customization, as well as from fees from consulting and training and from maintenance and
      support services. We sell licenses to our customers primarily through our direct
      sales force and indirectly through resellers. Both our customers and our
      resellers are considered end users. We are also entitled to revenues from some
      resellers upon the sublicensing of the software to end users.




Major
      factors influencing our revenues include the decrease in the revenues from
      our
      traditional products, and the increase in revenues from our Jacada Fusion and
      Jacada WorkSpace products. The decrease in traditional product revenues was
      primarily due to the continuing trend of a decrease in average deal size due
      to
      increased competition in this market as well as a decrease in the overall number
      of deals, resulting from our decreased sales efforts in this market. The
      decrease in traditional product revenues was offset by the increase in revenues
      from our contact center market products. Revenues from this market were
      influenced by full first year sales of Jacada Fusion, including a sale of this
      product to a major customer. While the value of the Jacada Fusion and WorkSpace
      transactions we signed in 2005 aggregated $9.5 million, which resulted mainly
      from transactions with four large customers in the telecommunications and
      outsourcing verticals, due to the structure of these deals, only a portion
      of
      this amount was recognized as revenues in 2005.





We
      and our subsidiaries apply American Institute of Certified Public Accountants
      Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended.
      SOP 97-2 generally requires revenue earned on software arrangements involving
      multiple elements to be allocated to each element based on the Vendor Specific
      Objective Evidence (VSOE) of fair value of each element. We and our subsidiaries
      also apply SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition
      with Respect to Certain Transactions”. SOP 98-9 requires that revenue be
      recognized under the “residual method” when VSOE of fair value exists for all
      undelivered elements and no VSOE exists for the delivered elements.




25




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. We do not grant a right of return to our customers. We consider all
      arrangements with payment terms extending beyond six months not to be fixed
      or
      determinable. If the fee is not fixed or determinable, revenue is recognized
      as
      payments become due from the customer provided that all other revenue
      recognition criteria have been met.




Maintenance
      and support revenue included in multiple element arrangements is deferred and
      recognized on a straight-line basis over the term of the maintenance and support
      agreement.




Transactions
      that include consulting and training services are evaluated to determine whether
      those services are essential to the functionality of other elements of the
      transaction. When services are not considered essential, the revenue allocable
      to the services is recognized as the services are performed. When we determine
      that the services are considered essential to the functionality of other
      elements of the transaction, we account for such transaction as a single unit
      of
      accounting as described below.




Where
      software arrangements involve multiple elements, revenue is allocated to each
      element based on VSOE of the relative fair values of each element in the
      arrangement, in accordance with the “residual method” prescribed by SOP 98-9.
      Our VSOE used to allocate the sales price to services, support and maintenance
      is based on the price charged when these elements are sold separately. License
      revenues are recorded based on the residual method. Under the residual method,
      revenue is recognized for the delivered elements when (1) there is VSOE of
      the
      fair values of all the undelivered elements, and (2) all revenue recognition
      criteria of SOP 97-2, as amended, are satisfied. Under the residual method,
      any
      discount in the arrangement is allocated to the delivered element.




In
      agreements that involve significant customization of the Company's software
      and
      a commitment to provide maintenance, the entire agreement represents a single
      unit of accounting, as there is an undelivered element for which objective
      and
      reliable evidence of fair value does not exist. Accordingly, revenues from
      such
      agreements are recognized ratably over the longest element of the contract,
      which generally is the maintenance period, starting from the date on which
      the
      customization of the software is completed.




In
      transactions where the contractual terms include a provision for customer
      acceptance, revenues are recognized either when such acceptance has been
      obtained or when the acceptance provision has lapsed provided that all other
      revenue recognition criteria have been met.




For
      further discussion of our revenue recognition policy, see below under “Critical
      Accounting Policies.”




***Cost
      of Revenues***




Our
      costs of revenues are comprised of (a) costs of software and products, (b)
      costs
      of service and (c) costs of maintenance. In 2005, in conjunction with the
      rollout of our call center market products that are designed to provide an
      overall solution to customers, combining the sale of a software license with
      various services, such as customization and implementation, we began to include
      in our costs of software and products the costs associated with the provision
      of
      these services. In addition, cost of software and products revenues also
      consists of royalties, including payments to the Office of the Chief Scientist
      of the State of Israel, amortization of acquired technology, royalties to
      partners, and costs of duplicating media and documentation.




26




Cost
      of service and maintenance revenues consists of compensation expense, related
      overhead and subcontractor costs for personnel engaged in training, consulting,
      support and maintenance services for our customers.




***Research
      and Development Costs***




As
      part of our long-term growth strategy we have incurred substantial research
      and
      development costs.




Costs
      for the development of new software products and substantial enhancements to
      existing software products are expensed as incurred until technological
      feasibility has been established, at which time any additional development
      costs
      are capitalized. Based on our product development process, technological
      feasibility is established upon completion of a working model. No costs are
      incurred between the completion of the working model and the point at which
      the
      products are ready for general release. Therefore, all research and development
      costs have been expensed .




**Recently
      Issued Accounting Pronouncements**




On
      December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 123 (revised 2004), Share-Based Payment, or “Statement 123(R).”
Statement 123(R) is a revision of FASB Statement No. 123, Accounting for
      Stock-Based Compensation. Statement 123(R) requires all share-based payments
      to
      employees, including grants of employee stock options, to be recognized in
      the
      income statement based on their fair values. Pro forma disclosure is no longer
      an alternative. This new standard will be effective for us in the first interim
      period beginning after January 1, 2006 .





As
      permitted by Statement 123, we currently account for share-based payments to
      employees using the intrinsic value method and, as such, we generally recognize
      no compensation cost for employee stock options. Accordingly, the adoption
      of
      Statement 123(R)’s fair value method will have a significant impact on our
      results of operations, although it will have no impact on our overall financial
      position.





For
      a discussion of Statement 123(R) and other applicable recently issued accounting
      pronouncements, see Note 2 to our financial statements included in Item 18
      below.




**Critical
      Accounting Policies**




The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with U.S. 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. These estimates are evaluated by us on an ongoing 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 amount
      values of assets and liabilities that are not readily apparent from other
      sources. Actual results may differ from these estimates under different
      assumptions or conditions.





27




We
      believe
      that application of the following critical accounting policies entails the
      more
      significant judgments and estimates used in the preparation of our consolidated
      financial statements.





*Revenues* .
      Our
      revenue recognition policy is significant because our revenues are a key
      component of our results of operations. Revenue results are difficult to
      predict, and any shortfall in revenues or delay in recognizing revenues could
      cause our operating results to vary significantly from quarter to quarter and
      could result in future operating losses. In addition, our revenue recognition
      determines the timing of certain expenses, such as certain commissions and
      royalties. We follow very specific and detailed guidelines in measuring
      revenues; however, certain judgments affect the application of our revenue
      policy. Our revenues are principally derived from the licensing of our software
      and the provision of related services. We recognize revenues from software
      license in accordance with SOP 97-2 as amended and modified by
      SOP 98-9. Revenues from software license fees are recognized when
      persuasive evidence of an arrangement exists, either by written agreement or
      a
      purchase order signed by the customer, the software product has been delivered,
      the license fees are fixed and determinable, and collection of the license
      fees
      is considered probable. License fees from software arrangements which involve
      multiple elements, such as post-contract customer support, consulting and
      training, are allocated to each element of the arrangement based on the relative
      fair values of the elements. We determine the fair value of each element in
      multiple-element arrangements based on VSOE.




In
      agreements that involve significant customization of the Company's software
      and
      a commitment to provide maintenance, the entire agreement represents a single
      unit of accounting, as there is an undelivered element for which objective
      and
      reliable evidence of fair value does not exist. Accordingly, the revenues from
      such agreements are recognized as part of software and products revenues, and
      the maintenance revenues under such agreements are recognized separately as
      maintenance revenues.




In
      judging
      the probability of collection of software license fees we continuously monitor
      collection and payments from our customers and maintain a provision for doubtful
      accounts based upon our historical experience and any specific customer
      collection issues that we have identified. In connection with customers with
      whom we have no previous experience, we may utilize independent resources to
      evaluate the creditworthiness of those customers. For some customers, typically
      those with whom we have long-term relationships, we may grant extended payment
      terms. We perform initial credit evaluations of our customers and adjust credit
      limits based upon payment history and the customer’s creditworthiness, as
      determined by our review of their credit information. 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, additional allowances may
      be
      required.





Our
      traditional software products do not require significant customization or
      modification. However, i n
      2005, in conjunction with the rollout of our call center market products that
      are designed to provide an overall solution to customers, we began providing
      customization and implementation services to our customers. We anticipate that
      a
      portion of our future deals will involve the provision of these types of
      services and in connection with these deals we will only recognize revenues
      for
      the provision of the overall solution upon acceptance by the
      customer. Revenues
      from such deals are recognized ratably over the period during which the last
      element of the contract is performed, which in most cases is the maintenance
      period, starting from the date on which the customization of the software is
      completed.





28




Service
      revenues include post-contract customer support, consulting and training.
      Post-contract customer support arrangements provide for technical support and
      the right to unspecified upgrades on an if-and-when-available basis. Revenues
      from those arrangements are recognized ratably over the term of the arrangement,
      usually one year. Where
      the contractual terms include a provision for customer acceptance, revenues
      are
      recognized either when such acceptance has been obtained or when the acceptance
      provision has lapsed. Consulting services and training are recognized either on a time and materials
      basis as the services are provided or on a fixed fee basis.





*Impairment
      of long-lived assets* . We
      and our
      subsidiaries' long-lived assets and certain identifiable intangibles are
      reviewed for impairment in accordance with Statement of Financial Accounting
      Standard No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
(“SFAS No.144”) whenever events or changes in circumstances indicate that the
      carrying amount of an asset or group of assets may not be recoverable.
      Recoverability of an asset or group of assets to be held and used is measured
      by
      a comparison of the carrying amount of an asset or group of assets to the future
      undiscounted cash flows expected to be generated by the assets. If such assets
      are considered to be impaired, the impairment to be recognized is measured
      by
      the amount by which the carrying amount of the assets exceeds the fair value
      of
      the assets. We have performed impairment tests on our long-lived assets and
      as
      of December 31, 2005, no impairment losses have been identified.




*Goodwill* .
      Under
      Statement of Financial Accounting Standard No.142, “Goodwill and Other
      Intangible Assets” (“SFAS No, 142”) goodwill acquired in a business combination
      which closes on or after July 1, 2001 is deemed to have indefinite life and
      will
      not be amortized. SFAS No.142 requires goodwill to be tested for impairment
      on
      adoption and at least annually thereafter or between annual tests in certain
      circumstances, and written down when impaired, rather than being amortized
      as
      previous accounting standards required. Goodwill is tested for impairment by
      comparing the fair value of the reporting unit with its carrying value. Fair
      value is determined using market multiples and comparative analysis. Significant
      estimates used in the methodologies include future cash flows, future short-term
      and long-term growth rates, weighted average cost of capital and estimates
      of
      market multiples. We have performed impairment tests during the third fiscal
      quarter and determined that our goodwill of $4.6 million was not subject to
      impairment during fiscal year 2005.




***Contingencies*** .
      From
      time to time, we are defendant or plaintiff in various legal actions, which
      arise in the normal course of business. We are required to assess the likelihood
      of any adverse judgments or outcomes to these matters as well as potential
      ranges of probable losses. A determination of the amount of reserves required
      for these contingencies, if any, which would be charged to earnings, is made
      after careful and considered analysis of each individual action together with
      our legal advisors. The required reserves may change in the future due to new
      developments in each matter or changes in circumstances, such as a change in
      settlement strategy. A change in the required reserves would affect our earnings
      in the period the change is made.




29




Our
      historical operating results for the years ended December 31, 2005, 2004 and
      2003 as a percentage of total revenues are as follows:




**Year
                Ended December 31,****2005**
            
            **2004**
            
            **2003**Revenues:Software
                and products
            
            
            33.7
            %
            
            29.1
            %
            
            40.6
            %Services
            
            
            18.3
            
            
            27.7
            
            
            22.9Maintenance
            
            
            48.0
            
            
            43.2
            
            
            36.5Total
                revenues
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of revenues:Software
                and products
            
            
            6.6
            
            
            3.2
            
            
            4.1Services
            
            
            13.6
            
            
            16.9
            
            
            11.6Maintenance
            
            
            4.3
            
            
            5.8
            
            
            5.4Total
                cost of revenues
            
            
            24.5
            
            
            25.9
            
            
            21.1Gross
                profit
            
            
            75.5
            
            
            74.1
            
            
            78.9Operating
                expenses:Research
                and development
            
            
            20.5
            
            
            26.7
            
            
            25.8Sales
                and marketing
            
            
            55.3
            
            
            53.1
            
            
            45.6General
                and administrative
              Restructuring
            
            
            28.7
            
            
            24.0
              2.7
            
            
            22.9
              -Total
                operating expenses
            
            
            104.5
            
            
            106.5
            
            
            94.3Operating
                loss
            
            
            (29.0
            )
            
            (32.4
            )
            
            (15.4
            )Financial
                income, net
            
            
            4.2
            
            
            3.9
            
            
            5.0Net
                loss
            
            
            (24.8
            )%
            
            (28.5
            )%
            
            (10.4
            )%





**Years
      Ended December 31, 2005, 2004 and 2003** ****




***Revenues
      and Cost of Revenues***




*Revenues.* Revenues
      were $19.9 million, $19.8 million and $20.6 million for the years ended December
      31, 2005, 2004 and 2003, respectively. The slight increase in total revenues
      in
      2005 as compared to 2004 was due to the increase in revenues from our call
      center market products which offset the decrease in traditional product
      revenues. The value of the Jacada Fusion and WorkSpace transactions we signed
      in
      2005 aggregated $9.5 million resulted mainly from transactions with four large
      customers in the telecommunications and outsourcing verticals. However, only
      a
      portion of this amount, primarily revenues from our transaction with a major
      customer, was recognized in 2005. The other portion was not recognized primarily
      due the fact that it involves the provision of implementation and customization
      services and we will only begin recognizing revenues for the provision of the
      overall solution upon acceptance by the customer. In addition, as we had yet
      to
      establish fair value for some of the types of transactions involving these
      new
      products, we could not recognize the revenues from these transactions upfront.
      We also believe that these results will typify our activity in the call center
      market in that we expect to generate revenues from a smaller number of deals
      with larger average dollar amounts.




The
      3.8% decrease in total revenues in 2004 as compared to 2003 was primarily due
      to
      the competitive environment in our traditional software product market, which
      created pricing pressures and resulted in companies stretching out commitments
      and postponing purchases. As a result of these developments, we experienced
      a
      decrease in the average dollar amount of our transactions and in the average
      number of transactions. For the years ended December 31, 2003 and 2004, no
      customer represented 10% or more of our revenues. For
      the year ended December 31, 2005 one of our customers represented more than
      20%
      of our revenues.




30




*Software
      and products revenues.* Software
      and products revenues were $6.7 million, or 33.7 % of revenues for the year
      ended December 31, 2005, compared to $5.7 million, or 29.1% of revenues for
      the
      year ended December 31, 2004, and $8.4 million, or 40.6% of revenues for the
      year ended December 31, 2003. However, our software and products revenues
      margins decreased in 2005 as compared with 2004, due to the increase in our
      costs of software and products revenues, as discussed below under “Costs of
      Revenues.” The 17% increase in software revenues during 2005 as compared to 2004
      was primarily related to our transaction with a major customer which was
      partially offset by a decrease
      in traditional product revenues .
      The 31.2% reduction in software revenues during 2004 as compared to 2003 was
      related to the decrease in average deal size due to increased competition in
      our
      traditional market as well as a decrease in the overall number of deals,
      resulting from our decreased sales efforts in this market.




*Service
      revenues.* Service revenues were $3.7 million or 18.3% of revenues for the year ended
      December 31, 2005, compared to $5.5 million or 27.7% of revenues for the year
      ended December 31, 2004, and $4.7 million or 22.9% of revenues for the year
      ended December 31, 2003. Service revenues are generated primarily from
      supporting customers during the implementation of projects (other than projects
      for which the services are included in software and products revenues as
      discussed above), including our software products. The decrease in service
      revenues in 2005 is due to the decrease in sales of our traditional software
      products, which resulted in a decrease in the follow-up services transactions.
      Furthermore, a significant portion of our traditional software and products
      revenues in 2005 were due to sale to existing customers, which sales generally
      do not involve a service component. The increase in service revenues in 2004
      was
      due to two large orders and an increase in the number of service transactions.




*Maintenance
      revenues.* Maintenance revenues were $9.6 million or 48% of revenues for the year ended
      December 31, 2005, compared to $8.6 million or 43.2% of revenues for the year
      ended December 31, 2004 and $7.5 million or 36.5% of revenues for the year
      ended
      December 31, 2003. The increase in maintenance revenues during 2005 was
      primarily related to our transaction with a major customer and the increase
      in
      2004 was primarily due to our expanding customer base and related annual
      maintenance contract renewals.




*Cost
      of Revenues.* Cost
      of revenues was $4.9 million or 24.5% of revenues for the year ended December
      31, 2005, compared to $5.1 million or 25.9% of revenues for the year ended
      December 31, 2004 and $4.3 million or 21.1% of revenues for the year ended
      December 31, 2003. The decrease in cost of revenues during 2005 was primarily
      due to savings due to the reduction in manpower and related costs which was
      partially offset by the allocation of research and development costs to costs
      of
      software and products as explained below.




Cost
      of software and products revenues was $1.3 million or 6.6% of revenues for
      the
      year ended December 31, 2005, compared to $0.6 million or 3.0% of revenues
      for
      the year ended December 31, 2004 and $0.8 million or 4.1% of revenues for the
      year ended December 31, 2003. The increase in costs of software and products
      in
      2005 was due to the change in the allocation of the cost of product
      customization from costs of services and from research and development costs
      to
      costs of software and products due to the rollout in 2005 of our call center
      market products. As these products are designed to provide an overall solution
      to customers, combining the sale of software license with various services,
      such
      as customization and implementation, we began to include in our costs of
      software and products the costs associated with the provision of these services.
      As a result of the change in the allocation of these costs, our software and
      products revenues margins were negatively impacted. The
      decrease in cost of software and products revenues in 2004 was due to fewer
      transactions generated by our partners in 2004, resulting in reduced royalty
      payments to our partners.




31




Cost
      of service revenues was $2.7 million or 13.6% of revenues for the year ended
      December 31, 2005, compared to $3.3 million or 16.9% of revenues for the year
      ended December 31, 2004 and $2.4 million or 11.6% of revenues for the year
      ended
      December 31, 2003. The decrease in cost of services revenues from 2004 to 2005
      was due to the reduction in work force as part of the realignment of our
      business behind Jacada Fusion products in the first quarter of 2005, the
      decrease in service revenues in 2005 of our traditional software products and
      the allocation of costs related to product customization from costs of services
      to costs of software and product. The decrease in traditional product revenues
      resulted with a decrease in follow-up services transactions which resulted
      in
      decrease in work force from 28 services professionals at year end 2004 to 22
      at
      year end 2005. The increase in cost of services revenues from 2003 to 2004
      was
      due to the increase in the number of services professionals from 20 at December
      31, 2003 to 28 at December 31, 2004 and the costs relating to subcontractors
      needed to support a small number of transaction in which we required
      subcontractor services.




Cost
      of maintenance revenues was $0.9 million or 4.3% of revenues for the year ended
      December 31, 2005, compared to $1.1 million or 5.8% of revenues for the year
      ended December 31, 2004, and compared to $1.1 million or 5.4% of revenues for
      the year ended December 31, 2003. The decrease from 2004 to 2005 was due to
      the
      reduction in our work force as part the realignment of our business behind
      Jacada Fusion in the first quarter of 2005 and the maturity of our traditional
      products.




***Total
      Operating Expenses***




During
      the first quarter of 2005, in response to
      the
      realization that the sales cycle of Jacada Fusion products was longer than
      we
      anticipated, we adopted a restructuring plan in an attempt to minimize the
      gap
      between our declining traditional business revenue and the anticipated Jacada
      Fusion revenue by improving operational processes. The plan included merging
      several departments, aligning the marketing and sales organization to support
      the new business model and implementing various expense reductions. These
      changes also resulted in a 12% reduction in workforce worldwide and included
      the
      related costs associated with this reduction. Due to the fact that these changes
      do not qualify as restructuring costs under the provisions of SAFS 146 no
      restructuring costs were recorded for such changes.




Total
      operating expenses in 2005 were $20.9 million, representing a slight decrease
      from $21.1 million in 2004 which includes a restructuring cost in the amount
      of
      $0.5 million. This was achieved by savings from our first quarter alignment
      plan
      resulted with a reduction of $1.2 million in research and development expenses
      being offset by increases of $1.0 million in general and administrative expenses
      and $0.5 in sales and marketing expenses. The increase in total operating
      expenses to $21.1 million in 2004 from $19.4 million in 2003 was primarily
      due
      to an increase in sales and marketing expenses in the amount of $1.1 million
      and
      to restructuring expenses in the amount of $0.5 million incurred in 2004 for
      the
      shutting down of our research and development operations in Minneapolis in
      order
      to consolidate all research and development in Israel.




32




*Research
      and Development.* Research
      and development expenses were $4.1 million , $5.3
      million and $5.3 million for the years ended December 31, 2005, 2004 and 2003,
      respectively. The decrease from 2004 to 2005 was due to (a) the reduction in
      our
      work force as part of our realignment of our business behind Jacada Fusion
      products in the first quarter of 2005 and (b) the allocation of salaries and
      other costs of development personnel involved in the provision of customization
      services as part of certain software projects to costs of software and products
      from research and development. The research and development expenses in 2004
      include cost associated with an increase in hiring through the end of the year
      offset by savings associated with the closing of our lab in Minneapolis and
      the
      consolidation of all research and development activities into our facilities
      in
      Israel. As a percentage of total revenues, research and development expenses
      were 20.5% , 26.7%
      and 25.8% for the years ended December 31, 2005, 2004 and 2003, respectively.




*Sales
      and Marketing.* Sales
      and marketing expenses were $11.0 million, $10.5
      million and $9.4 million for the years ended December 31, 2005, 2004 and 2003,
      respectively. The increase in 2005 compared to 2004 was primarily due to
      compensation costs related to new hiring in our sales organization, and to
      increases in commission and incentive payments. The increase in sales expenses
      was partially offset by a reduction in marketing expenses due to a reduction
      in
      marketing personnel as part of the realignment of our business behind Jacada
      Fusion products in the first quarter of 2005 and an overall reduction in our
      marketing budget. The increase in 2004 compared to 2003 was primarily due to
      the
      marketing expenses relating to our new product launch and the expenses relating
      to increasing our European sales organization. As a percentage of total
      revenues, sales and marketing expenses were 55.3 %, 53.1%
      and 45.6% for the years ended December 31, 2005, 2004 and 2003, respectively.




*General
      and Administrative.* General
      and administrative expenses were $5.7 , $4.7
      million and $4.7 million for the years ended December 31, 2005, 2004 and 2003,
      respectively. As a percentage of total revenues, general and administrative
      expenses were 28.7 %, 24.0%
      and 22.9% of total revenues for the years ended December 31, 2005, 2004 and
      2003, respectively. The increase in 2005 compared to 2004 was primarily due
      to
      expenses incurred in connection with legal matters relating to former employees
      as well as an increase in executive compensation relating to the hiring of
      the
      President of Jacada, Inc.




*Restructuring* .
      During 2004, we recorded a charge in the amount of $0.5 million, or 2.7% of
      revenues, associated with the consolidation of all research and development
      operations in Minneapolis into the lab in Israel. This consolidation was
      designed to improve overall development efficiency, accelerate new product
      releases and reduce operating expenses.





*Financial
      Income, Net.* Financial
      income, net, was $0.8 million for the year ended December 31, 2005, $0.8 million
      for the year ended December 31, 2004 and $1.0 million for the year ended
      December 31, 2003. In October 1999, we raised approximately $51 million, net
      of
      expenses, in an initial public offering. Most of the financial income was
      generated from investments of our funds in certain financial instruments, which
      generate interest and investment income. The decline from 2003 to 2004 is
      primarily due to exchange rate income in 2003 which was hedged in 2004 and
      also
      a reduction in our cash balance during 2004 due to use of cash to fund working
      capital.




*Income
      Taxes.* As
      of
      December 31, 2005, we had carry forward tax losses totaling approximately $30
      million, part of which can be carried forward and offset against taxable income
      with expiration dates from 2011 to 2025 and the rest of the carry forward tax
      losses have no expiration date .
      We believe
      that since we have a history of losses it is more likely than not that the
      deferred tax regarding the loss carryforwards will not be realized in the
      foreseeable future and therefore we have provided a valuation allowance in
      respect of deferred tax asset resulting from these tax loss
      carryforwards.




33




*Net
      Loss* .
      As a result of the above factors, our operations resulted in net losses of
      $5.0
      million in 2005, $5.6 million in 2004 and $2.1 million in 2003.




**B.**
            
            **Liquidity
              and Capital Resources**




Since
      our inception, we have funded operations through the private placement and
      public offering of equity securities, internal operations and, to a lesser
      extent, borrowings from financial institutions.




As
      of December 31, 2005, we had $35.7 million in cash and investments, all of
      which
      were interest and dividend bearing. During 2005, operating activities used
      approximately $2.9 million in cash. The major component using cash during 2005
      was the net loss of $5.0 million from operations. Partially offsetting the
      use
      of cash was the non-cash depreciation and amortization of $0.9 million, an
      increase in deferred revenue of $1.7 million, proceeds from exercise of stock
      options of $0.5 million, proceeds from sales of fixed assets of $0.1 million
      and
      increase in trade payables of $0.9 million.




As
      of December 31, 2004, we had $37.6 million in cash and investments, all of
      which
      were interest and dividend bearing. During 2004, operating activities used
      approximately $2.6 million in cash. The major components using cash during
      2004
      included the net loss of $5.6 million from operations and the acquisition of
      technology in the amount of $0.9 million. Partially offsetting the use of cash
      was the non-cash depreciation and amortization of $1.2 million, an increase
      in
      deferred revenue of $0.5 million, proceeds from exercise of stock options of
      $0.4 million, proceeds from sales of fixed assets of $0.2 million, increase
      in
      trade payables of $0.5 million, and decrease in accrued interest and
      amortization of premium on marketable securities of $0.6 million.




As
      of December 31, 2003, we had $41.8 million in cash and investments, all of
      which
      were interest and dividend bearing. During 2003, operating activities provided
      approximately $0.8 million in cash. One of the major components providing cash
      during 2003 was an increase in deferred revenues of $1.2 million. This increase
      was due to our ability to structure transactions that feature multiyear
      maintenance commitments and yield up front payments. Other major components
      providing cash during 2003 included non-cash depreciation and amortization
      of
      $1.4 million and the accrued interest and amortization of premium on marketable
      securities of $0.4 million. Partially offsetting the provision of cash was
      the
      net loss of $2.1 million generated from operations and a reduction in trade
      payables of $0.2 million.




Expenditures
      for property and equipment were approximately $0.3 million, $0.5 million and
      $0.3 million for the years ended December 31, 2005, 2004 and 2003, respectively.
      These expenditures include computer hardware and software used in product
      development and testing, leasehold improvements relating to new and existing
      facilities and office equipment in support of our operations.




Our
      capital requirements depend on numerous factors, including market acceptance
      of
      our products, the resources we devote to developing, marketing, selling and
      supporting our products, the timing and extent of establishing additional
      international operations, acquisitions and other factors. We believe our working
      capital is sufficient for our projected requirements.




34




Our
      intention is to hold our securities until the maturity date thereof and we
      have
      the financial ability to do so.




*Derivative
      Financial Instruments* .  Since
      our financial results are reported in dollars, fluctuations in the rates of
      exchange between the dollar and non-dollar currencies may have a material effect
      on our results of operations. We therefore use currency exchange forward
      contracts to hedge the impact of the variability in the exchange rates on
      accounts receivable and future cash flows from certain Euro-denominated
      transactions as well as certain NIS-denominated expenses. The counter-parties
      to
      our forward contracts are major financial institutions with high credit ratings.
      We believe the risk of incurring losses on such forward contracts related to
      credit risks is remote and that any losses would be immaterial. As of December
      31, 2005, we had forward contracts to sell up to $2,246,606 for a total amount
      of NIS 10,341,129 maturing prior to July 1, 2006.




*Impact
      of Taxation.* Please
      refer to Item 3.D and Item 10.E for certain information regarding tax benefits
      in Israel.




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




We
      believe that strong product development is essential to our strategy of
      continuing to enhance and expand the capabilities of our products. We have
      invested significant time and resources in creating a structured process for
      undertaking all product development. This process involves several functional
      groups at all levels within our organization and is designed to provide a
      framework for defining and addressing the activities required to bring product
      concepts and development projects to market successfully. In addition, we have
      recruited key software engineers and developers with experience in Java, .net,
      communications, expert systems, Windows internals and Internet technologies.
      Our
      research and development efforts in recent years have been primarily focused
      on
      adding new products based on our expectations of future technologies and
      industry trends and, to a lesser extent, on enhancing and adding functionality
      to our existing products.




Our
      research and development expenses were $4.1 million for the year ended December
      31, 2005, $5.3 million for the year ended December 31, 2004 and $5.3 million
      for
      the year ended December 31, 2003. As of December 31, 2005, 2004 and 2003,
      respectively, we had 40, 52 and 52 employees engaged in our product development
      activities.




**D.**
            
            **Trend
              Information**




Our
      overall revenues from sales of our traditional software products have declined
      over the past four years, partially as a result of our decreased selling efforts
      in this market. In addition, the average selling price of these products has
      declined over the past six years due to changes in our competitive environment
      that have resulted in increased pricing pressures. We believe that these trends
      may continue. See “Risk Factors - *The
      revenue associated with our traditional products has declined and the revenue
      generated by our new Jacada Fusion* *and
      Jacada Workspace* *products is less than we anticipated; failure to increase revenues will result
      in increased losses and a material adverse effect on our business” and
“* *Competitive
      pressures in our current market will result in continuing reductions in the
      average selling price of our traditional software products* ” ****** for
      a discussion of the potential effects of this trend.




We
      have developed two new products, Jacada Fusion, which is designed to integrate
      different applications residing on host, Windows and Web-based platforms and
      Jacada WorkSpace which
      is
      designed to be a single
      agent console that unifies customer interaction tools with a single access
      point
      to all the mission-critical applications required by the customer
      service representative to
      effectively complete a customer interaction. However, we cannot be sure that
      a
      market for these products will develop, that the products will achieve market
      acceptance or that the costs we have incurred in the development and
      introduction of these products will be recovered. In addition, our sales cycle
      for our new Jacada Fusion and Jacada WorkSpace products is longer than we
      expected. Therefore, we are unable to determine if our business model will
      support our forecasted revenue.




35




In
      2005 we signed four Jacada Fusion and WorkSpace transactions which represent
      the
      majority of the aggregate amount of $9.5 million in 2005 Fusion and Workspace
      bookings. We believe that these results will typify our activity in the call
      center market in that we expect to generate revenues from a smaller number
      of
      deals with larger average dollar amounts. However, only a portion of this
      amount, primarily revenues from our transaction with a major customer, was
      recognized in 2005. Accordingly, the other portion (more than half of the
      aggregate value of these transactions) represents our backlog as of the
      beginning of 2006.




In
      addition, in
      conjunction with the 2005 rollout of our call center market products, we began providing
      customization and implementation services to our customers. We anticipate that
      a
      portion of our future deals will involve the provision of these types of
      services and in connection with these deals we will only recognize revenues
      for
      the provision of the overall solution upon acceptance by the customer.




See
      “Risk Factors, and specifically - *“* *Our
      introduction of Jacada Fusion and Jacada WorkSpace represents an attempt to
      enter a new market in which we have limited experience and failure to
      successfully penetrate this market would harm our results of operations”,* “ *We
      do not have a proven business model for the contact center market; if our
      business model is inappropriate for this market and our estimations regarding
      the sales cycle for this market is incorrect, our efforts to successfully
      commercialize Jacada Fusion and Jacada WorkSpace may be harmed or we will
      experience a further delay in generating revenues from this product”* and *“* *We
      expect revenues from our contact center business to be concentrated in a few
      large orders and a small number of customers, meaning that the loss of a
      significant customer or a failure to make even a small number of such sales
      could harm our results of operations”* ****** for
      a discussion of the risks our business and prospects for growth face in
      connection with the introduction of Jacada Fusion and Jacada WorkSpace.




**E** .  **Off-balance
      sheet arrangements** .
      We are not party to any off-balance sheet arrangements.




**F.**  **Tabular
      Disclosure of Contractual Obligations.** ****** The
      following table summarizes our contractual obligations and commercial
      commitments as of December 31, 2005 **:**


**Payments
                  due by period (in thousands)****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                than 1 year**
              
              **1-3
                  years**
              
              **3-5
                  years**
              
              **More
                  than 5 years**Facilities
              
              $
              1,924
              
              $
              810
              
              $
              1,097
              
              $
              17
              
              
              0Vehicles
              
              $
              696
              
              $
              298
              
              $
              398
              
              $
              0
              
              
              0


36




**Item
      6: DIRECTORS, SENIOR MANAGEMENT AND
      EMPOYEES**




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




The
      following table sets forth certain information regarding our executive officers
      and directors as of June 22, 2006:




Name
            
            Age
            
            PositionGideon
                Hollander(1)
            
            41
            
            Chief
                Executive Officer and DirectorPaul
                O’Callaghan
            
            48
            
            PresidentTzvia
                Broida
            
            36
            
            Chief
                Financial OfficerDavid
                Holmes
            
            50
            
            Executive
                Vice President, Sales and MarketingJeffrey
                Roth
            
            44
            
            Senior
                VP of Israeli OperationsOfer
                Yourvexel
            
            42
            
            Senior
                Vice President Sales and Managing Director of Jacada EMEA &
                APACOren
                Ezra
            
            37
            
            Senior
                VP of Products and Professional ServicesYossie
                Hollander
            
            48
            
            Chairman
                of the Board and DirectorAmnon
                Shoham(1)(2)
            
            48
            
            DirectorOhad
                Zuckerman(2)
            
            41
            
            DirectorNaomi
                Atsmon(2)
            
            53
            
            DirectorDan
                Falk (2)
            
            61
            
            Director




(1)
            
            Member
              of the Compensation Committee(2)
            
            Member
              of the Audit Committee




*Gideon
      Hollander* was a co-founder of Jacada in 1990 and has served as our Chief Executive Officer
      and a director since 1990. From 1988 to 1990, Mr. Hollander worked in the area
      of research and development at Comverse Technology. From 1982 to 1987, Mr.
      Hollander served in various technology and management positions in an elite
      unit
      of the Israeli Defense Forces, where he specialized in expert systems and user
      interface design. Two of the projects that Mr. Hollander managed won the most
      prominent Israeli award for technological innovations. Gideon Hollander is
      Yossie Hollander’s brother.




*Paul
      O’Callaghan* joined
      us in May 2006 as our President. Mr. O’Callaghan has more than **** 25
      years of executive experience in the international software, Internet and
      network infrastructure markets. From February 2003 to May 2006 Mr. O’Callaghan
      was Senior Vice President of Worldwide Sales & Field Services for Optio
      Software a provider of software solutions that enable organizations to improve
      functionality and quality in their inbound and outbound document processes.
      Mr.
      O'Callaghan also held that position from May 2001 to November 2001. From July
      2000 to February 2001 Mr. O’Callaghan was Senior Vice President of Worldwide
      Sales and Services for Idapta Inc. From November 1997 to July 2000 Mr.
      O’Callaghan was Vice President of Sales for XACCT Technologies (acquired by
      Amdocs Limited). From December 1994 to November 1997 Mr. O’Callaghan was Area
      Vice President for Southeastern Operations, Cisco Systems. From November 1993
      to
      December 1994 Mr. O’Callaghan was Vice President of Sales for Network Systems
      Corporation. From January 1990 to November 1993 Mr. O’Callaghan was Senior Vice
      President of Sales and Marketing for Imnet Systems. From January 1982 to January
      1990 Mr. O’Callaghan was Country Manager (UK)/Southern Region Sales Vice
      President Network Systems Corporation (acquired by StorageTek)





*Tzvia
      Broida* has
      been our Chief Financial Officer since January 2005, having served as our Vice
      President, Finance since March 2000. Mrs. Broida has held various positions
      at
      Jacada since August 1995. From 1994 to 1995, Mrs. Broida worked as an accountant
      at the accounting firm of Yehuda Ehrlich & Partners. From 1992 to 1994, Mrs.
      Broida worked as an accountant at the accounting firm of Vexler, Kodenzick
&
Partners.





37




*David
      Holmes* has been Executive Vice President of Marketing since December 2002. He served
      as
      Senior Vice President, Marketing from June 1998 through December 2002 and as
      Vice President of Marketing from October 1995 to June 1998. From June 1991
      to
      October 1995, Mr. Holmes was Marketing Director for KnowledgeWare, Inc., later
      acquired by Sterling Software, Inc. From March 1984 to June 1991, Mr. Holmes
      was
      a consultant for Deloitte & Touche.




*Jeffrey
      Roth* has
      been Senior Vice President of Israeli Operations since March 2000. He served
      as
      Vice President, Customer Support from 1998 through March 2000. From 1993 to
      1997, Mr. Roth was Vice President of Service and Support for Gerber Systems
      Inc,
      later acquired by Kronos, Inc., a provider of HR, payroll, scheduling, and
      time
      and labor solutions. From 1990 to 1993, Mr. Roth was Operations Manager for
      Pacer/CATS Corporation, a provider of admissions, point-of-sale and management
      systems to the leisure industry.





*Ofer
        Yourvexel* joined us in March 2004 as our Senior Vice President Sales and
        Managing Director of Jacada EMEA & APAC. From March 2003 to March 2004, Mr.
        Yourvexel was Executive Vice President of Visonic Technologies, a provider
        of
        integrated identification solutions to enhance security, safety and
        communications throughout enterprises. From September 1998 to March 2003,
        Mr.
        Yourvexel headed the Marketing and Sales division at Elpas, a Visonic
        Technologies company. From June 1996 to August 1998, Mr. Yourvexel held the
        position of President at Enigma U.S.A. Inc., stationed in Boston; Enigma
        is a
        worldwide leader in the development, implementation and marketing of electronic
        publishing solutions from June 1991 to May 1996. Mr. Yourvexel began his
        career
        in the high-tech industry at Tefen Ltd., a leading industrial engineering
        and
        system analysis consulting firm, where he advanced to Vice President of
        Operations in the Central U.S.A. region.




*Oren
      Ezra* has been
      our Senior VP of Products and Professional Services since January 1, 2006,
      having served as our VP of Project Management and Professional Services since
      2001, and Director Professional Services prior to that, since joining Jacada
      in
      1998. From 1997 to 1998 Mr. Ezra was a project manager for John Bryce Systems,
      and prior to that, he served for 6 years in Israel's Air Force as an officer
      in
      various positions, ranging from software development to project management.





*Yossie
      Hollander* has been Chairman of the Board of Directors since November 1995 and a director
      since 1990. Mr. Hollander was a founder, and from 1983 to 1994 served as the
      Chief Executive Officer, of New Dimension Software Ltd., an enterprise system
      and management software company that was acquired by BMC Software in April
      1999.
      Mr. Hollander is a member of the executive committee of the Weizman Institute.
      Yossie Hollander is Gideon Hollander’s brother.





*Amnon
      Shoham* has served as a director since January 1994. Mr. Shoham is the Managing Director
      of Cedar Advisors Inc., a
      provider
      of investment and financial advice for high technology companies and venture
      capital funds. Mr. Shoham has held this position  since
      2001. From 1997 to 2000, Mr. Shoham was the Managing Director of Cedar Financial
      Advisors (Israel) Ltd, an Israeli affiliate of Cedar Advisors Inc. Mr. Shoham
      is
      also associated with the Cedar Funds, venture capital funds investing in
      Israel-related, high technology companies. From 1993 to 1997, Mr. Shoham served
      as a Managing Partner of Star Ventures, a venture capital firm in Israel. Mr.
      Shoham serves on the board of directors of several private
      companies.





38




*Ohad
      Zuckerman* has served as a director since December 2000. Mr. Zuckerman is the CEO and
      President of Zeraim Gedera Ltd., an agricultural company which specializes
      in
      development and production of vegetable seeds, a position he has held since
      January 2000. From 1998 to January 2000, Mr. Zuckerman served as the
      Executive ** Vice
      President of Zeraim Gedera and from 1990 to 1998 he served at the same company
      as the ** Marketing ** Manager.
      Mr. Zuckerman served as a member of the board of directors at Maximal Innovative
      Intelligence LTD, a provider of software for extracting information from data
      warehouses, from 1998 to 2002.





*Naomi
      Atsmon* has served as a director since June 2001. In addition, Ms. Atsmon has served as
      a
      director of Clicksoftware Technologies Ltd. (NASDAQ: CKSW) since May
      2003 . Ms. Atsmon served as a Division President of Amdocs Ltd., a provider of
      information system solutions to communications companies, from July 1997 to
      December 2002. From 1994 until 1997, Ms. Atsmon served as a vice president
      at
      Amdocs Ltd. Ms. Atsmon held various positions at Amdocs since 1986.





*Dan
      Falk* joined us in August 2004 as a director. Since 2001 Mr. Falk serves as a member
      of the boards of directors of Orbotech Ltd., Attunity Ltd., Nice System Ltd.,
      Orad Hi-Tech SystemsLtd., Netafim Ltd., Ormat Technologies Inc., ClickSoftware
      Technologies Ltd., Poalim Ventures 1 Ltd., Dmatek Ltd., Plastopil Ltd. and
      Nova
      Measuring Systems Ltd. In 1999 and 2000, Mr. Falk was President and Chief
      Operating Officer of Sapiens International Corporation N.V. From 1985 to 1999,
      Mr. Falk served in various positions in Orbotech Ltd., the last of which were
      Chief Financial Officer and Executive Vice President. From 1973 to 1985, he
      served in several executive positions in the Israel Discount Bank.





**B.**
            
            **Compensation**




The
      aggregate remuneration we paid for the year ended December 31, 2005 to all
      executive officers as a group was $1,662,027 in salaries, fees, commissions
      and
      bonuses. This group included 11 persons, including 4 executive officers that
      are
      no longer work with company as of June 22. This also includes $53,973 set aside
      or accrued to provide for pension, retirement or similar benefits provided
      to
      our executive officers. As of May 20, 2003, directors (except the CEO) each
      receive $750 for each meeting of the board of directors attended and each
      meeting of a committee of the board of directors attended. In addition, all
      directors are entitled to be reimbursed for their expenses incurred in
      connection with the discharge of their responsibilities as board members,
      including attending board of directors meetings. Directors also receive options
      to purchase our ordinary shares.




As
      of June 22, 2006 options to purchase 1,910,283 ordinary shares granted to our
      directors and executive officers (12 persons, including Robert C. Aldworth
      our
      former CFO) under our option plans were outstanding. The weighted average
      exercise price of these options was $2.90 per share ranging from $0.99 to
      $9.125, and the expiration dates of the options range from July 30, 2006 to
      January 24, 2016.




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





**Election
      and Term of Directors**





Directors
      are elected by an ordinary resolution at the annual general meeting of
      shareholders, and by a vote of the holders of a majority of the voting power
      represented at the meeting. Our ordinary shares do not have cumulative voting
      rights in the election of directors. As a result, the holders of ordinary shares
      that represent more than 50% of the voting power have the power to elect all
      of
      our directors.




39




At
      our annual meeting in August 2004, the shareholders voted to fix the number
      of
      directors at six directors. In accordance with the terms of our articles of
      association, the board of directors is divided into four classes, with the
      following terms of office:





·
            Class
                I directors, whose terms expire at the annual meeting of shareholders
                to
                be held in 2006;





·
            Class
                II directors, whose terms expire at the annual meeting of shareholders
                to
                be held in 2007;





·
            Class
                III directors, whose terms expire at the annual meeting of shareholders
                to
                be held in 2008; and





·
            A
                class of directors whose terms expire after one year, at each annual
                meeting of shareholders.





Our
      Class I directors are Amnon Shoham and Ohad Zuckerman. Our Class II director
      is
      Naomi Atsmon. Our Class III directors are Gideon Hollander and Yossie Hollander.
      Our director with a term of one year is Dan Falk.




At
      each annual meeting of shareholders, the successors to directors whose terms
      will then expire will be elected to serve from the time of election and
      qualification until the third annual meeting following the election. Any
      additional directorships resulting from an increase in the number of directors
      will be distributed among the four classes. This classification of our board
      of
      directors may have the effect of delaying or preventing changes in control
      or
      management of our company.





Directors
      may be removed at any time by the holders of 75% of the voting power at a
      general meeting of shareholders. Shareholders may, by a majority vote (Ordinary
      Resolution), elect a director to fill the vacancy. If the shareholders do not
      elect a director to fill such vacancy within 30 days after the removal of the
      incumbent director, the board of directors may also elect a director to fill
      such vacancy. Any director elected to fill a vacancy will hold office for the
      remainder of the full term of the class of directors in which the vacancy
      occurred and until such director’s successor is elected and
      qualified.




We
      do not have service contracts with any of our directors; however, Gideon
      Hollander, our Chief Executive Office and a member of our board of directors
      is
      party to an employment agreement with us.





40




**Audit
      Committee**





Under
      the Companies Law, an audit committee is required to be appointed by the board
      of directors. The audit committee must consist of at least three members, and
      include the two external directors we are also required to appoint pursuant
      to
      Israeli law. Neither the Chairman of the board of directors, directors employed
      by us or granting services to us on a permanent basis, nor any controlling
      shareholder or any relative of a controlling shareholder may serve on the audit
      committee.





The
      responsibilities of the audit committee include identifying irregularities
      in
      the management of our business and approving related-party transactions as
      required by law. In addition, under its charter, our audit committee is
      responsible for monitoring the integrity of our financial statements and
      auditing, accounting and financial reporting processes, appointing and
      evaluating the qualifications and independence of the external
      auditor.





Pursuant
      to the current listing requirements of the Nasdaq National Market, we are
      required to have at least three independent directors on our audit committee.
      We
      have appointed such audit committee. Pursuant to the Sarbanes-Oxley Act of
      2002,
      the Nasdaq National Market has introduced new listing standards requiring all
      members of an audit committee to comply with tightened independence
      requirements. All four members of our audit committee currently comply with
      those requirements.





The
      current members of the audit committee are: Amnon Shoham, Ohad Zuckerman, Naomi
      Atsmon and Dan Falk. However, Amnon Shoham’s and Ohad Zuckerman’s respective
      terms as directors will terminate during 2006 as a result of the term limits
      under Israeli law described in “- External Directors” below.





In
      addition, the Companies Law requires the board of directors of a public company
      to appoint an internal auditor nominated by the audit committee. A person who
      does not satisfy certain independence requirements may not be appointed as
      an
      internal auditor. We have appointed Mr. Yossi Ginossar from Fahn Kanne Control
      Management Ltd. to serve as our internal auditor.





**Compensation
      Committee**





The
      responsibilities of the compensation committee include reviewing and, as
      required, approving policies under which compensation is awarded to our
      executive officers and key managers, overseeing the administration of our
      executive compensation programs, including the stock option plans and granting
      of options under our stock options plans.





The
      current members of the compensation committee are Gideon Hollander and Amnon
      Shoham. However, Amnon Shoham’s term as a director will terminate during 2006 as
      a result of the term limits under Israeli law described in “- External
      Directors” below





**External
      Directors**





Under
      the Companies Law, Israeli companies that are registered under the laws of
      Israel and whose shares are listed for trading on a stock exchange outside
      of
      Israel are treated as public companies. Under this law, a public company, like
      ours, is required to appoint at least two external directors. This law provides
      that a person may not be appointed as an external director if the person or
      the
      person’s relative, partner, employer or any entity under the person’s control,
      has, as of the date of the person’s appointment to serve as external director,
      or had, during the two years preceding that date, any affiliation with the
      company, any entity controlling the company or any entity controlled by the
      company or this controlling entity. The term “affiliation” includes an
      employment relationship, a business or professional relationship maintained
      on a
      regular basis, control and service as an office holder. External directors
      are
      elected at a shareholders meeting, provided that either the majority of shares
      voted at the meeting, including at least one third of the shares of
      non-controlling shareholders voted at the meeting, vote in favor of such
      election or the total number of shares voted against the election does not
      exceed one percent of the aggregate voting rights in the company. External
      directors do not have powers or authority that are different from those granted
      to all other directors. An external director is appointed for a term of three
      years and may be reelected to one additional term of three years by a majority
      vote at a shareholders’ meeting, subject to the conditions described above for
      the election of external directors.




41




A
      person may not serve as an external director if the person’s position or other
      business creates, or may create, conflict of interests with the person’s
      responsibilities as an external director. Any committee of the board of
      directors must include at least one external director, except that the audit
      committee must include both external directors. An external director is only
      entitled to compensation as provided in regulations promulgated under the
      Companies Law. Amnon Shoham, Ohad Zuckerman, and Naomi Atsmon are currently
      serving as our external directors.





The
      Companies Law was recently requires that at least one external director have
      financial and accounting expertise and that the other external director meet
      certain professional qualifications. Certain
      regulations promulgated recently under the Companies Law set out the conditions
      and criteria for a director qualifying as having a "financial and accounting
      expertise" or a "professional qualification". A director with financial and
      accounting expertise is a director who, due to his education, experience and
      skills, possesses capabilities relating to and an understanding of business
      and
      accounting matters and financial statements, which enable him to understand
      in
      depth the company’s financial statements and to initiate a debate regarding the
      manner in which the company’s financial information is presented. A director who
      meets certain professional qualifications is a director who satisfies one of
      the
      following requirements: (i) the director holds an academic degree in either
      economics, business administration, accounting, law or public administration,
      (ii) the director either holds another academic degree or has obtained other
      high education in the company’s primary field of business or in an area that is
      relevant to his position, (iii) the director has at least five (5) years of
      experience serving in one of the following capacities or an aggregate of at
      least five (5) years of experience in two or more of the following capacities:
      (a) a senior business management position of a company with a substantial scope
      of business, (b) a senior position in the primary field of business of the
      company or (c) a senior public administration position. A proposed external
      director must submit to the company a declaration as to his or her compliance
      with the requirements for his or her election as an external director (including
      with respect to such person’s financial and according expertise or professional
      qualification). At least one of the external directors should have a "financial
      and accounting expertise" and the other external directors should have a
      "professional qualification". The board of directors should determine the
      minimum number of directors having financial and accounting specialty, in
      addition to the external directors. In determining such number the board of
      directors shall consider, among other things, the type and size of the company
      and the scope and complexity of its operations.




42


**Nomination
      Committee Charter - Exemption**





As
      a foreign private issuer we are entitled to follow our home country practice
      in
      lieu of compliance with the NASD rule that requires adoption of a formal written
      charter or board resolution addressing the nominations process. Under the
      Companies Law the nominations process is conducted by the full board of
      directors, and there is no requirement to adopt a formal written charter or
      board resolution addressing a company’s nomination process .




**D.**
            
            **Employees**




As
      of December 31, 2005, we had 63 employees in Israel, 69 in the United States,
      10
      in Europe and 3 in Latin America. Of our 145 employees, 40 were engaged in
      research and development, 48 in sales, marketing and business development,
      32 in
      professional services and technical support and 25 in finance, administration
      and operations. With
      respect to our Israeli employees, we are subject to Israeli labor laws and
      regulations. These laws principally concern matters such as paid annual
      vacation, paid sick days, length of the workday and work week, minimum wages,
      pay for overtime, insurance for work-related accidents, severance pay and other
      conditions of employment.




Furthermore,
      with respect to our Israeli employees, we are subject to provisions of the
      collective bargaining agreements between the Histadrut (General Federation
      of
      Labor in Israel) and the Coordination Bureau of Economic Organizations
      (including the Industrialists Association) by order of the Israeli Ministry
      of
      Labor and Welfare. These provisions principally concern cost of living
      increases, recreation pay and other conditions of employment. To date, we have
      not experienced any work stoppages.




The
      following table sets forth for the last three financial years, the number of
      our
      employees broken down into categories.




Period
                ending December 31,2005
            
            2004
            
            2003Research
                and Development
            
            
            
            
            
            40
            
            
            52
            
            
            52Marketing,
                Sales and Customer Support
            
            
            
            
            
            80
            
            
            88
            
            
            81Administration
                Management and Information Systems
            
            
            
            
            
            25
            
            
            32
            
            
            29Total
            
            
            
            
            
            145
            
            
            172
            
            
            162




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




1.  Other
      then Gideon Hollander and Yossie Hollander, whose shareholdings are described
      in
      Item 7 below, none of our officers and directors owns in excess of one percent
      of our outstanding ordinary shares.




*2.*  *Option
      Plans* .
      We currently maintain three option plans, the 1996 Option Plan, the 1999 Option
      Plan and the 2003 Share Option Plan. The
      purpose of our option plans is to afford an incentive to officers, directors,
      employees and consultants of ours, or any of our subsidiaries, to acquire a
      proprietary interest in us, to continue as officers, directors, employees and
      consultants, to increase their efforts on behalf of us and to promote the
      success of our business.




We
      currently have 2,595,262 ordinary shares available for future grants under
      these
      option plans to be granted to officers, directors, employees and consultants.
      As
      of December 31, 2005, options to purchase 3,538,418 ordinary shares were
      outstanding under the option plans. As of December 31, 2005, the weighted
      average exercise price of options outstanding under our option plans is $3.05.
      Our option plans are administered by our board of directors and the compensation
      committee of our board of directors. Under the option plans, options to purchase
      our ordinary shares may be granted to officers, directors, employees or
      consultants. In addition, pursuant to the option plans, the exercise price
      of
      options shall be determined by our compensation committee but may not be less
      than the par value of the ordinary shares and is typically the fair market
      value
      on the date of grant. The vesting schedule of the options is also determined
      by
      our compensation committee but generally the options vest over a four year
      period. Generally, options granted under the option plans are exercisable until
      ten years from the date of the grant. The 1996 Option Plan expired on December
      31, 2005. The 1999 Option Plan and the 2003 Share Option Plan will expire on
      December 31, 2009 and December 31, 2012, **** respectively.




43




**Item
      7: MAJOR SHAREHOLDERS AND RELATED PARTY
      TRANSACTIONS**




**A.**
            
            **Major
              Shareholders**




The
      following table sets forth, to the best of our knowledge, as of March 31, 2006,
      those shareholders that own 5% or more of our capital stock




**Name
                  of Beneficial Owner**
              
              **Number
                  of Shares Owned**
              
              **Percentage**Yossie
                  Hollander (1)
              
              
              2,384,010
              
              
              12.1
              %Gideon
                  Hollander (2)
              
              
              2,077,488
              
              
              10.1
              %Emancipation
                  Capital, LP (3)
              
              
              982,794
              
              
              5.01
              %




(1)
            Based
                on a Directors and Officers Questionnaire submitted to us by Mr.
                Hollander. Represents 1,441,280ordinary shares owned individually
                by Mr.
                Hollander, 302,670 ordinary shares owned by Mr. Hollander’s spouse and
                500,060 ordinary shares owned individually by Dana Hollander Settlement
                1991, LLC, a Nevada limited liability company, as to which Mr. Hollander
                is an income beneficiary of a trust holding a 99% membership interest
                therein. Includes 140,000 ordinary shares issuable pursuant to options
                held by Mr. Hollander which are exercisable within 60 days of the
                date
                hereof Does not include 480,000 ordinary shares owned by Mr. Hollander’
                mother as Mr. Hollander disclaims beneficial ownership of such shares
                and
                an aggregate of 1,549,600 ordinary shares owned indirectly by various
                trusts, as equity holders of certain foreign entities, as to which
                Mr.
                Hollander and/or his children, as beneficiaries of such trusts, may
                be
                deemed to have interests. Any such interest would be in an indeterminable
                number of the ordinary shares owned indirectly by such trusts. Mr.
                Hollander disclaims beneficial ownership of any ordinary shares so
                held by
                such trusts. We make no representation as to the accuracy or completeness
                of the information reported. The address of Mr. Hollander is 400
                Perimeter
                Center Terrace, Suite 100, Atlanta, Georgia
                30346.





(2)
            Based
                on a Directors and Officers Questionnaire submitted to us by Mr.
                Hollander. Represents 1,189,988 ordinary shares owned individually
                by Mr.
                Hollander, and 887,500 ordinary shares issuable pursuant to options
                held
                by Mr. Hollander which are exercisable within 60 days of the date
                hereof.
                Does not include 480,000 ordinary shares owned by Mr. Hollander’ mother as
                Mr. Hollander disclaims beneficial ownership of such shares. We make
                no
                representation as to the accuracy or completeness of the information
                reported. The address of Mr. Hollander is 11 Galgalei Haplada Street,
                Herzliya, 46722, Israel.





(3)
            Based
                on a Schedule 13G filed with the Commission on April 7, 2006, this
                amount
                represents ordinary shares held by the following entities, (i) 948,016
                ordinary shares held by Emancipation Capital, LP and (ii) 34,778
                ordinary
                shares held by Hurley Capital, LLC, constituting in the aggregate
                5.01% of
                our capital stock. We make no representation as to the accuracy or
                completeness of the information reported. The address of Emancipation
                Capital, LP and of Hurley Capital, LLC is 1120 Avenue of the Americas,
                Suite 1504 New York, NY 10036, USA.





Based
      on a Schedule 13G/A filed with the Commission on November 30, 2005, Airbus
      Foundation held 888,708 of our ordinary shares as of such date, constituting
      4.5% of our capital stock. Accordingly Airbus Foundation has been removed from
      the above table. Based on a Schedule 13G/A filed with the Commission on January
      14, 2005, Airbus Foundation held 1,802,692 of our ordinary shares as of such
      date, constituting 9.3% of our capital stock as of such date. Based on a
      Schedule 13G/A filed with the Commission on January 9, 2003, Airbus Foundation
      held 2,025,590 ordinary shares as of such date. We make no representation as
      to
      the accuracy or completeness of the information reported. The address of Airbus
      Foundation is c/o Allegemeines, Treuunternehmen, P.O. Box 83, FL - 9490 Vaduz,
      Liechtenstein.





44




The
      shareholders that own 5% or more of our capital stock do not have different
      voting rights.





Based
      on information available to us, as of June 1st, 2006, there were 55 record
      holders of our shares in the United States, which represented approximately
      23.5% of the outstanding shares as of such date. To our knowledge, no
      corporation, foreign government or other natural or legal person directly or
      indirectly controls Jacada.





**B.**
            
            **Related
              Party Transactions**




None.





**C.**
            
            **Interests
              of Expert and Counsel**





Not
      applicable. ****




**Item
      8:****FINANCIAL
      INFORMATION**




**A.**
            
            **Consolidated
              Statements and Other Financial
              Information**





**See
      Item 18 for audited consolidated financial statements.**




**Export
      Sales**




We
      generated approximately 62% of our revenues in North and Latin America and
      approximately 38% in Europe through
      wholly owned subsidiaries during the period beginning January 1, 2005 and ending December 31, 2005. Our
      export sales consist
      mainly of intercompany transactions with our subsidiaries.





**Legal
      Proceedings**





We
      are, from time to time, a party to legal proceedings that are incidental to
      our
      business.




Other
      than the matters described below, we do not believe that any legal proceeding
      to
      which we currently are a party is likely to have a material impact upon us.




In
      August 1999, a former distributor filed an arbitration complaint against one
      of
      our subsidiaries, alleging, among other things, that the subsidiary breached
      its
      agreement with the distributor by directly selling our products to a customer
      with respect to which the distributor claimed it had the exclusive right to
      sell, entitling the distributor to damages. The arbitration was held in November
      2000 and a decision by the arbitrators was entered on April 3, 2001. The
      arbitrators awarded the distributor a net amount of $392,000, including costs,
      and 50% of amounts collected from the customer in the future.




45




We
      appealed the decision of the arbitrators on the grounds that the decision did
      not cap the subsidiary’s exposure to the amount set forth in the limitation of
      liability provision of the agreement. In the interim, pursuant to the
      arbitrators’ decision, we have accrued and will accrue on a prospective basis as
      a selling expense an amount equal to 50% of amounts collected from the customer
      that relate to the agreement that was the subject of the arbitration proceeding.
      Pursuant to an October 21, 2003 order, the arbitration award was confirmed
      by
      the United States District Court for the Western District of Michigan, and
      our
      Motion to Vacate was denied. We filed an appeal with the United States Court
      of
      Appeals for the Sixth Judicial Circuit, and on March 18, 2005, the Court of
      Appeals confirmed the District Court’s decision. We filed a motion for rehearing
      with the Court of Appeals; the motion for rehearing was denied on May 27, 2005.
      The arbitration award is therefor final. See Note 7(a)(2) to our financial
      statements included in Item 18 below for additional information concerning
      the
      potential impact of this matter on our financial condition and results of
      operations.




**Dividend
      Policy**




We
      have no current intention of paying dividends.




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






There
      have been no significant changes since the date of our financial statements
      filed with this Annual Report for the year 2005.




**Item
      9:****THE
      OFFER AND LISTING**




**A.**
            
            **Offer
              and Listing Details**





**Share
      History**




Our
      ordinary shares are quoted on the Nasdaq National Market under the symbol
“ *JCDA* ”
      and on the Tel Aviv Stock Exchange (“TASE”) under the same symbol or its Hebrew
      equivalent.




The
      following table shows the high and low market prices on the Nasdaq National
      Market of our ordinary shares in the indicated years. Trading in our shares
      on
      the Nasdaq commenced on October 14, 1999.




**Year**
            
            **Period**
            
            **High**
            
            **Low**2001
            
            
            01/01/01
                - 12/31/01
            
            
            6.300
            
            
            2.0502002
            
            
            01/01/02
                - 12/31/02
            
            
            3.740
            
            
            1.0802003
            
            
            01/01/03
                - 12/31/03
            
            
            3.740
            
            
            1.1802004
            
            
            01/01/04
                - 12/31/04
            
            
            4.730
            
            
            2.1202005
            
            
            01/01/05
                - 12/31/05
            
            
            3.580
            
            
            1.930




46




The
      following table shows the high and low market prices on the Nasdaq National
      Market for our ordinary shares for each financial quarter during our two most
      recent financial years.





**Period**
            
            **High**
            
            **Low**01/01/04
                - 03/31/04
            
            
            4.73
            
            
            2.8604/01/04
                - 06/30/04
            
            
            3.57
            
            
            2.6307/01/04
                - 09/30/04
            
            
            3.05
            
            
            2.2110/01/04
                - 12/31/04
            
            
            2.83
            
            
            2.1201/01/05
                - 03/31/05
            
            
            2.89
            
            
            1.9304/01/05
                - 06/30/05
            
            
            2.87
            
            
            2.1807/01/05
                - 09/30/05
            
            
            3.58
            
            
            2.4610/01/05
                - 12/31/05
            
            
            3.53
            
            
            2.2801/01/06
                - 03/31/06
            
            
            2.98
            
            
            2.43





The
      following table shows the high and low market prices on the Nasdaq National
      Market for our ordinary shares for the most recent six months.




**Month**
              
              **High**
              
              **Low**May
                  2006
              
              
              3.10
              
              
              2.60April
                  2006
              
              
              3.10
              
              
              2.54March
                  2006
              
              
              2.98
              
              
              2.49February
                  2006
              
              
              2.97
              
              
              2.45January
                  2006
              
              
              2.91
              
              
              2.43December
                  2005
              
              
              2.90
              
              
              2.28





The
      following table shows the high and low market prices on the TASE of our ordinary
      shares in the indicated years. Trading in our shares on the TASE commenced
      on
      June 18, 2001. Share prices in the TASE are denominated in New Israeli Shekels
      (NIS). The following prices are denominated in U.S. Dollars in accordance with
      the applicable exchange rate between the U.S. Dollar and the NIS.





**Year**
            
            **Period**
            
            **High**
            
            **Low**2001
            
            
            06/18/01
                - 12/31/01
            
            
            3.88
            
            
            1.912002
            
            
            01/01/02
                - 12/31/02
            
            
            3.48
            
            
            1.212003
            
            
            01/01/03
                - 12/31/03
            
            
            3.87
            
            
            1.592004
            
            
            01/01/04
                - 12/31/04
            
            
            4.73
            
            
            2.122005
            
            
            01/01/05
                - 12/31/05
            
            
            3.37
            
            
            1.86




47




The
      following table shows the high and low market prices on the TASE for our
      ordinary shares for each financial quarter during our two most recent financial
      years. Share prices in the TASE are denominated in New Israeli Shekels (NIS).
      The following prices are denominated in U.S. Dollars in accordance with the
      applicable exchange rates between the U.S. Dollar and the NIS.




**Period**
              
              **High**
              
              **Low**01/01/04
                  - 03/31/04
              
              
              4.79
              
              
              3.0204/01/04
                  - 06/30/04
              
              
              3.74
              
              
              2.8707/01/04
                  - 09/30/04
              
              
              3.13
              
              
              2.3910/01/04
                  - 12/31/04
              
              
              2.92
              
              
              2.2601/01/05
                  - 03/31/05
              
              
              2.63
              
              
              1.8604/01/05
                  - 06/30/05
              
              
              2.8
              
              
              2.1507/01/05
                  - 09/30/05
              
              
              3.37
              
              
              2.610/01/05
                  - 12/31/05
              
              
              3.50
              
              
              2.4201/01/06
                  - 03/31/06
              
              
              2.94
              
              
              2.43


The
      following table shows the high and low market prices on the TASE for our
      ordinary shares for the most recent six months. Share prices in the TASE are
      denominated in New Israeli Shekels (NIS). The following prices are denominated
      in U.S. Dollars in accordance with the applicable exchange rates between the
      U.S. Dollar and the NIS.




**Month**
            
            **High**
            
            **Low**May
                2006
            
            
            3.09
            
            
            2.68April
                2006
            
            
            3.11
            
            
            2.88March
                2006
            
            
            2.87
            
            
            2.62February
                2006
            
            
            2.94
            
            
            2.49January
                2006
            
            
            2.78
            
            
            2.43December
                2005
            
            
            2.90
            
            
            2.42




**B.**
              
              **Plan
                of distribution**




Not
      applicable.




**C.**
            
            **Markets**





Our
      ordinary shares are quoted on the Nasdaq National Market under the symbol
“ *JCDA* ”
      and on the TASE under the same symbol or its Hebrew equivalent.




**D.**
            
            **Selling
              Shareholders**




Not
      applicable.




**E.**
            
            **Dilution**




Not
      applicable.




**F.**
            
            **Expenses
                of the Issue**




Not
      applicable.




48




**Item
      10:****ADDITIONAL
      INFORMATION**




**A.**
            
            **Share
              Capital**




Not
      applicable.




**B.**
            
            **Memorandum
              and Articles of Association**




For
      a copy of our Memorandum of Association and our Articles of Association, see
      Item 19, Exhibits 1.1 and 1.2 which have been incorporated by reference as
      part
      of this Annual Report from our Registration Statement on Form F-1, File No.
      333-10882, as well as Exhibit 1.3 (incorporated by reference to Exhibit 1.3
      to
      the our Annual Report on Form 20-F for the year ended December 31, 2003) and
      Exhibit 1.4 (incorporated by reference to Exhibit 1.4 to our Annual Report
      on
      Form 20-F for the year ended December 31, 2004). In addition, because we are
      an
      Israeli company, we are governed by the provisions of the Companies Law, which
      are described below along with certain provisions of our governing
      documents.




**Objects
      and Purposes**




The
      objects and purposes of our company appear in our Memorandum of Association
      and
      include engaging in all businesses of trade, finance, import, export,
      distribution, services, economic initiatives and capital investments;
      production, processing and development of any kind; engaging in any activities
      of initiators, founders, and managers of plants, companies, corporations, and
      real estate; serving as brokers and agents for any person, business or
      corporation in Israel and abroad; and engaging in research, exploration, and
      development.





**Approval
      of Specified Related Party Transactions**





The
      Companies Law imposes a duty of care and a duty of loyalty on all of the
      company’s office holders as defined below, including directors and executive
      officers. The duty of care requires an office holder to act with the level
      of
      care that a reasonable office holder in the same position would have acted
      under
      the same circumstances. The duty of loyalty generally requires an office holder
      to act in good faith and for the good of the company. An “office holder” as
      defined in the Companies Law is a director, a general manager, a chief executive
      officer, a deputy chief executive officer, a vice chief executive officer,
      other
      managers directly subordinate to the chief executive officer and any person
      who
      fills one of the above positions without regard to title.




The
        Companies Law requires that an office holder of a company promptly disclose
        any
        personal interest that he or she may have and all related material information
        known to him or her, in connection with any existing or proposed transaction
        by
        the company. Once an office holder complies with these disclosure requirements,
        the board of directors may approve a transaction between the company and
        the
        office holder, or a third party in which an office holder has a personal
        interest, unless the articles of association provide otherwise. A transaction
        that is adverse to the company's interest cannot be approved. If the transaction
        is an extraordinary transaction under the Companies Law, then, in addition
        to
        any approval stipulated by the articles of association, it also requires
        audit
        committee approval before board approval and, in specified circumstances,
        subsequent shareholder approval. Any transaction between a company and one
        of
        its directors relating to the conditions of the director’s service, including in
        relation to compensation exculpation, insurance or indemnification, or in relation to the terms of
        the
        director’s service in any other capacity requires audit committee approval
        before board approval and subsequent shareholder approval. The
        Companies Law also provides that a director with an interest in an extraordinary
        transaction brought before the board or the audit committee for its approval
        may
        not vote on the approval and may not be present for the discussion of the
        issue.
        However, this rule would not apply if a majority of the directors or a majority
        of the members of the audit committee also possessed an interest in the
        transaction.




49




Under
      our articles of association, our board can, among other things, determine our
      plans of activity and the principles of financing such plans, examine our
      financial situation and set the framework of credit which we may take and decide
      to issue a series of debentures.




Our
      directors are not subject to any age limit requirement, nor are they
      disqualified from serving on our board of directors because of a failure to
      own
      our shares.




**Insurance,
      Indemnification, and Exculpation of Directors and Officers**


Under
      the Companies Law, an Israeli company may not exculpate an office holder from
      liability for a breach of the duty of loyalty of the office holder. However,
      the
      company may approve an act performed in breach of the duty of loyalty of an
      office holder provided that the office holder acted in good faith, the act
      or
      its approval does not harm the company, and the office holder discloses the
      nature of his or her personal interest in the act and all material facts and
      documents a reasonable time before discussion of the approval. An Israeli
      company may exculpate an office holder in advance from liability to the company,
      in whole or in part, for a breach of duty of care but only if a provision
      authorizing such exculpation is inserted in its articles of association. Our
      articles of association include such a provision. An Israeli company may not
      exculpate a director for liability arising out of a prohibited dividend or
      distribution to shareholders.




An
      Israeli company may indemnify an office holder in respect of certain liabilities
      either in advance of an event or following an event provided a provision
      authorizing such indemnification is inserted in its articles of association.
      Our
      articles of association contain such an authorization. An undertaking provided
      in advance by an Israeli company to indemnify an office holder with respect
      to a
      financial liability imposed on him or her in favor of another person pursuant
      to
      a judgment, settlement or arbitrator’s award approved by a court must be limited
      to events which in the opinion of the board of directors can be foreseen based
      on the company’s activities when the undertaking to indemnify is given, and to
      an amount or according to criteria determined by the board of directors as
      reasonable under the circumstances, and such undertaking shall detail the
      abovementioned events and amount or criteria. In addition, a company may
      undertake in advance to indemnify an office holder against the following
      liabilities incurred for acts performed as an office holder:




·
            reasonable
                litigation expenses, including attorneys’ fees, incurred by the office
                holder as a result of an investigation or proceeding instituted against
                him or her by an authority authorized to conduct such investigation
                or
                proceeding, provided that (i) no indictment was filed against such
                office holder as a result of such investigation or proceeding; and
                (ii) no financial liability, such as a criminal penalty, was imposed
                upon him or her as a substitute for the criminal proceeding as a
                result of
                such investigation or proceeding or, if such financial liability
                was
                imposed, it was imposed with respect to an offense that does not
                require
                proof of criminal intent; and


·
            reasonable
                litigation expenses, including attorneys’ fees, incurred by the office
                holder or imposed by a court in proceedings instituted against him
                or her
                by the company, on its behalf or by a third party or in connection
                with
                criminal proceedings in which the office holder was acquitted or
                as a
                result of a conviction for a crime that does not require proof of
                criminal
                intent.





50




An
      Israeli company may insure an office holder against the following liabilities
      incurred for acts performed as an office holder:




·
            a
                breach of duty of loyalty to the company, to the extent that the
                office
                holder acted in good faith and had a reasonable basis to believe
                that the
                act would not prejudice the
                company;


·
            a
                breach of duty of care to the company or to a third party, including
                a
                breach arising out of the negligent conduct of the office
                holder; and


·
            a
                financial liability imposed on the office holder in favor of a third
                party.




An
      Israeli
      company may not indemnify or insure an office holder against any of the
      following:




·
            a
                breach of duty of loyalty, except to the extent that the office holder
                acted in good faith and had a reasonable basis to believe that the
                act
                would not prejudice the company;


·
            a
                breach of duty of care committed intentionally or recklessly, excluding
                a
                breach arising out of the negligent conduct of the office
                holder;


·
            an
                act or omission committed with intent to derive illegal personal
                benefit; or


·
            a
                fine levied against the office
                holder.





Under
      the Companies Law, exculpation, indemnification and insurance of office holders
      must be approved by our audit committee and our board of directors and, in
      respect of our directors, by our shareholders.




Our
      articles of association, provide that, subject to the provisions of the
      Companies Law, we may enter into a contract for the insurance of all or part
      of
      the liability of any of our office holders with respect to:





·
            a
                breach of his duty of care to us or to another
                person;


·
            a
                breach of his duty of loyalty to us, provided that the office holder
                acted
                in good faith and had reasonable cause to assume that his act would
                not
                prejudice our interests; or


·
            a
                financial liability imposed upon such office holder in favor of another
                person concerning an act performed by the office in his/her capacity
                as an
                office holder.





Our
      articles of association also provide that we may indemnify an office holder
      against:





·
            a
                financial liability imposed on him in favor of another person by
                a court
                judgment, including a compromise judgment or an arbitrator's award
                which
                has been confirmed by a court; and


·
            reasonable
                litigation expenses, including attorneys' fees, expended by the office
                holder or which were imposed on the office holder by a court in
                proceedings instituted against the office holder by us or in our
                name or
                by any other person or in a criminal charge from which the office
                holder
                was acquitted or in a criminal proceeding in which the office holder
                was
                convicted for a criminal offense that does not require proof of criminal
                intent.




51


**Required
      Approvals**





Under
      the Companies Law, indemnification of, and procurement of insurance coverage
      for
      office holders must be approved by the audit committee and board of directors
      and, in specified circumstances, by the shareholders of a company. In August
      2003 and in August 2004, our shareholders approved indemnification agreements
      with our directors under which we have undertaken to indemnify our directors
      to
      the fullest extent permitted under the Companies Law. In July 2005, our audit
      committee and board of directors approved an indemnification agreement with
      our
      chief financial officer under which we have undertaken to indemnify our chief
      financial officer to the fullest extent permitted under the Companies Law.




**Rights,
      Preferences and Restrictions upon Shares**





Our
      Board of Directors may from time to time declare, and cause us to pay, an
      interim dividend and final dividend for any fiscal year only out of retained
      earnings, or earnings derived over the two most recent fiscal years, whichever
      is higher. Our articles provide that the final dividend in respect of any fiscal
      year shall be proposed by the Board of Directors and shall be payable only
      after
      the same has been approved by a resolution of our shareholders, approved by
      a
      majority of the shares voting thereon. However, no such resolution shall provide
      for the payment of an amount exceeding the amount proposed by the Board of
      Directors for the payment of such final dividend, and no such resolution or
      any
      failure to approve a final dividend shall affect any interim dividend
      theretofore declared and paid. The Board of Directors shall determine the time
      for payment of such dividends, both interim and final, and the record date
      for
      determining the shareholders entitled thereto.




Subject
      to the provisions of our articles of association and subject to any rights
      or
      conditions attached at that time to any of our shares granting preferential,
      special or deferred rights or not granting any rights with respect to dividends,
      profits which shall be declared as dividends shall be distributed according
      to
      the proportion of the nominal value paid upon account of the shares held at
      the
      date so appointed by us, without regard to the premium paid in excess of the
      nominal value, if any. No amount paid or credited as paid on a share in advance
      of calls shall be treated as paid on a share.




If
      we are wound up, after satisfying liabilities to creditors, then subject to
      applicable law and to the rights of the holders of shares with special rights
      upon winding up, our assets available for distribution among the shareholders
      shall be distributed to them in proportion to their respective holdings.




Holders
      of ordinary shares have one vote for each fully-paid share held of record,
      on
      every resolution, without regard to whether the vote thereon is conducted by
      a
      show of hands, by written ballot or by any other means.




We
      may, subject to applicable law, issue redeemable shares and redeem the same.
      In
      addition, our Board of Directors may, from time to time, as it, in its
      discretion, deems fit, make calls for payment upon shareholders in respect
      of
      any sum which has not been paid up in respect of shares held by such
      shareholders.




Under
      the Companies Law, the disclosure requirements that apply to an office holder
      also apply to a controlling shareholder of a public company. A controlling
      shareholder includes a shareholder that holds 25% or more of the voting rights
      in a public company if no other shareholder owns more than 50% of the voting
      rights in the company. Extraordinary transactions with a controlling shareholder
      or in which a controlling shareholder has a personal interest, and the terms
      of
      compensation of a controlling shareholder who is an office holder, require
      the
      approval of the audit committee, the board of directors and the shareholders
      of
      the company. The shareholder approval requires that: (a) the majority of shares
      voted at the meeting, including at least one third of the shares of
      disinterested shareholders voted at the meeting, vote in favor of the
      transaction; or (b) the total number of shares of disinterested shareholders
      voted against the transaction does not exceed one percent of the aggregate
      voting rights in the company.




52




The
      Companies Law also requires a shareholder to act in good faith towards a company
      in which he holds shares and towards other shareholders and to refrain from
      abusing his power in the company, including in connection with voting at a
      shareholders’ meeting on:




·
            Any
                amendment to the articles of
                association;





·
            An
                increase in the company’s authorized
                capital;





·
            A
                merger; or





·
            Approval
                of some of the acts and transactions which require shareholder
                approval.





A
      shareholder has the general duty to refrain from depriving other shareholders
      of
      their rights. Any controlling shareholder, any shareholder that knows that
      it
      possesses the power to determine the outcome of a shareholder vote and any
      shareholder that, under the provisions of the articles of association, has
      the
      power to appoint an office holder in the company, is under a duty to act in
      fairness towards the company. The Companies Law does not describe the substance
      of this duty  except
      to
      state that the remedies generally available upon a breach of contract will
      apply
      also in the event of a breach of the duty to act with fairness .




**Amendment
      of Articles of Association**





Our
      Articles of Association require, in order to amend the articles, the approval
      of
      the holders of at least 75% of the shares represented at a meeting, in person
      or
      by proxy, with the right to vote on the issue. Our articles differ from the
      Companies Law in this respect as the law requires only the consent of at least
      50% of the voting power of the company represented at a meeting and voting
      on
      the change for amendment of articles of association.




**Shareholders
      Meetings and Resolutions**





We
      are required to hold an annual general meeting of our shareholders once every
      calendar year, but no later than 15 months after the date of the previous annual
      general meeting. All meetings other than the annual general meeting of
      shareholders are referred to as extraordinary general meetings. Extraordinary
      general meetings may be called by our board whenever it sees fit, at such time
      and place, within or without the State of Israel, as it may determine. In
      addition, the Companies Law provides that the board of a public company is
      required to convene an extraordinary meeting upon the request of (a) any two
      directors of the company or one quarter of the company’s board of directors or
      (b) one or more shareholders holding, in the aggregate, (i) five percent of
      the
      outstanding shares of the company and one percent of the voting power in the
      company or (ii) five percent of the voting power in the company.




53




The
      quorum required by our articles for a meeting of shareholders consists of at
      least two shareholders present in person or by proxy who hold or represent
      between them at least 33.3% of the voting power in our Company. Our articles
      differ from the Companies Law in this respect, as under the Companies Law only
      the presence of two shareholders holding at least 25% of the voting power in
      the
      Company is required for a quorum. A meeting adjourned for lack of quorum is
      adjourned to the same day in the following week at the same time and place
      or
      any time and place as the chairman of the meeting decides with the consent
      of
      the holders of a majority of the voting power represented at such meeting.
      At
      such reconvened meeting, the required quorum consists of any two shareholders
      present in person or by proxy.




Our
      articles enable our board to fix a record date to allow us to determine the
      shareholders entitled to notice of, or to vote at, any general meeting of our
      shareholders. The Companies Law provides that a record date may not be more
      than
      40 nor less than four days before the date of the meeting. Each shareholder
      of
      record as of the record date determined by the board may vote the shares then
      held by that shareholder unless all calls and other sums then payable by the
      shareholder in respect of its shares have not been paid.




**Limitation
      on Ownership of Securities**





The
      ownership and voting of our ordinary shares by non-residents of Israel are
      not
      restricted in any way by our articles or by the laws of the State of Israel,
      except for shareholders who are subjects of countries that are in a state of
      war
      with the State of Israel.




**Mergers
      and Acquisitions; Anti-takeover Provisions**





The
      Companies Law includes provisions allowing corporate mergers. These provisions
      require that the board of directors of each company that is party to the merger
      approve the transaction. In addition, the shareholders of our Company must
      approve a merger involving our company by a vote of the 75% of our shares,
      present and voting on the proposed merger at a shareholders’ meeting, provided
      that the merger is not objected to by a majority of the shares represented
      at
      the meeting after excluding shares held by the other party to the merger or
      any
      person holding at least a 25% interest in such other party, including related
      parties or entities under the other party’s control.




The
      Companies Law does not require court approval of a merger other than in
      specified situations. However, upon the request of a creditor of either party
      to
      the proposed merger, a court may delay or prevent the merger if it concludes
      that there exists a reasonable concern that as a result of the merger, the
      surviving company will be unable to satisfy the obligations of any of the
      parties of the merger to their creditors.




A
      merger may not be completed unless at least 50 days have passed from the date
      that a request for the approval of the merger was filed with the Israeli
      registrar of companies  and
      30
      days from the date that shareholder approval of both merging companies was
      obtained .
      The request for the approval of a merger may be filed once a shareholder meeting
      has been called to approve the merger.




The
      Companies Law also provides that the acquisition of shares in a public company
      on the open market 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 company.
      The rule does not apply if there already is another 25% shareholder of the
      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 company, unless
      there already is another 45% shareholder of the company.




54




If,
      following any acquisition of shares, the purchaser would hold 90% or more of
      the
      shares of the 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 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, the acquirer may not acquire in such tender offer any
      tendered shares to the extent that the acquisition of those shares would bring
      the acquirer’s ownership to more than 90% but less than 95% of the shares of the
      target company. In addition, 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.





Our
      articles contain provisions which could delay, defer or prevent a change in
      our
      control. These provisions include the staggered board provisions of our articles
      described above under Item 6C.





**Changes
      in Capital**





Our
      articles enable us to increase our share capital. Any such changes are subject
      to the provisions of the Companies Law and must be approved by a resolution
      passed by a majority of the holders of at least 75% of our shares represented,
      in person or by proxy, at a general meeting voting on such change in the
      capital. Our articles differ from the Companies Law in this respect, as under
      the law changes in capital require approval only of a majority of the voting
      power of a company represented at the relevant shareholders meeting and voting
      thereon.




**C.**
            
            **Material
              Contracts**




**None.**




**D.**
            
            **Exchange
              Controls**




In
      1998, the Israeli currency control regulations were liberalized significantly,
      so that Israeli residents generally may freely deal in foreign currency and
      foreign assets, and nonresidents may freely deal in Israeli currency and Israeli
      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 provided that all taxes were paid or withheld; however, legislation
      remains in effect pursuant to which currency controls can be imposed by
      administrative action at any time.




Nonresidents
      of Israel may freely hold and trade our securities. 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 nonresidents,
      except that such restrictions may exist with respect to citizens of countries
      which are in a state of war with Israel. Israeli residents are allowed to
      purchase our ordinary shares.




**E.**
            
            **Taxation**




The
      following discussion sets forth the material United States and Israeli tax
      consequences of the ownership of ordinary shares by a holder that holds our
      ordinary shares, as capital assets.




55




The
      following discussion does not address the tax consequences to holders of
      ordinary shares to which special tax rules may apply, such as tax-exempt
      entities, certain insurance companies, broker-dealers, traders in securities
      that elect to mark to market, holders liable for alternative minimum tax,
      holders that actually or constructively own 10% or more of our voting stock,
      holders that hold ordinary shares as part of a straddle or a hedging or
      conversion transaction or holders whose functional currency is not the U.S.
      dollar. This discussion also does not apply to holders who acquired their
      ordinary shares pursuant to the exercise of employee stock options or otherwise
      as compensation or through a tax-qualified retirement plan. This discussion
      is
      based on the tax laws of Israel and the United States, including the Internal
      Revenue Code of 1986, as amended, its legislative history, existing and proposed
      regulations under the Internal Revenue Code, published rulings and court
      decisions, as in effect on the date of this document, as well as the Income
      Tax
      Treaty Between the United States of America and Israel, as amended (the
“Treaty”), all of which are subject to change or change in interpretation, possibly with retroactive
      effect.




For
      purposes of this discussion, a “U.S. holder” is any beneficial owner of ordinary
      shares that is:




a
      citizen or resident of the United States;




a
      corporation or other entity taxable as a corporation organized under the laws
      of
      the United states or any political subdivision of the United
      States;




an
      estate the income of which is subject to United States federal income taxation
      without regard to its source; or




a
      trust if a court within the United States is able to exercise primary
      supervision over the administration of the trust and one or more United States
      persons have the authority to control all substantial decisions of the
      trust.




**This
      discussion does not address any aspects of United States taxation other than
      federal income taxation. Holders are urged to consult their tax advisors
      regarding the United States federal, state and local and the Israeli and other
      tax consequences of owning and disposing of ordinary
      shares.**




**Information
      Reporting and Backup Withholding**




U.S.
      information reporting requirements and backup withholding tax generally will
      apply to payments to some U.S non-corporate holders of ordinary shares.
      Information reporting generally will apply to payments of dividends on, and
      to
      proceeds from the sale or redemption of, ordinary shares by a payor within
      the
      United States to a holder of ordinary shares other than an “exempt recipient,”
including a corporation and any payee that is not a U.S. holder that provides
      an
      appropriate certification.




A
      payor within the United States will be required to withhold at the fourth lowest
      rate of tax applicable to single individual taxpayers ( currently
      28%) on any payments of dividends on, or proceeds from the sale of, ordinary
      shares within the United States to a holder, other than an “exempt recipient,”
if the holder fails to furnish its correct taxpayer identification number or
      otherwise fails to comply with, or establish an exemption from, backup
      withholding tax requirements.




56




**United
      States Federal Income Taxation of Owning and Selling Ordinary Shares.**




**Dividends
      and Distributions**




**U.S.
      Holders**




Subject
      to the passive foreign investment company rules discussed below, U.S. holders
      will include in gross income the gross amount of any dividend paid, before
      reduction of Israeli withholding taxes, by us out of current or accumulated
      earnings and profits, as determined for Untied States federal income tax
      purposes, as ordinary income when the dividend is actually or constructively
      received by the U.S. holder. Dividends will be income from sources outside
      the
      United States for foreign tax credit limitation purposes, but generally will
      be
“passive income” or “financial services income,” which are treated separately
      from other types of income for foreign tax credit limitation purposes. Dividends
      will not be eligible for the dividends-received deduction generally allowed
      to
      United States corporations in respect of dividends received from other United
      States corporations. The amount of the dividend distribution included in income
      of a U.S. holder will be the U.S. dollar value of the NIS payments made,
      determined at the spot NIS/U.S. dollar rate on the date such dividend
      distribution is included in the income of the U.S. holder, regardless of whether
      the payment is in fact converted into U.S. dollars. Generally, any gain or
      loss
      resulting from currency exchange fluctuations during the period from the date
      the dividend distribution is included in income to the date such dividend
      distribution is converted into U.S. dollars will be treated as ordinary income
      or loss. Such gain or loss will generally be income from sources within the
      United States for foreign tax credit limitation purposes. Distributions in
      excess of current and accumulated earnings and profits, as determined for United
      States federal income tax purposes, will be treated as a return of capital
      to
      the extent of the U.S. holder’s basis in the ordinary shares and thereafter as
      capital gain. We will notify our shareholders of any distribution in excess
      of
      current and accumulated earnings and profits at the time of such distribution
      in
      accordance with the requirements of the Internal Revenue Code.




Subject
      to certain limitations, the Israeli tax withheld in accordance with the Treaty
      and paid over to Israel will be creditable against the U.S. holder’s United
      States federal income tax liability. To the extent a refund of the tax withheld
      is available to a U.S. holder under the laws of Israel or under the Treaty,
      the
      amount of tax withheld that is refundable will not be eligible for credit
      against the U.S. holder’s United States federal income tax liability, whether or
      not the refund is actually obtained.




**Non-U.S.
      Holders**




A
      non-U.S. holder is not subject to United States federal income tax with respect
      to dividends paid on ordinary shares unless (i) the dividends are “effectively
      connected” with that non-U.S. holder’s conduct of a trade or business in the
      United States, and attributable to a permanent establishment maintained in
      the
      United States (if that is required by an applicable income tax treaty as a
      condition for subjecting that non-U.S. holder to United States taxation on
      a net
      income basis), or (ii) that non-U.S. holder is an individual present in the
      United States for at least 183 days in the taxable year of the dividend
      distribution and certain other conditions are met. In such cases, a non-U.S.
      holder will be taxed in the same manner as a U.S. holder. A corporate non-U.S.
      holder may also, under certain circumstances, be subject to an additional branch
      profits tax at a 30% rate, or at a lower rate if that corporate non-U.S. holder
      is eligible for the benefits of an income tax treaty providing for a lower
      rate,
      with respect to gains that are “effectively connected” with its conduct of a
      trade or business in the United States.




57




**Sale
      or Exchange of Ordinary Shares**




**U.S.
      Holders**




Subject
      to the passive foreign investment company rules discussed below, a U.S. holder
      that sells or otherwise disposes of ordinary shares generally will recognize
      capital gain or loss for United States federal income tax purposes equal to the difference between
      the U.S. dollar value of the amount realized on the sale or disposition and
      the
      tax basis, determined in U.S. dollars, in the ordinary shares. Capital gain
      of a
      non-corporate U.S. holder is generally taxed at a maximum rate of 15% if the ordinary shares were held for more than one year. The gain or loss
      will generally be income or loss from sources within the United States for
      foreign tax credit limitation purposes.




**Non-U.S.
      Holders**




A
      non-U.S. holder will not be subject to United States federal income tax on
      gain
      recognized on the sale or other disposition of ordinary shares unless (i) the
      gain is “effectively connected” with the non-U.S. holder’s conduct of a trade or
      business in the United States, and the gain is attributable to a permanent
      establishment maintained in the United States (if that is required by an
      applicable income tax treaty as a condition for subjecting that non-U.S. holder
      to United States taxation on a net income basis), or (ii) the non-U.S. holder
      is
      an individual and present in the United States for at least 183 days in the
      taxable year of the sale and certain other conditions are met. In such cases,
      a
      non-U.S. holder will be taxed in the same manner as a U.S. holder. A corporate
      non-U.S. holder may also, under certain circumstances, be subject to an
      additional “branch profits tax” at a 30% rate, or at a lower rate if eligible
      for the benefits of an income tax treaty that provides for a lower rate, on
      “effectively connected” gains recognized.




**Passive
      Foreign Investment Company Rules**




We
      believe that our ordinary shares should not be treated as stock of a passive
      foreign investment company for United States federal income tax purposes, but
      this conclusion is a factual determination made annually and may be subject
      to
      change. In general, we will be a passive foreign investment company with respect
      to a U.S. holder if, for any taxable year in which the U.S. holder held ordinary
      shares, either at least 75% of our gross income for the taxable year is passive
      income or at least 50% of the value, determined on the basis of a quarterly
      average, of our assets is attributable to assets that produce or are held for the production of passive income. If we were to be treated as a passive foreign investment
      company, then unless a U.S. holder makes a mark-to-market election, gain
      realized on the sale or other disposition of our ordinary shares would in
      general not be treated as capital gain. Instead, a U.S. holder would be treated
      as if the holder had realized such gain and certain “excess distributions”
ratably over the holder’s holding period for the shares and would be taxed at
      the highest tax rate in effect for each such year to which the gain was
      allocated, together with an interest charge in respect of the tax attributable
      to each such year .




**Israeli
      Taxation**




The
      following is a summary of the principal tax laws applicable to companies in
      Israel, with special reference to their effect on us, and certain Israeli
      Government programs benefiting us. This section also contains a discussion
      of
      certain Israeli tax consequences to persons acquiring ordinary shares. This summary does not discuss all the acts of Israeli tax law that
      may
      be relevant to a particular investor in light of his or her personal investment
      circumstances or to certain types of investors subject to special treatment
      under Israeli law, such as traders in securities or persons that own, directly
      or indirectly, 10% or more of our outstanding voting share capital. To the
      extent that the discussion is based on new tax legislation which has not been
      subject to judicial or administrative interpretation, there can be no assurance
      that the views expressed in this discussion will be accepted by the tax
      authorities. This discussion should not be construed as legal or professional
      tax advice and is not exhaustive of all possible tax considerations.




58




Potential
      investors are urged to consult their own tax advisors as to the Israeli or
      other
      tax consequences of the purchase, ownership and disposition of ordinary shares,
      including, in particular, the effect of any foreign, state or local taxes.




**General
      Corporate Tax Structure**




Generally,
      Israeli companies are subject to corporate tax at the rate of 34% on taxable
      income and are subject to capital gains tax at a rate of 25% on capital gains
      (other than gains derived from the sale of listed securities that are taxed
      at
      the prevailing corporate tax rates) derived after January 1, 2003. The corporate
      tax rate was reduced in June 2004, from 36% to 35% for the 2004 tax year, 34%
      for the 2005 tax year, 31% for the 2006 tax year, 29% for the 2007 tax year,
      27%
      for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year
      and thereafter. However, the effective tax rate payable by a company that
      derives income from an approved enterprise (as discussed below) may be
      considerably less.




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




We
      currently qualify as an “Industrial Company” pursuant to the Law for the
      Encouragement of Industry (Taxes), 1969 (the “Industry Encouragement Law”).
      A
      company qualifies as an “Industrial Company” if it is resident in Israel and at
      least 90% of its income in a given tax year, determined in NIS (exclusive of
      income from certain specified sources), is derived from Industrial Enterprises
      owned by that company. An “Industrial Enterprise” is defined as an enterprise
      whose major activity in a particular tax year is industrial manufacturing
      activity. Industrial Companies are entitled to the following preferred corporate
      tax benefits, among others:





·
            Deduction
                of purchases of know-how and patents over an eight-year period for
                tax
                purposes;




·
            Right
                to elect, under specified conditions, to file a consolidated tax
                return
                with additional related Israeli Industrial Companies;




·
            Accelerated
                depreciation rates on equipment and buildings; and




·
            Deductions
                over a three-year period of expenses involved with the issuance and
                listing of shares on the Tel Aviv Stock Exchange or, on or after
                January
                1, 2003, on a recognized stock market outside of
                Israel.




Eligibility
      for benefits under the Industry Encouragement Law
      is not
      contingent upon the approval of any Government agency. No assurance can be
      given
      that we will continue to qualify as an Industrial Company, or will be able
      to
      avail us of any benefits under the Industry Encouragement Law
      in the
      future.




59




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




*Tax
      benefits prior March 2005 Amendment*




The
      Law for Encouragement of Capital Investments, 1959, which is referred to below
      as the Capital Investments Law, provides that capital investments in a
      production facility or other eligible assets may, upon application to the
      Israeli Investment Center of the Ministry of Industry and Commerce, be
      designated as an “Approved Enterprise.” Each certificate of approval for an
      Approved Enterprise relates to a specific investment program in the Approved
      Enterprise, delineated both by the financial scope of the investment and by
      the
      physical characteristics of the facility or the asset. An Approved Enterprise
      is
      entitled to certain benefits, including Israeli Government cash grants,
      state-guaranteed loans and tax benefits.




**Tax
      Benefits**




Taxable
      income derived from an Approved Enterprise under the Capital Investments Law
      grants program is subject to a reduced corporate tax rate of 25%. That income
      is
      eligible for further reductions in tax rates depending on the percentage of
      the
      foreign investment in our share capital. The tax rate is 20% if the foreign
      investment is 49% or more but less than 74%, 15% if the foreign investment
      is
      74% or more but less than 90%, and 10% if the foreign investment is 90% or
      more.
      The lowest level of foreign investment during the year will be used to determine
      the relevant tax rate for that year. These tax benefits are granted for a
      limited period not exceeding seven years, or 10 years for a company whose
      foreign investment level exceeds 25%, from the first year in which the Approved
      Enterprise has taxable income, after the year in which production commenced
      (as
      determined by the Israeli Investment Center of the Ministry of Industry and
      Commerce, or the Investment Center). The period of benefits may in no event,
      however, exceed the lesser of 12 years from the year in which the production
      commenced (as determined by the Investment Center) or 14 years from the year
      of
      receipt of Approved Enterprise status.




An
      Approved Enterprise may elect to forego any entitlement to the grants otherwise
      available under the Capital Investments Law and, in lieu of the foregoing,
      may
      participate in an Alternative Benefits Program. Under
      the Alternative
      Benefits Program ,
      a
      company's undistributed income derived from an Approved Enterprise will be
      exempt from company tax for a period of between two and ten years from the
      first
      year of taxable income, depending on the geographic location of the Approved
      Enterprise within Israel, and the company will be eligible for a reduced tax
      rate of 10%-25% for the remainder of the benefits period .
      There can be no assurance that the current benefit programs will continue to
      be
      available or that we will continue to qualify for benefits under the current
      programs.




*Tax
      benefits Subsequent to the March 2005 Amendment*





In
      March
      2005, the government of Israel passed an amendment to the Investment Law in
      which it revised the criteria for investments qualified to receive tax benefits
      as an Approved Enterprise. Among other things, companies that meet the criteria
      of the alternate package of tax benefits will receive those benefits without
      prior approval. However, no assurance can be given that we will, in the future,
      be eligible to receive additional tax benefits under this law. See
      “Risk Factors, and specifically - *“* *Any
      failure to obtain the tax benefits from the State of Israel that we anticipate
      receiving could adversely affect our plans and prospects* *”* and *“* *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”* ****** for
      a discussion of the risks our business and prospects for growth face in
      connection with Tax benefits under Israeli law.





60




We
      currently have Approved Enterprise programs under the Capital Investments Law,
      which entitle us to certain tax benefits. The tax benefit period for these
      programs has not yet commenced. We have elected the Alternative Benefits Program
      which provides for the waiver of grants in return for tax exemption.
      Accordingly, our income is tax exempt for a period of two years commencing
      with
      the year we first earn taxable income relating to each expansion program, and
      is
      subject to corporate taxes at the reduced rate of 10% to 25%, for an additional
      period of five years to eight
      years, depending on the percentage of the company’s ordinary shares held by
      foreign shareholders in each taxable year .
      The exact rate reduction is based on the percentage of foreign ownership in
      each
      tax year. See note 9 to our consolidated financial statements. 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 gross amount distributed, including withholding tax thereon,
      at
      the rate that would have been applicable had the company not elected the
      Alternative Benefits Program, ranging from 10% to 25%. The dividend recipient
      is subject
      to
      withholding tax
      at the reduced rate of 15%, applicable to dividends from Approved Enterprises
      if
      the dividend is distributed within 12 years after the benefits period. The
      withholding tax rate will be 25% after such period. In the case of a company
      with over 25% foreign investment level, as defined by law, the 12-year
      limitation on reduced withholding tax on dividends does not apply. This tax
      should be withheld by the company at the source, regardless of whether the
      dividend is converted into foreign currency. See “Withholdings and Capital Gains
      Taxes Applicable to Non-Israeli Shareholders.”




From
      time to time, the Israeli Government has discussed reducing the benefits
      available to companies under the Capital Investments Law. The termination or
      substantial reduction of any of the benefits available under the Capital
      Investments Law could materially impact the cost of our future investments.




The
      benefits available to an Approved Enterprise are conditional upon the
      fulfillment of certain conditions stipulated in the Capital Investments Law
      and
      its regulations and the criteria set forth in the specific certificate of
      approval, as described above. In the event that these conditions are violated,
      in whole or in part, we would be required to refund the amount of tax benefits,
      together with linkage differences to the Israeli CPI and interest. We believe
      that our Approved Enterprise programs operate in compliance with all such
      conditions and criteria.





**Foreign
      investor’s 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 of 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.




61




·
            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.





**Other
      Benefits**




An
      Approved Enterprise is also entitled to the following two other incentives
      from
      the Israeli Government regardless of whether the Alternative Benefits Program
      is
      elected:




·
            accelerated
                rates of depreciation applied on a straight-line basis in respect
                of
                property and equipment, generally ranging from 200% in respect of
                equipment to 400% of the ordinary depreciation rates in respect of
                buildings, during the first five years of service of the assets,
                subject
                to a ceiling of 20% per year with respect to depreciation of
                buildings.




Measurement
      of Taxable Income




Results
      for tax purposes are measured in real terms, in accordance with the changes
      in
      the Israeli Consumer Price Index, or changes in exchange rate of the NIS against
      the dollar, for a “foreign investors” company. Until taxable year 2002, we
      measured our results for tax purposes in accordance with changes in the Israeli
      consumer price index. Commencing with taxable year 2003, we have elected to
      measure its results for tax purposes on the basis of the changes in the exchange
      rate of NIS against the dollar.




**Tax
      Benefits of Research and Development**




Israeli
      tax law permits, under certain conditions, a tax deduction in the year incurred
      for expenditures, including capital expenditures, in scientific research and
      development projects, if the expenditures are approved by the relevant
      government ministry, determined by the field of research, and if the research
      and development is for the promotion of the enterprise and is carried out by,
      or
      on behalf of, a company seeking such deduction. Expenditures not so approved
      are
      deductible over a three year period; however, expenditures made out of proceeds
      made available to us through government grants are not deductible.




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




Nonresidents
      of Israel are subject to income tax on income accrued or derived from sources
      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 generally required to withhold income tax at the rate of 25%
      on
      all distributions of dividends, although, with respect to U.S. taxpayers, if
      the
      dividend recipient holds 10% or more of our voting stock for a certain period
      prior to the declaration and payment of the dividend, we are only required
      to
      withhold at a 12.5% rate. Notwithstanding the foregoing, with regard to
      dividends generated by an Approved Enterprise, we are required to withhold
      income tax at the rate of 15%.




Israeli
      law generally imposes a capital gains tax on the sale of publicly traded
      securities. Pursuant to changes made to the Israeli Income Tax Ordinance in
      January 2006, capital gains on the sale of our ordinary shares will be subject
      to Israeli capital gains tax, generally at a rate of 20% unless the holder
      holds
      less than 10% of our voting power during the 12 months preceding the sale,
      in
      which case it will be subject to a 25% capital gains tax. However, as of January
      1, 2003, nonresidents of Israel are exempt from capital gains tax in relation
      to
      the sale of our ordinary shares for so long as (a) our ordinary shares are
      listed for trading on a stock exchange outside of Israel, (b) the capital gains
      are not accrued or derived by the nonresident shareholder’s permanent enterprise
      in Israel, (c) the ordinary shares in relation to which the capital gains are
      accrued or derived were acquired by the nonresident shareholder after the
      initial listing of the ordinary shares on a stock exchange outside of Israel,
      and (d) neither the shareholder nor the particular capital gain is otherwise
      subject to certain sections of the Israeli Income Tax Ordinance. As of January
      1, 2003, nonresidents of Israel are also exempt from Israeli capital gains
      tax
      resulting from the sale of securities on the Tel Aviv Stock Exchange; provided
      that the capital gains are not accrued or derived by the nonresident
      shareholder’s permanent enterprise in Israel.





62




In
      addition, under the income tax treaty between the United States and Israel,
      a
      United States resident holder of ordinary shares which are not listed for
      trading on a stock exchange outside of Israel will be exempt from Israeli
      capital gains tax on the sale, exchange or other disposition of such ordinary
      shares unless the holder owns, directly or indirectly, 10% or more of our voting
      power during the 12 months preceding such sale, exchange or other disposition.




A
      nonresident of Israel who receives interest, dividend or royalty income derived
      from or accrued in Israel, from which tax was withheld at the source, is
      generally exempt from the duty to file tax returns in Israel with respect to
      such income, provided such income was not derived from a business conducted
      in
      Israel by the taxpayer.




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 currently subject to the information and periodic reporting requirements
      of
      the U.S. Securities Exchange Act of 1934, as amended, and file periodic reports
      and other information with the Securities and Exchange Commission through its
      electronic data gathering, analysis and retrieval (EDGAR) system. Our securities
      filings, including this Annual Report and the exhibits thereto, are available
      for inspection and copying at the public reference facilities of the Securities
      and Exchange Commission located at Room 1024, 450 Fifth Street, NW, Washington,
      D.C. 20549, and the Commission’s regional offices located in New York, New York
      and Chicago, Illinois. Copies of all or any part of our registration statement
      or other filings may be obtained from these offices after payment of fees
      required by the Commission. Please call the Commission at 1-800-SEC-0330 for
      further information. The Commission also maintains a website at http://www.sec.gov from which certain EDGAR filings may be accessed.




As
      a foreign private issuer, we are exempt from certain rules under the Securities
      Exchange Act of 1934, as amended, prescribing the furnishing and content of
      proxy statements to our shareholders. In addition, we, our directors, and our
      officers are also exempt from the shortswing profit recovery and disclosure
      regime of Section 16 of the Exchange Act.




63




**I.**
            
            **Subsidiary
              Information**




Not
      applicable.




**Item
      11:****QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




We
      develop products in Israel and sell them worldwide. As a result, our financial
      results could be affected by factors such as changes in foreign currency
      exchange rates or weak economic conditions in foreign markets. As most of our
      sales are currently made in dollars, an increase in the value of the dollar
      could make our products less competitive in foreign markets. The foreign
      currency exchange rate effects for the years ended December 31, 2005, 2004,
      and
      2003 were immaterial.




In
      addition, since our financial results are reported in dollars, fluctuations
      in
      the rates of exchange between the dollar and non-dollar currencies may have
      a
      material effect on our results of operations. We therefore use currency exchange
      forward contracts to hedge the impact of the variability in the exchange rates
      on accounts receivable and future cash flows from certain Euro-denominated
      transactions as well as certain NIS-denominated expenses. The counter-parties
      to
      our forward contracts are major financial institutions with high credit ratings. Our
      hedging program reduces, but does not eliminate, the impact of foreign currency
      rate movements. We have, based on our past experience, concluded that there
      is
      no material foreign exchange rate exposure. As of December 31, 2005, we had forward contracts to sell up to $2,246,606
      for a
      total amount of NIS 10,341,129 that matured prior to July 1, 2006.




We
      invest in U.S. Treasury notes, investment grade U.S. corporate securities and
      dollar deposits with banks. These investments typically carry fixed interest
      rates. Until September 2001 our marketable securities were designated under
      FAS
      115 as held-to-maturity marketable securities. As a result of unexpected events,
      we sold our held-to-maturity marketable securities. As of December 31, 2005,
      our
      marketable securities were designated as available for sale. If we hold these
      securities to the maturity date, financial income over the holding period is
      not
      sensitive to changes in interest rates and market value.




As
      of December 31, 2005, we had no other exposure to changes in interest rates
      and
      had no interest rate derivative financial instruments outstanding.




**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**




There
      have been no changes in the rights of holders of any of our registered
      securities.




64




The
      effective date of the registration statement (No. 333-10882) for our initial
      public offering of our ordinary shares, par value NIS 0.01 per share, was
      October 14, 1999. The offering commenced on October 20, 1999, and terminated
      after the sale of all the securities registered. The managing underwriter of
      the
      offering was Lehman Brothers. We registered 5,175,000 ordinary shares in the
      offering, including shares issued pursuant to the exercise of the underwriters’
over-allotment option. We sold 5,175,000 ordinary shares at an aggregate
      offering price of $56,925,000 ($11.00 per share). Under the terms of the
      offering, we incurred underwriting discounts of $3,984,750. We also incurred
      expenses of $2,769,250 million in connection with the offering. None of these
      amounts was paid directly or indirectly to any director, officer, general
      partner of ours or to their associates, persons owing ten percent or more of
      any
      class of our equity securities, or to any of our affiliates.




The
      net proceeds that we received as a result of the offering were $50,568,390.
      As
      of December 31, 2005, the net proceeds have been used to invest in a variety
      of
      financial instruments and for general corporate purposes. More specifically,
      a
      portion of the proceeds, $6.9 million, was used in August 2001 to purchase
      certain assets of Propelis Software, Inc., a business unit of Computer Network
      Technology Corporation. None of the net proceeds of the offering was paid
      directly or indirectly to any director, officer, general partner of ours or
      to
      their associates, persons owning ten percent or more of any class of our equity
      securities, or to any of our affiliates.




**Item
      15:****CONTROLS
      AND PROCEDURES**




(a)
      Disclosure Controls and Procedures. We performed an evaluation under the
      supervision and with the participation of our management, including our Chief
      Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness
      of the design and operation of our disclosure controls and procedures (as
      defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended) as of December 31, 2005 Following that evaluation, our
      management, including the CEO and CFO, concluded that based on the evaluation,
      the design and operation of our disclosure controls and procedures were
      effective at that time. Since the evaluation, there have been no significant
      changes in our internal controls or in factors that could significantly affect
      internal controls, including, because we have not identified any significant
      deficiencies or material weaknesses in our internal controls, any corrective
      actions with regard to significant deficiencies and material weaknesses.




(b)
      Not
      yet applicable




(c) 
      Not yet applicable




(d)
      Changes in Internal Control Over Financial Reporting. There has been no change
      in the Company’s internal control over financial reporting (as defined in Rules
      13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during 2005,
      that
      has materially affected, or is reasonably likely to materially affect, the
      Company’s internal control over financial reporting.




**Item
      16A:****AUDIT
      COMMITTEE FINANCIAL EXPERT**




At
      our
      annual shareholders meeting in August 2004, the shareholders elected Dan Falk
      to
      the Company’s Board of Directors to serve for a one year term. Such term was
      extended by an additional one year term at our annual shareholders meeting
      held
      in September 2005. Our Board of Directors has determined that Mr. Falk qualifies
      as an audit committee financial expert, and Mr. Falk was appointed by the Board
      to serve on the audit committee. Mr. Falk also meets the requirements of the
      NASDAQ Stock Market listing standards to be an “independent” director and audit
      committee member.




65




**Item
      16B:****CODE
      OF ETHICS**




In
      March 2003, our Board of Directors adopted a Code of Ethics relating to, among
      others, our principal executive officer, principal financial officer and
      principal accounting officer. The code was filed as exhibit 11 to our Annual
      Report for the year ended December 31, 2003 and is incorporated by reference
      to
      that filing, which is available and can be reached through the Investor Relations
      link on our website, www.jacada.com .
      Pursuant to new requirements of the Nasdaq Stock Market, we adopted, in May
      2004, a Code of Business Conduct and Ethics that is applicable to all our
      directors, officers and employees. This code is also available on our
      website.




**Item
      16C:****PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




Audit
      Fees




2004
            
            $
            77,5002005
            
            $
            102,500




Audit
      Related Fees




2004
            
            $
            02005
            
            $
            2,000





Tax
      Fees




2004
            
            $
            55,0002005
            
            $
            46,000




Other
      Fees




2004
            
            $
            20,0002005
            
            
            0




The
      tax fees we incurred in 2004 and 2005 are related to preparation of tax returns
      and consultations regarding international tax. The Audit Related Fees we
      incurred in 2005 are related to on going  consultations.
      The other fees incurred in 2004 are related to services performed in connection
      with the transfer of our HostFuse technology from Jacada, Inc. to Jacada
      Ltd.




Our
      audit committee is responsible for the appointment and oversight of our
      independent auditors’ work. Pursuant to its charter, the audit committee also
      has the sole authority to review in advance, and grant any appropriate
      pre-approvals of, (a) all auditing services to be provided by our independent
      auditors; (b) all non-audit services to be provided by our independent auditors
      as permitted by Section 10A of the U.S. Securities Exchange Act of 1934; and
      (c)
      all fees and other terms of engagement. The audit committee’s policy is to
      specifically pre-approve all annual services provided by our independent
      auditors in connection with the preparation of their audit, which may include
      audit services, audit-related services, tax services and other services. 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
      setting a specific budget for such services. Additional services may be
      commissioned on the basis of a
      pre-approval by the audit committee for non-annual audit related services up
      to
      a specified amount. Once such services have been pre-approved and performed,
      the
      independent auditors and our management 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 the services
      performed.




66




**Item
                16D:**
            **EXEMPTIONS
                FROM THE LISTING STANDARDS FOR AUDIT
                COMMITTEES**




Not
      applicable.




**Item
                16E:**
            **PURCHASES
                OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                PURCHASERS**




None.




67





**PART
      III**




**Item
      17:****FINANCIAL****STATEMENTS**




See
      Item 18.




**Item
      18:** **FINANCIAL
      STATEMENTS**




68




**JACADA
      LTD. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      FINANCIAL STATEMENTS**





**AS
      OF DECEMBER 31, 2005**





**U.S.
      DOLLARS IN THOUSANDS**





**INDEX**


**Page****Report
                of Independent Registered Public Accounting Firm**
            **F-2****Consolidated
                Balance Sheets**
            **F-3
                - F-4****Consolidated
                Statements of Operations**
            **F-5****Consolidated
                Statements of Changes in Shareholders' Equity**
            **F-6****Consolidated
                Statements of Cash Flows**
            **F-7
                - F-8****Notes
                to Consolidated Financial Statements**
            **F-9
                - F-30**





**-
      - - - - - - - - - - - - - - - - - -**








ernst  young logo




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





**To
      the Shareholders of**





**JACADA
      LTD.**







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




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. We were not engaged to perform
      an
      audit of the Company's internal control over financial reporting. Our audit
      included 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,
      and
      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 referred to above present fairly,
      in all material respects, the consolidated financial position of the Company
      and
      its subsidiaries as of December 31, 2005 and 2004 and the consolidated results
      of their operations and their cash flows for each of the three years in the
      period ended December 31, 2005, in conformity with U.S. generally accepted
      accounting principles.




Tel-Aviv,
                Israel
            KOST
                FORER GABBAY & KASIERERFebruary
                8, 2006
            A
                Member of Ernst & Young Global




F-2


**JACADA
      LTD. AND ITS SUBSIDIARIES**




**CONSOLIDATED
      BALANCE SHEETS**





**U.S.
      dollars in thousands**


**December
                31,****2005**
            
            **2004**ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            3,461
            
            $
            3,552Marketable
                securities
            
            
            14,655
            
            
            19,573Trade
                receivables (net of allowance for doubtful accounts of $ 228 and
                $ 220 at December 31, 2005 and 2004, respectively)
            
            
            1,614
            
            
            2,472Other
                current assets
            
            
            905
            
            
            791Totalcurrent assets
            
            
            20,635
            
            
            26,388LONG-TERM
                INVESTMENTS:Marketable
                securities
            
            
            17,535
            
            
            14,488Severance
                pay fund
            
            
            825
            
            
            969Totallong-term investments
            
            
            18,360
            
            
            15,457PROPERTY
                AND EQUIPMENT, NET
            
            
            997
            
            
            1,326OTHER
                ASSETS, NET:Other
                intangibles, net
            
            
            990
            
            
            1,429Goodwill
            
            
            4,630
            
            
            4,630Totalother assets, net
            
            
            5,620
            
            
            6,059Totalassets
            
            $
            45,612
            
            $
            49,230


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


F-3


**JACADA
      LTD. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      BALANCE SHEETS**


**U.S.
      dollars in thousands, except share and per share data**


**December
                31,****2005**
            
            **2004**LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Trade
                payables
            
            $
            981
            
            $
            1,024Deferred
                revenues
            
            
            5,533
            
            
            3,822Accrued
                expenses and other liabilities
            
            
            3,373
            
            
            3,816Totalcurrent liabilities
            
            
            9,887
            
            
            8,662ACCRUED
                SEVERANCE PAY
            
            
            1,250
            
            
            1,479SHAREHOLDERS'
                EQUITY:Share
                capital:Ordinary
                shares of NIS 0.01 par value -Authorized:
                30,000,000 shares at December 31, 2005 and 2004; Issued and outstanding:
                19,619,806 and 19,326,010 shares at December 31, 2005 and 2004,
                respectively
            
            
            57
            
            
            56Additional
                paid-in capital
            
            
            70,297
            
            
            69,785Accumulated
                other comprehensive loss
            
            
            (369
            )
            
            (200
            )Accumulated
                deficit
            
            
            (35,510
            )
            
            (30,552
            )Totalshareholders' equity
            
            
            34,475
            
            
            39,089Totalliabilities and shareholders' equity
            
            $
            45,612
            
            $
            49,230


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


F-4


**JACADA
        LTD. AND ITS SUBSIDIARIES**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**U.S.
      dollars in thousands, except share and per share data**


**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Revenues:Software
                and products
            
            $
            6,725
            
            $
            5,749
            
            $
            8,354Services
            
            
            3,650
            
            
            5,481
            
            
            4,704Maintenance
            
            
            9,567
            
            
            8,554
            
            
            7,504Totalrevenues
            
            
            19,942
            
            
            19,784
            
            
            20,562Cost
                of revenues:Software
                and products
            
            
            1,309
            
            
            631
            
            
            846Services
            
            
            2,704
            
            
            3,341
            
            
            2,384Maintenance
            
            
            865
            
            
            1,143
            
            
            1,110Totalcost of revenues
            
            
            4,878
            
            
            5,115
            
            
            4,340Gross
                profit
            
            
            15,064
            
            
            14,669
            
            
            16,222Operating
                expenses:Research
                and development
            
            
            4,094
            
            
            5,278
            
            
            5,308Sales
                and marketing
            
            
            11,035
            
            
            10,507
            
            
            9,386General
                and administrative
            
            
            5,723
            
            
            4,758
            
            
            4,714Restructuring
                charges
            
            
            -
            
            
            525
            
            
            -Totaloperating expenses
            
            
            20,852
            
            
            21,068
            
            
            19,408Operating
                loss
            
            
            (5,788
            )
            
            (6,399
            )
            
            (3,186
            )Financial
                income, net
            
            
            830
            
            
            786
            
            
            1,037Net
                loss
            
            $
            (4,958
            )
            $
            (5,613
            )
            $
            (2,149
            )Basic
                and diluted net loss per share
            
            $
            (0.25
            )
            $
            (0.29
            )
            $
            (0.11
            )Weighted
                average number of shares used in computing basic and diluted net
                loss per
                share
            
            
            19,497,726
            
            
            19,282,800
            
            
            19,011,435


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


F-5


**JACADA
        LTD. AND ITS SUBSIDIARIES**
  **CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY**


**U.S.
      dollars in thousands, except share data**


**Accumulated****Additional**
            
            **Deferred**
            
            **other**
            
            
            
            **Total**
            
            **Total****Ordinary
                shares**
            
            **paid-in**
            
            **stock**
            
            **comprehensive**
            
            **Accumulated**
            
            **comprehensive**
            
            **shareholders'****Shares**
            
            **Amount**
            
            **capital**
            
            **compensation**
            
            **income
                (loss)**
            
            **deficit**
            
            **loss**
            
            **equity**Balance
                as of January 1, 2003
            
            
            18,935,903
            
            $
            55
            
            $
            69,143
            
            $
            (25
            )
            $
            81
            
            $
            (22,790
            )
            
            
            
            $
            46,464Exercise
                of stock options
            
            
            97,875
            
            
            *)
                -
            
            
            134
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            134Amortization
                of deferred stock compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            25
            
            
            -
            
            
            -
            
            
            
            
            
            25Comprehensive
                loss:Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,149
            )
            $
            (2,149
            )
            
            (2,149
            )Unrealized
                loss from available-for-sale marketable securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (11
            )
            
            -
            
            
            (11
            )
            
            (11
            )Unrealized
                gains from derivatives
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            41
            
            
            -
            
            
            41
            
            
            41Totalcomprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (2,119
            )Balance
                as of December 31, 2003
            
            
            19,033,778
            
            
            55
            
            
            69,277
            
            
            -
            
            
            111
            
            
            (24,939
            )
            
            
            
            
            44,504Exercise
                of stock options
            
            
            292,232
            
            
            1
            
            
            435
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            436Stock
                compensation related to options granted to non-employees
            
            
            -
            
            
            -
            
            
            73
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            73Comprehensive
                loss:Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (5,613
            )
            $
            (5,613
            )
            
            (5,613
            )Unrealized
                loss from available-for-sale marketable securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (326
            )
            
            -
            
            
            (326
            )
            
            (326
            )Unrealized
                gains from derivatives
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            15
            
            
            -
            
            
            15
            
            
            15Totalcomprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (5,924
            )Balance
                as of December 31, 2004
            
            
            19,326,010
            
            
            56
            
            
            69,785
            
            
            -
            
            
            (200
            )
            
            (30,552
            )
            
            
            
            
            39,089Exercise
                of stock options
            
            
            293,796
            
            
            1
            
            
            484
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            485Stock
                compensation related to options granted to non-employees
            
            
            -
            
            
            -
            
            
            28
            
            
            -
            
            
            -
            
            
            -
            
            
            
            
            
            28Comprehensive
                loss:Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,958
            )
            $
            (4,958
            )
            
            (4,958
            )Unrealized
                loss from available-for-sale marketable securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (125
            )
            
            -
            
            
            (125
            )
            
            (125
            )Unrealized
                loss from derivatives
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (44
            )
            
            -
            
            
            (44
            )
            
            (44
            )Totalcomprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            (5,127
            )Balance
                as of December 31, 2005
            
            
            19,619,806
            
            $
            57
            
            $
            70,297
            
            $
            -
            
            $
            (369
            )
            $
            (35,510
            )
            
            
            
            $
            34,475Accumulated
                other comprehensive income (loss) as ofDecember  31,
                2005:Accumulated
                unrealized income from derivatives
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            12Accumulated
                loss from available-for-sale securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (381
            )$
            (369
            )


*)  Represents
      an amount lower than $ 1.


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


F-6


**JACADA
      LTD. AND ITS SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**U.S.
      dollars in thousands**


**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Cash
                flows from operating activities:Net
                loss
            
            $
            (4,958
            )
            $
            (5,613
            )
            $
            (2,149
            )Adjustments
                required to reconcile net loss to net cash provided by (used in)
                operating
                activities:Depreciation
                and amortization
            
            
            935
            
            
            1,226
            
            
            1,444Stock
                compensation related to options granted to non-employees
            
            
            28
            
            
            73
            
            
            -Amortization
                of deferred stock compensation
            
            
            -
            
            
            -
            
            
            25Accrued
                interestand
                amortization of premium on marketable securities
            
            
            (675
            )
            
            562
            
            
            388Increase
                (decrease) in accrued severance pay, net
            
            
            (85
            )
            
            79
            
            
            80Decrease
                (increase) in trade receivables, net
            
            
            858
            
            
            287
            
            
            (98
            )Decrease
                (increase) in other current assets
            
            
            (158
            )
            
            (154
            )
            
            98Increase
                (decrease) in trade payables
            
            
            (15
            )
            
            481
            
            
            (235
            )Increase
                in deferred revenues
            
            
            1,711
            
            
            474
            
            
            1,204Increase
                (decrease) in accrued expenses and other liabilities
            
            
            (443
            )
            
            40
            
            
            101Decrease
                in long-term accrued expenses
            
            
            -
            
            
            (55
            )
            
            (69
            )Other
            
            
            (52
            )
            
            (31
            )
            
            (32
            )Net
                cash provided by (used in) operating activities
            
            
            (2,854
            )
            
            (2,631
            )
            
            757Cash
                flows from investing activities:Investment
                in available-for-sale marketable securities
            
            
            (27,536
            )
            
            (18,416
            )
            
            (83,478
            )Proceeds
                from redemption and sale of available-for-sale marketable
                securities
            
            
            29,957
            
            
            15,415
            
            
            77,194Purchase
                of property and equipment (a)
            
            
            (258
            )
            
            (512
            )
            
            (318
            )Purchase
                of technology
            
            
            -
            
            
            (900
            )
            
            -Proceeds
                from sale of property and equipment
            
            
            115
            
            
            315
            
            
            176Proceeds
                from other long-term assets
            
            
            -
            
            
            -
            
            
            61Net
                cash provided by (used in) investing activities
            
            
            2,278
            
            
            (4,098
            )
            
            (6,365
            )Cash
                flows from financing activities:Proceeds
                from exercise of stock options
            
            
            485
            
            
            436
            
            
            134Net
                cash provided by financing activities
            
            
            485
            
            
            436
            
            
            134Decrease
                in cash and cash equivalents
            
            
            (91
            )
            
            (6,293
            )
            
            (5,474
            )Cash
                and cash equivalents at the beginning of the year
            
            
            3,552
            
            
            9,845
            
            
            15,319Cash
                and cash equivalents at the end of the year
            
            $
            3,461
            
            $
            3,552
            
            $
            9,845


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


F-7


**JACADA
        LTD. AND ITS SUBSIDIARIES**
  **CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**U.S.
      dollars in thousands**


**Year
                  ended December 31,****2005**
              
              **2004**
              
              **2003**(a)  
                  Non-cash
                  activities:Purchase
                  of property and equipment
              
              
              
              
              $
              -
              
              $
              28
              
              $
              10Additional
                  goodwill in respect of Anota acquisition
              
              
              
              
              
              -
              
              
              -
              
              
              76$
              -
              
              $
              28
              
              $
              86


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


F-8


**JACADA
      LTD. AND ITS SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**





**NOTE
                1:-**
            **GENERAL**





a.
            Jacada
                Ltd. ("the Company") was incorporated under the laws of Israel in
                December
                1990.





The
      Company and its wholly-owned subsidiaries develop, market and support software
      and solution that enables businesses to web-enable, modernize and integrate
      their existing software applications and to reduce their operational costs.
      The
      Company generates revenues from licensing its software products and from
      services such as maintenance, support, consulting and training.





The
      majority of the Company's sales are made in North America and Europe.





b.
            Restructuring
                charges:





In
                February 2004, the Company consolidated all its research and development
                activities into its lab in Israel. As part of this plan, the Company
                shut
                down research and development operations in Minneapolis in order
                to
                improve overall development efficiency, accelerate new product release
                and
                reduce operating expenses. The Company completed the plan in June
                2004.





The
                plan consisted of the involuntary termination of 10 research and
                development employees, termination of the lease agreement of the
                Company's
                premises in Minneapolis and other expenses that consisted of shipment
                and
                relocation costs and travel costs.





In
      connection with the 2004 restructuring plan, the Company incurred expenses
      of
      $ 525, which were composed of $ 373 from employee termination benefits, $
      108 from facility closures and $ 44 in other expenses. As of December 31, 2004,
      all amounts were paid.





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





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





A
      majority
      of the revenues of the Company and its subsidiaries is generated in United
      States dollars ("dollars"). The Company's management believes that the dollar
      is
      the primary currency of the economic environment in which the Company and its
      subsidiaries operate. Thus, the functional and reporting currency of the Company
      is the dollar.


F-9


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**





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





Accordingly,
      monetary accounts maintained in currencies other than the dollar are remeasured
      into U.S. dollars in accordance with Statement of Financial Accounting Standard
      No. 52, "Foreign Currency Translation" ("SFAS No. 52"). All transaction gains
      and losses of the remeasurement of monetary balance sheet items are reflected
      in
      the statement of operations as financial income or expenses, as
      appropriate.





c.
            Principles
                of consolidation:





The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiaries. Intercompany transactions and balances have been
      eliminated upon consolidation.





d.
            Cash
                equivalents:





Cash
      equivalents are short-term, highly liquid investments that are readily
      convertible to cash with maturities of three months or less at the date
      acquired.





e.
            Marketable
                securities:





Management
      determines the classification of investments in debt securities with fixed
      maturities at the time of purchase and reevaluates such designations as of
      each
      balance sheet date. At December 31, 2005 and 2004, all marketable securities
      covered by Statement of Financial Accounting Standard No. 115, "Accounting
      for
      Certain Investments in Debt and Equity Securities" ("SFAS No. 115") were
      designated as available-for-sale. Accordingly, these securities are stated
      at
      fair value, with unrealized gains and losses reported in accumulated other
      comprehensive income (loss), a separate component of shareholders' equity.
      The
      amortized cost of available-for-sale securities is adjusted for amortization
      of
      premiums to maturity. Such amortization and interest are included in financial
      income, net.





Realized
      gains and losses on sales of investments, as determined on a specific
      identification basis, 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 estimated useful lives of
      the
      assets at the following annual rates:


**%**Computers
                and peripheral equipment
            20
                -
                33Office
                furniture and equipment
            6
                -
                15Motor
                vehicles
            15Leasehold
                improvements
            Over
                the shorter of the related lease period or the life of the
                asset




F-10


**JACADA
      LTD. AND ITS SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**




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





g.
            Other
                assets:





Intangible
      assets acquired in a business combination are amortized over their useful life
      using a method of amortization that reflects the pattern in which the economic
      benefits of the intangible assets are consumed or otherwise used up, in
      accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
      and Other Intangible Assets" ("SFAS No. 142").





Technology
      is amortized using the straight-line method over the estimated economic life
      of
      the technology rights, which is five years and the other intangible assets
      are
      amortized over a period of three years.





h.
            Impairment
                of long-lived assets:





The
      Company's long-lived assets and certain identifiable intangibles are reviewed
      for impairment in accordance with Statement of Financial Accounting Standard
      No.
      144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
      No.
      144") whenever events or changes in circumstances indicate that the carrying
      amount of an asset may not be recoverable. During 2005, 2004 and 2003, no
      impairment losses have been identified.





i.
            Goodwill:





Goodwill
      represents the excess of the cost of businesses acquired over the fair value
      of
      the net assets acquired in the acquisition.





Effective
      January 1, 2002, the Company adopted the full provisions of Statement of
      Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
      ("SFAS No. 142").


SFAS
      142
      prescribes a two-phase process for impairment testing of goodwill. The first
      phase screens for impairment, while the second phase (if necessary) measures
      impairment.





In
      the
      first phase of impairment testing, goodwill attributable to each of the
      reporting units is tested for impairment by comparing the fair value of each
      reporting unit with its carrying value. If the carrying value of the reporting
      unit exceeds its fair value, the second phase is then performed. The second
      phase of the goodwill impairment test compares the implied fair value of the
      reporting unit's goodwill with the carrying amount of that goodwill. If the
      carrying amount of the reporting unit's goodwill exceeds the implied fair value
      of that goodwill, an impairment loss is recognized in an amount equal to that
      excess.





Goodwill
      attributable to the Company's single reporting unit as defined under SFAS No.
      142, was tested for impairment by comparing its fair value with its carrying
      value. Fair value is determined using market multiples and comparative
      analyses.





Estimates
      used in the methodologies include future cash flows, future short-term and
      long-term growth rates, weighted average cost of capital and estimates of market
      multiples. The Company performs the impairment tests during the third fiscal
      quarter. During 2005, 2004 and 2003, no impairment losses have been
      identified.


F-11


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**


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





j.
            Research
                and development costs:





Research
      and development costs are charged to the statement of operations as incurred.
      Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
      of
      Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"),
      requires capitalization of certain software development costs subsequent to
      the
      establishment of technological feasibility.





Based
      on
      the Company's product development process, technological feasibility is
      established upon completion of a working model. No costs are incurred by the
      Company between the completion of the working model and the point at which
      the
      products are ready for general release. Therefore, research and development
      costs have been expensed.





k.
            Income
                taxes:





The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards 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.





l.
            Revenue
                recognition:





The
      Company generates revenues from software license fees and from maintenance,
      support and rendering of services that include consulting and training. The
      Company also generates revenues from sales of software licenses that require
      significant customization. The Company sells its products primarily through
      its
      direct sales force to customers and indirectly through resellers. Both the
      customers and the resellers are considered end users.





Revenues
      from software license fees are recognized when all criteria outlined in
      Statement Of Position ("SOP") 97-2, "Software Revenue Recognition" (as amended
      by SOP 98-9) are met. Accordingly, revenue from software license fees is
      recognized when persuasive evidence of an agreement exists, delivery of the
      product has occurred, the fee is fixed or determinable, and collectibility
      is
      probable. Sales agreements with specific acceptance terms are not recognized
      until the customer has confirmed that the product or service has been
      accepted.





Where
      software license 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, in accordance with
      the
      residual method. The Company's VSOE used to allocate the sales price to
      maintenance is based on the renewal percentage. The VSOE of other services
      is
      determined based on the price charged for the undelivered element when sold
      separately. Under the residual method, revenue is recognized for the delivered
      elements when (1) there is VSOE of the fair values of all the undelivered
      elements, and (2) all revenue recognition criteria of SOP 97-2, as amended,
      are
      satisfied. Under the residual method any discount in the arrangement is
      allocated to the delivered element.


F-12


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**




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





Maintenance
      and support revenue included in multiple element arrangements is deferred and
      recognized on a straight-line basis over the term of the maintenance and support
      agreement.





Arrangements
      for the sale of software products that include consulting and training services
      are evaluated to determine whether those services are essential to the
      functionality of other elements of the arrangement. When services are not
      considered essential, the revenue allocable to the software services is
      recognized as the services are performed.





The
      Company considers all arrangements with payment terms extending beyond six
      months not to be fixed or determinable. If the fee is not fixed or determinable,
      revenue is recognized as payments become due from the customer, provided that
      all other revenue recognition criteria have been met.





In
      agreements that involve significant customization of the Company's software
      and
      a commitment to provide maintenance, the entire agreement represents a single
      unit of accounting, as there is an undelivered element for which objective
      and
      reliable evidence of fair value does not exist. Accordingly, revenues from
      such
      agreements are recognized ratably over the maintenance period, starting from
      the
      date on which the customization of the software is completed.





Deferred
      revenues include unearned amounts received under maintenance and support
      contracts and amounts received from customers but not recognized as
      revenues.





m.
            Accounting
                for stock-based compensation:





The
      Company has elected to follow Accounting Principles Board Opinion No. 25,
      "Accounting for Stock Issued to Employees" ("APB No. 25") and FASB
      Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
      Compensation" ("FIN No. 44") in accounting for its employee stock option plans.
      Under APB No. 25, when the exercise price of the Company's stock options is
      less
      than the market price of the underlying shares on the date of grant,
      compensation expense is recognized.





Pro
      forma
      information regarding the Company's net loss and net loss per share is required
      by Statement of Financial Accounting Standards No. 123, "Accounting for
      Stock-Based Compensation" ("SFAS No. 123") and has been determined as if the
      Company had accounted for its employee stock options under the fair value method
      prescribed by SFAS No. 123.


F-13


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**





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





The
      fair
      value for options granted in 2005, 2004 and 2003 is amortized over their vesting
      period and estimated at the date of grant using a Black-Scholes options pricing
      model with the following weighted average assumptions:


**2005**
            
            **2004**
            
            **2003**Dividend
                yield
            
            
            0
            %
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            60
            %
            
            60
            %
            
            66
            %Risk-free
                interest
            
            
            3.65
            %
            
            3.5
            %
            
            3
            %Expected
                life (years)
            
            
            4
            
            
            3.25
            
            
            2.5





Pro
      forma
      information under SFAS No. 123:


**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Net
                loss as reported
            
            $
            (4,958
            )
            $
            (5,613
            )
            $
            (2,149
            )Add:
                Stock-based compensation expenses included in reported net loss -
                intrinsic value
            
            
            -
            
            
            -
            
            
            25Deduct:
                Stock-based compensation expense determined under fair value method
                for
                all awards
            
            
            (738
            )
            
            (1,879
            )
            
            (2,551
            )Pro
                forma net loss
            
            $
            (5,696
            )
            $
            (7,492
            )
            $
            (4,675
            )Basic
                and diluted net loss per share as reported
            
            $
            (0.25
            )
            $
            (0.29
            )
            $
            (0.11
            )Pro
                forma basic and diluted net loss per share
            
            $
            (0.29
            )
            $
            (0.39
            )
            $
            (0.25
            )





The
      Company applies SFAS No. 123 and Emerging Issues Task Force No. 96-18,
      "Accounting for Equity Instruments that are Issued to Other than Employees
      for
      Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF No. 96-18")
      and its amendments with respect to options issued to non-employees. SFAS No.
      123
      requires use of an option valuation model to measure the fair value of the
      options at the date of grant.




n.
              Advertising
                expenses:


Advertising
      expenses (including trade shows) are charged to the statement of operations,
      as
      incurred. Advertising expenses for the years ended December 31, 2005, 2004
      and
      2003 were $ 653, $ 468 and $ 530, respectively.





o.
            Severance
                pay:





The
      Company's liability for severance pay for its Israeli employees is calculated
      pursuant to Israel's 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. Israeli employees are entitled to severance equal to one month's
      salary for each year of employment or a portion thereof. The Company's liability
      for all of its Israeli employees is fully provided 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.


F-14


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**





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





The
      deposited funds include profits accumulated up to the balance sheet date. The
      deposited funds may be withdrawn only upon the fulfillment of the obligation
      pursuant to Israel's Severance Pay Law or labor agreements. The value of the
      deposited funds is based on the cash surrendered value of these policies and
      includes immaterial profits.





Severance
      pay expenses for the years ended December 31, 2005, 2004 and 2003 were
      $ 744, $ 499 and $ 533, respectively.





p.
            Fair
                value of financial instruments:





The
      estimated fair value of financial instruments has been determined by the Company
      using available market information and valuation methodologies. Considerable
      judgment is required in estimating fair values. Accordingly, the estimates
      may
      not be indicative of the amounts the Company could realize in a current market
      exchange.





The
      carrying amounts of cash and cash equivalents, trade receivables, other current
      assets, trade payables and accrued expenses and other liabilities approximate
      their fair value due to the short-term maturities of such
      instruments.





The
      fair
      value of marketable securities is based on the quoted market prices and does
      not
      differ significantly from the
      carrying amount (see Note 3).





The
      fair
      value of derivative instruments is estimated by obtaining current quotes from
      banks.





q.
            Derivative
                instruments:





Financial
      Accounting Standards Board Statement No. 133, "Accounting for Derivative
      Instruments and Hedging Activities" ("SFAS No. 133"), requires companies to
      recognize all of its derivative instruments as either assets or liabilities
      in
      the statement of financial position at fair value. The accounting for changes
      in
      the fair value (i.e., gains or losses) of a derivative instrument depends on
      whether it has been designated and qualifies as part of a hedging relationship
      and further, on the type of hedging relationship. For those derivative
      instruments that are designated and qualify as hedging instruments, the Company
      must designate the hedging instrument, based upon the exposure being hedged,
      as
      a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign
      operation.





Derivative
      instruments that are designated and qualify as a cash flow hedge (i.e., hedging
      the exposure to variability in expected future cash flows that is attributable
      to a particular risk), the effective portion of the gain or loss on the
      derivative instrument is reported as a component of other comprehensive income
      and reclassified into earnings in the same line item associated with the
      forecasted transaction in the same period or periods during which the hedged
      transaction affects earnings.


F-15


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**





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





To
      protect
      against the reduction in value of forecasted foreign currency cash flows
      resulting from payroll expenses and payment to suppliers over the next year,
      the
      Company has instituted a foreign currency cash flow hedging program. The Company
      hedges portions of its forecasted expenses denominated in foreign currencies
      with forward contracts. When the dollar strengthens significantly against the
      foreign currencies, the decline in value of future foreign currency expenses
      is
      offset by losses in the value of the forward contracts designated as hedges.
      Conversely, when the dollar weakens, the increase in the value of future foreign
      currency cash flows is offset by gains in the value of the forward
      contracts.





These
      forward contracts are designated as cash flow hedges, as defined by SFAS No.
      133
      and are all effective.





At
      December 31, 2005, the Company expects to reclassify $ 12 of net gains on
      derivative instruments from accumulated other comprehensive income to earnings
      during the next six months, due to actual payments to suppliers and payroll
      payment.





r.  Net loss per
      share:





Basic
      net
      loss per share is computed based on the weighted average number of Ordinary
      shares outstanding during each year. Diluted net loss 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 Statement of Financial Accounting Standard No. 128,
      "Earnings Per Share" ("SFAS No. 128").





All
      outstanding stock options and warrants have been excluded from the calculation of the diluted net loss per Ordinary share because the securities
      are anti-dilutive for all periods presented. The total weighted average number
      of shares related to the outstanding stock, options and warrants excluded from
      the calculations of diluted net loss per share due to their anti-dilutive effect
      was 3,906,814, 4,271,178 and 4,717,397 for the years ended December 31, 2005,
      2004 and 2003, respectively.





s.  Concentrations
      of credit risk:





Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist principally of cash and cash equivalents, marketable securities
      and
      trade receivables.





Cash
      and
      cash equivalents are invested in U.S. dollars with major banks in the United
      States, England, Germany and Israel. Such cash and cash equivalents in the
      United States may be in excess of insured limits and are not insured in other
      jurisdictions. However, management believes that the financial institutions
      that
      hold the Company's investments are financially sound, and accordingly, minimal
      credit risk exists with respect to these investments.





The
      Company's marketable securities include investments in debentures of U.S
      corporations and U.S. government securities. Management believes that those
      corporations are financially sound, the portfolio is well diversified, and
      accordingly, minimal credit risk exists with respect to these marketable
      securities.


F-16


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**




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





The
                Company's trade receivables are mainly derived from sales to customers
                in
                North America and Europe.In
                connection with customers with whom the Company does not have previous
                experience, it may utilize independent resources to evaluate the
                creditworthiness of those customers.An
                allowance for doubtful accounts is determined with respect to those
                amounts that the Company has determined to be doubtful of collection.
                Adjustments to allowance account for the years ended December 31,
                2005,
                2004 and 2003 were $ 159, $ 68 and $ (63), respectively.
                Write-offs of uncollectible accounts for the years ended December
                31,
                2005, 2004 and 2003 were $ 167, $ 54 and $ 101,
                respectively.





t.
            Impact
                of recently issued accounting
                standards:





In
        December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
        No. 123 (revised 2004), "Share-Based Payment". SFAS No. 123(R) will provide
        investors and other users of financial statements with more complete and
        neutral
        financial information by requiring that the compensation cost relating to
        share-based payment transactions be recognized in financial statements. That
        cost will be measured based on the fair value of the equity or liability
        instruments issued. SFAS No. 123(R) covers a wide range of share-based
        compensation arrangements including share options, restricted share plans,
        performance-based awards, share appreciation rights and employee share purchase
        plans. SFAS No. 123(R) replaces SFAS No. 123, "Accounting for Stock-Based
        Compensation", and supersedes APB No. 25, "Accounting for Stock Issued to
        Employees". SFAS No. 123, as originally issued in 1995, established as
        preferable a fair-value-based method of accounting for share-based payment
        transactions with employees. However, that Statement permitted entities the
        option of continuing to apply the guidance in APB No. 25, as long as the
        footnotes to financial statements disclosed what net income would have been
        had
        the preferable fair-value-based method been used. Public entities will be
        required to apply SFAS No. 123(R) as of the first annual reporting period
        that
        begins after June 15, 2005.





As
      permitted by SFAS No. 123, the Company currently accounts for share-based
      payments to employees using APB No. 25’s intrinsic value method. Accordingly,
      the adoption of SFAS No. 123(R)'s fair value will have a significant impact
      on
      the Company's results of operations, although it will have no impact on its
      overall financial position. The Company plans to adopt SFAS No. 123(R) using
      the
      "modified prospective" method. Under this method, companies are required to
      recognize compensation cost for share-based payments to employees based on
      their
      grant-date fair value from the beginning of the fiscal period in which the
      recognition provisions are first applied. Measurement and recognition of
      compensation cost for awards that were granted prior to, but not vested as
      of,
      the date SFAS No. 123(R) is adopted would be based on the same estimate of
      the
      grant-date fair value and the same recognition method used previously under
      SFAS
      No. 123 (either for financial statement recognition or pro forma disclosure
      purposes). Any adjustments to recognize share-based liabilities at fair value
      (as opposed to intrinsic value under APB No. 25) will be recognized as the
      cumulative effect of a change in accounting principle. For those awards that
      are
      granted, modified, or settled after SFAS No. 123(R) is adopted, compensation
      cost will be measured and recognized in the financial statements in accordance
      with the provisions of SFAS No. 123(R). Prior periods would not be restated.


F-17


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**




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





For
                periods prior to adoption, the financial statements are unchanged,
                and the
                pro forma disclosures previously required by SFAS No. 123 will continue
                to
                be required under the new Standard to the extent those amounts differ
                from
                those in the statements of operations. For periods subsequent to
                adoption,
                pro forma disclosures will not be necessary for periods that begin
                after
                the adoption date of the new Standard because the post-adoption statements
                of operations will reflect compensation cost for all share-based
                payments
                for which requisite service continues to be provided based on fair
                value.
                Additionally, if the Company did not estimate forfeitures prior to
                adopting SFAS No. 123(R), forfeitures will have to be estimated upon
                adoption. Those companies are required to recognize a cumulative
                effect of
                a change in accounting principles to reverse compensation cost recognized
                in the financial statements (not cost "recognized" only in the pro
                forma
                disclosures) in periods prior to the effective date of SFAS No. 123(R)
                for
                those awards that are not expected to vest.





The
                impact of the adoption of SFAS 123(R) on future periods cannot be
                predicted at this time because it will depend on share-based payments
                granted in the future. However, had the Company adopted SFAS No.
                123(R) in
                prior periods, the impact of the Standard would have approximated
                the
                impact of SFAS No. 123 as described in the disclosure of pro forma
                net
                loss and net loss per share in item m.
                above.





In
      March
      2005, the SEC staff issued Staff Accounting Bulletin No. 107 ("SAB 107") to
      give
      guidance on implementation of SFAS 123(R), which the Company plans to adopt
      in
      implementing SFAS 123(R).





In
                May 2005, the FASB issued SFAS No. 154 ("SFAS 154"), "Accounting
                Changes
                and Error Corrections", a replacement of APB No. 20, "Accounting
                Changes"
                and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
                Statements". SFAS 154 provides guidance on the accounting for and
                reporting of accounting changes and error corrections. APB No. 20
                previously required that most voluntary changes in accounting principles
                be recognized by including in net income for the period of the change,
                the
                cumulative effect of changing to the new accounting principle. SFAS
                154
                requires retroactive application to prior periods' financial statements
                of
                a voluntary change in accounting principles unless it is impracticable.
                SFAS 154 is effective for accounting changes and corrections of errors
                made in fiscal years beginning after December 15, 2005. The Company
                does
                not expect that the adoption of SFAS 154 will have a material impact
                on
                its financial position or results of
                operations.





In
                December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
                Assets, an amendment of APB Opinion No. 29". The guidance in APB
                Opinion
                No. 29, Accounting for Nonmonetary Transactions ("APB No. 29"), is
                based
                on the principle that exchanges of nonmonetary assets should be measured
                based on the fair value of the assets exchanged. APB No. 29 included
                certain exceptions to that principle. SFAS No. 153 amends APB No.
                29 to
                eliminate the exception for nonmonetary exchanges of similar productive
                assets and replaces it with a general exception for exchanges of
                nonmonetary assets that do not have commercial substance. A nonmonetary
                exchange has commercial substance if the future cash flows of the
                entity
                are expected to change significantly as a result of the exchange.
                SFAS No.
                153 is effective for nonmonetary assets exchanges occurring in fiscal
                periods beginning after June 15, 2005. The Company does not expect
                that the adoption of SFAS No. 153 will have any material effect on
                its
                financial position or results of operations.




F-18


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**


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





In
      November 2005, the FASB released FASB Staff Position Nos. FAS 115-1 and FAS
      124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
      to
      Certain Investments" ("FSP 115-1"), which effectively replaces EITF Issue No.
      03-1. FSP 115-1 contains a three-step model for evaluating impairments and
      carries forward the disclosure requirements in EITF Issue No. 03-1 pertaining
      to
      securities in an unrealized loss position. Under the model, any security in
      an
      unrealized loss position is considered impaired; an evaluation is made to
      determine whether the impairment is other than temporary; and, if an impairment
      is considered other-than-temporary, a realized loss is recognized to write
      the
      security's cost or amortized cost basis down to fair value. FSP 115-1 references
      existing other than temporary impairment guidance for determining when an
      impairment is other than temporary and clarifies that subsequent to the
      recognition of an other-than-temporary impairment loss for debt securities,
      an
      investor shall account for the security using the constant effective yield
      method. FSP 115-1 is effective for reporting periods beginning after December
      15, 2005, with earlier application permitted. The Company adopted FSP 115-1
      upon
      issuance. The adoption of the Standards did not have a material effect on the
      Company's consolidated financial condition or results of
      operations.








**NOTE
                3:-**
            **MARKETABLE
                SECURITIES**





The
      following is a summary of the Company's investment in marketable
      securities:





**December
                31, 2005**
            
            **December
                31, 2004****Amortized**
            
            **Gross**
              **unrealized**
            
            **Fair**
              **market**
            
            **Amortized**
            
            **Gross**
              **unrealized**
            
            **Fair**
              **market****cost**
            
            **losses**
            
            **value**
            
            **cost**
            
            **losses**
            
            **value**Available-for-sale:Corporate
                bonds
            
            $
            19,474
            
            $
            (172
            )
            $
            19,302
            
            $
            20,993
            
            $
            (134
            )
            $
            20,859U.S.
                Government securities
            
            
            8,076
            
            
            (165
            )
            
            7,911
            
            
            7,911
            
            
            (94
            )
            
            7,817States
                of the U.S securities
            
            
            752
            
            
            -
            
            
            752
            
            
            1,550
            
            
            -
            
            
            1,550Other
                government securities
            
            
            2,479
            
            
            (35
            )
            
            2,444
            
            
            2,066
            
            
            (6
            )
            
            2,060Other
                securities
            
            
            1,790
            
            
            (9
            )
            
            1,781
            
            
            1,797
            
            
            (22
            )
            
            1,775$
            32,571
            
            $
            (381
            )
            $
            32,190
            
            $
            34,317
            
            $
            (256
            )
            $
            34,061




F-19


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**




**NOTE
                3:-**
            **MARKETABLE
                SECURITIES (Cont.)**





The
      following table shows the gross unrealized losses and fair value of the
      Company's investments with unrealized losses that are not deemed to be other
      than temporarily impaired, aggregated by investment category and length of
      time
      that individual securities have been in a continuous unrealized loss position,
      at December 31, 2005 and 2004:





**December
                31, 2005****Less
                than 12 months**
            
            **12
                months or greater**
            
            **Total****Fair**
              **value**
            
            **Unrealized
                losses**
            
            **Fair**
              **value**
            
            **Unrealized
                losses**
            
            **Fair**
              **value**
            
            **Unrealized
                losses**Corporate
                bonds
            
            $
            12,387
            
            $
            (114
            )
            $
            6,915
            
            $
            (58
            )
            $
            19,302
            
            $
            (172
            )U.S.
                Government securities
            
            
            1,009
            
            
            (9
            )
            
            6,902
            
            
            (156
            )
            
            7,911
            
            
            (165
            )Other
                government securities
            
            
            982
            
            
            (16
            )
            
            1,462
            
            
            (19
            )
            
            2,444
            
            
            (35
            )Other
                securities
            
            
            -
            
            
            -
            
            
            1,781
            
            
            (9
            )
            
            1,781
            
            
            (9
            )$
            14,378
            
            $
            (139
            )
            $
            17,060
            
            $
            (242
            )
            $
            31,438
            
            $
            (381
            )




**December
                31, 2004****Less
                than 12 months**
            
            **12
                months or greater**
            
            **Total****Fair**
              **value**
            
            **Unrealized
                losses**
            
            **Fair**
              **value**
            
            **Unrealized
                losses**
            
            **Fair**
              **value**
            
            **Unrealized
                losses**Corporate
                bonds
            
            $
            18,347
            
            $
            (106
            )
            $
            2,512
            
            $
            (28
            )
            $
            20,859
            
            $
            (134
            )U.S.
                Government securities
            
            
            7,817
            
            
            (94
            )
            
            -
            
            
            -
            
            
            7,817
            
            
            (94
            )Other
                government securities
            
            
            2,060
            
            
            (6
            )
            
            -
            
            
            -
            
            
            2,060
            
            
            (6
            )Other
                securities
            
            
            -
            
            
            -
            
            
            1,775
            
            
            (22
            )
            
            1,775
            
            
            (22
            )$
            28,224
            
            $
            (206
            )
            $
            4,287
            
            $
            (50
            )
            $
            32,511
            
            $
            (256
            )





The
      unrealized losses in the Company's investments in available-for-sale marketable
      securities were caused by interest rate increases. The contractual cash flows
      of
      these investments are either guaranteed by the U.S. Government or an agency
      of
      the U.S. Government or were issued by highly rated corporations. Accordingly,
      it
      is expected that the securities would not be settled at a price less than the
      amortized cost of the Company's investment. Based on the immaterial severity
      of
      the impairments and the ability and intent of the Company to hold these
      investments until a recovery of fair value, which may be maturity, the bonds
      were not considered to be other than temporarily impaired at December 31,
      2005.


F-20
 
 
 **JACADA
        LTD. AND ITS SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**





**NOTE
                3:-**
            **MARKETABLE
                SECURITIES (Cont.)**





The
      amortized cost and fair value of marketable securities as of December 31,
      2005, by contractual maturity, are shown below:





**December
                31, 2005****Amortized**
            
            **Fair**
              **market****cost**
            
            **value**Matures
                in one year
            
            $
            14,477
            
            $
            14,655Matures
                after one year through five years
            
            
            18,094
            
            
            17,535Total
            
            $
            32,571
            
            $
            32,190




**NOTE
                4:-**
            **PROPERTY
                AND EQUIPMENT, NET**





Composition
      of property and equipment is as follows:





**December
                31,****2005**
            
            **2004**Cost:Computers
                and peripheral equipment
            
            $
            4,632
            
            $
            4,388Office
                furniture and equipment
            
            
            1,052
            
            
            1,039Motor
                vehicles
            
            
            122
            
            
            438Leasehold
                improvements
            
            
            637
            
            
            6446,443
            
            
            6,509Accumulated
                depreciation
            
            
            5,446
            
            
            5,183Depreciated
                cost
            
            $
            997
            
            $
            1,326





Depreciation
      expenses for the years ended December 31, 2005, 2004 and 2003 were $ 496,
      $ 804 and $ 1,078, respectively.


F-21


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**


**NOTE
                5:-**
            **OTHER
                INTANGIBLES, NET**


a.  Composition:


**December
                31,****2005**
            
            **2004**Original
                amounts:Technology
            
            
            
            
            $
            2,458
            
            $
            2,458Other
                intangibles
            
            
            
            
            
            163
            
            
            1632,621
            
            
            2,621Accumulated
                amortization:Technology
            
            
            
            
            
            1,468
            
            
            1,061Other
                intangibles
            
            
            
            
            
            163
            
            
            1311,631
            
            
            1,192Amortized
                cost
            
            
            
            
            $
            990
            
            $
            1,429


b.
            Amortization
                expense for the years ended December 31, 2005, 2004 and 2003 amounted
                to
                $ 439, $ 422 and $ 366, respectively. As of December 31,
                2005, the weighted average amortization period is 2.2
                years.


c.
            Estimated
                amortization expenses for the years
                ended:


**Year
                ended December 31,**2006
            
            $
            4152007
            
            
            3012008
            
            
            1802009
            
            
            94$
            990


d.
            During
                2004, the Company purchased technology in the amount of $
                900.


The
      technology is amortized using the straight-line method over the estimated
      economic life of the technology, which is five years.


**NOTE
                6:-**
            **ACCRUED
                EXPENSES AND OTHER****LIABILITIES**


**December
                31,****2005**
            
            **2004**Employees
                and payroll accruals
            
            $
            1,708
            
            $
            1,768Accrued
                expenses
            
            
            711
            
            
            1,104Liability
                in respect of technology
            
            
            281
            
            
            281Accrued
                royalties (1)
            
            
            673
            
            
            663$
            3,373
            
            $
            3,816


(1)
            See
                also Note 7a.




F-22


**JACADA
      LTD. AND ITS SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**


**NOTE
                7:-**
            **COMMITMENTS
                AND CONTINGENT LIABILITIES**





a.
            Royalties:


1.
              The
                Company participated in programs sponsored by the Israeli Government
                for
                the support of research and development activities. Through December
                31,
                2005, the Company had  obtained grants from the Office of the Chief
                Scientist of the Israeli Ministry of Industry and Trade ("the OCS")
                in the
                aggregate amount of $ 2,178 for certain of the Company's research and
                development projects. The Company is obligated to pay royalties to
                the
                OCS, amounting to 3%-5% of the sales of the products and other related
                revenues generated from such projects, up to 100%-150% of the grants
                received, linked to the U.S. dollar and for grants received after
                January
                1, 1999 also bearing interest at the rate of LIBOR. The obligation
                to pay
                these royalties is contingent on actual sales of the products and
                in the
                absence of such sales no payment is
                required.
  Through
                      December 31, 2005, the Company has paid or accrued royalties
                      to the OCS in
                      the amount of $ 1,818. As of December 31, 2005, the aggregate
                      contingent liability to the OCS amounted to
                      $ 441.




Royalties
                      accrued or paid were recorded as part of the cost of software
                      and
                      product.




2.
                  The
                        Company’s subsidiary is obligated to pay 50% of the sales of a specific
                        product to a former distributor. Through December 31, 2005
                        and 2004, the
                        Company has accrued an amount of $ 673 and $ 663, respectively,
                        in regard
                        of this
                        obligation.





b.
            Lease
                commitments:





The
      Company’s facilities are leased under various operating lease agreements, which
      expire on various dates, the latest of which is in 2010. Future minimum lease
      payments under non-cancelable operating leases are as follows:





**Year
                ended December 31,**2006
            
            $
            8102007
            
            
            5352008
            
            
            3672009
            
            
            1952010
            
            
            17$
            1,924





Total
      rent
      expenses for the years ended December 31, 2005, 2004 and 2003 were approximately
      $ 853, $ 856 and $ 798, respectively.


F-23


**JACADA
      LTD. AND ITS SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands, except share and per share
        data**




**NOTE
                8:-**
            **SHAREHOLDERS'
                EQUITY**




a.
              General:


Since
      October 1999, the Company's shares have been traded on the NASDAQ National
      Market. Since June 2001, the Company's shares have been traded on the Tel-Aviv
      Stock Exchange as well. Ordinary shares confer upon their holders the right
      to
      receive notice to participate and vote in general meetings of the Company,
      and
      the right to receive dividends if declared.





b.
            Stock
                Option Plans:





As
      of
      December 31, 2005, the Company has three Incentive Share Option Plans (the
      1996,
      1999 and 2003 plans), which provide for the grant of options to officers,
      management, other key employees, directors, consultants and others of up to
      7,760,450 of the Company's Ordinary shares.  The
      options granted generally become fully exercisable after two to four years
      and
      expire 10 years from the grant date. Any options that are forfeited or canceled
      before expiration become available for future grants.





Pursuant
      to the option plans, the exercise price of options shall be determined by the
      Company's Board of Directors but may not be less than the par value of the
      Ordinary shares.





As
      of
      December 31, 2005, an aggregate of 2,595,262 Ordinary shares of the Company
      are
      still available for future grant under the Incentive Share Option
      Plans.


F-24


**JACADA
      LTD. AND ITS SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands, except share and per share data**


**NOTE
                8:-**
            **SHAREHOLDERS'
                EQUITY (Cont.)**





A
      summary
      of the Company's share option activity (except options to consultants) and
      related information is as follows:


**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003****Weighted**
            
            
            
            **Weighted**
            
            
            
            **Weighted****average**
            
            
            
            **average**
            
            
            
            **average****Number
                of**
            
            **exercise**
            
            **Number
                of**
            
            **exercise**
            
            **Number
                of**
            
            **exercise****options**
            
            **price**
            
            **options**
            
            **price**
            
            **options**
            
            **price**Outstanding
                at the beginning of the year
            
            
            4,318,903
            
            $
            3.07
            
            
            4,326,506
            
            $
            3.18
            
            
            3,522,382
            
            $
            3.74Granted
            
            
            411,125
            
            $
            2.46
            
            
            730,500
            
            $
            2.67
            
            
            1,326,700
            
            $
            1.98Exercised
            
            
            (293,796
            )
            $
            1.65
            
            
            (198,637
            )
            $
            2.19
            
            
            (97,875
            )
            $
            1.40Forfeited
                and cancelled
            
            
            (950,064
            )
            $
            3.30
            
            
            (539,466
            )
            $
            3.74
            
            
            (424,701
            )
            $
            4.50Outstanding
                at the end of the year
            
            
            3,486,168
            
            $
            3.05
            
            
            4,318,903
            
            $
            3.07
            
            
            4,326,506
            
            $
            3.18Exercisable
                options at the end of the year
            
            
            2,717,892
            
            $
            3.22
            
            
            2,821,881
            
            $
            3.48
            
            
            2,381,142
            
            $
            3.86





The
      exercise price of the options is equal to the market value of the Ordinary
      shares on the date the option is granted. Weighted average fair value of options
      granted during 2005, 2004 and 2003, which the exercise price equals the market
      price on the date of grant, is $ 1.2, $ 1.21 and $ 0.60,
      respectively.





The
      options outstanding as of December 31, 2005 have been classified by exercise
      price, as follows:


**Weighted****Options**
            
            **Weighted**
            
            
            
            **Options**
            
            **average****outstanding**
            
            **average**
            
            **Weighted**
            
            **exercisable**
            
            **exercise****as
                of**
            
            **remaining**
            
            **average**
            
            **as
                of**
            
            **price
                of****Exercise**
            
            **December
                31,**
            
            **contractual**
            
            **exercise**
            
            **December
                31,**
            
            **options****price**
            
            **2005**
            
            **life
                (years)**
            
            **price**
            
            **2005**
            
            **exercisable**$
                0.99 - $ 1.18
            
            
            464,457
            
            
            0.76
            
            $
            1.02
            
            
            462,459
            
            $
            1.02$
                1.20 - $ 1.40
            
            
            274,375
            
            
            6.78
            
            $
            1.3
            
            
            188,862
            
            $
            1.3$
                1.60 - $ 2.22
            
            
            222,511
            
            
            2.67
            
            $
            2.07
            
            
            185,011
            
            $
            2.04$
                2.28 - $ 3.14
            
            
            1,766,729
            
            
            7.14
            
            $
            2.67
            
            
            1,123,464
            
            $
            2.71$
                4.04 - $ 5.06
            
            
            519,021
            
            
            4.85
            
            $
            4.56
            
            
            519,021
            
            $
            4.56$
                9.00 - $ 11.00
            
            
            239,075
            
            
            3.77
            
            $
            9.45
            
            
            239,075
            
            $
            9.453,486,168
            
            
            5.41
            
            $
            3.05
            
            
            2,717,892
            
            $
            3.22





The
      Company has recorded deferred stock compensation in 1999 for options issued
      with
      an exercise price below the fair market value of the Ordinary shares, the
      deferred stock compensation has been amortized and recorded as compensation
      expense ratably over the vesting period of the options (1999-2003).


F-25




**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands, except share and per share
        data**


**NOTE
                8:-**
            **SHAREHOLDERS'
                EQUITY (Cont.)**





c.
            Options
                issued to consultants:





The
      Company's outstanding options to consultants as of December 31, 2005, are as
      follows:





**Grant
                date**
            
            **Options
                for Ordinary shares**
            
            **Exercise
                price per share**
            
            **Options
                exercisable**
            
            **Exercisable
                through**1999
            
            
            1,500
            
            $
            11.00
            
            
            1,500
            
            
            20092000
            
            
            4,750
            
            $
            4.38
            
            
            4,750
            
            
            20102001
            
            
            5,000
            
            $
            2.89
            
            
            5,000
            
            
            20112002
            
            
            11,000
            
            $
            2.61
            
            
            11,000
            
            
            20122004
            
            
            30,000
            
            $
            2.94
            
            
            15,000
            
            
            2014Total
            
            
            52,250
            
            
            
            
            
            37,250





In
      January
      2004, the Company granted, in addition to the 30,000 options shown above,
      another 62,500 options to a consultant, that were exercisable for a period
      of
      1.5 years. These options expired in 2005. The Company had accounted for its
      options to consultants under the fair value method of SFAS No. 123 and EITF
      96-18. The fair value for these options was estimated using Black-Scholes
      option-pricing model with the following weighted-average assumptions for 2004:
      risk-free interest rates of 3.5%, dividend yield of 0%, volatility factors
      of
      the expected market price of the Company's Ordinary shares of 0.66 and a
      contractual life of 4.26 years .





d.
            Warrants:





In
      connection with the Acquisition of Propelis in 2001, the Company issued a
      warrant to purchase 350,000 Ordinary shares of the Company at an exercise price
      of $ 3.26. In January 2004, the warrant holders preformed a cashless
      exercise of their warrants and the Company issued 93,595 Ordinary
      shares.





e.
            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.








**NOTE
                9:-**
            **TAXES
                ON INCOME**





a.
            Tax
                benefits under the Law for the Encouragement of Capital Investments,
                1959
                ("the law"):





The
      production facilities of the Company have been granted the status of "Approved
      Enterprise" under the law, for four separate investment programs, which were
      approved in July 1994, July 1995, December 1996 and April 2002. The investment
      programs expire in July 2007, July 2008, December 2010 and 2014, respectively.


F-26


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands, except share and per share
        data**





**NOTE
                9:-**
            **TAXES
                ON INCOME (Cont.)**





According
      to the provisions of the law, the Company has elected the "alternative benefits"
      - waiver of grants in return for a tax exemption and, accordingly, the Company's
      income is tax-exempt for a period of 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 period
      of
      five years to eight years, (based on the percentage of foreign ownership in
      each
      taxable year).





The
      period
      of tax benefits, detailed above, is limited to the earlier of 12 years from
      the
      commencement of production, or 14 years from the approval date.





The
      entitlement to the above benefits is conditional upon the Company's fulfilling
      the conditions stipulated by the above law, regulations published thereunder
      and
      the letter 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.





As
      of
      December 31, 2005, management believes that the Company is meeting all of the
      aforementioned conditions.





As
      the
      Company currently has no taxable income, these benefits have not yet commenced
      for all programs since inception.





The
      tax-exempt income attributable to the "Approved Enterprises" can be distributed
      to shareholders, without subjecting the Company to taxes, only upon the complete
      liquidation of the Company. If this retained tax-exempt income is distributed
      in
      a manner other than in the complete liquidation of the Company, it would be
      taxed at the corporate tax rate applicable to such profits as if the Company
      had
      not elected the alternative tax benefits (currently between 10% to 25% for
      an
      "Approved Enterprise"). The Company's Board of Directors has determined that
      such tax-exempt income will not be distributed as dividends.





Income
      not
      eligible for the "Approved Enterprise" benefits mentioned above is taxed at
      the
      regular corporate tax rate.





A
                recent amendment to the law, which has been officially published
                effected
                as of April 1, 2005 ("the Amendment") has changed the provisions
                of the
                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 an "Approved Enterprise", such as provisions generally
                requiring that at least 25% of the "Approved Enterprise's" income
                will be
                derived from export. Additionally, as explained below, the Amendment
                enacted major changes in the manner in which tax benefits are awarded
                under the law so that companies no longer require Investment Center
                approval in order to qualify for tax benefits.However,
                the law provides that terms and benefits included in any letter of
                approval already granted will remain subject to the provisions of
                the law
                as they were on the date of such approval. Therefore, the Company's
                existing "Approved Enterprises" will generally not be subject to
                the
                provisions of the Amendment.




F-27


**JACADA
      LTD. AND ITS SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands, except share and per share
        data**




**NOTE
                9:-**
            **TAXES
                ON INCOME (Cont.)**





b.
            Tax
                benefits under the Law for the Encouragement of Industry (Taxation),
                1969:





The
      Company is an "industrial company", as defined by this law and, as such, is
      entitled to certain tax benefits, mainly accelerated depreciation of machinery
      and equipment, as prescribed by regulations published under the Inflationary
      Adjustments Law, the right to claim public issuance expenses and amortization
      of
      intangible property rights as a deduction for tax purposes.





c.
            Net
                operating losses carryforward:





As
      of
      December 31, 2005, the Company had carry forward tax losses totaling
      approximately $ 30,000, part of which can be carried forward and offset
      against taxable income with expiration dates from 2011 to 2025 and the rest
      of
      the carry forward tax losses have no expiration date . 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 Sate provisions. The annual limitation may result in a restriction
      of
      the net operating losses increasing taxes payable in the future.





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's deferred tax assets are as follows:





**December
                31,****2005**
            
            **2004**Deferred
                tax assets:Operating
                loss carryforward
            
            $
            6,447
            
            $
            5,408Reserves
                and allowances
            
            
            1,499
            
            
            1,335Total
                deferred tax asset before valuation allowance
            
            
            7,946
            
            
            6,743Valuation
                allowance
            
            
            (7,946
            )
            
            (6,743
            )Net
                deferred tax asset
            
            $
            -
            
            $
            -





The
      Company has provided valuation allowances in respect of deferred tax assets
      resulting from tax loss carryforwards and temporary differences. Management
      currently believes that since the Company has a history of losses it is more
      likely than not that the deferred tax regarding the loss carryforwards will
      not
      be realized in the foreseeable future. During fiscal 2005, the Company increased
      the valuation allowance by $ 1,203 to $ 7,946.





e.
            The
                main reconciling item between the statutory tax rate of the Company
                (Israel - 36% in 2003, 35% in 2004 and 34% in 2005) and the effective
                tax
                rate (0%) is the non-recognition of tax benefits from accumulated
                net
                operating losses carryforward due to the uncertainty of the realization
                of
                such tax benefits and the effect of "Approved
                Enterprises".




F-28


**JACADA
        LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands, except share and per share
        data**


**NOTE
                9:-**
            **TAXES
                ON INCOME (Cont.)**





f.  Loss
      before taxes is comprised as follows:


**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Domestic
                (Israel)
            
            $
            (3,611
            )
            $
            (4,377
            )
            $
            (1,152
            )Foreign
            
            
            (1,347
            )
            
            (1,236
            )
            
            (997
            )$
            (4,958
            )
            $
            (5,613
            )
            $
            (2,149
            )





g.
            Changes
                in tax rates in Israel:





Until
      December 31, 2003, the regular tax rate applicable to income of companies (which
      are not entitled to benefits due to "Approved Enterprise", as described above)
      was 36%. In June 2004, an amendment to the Income Tax Ordinance (No. 140 and
      Temporary Provision), 2004 was passed by the "Knesset" (Israeli parliament)
      and
      on July 25, 2005, another law was passed, the amendment to the Income Tax
      Ordinance (No. 147) 2005, according to which the corporate tax rate is to be
      progressively reduced to the following tax rates: 2004 - 35%, 2005 - 34%, 2006
      -
      31%, 2007 - 29%, 2008 - 27%, 2009 - 26%, 2010 and thereafter - 25%.




**NOTE
                10:-**
            **GEOGRAPHIC
                INFORMATION**





a.
            Summary
                information about geographical
                areas:





The
                Company manages its business on a basis of one reportable segment
                (see
                Note 1a for a brief description of the Company's business) and follows
                the
                requirements of Statement of Financial Accounting Standards No. 131,
                "Disclosures About Segments of an Enterprise and Related Information"
                ("SFAS No. 131").





The
                following is a summary of operations within geographic areas based
                on
                end-customer's location:


**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Revenues
                from sales to unaffiliated
              customers:North
                America
            
            $
            12,274
            
            $
            15,982
            
            $
            16,435Europe
                and other
            
            
            7,668
            
            
            3,802
            
            
            4,127$
            19,942
            
            $
            19,784
            
            $
            20,562




F-29


**JACADA
      LTD. AND ITS SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands, except share and per share
        data**


**NOTE
                10:-**
            **GEOGRAPHIC
                INFORMATION (Cont.)**





**December
                31,****2005**
            
            **2004**
            
            **2003**Long-lived
                assets:Israel
            
            $
            5,251
            
            $
            5,935
            
            $
            1,543North
                America
            
            
            1,346
            
            
            1,426
            
            
            5,893United
                Kingdom
            
            
            20
            
            
            14
            
            
            5Germany
            
            
            -
            
            
            10
            
            
            14$
            6,617
            
            $
            7,385
            
            $
            7,455





b.
            Major
                customers' data as a percentage of total
                revenues:


Customer
                A
            
            
            21.8
            %





**NOTE
      11:-**  **FINANCIAL
      INCOME (EXPENSES), NET**





**Year
                ended December 31,****2005**
            
            **2004**
            
            **2003**Financial
                expenses:Bank
                charges
            
            $
            (96
            )
            $
            (112
            )
            $
            (93
            )Financial
                income:Foreign
                currency translation adjustments
            
            
            (113
            )
            
            70
            
            
            263Interest
                on marketable securities
            
            
            1,039
            
            
            828
            
            
            867926
            
            
            898
            
            
            1,130$
            830
            
            $
            786
            
            $
            1,037




**-
      - - - - - - - - - - - - - - - - - -**





F-30




**Item
                  19:**
              **EXHIBITS**ExhibitNumber
              Description
                  of Document1.1
              Memorandum
                  of Association of the Company (incorporated by reference to Exhibit
                  3.1
                  from the Company’s Registration Statement filed on Form F-1 (file no.
                  333-10882)).1.2
              Articles
                  of Association of the Company (incorporated by reference to Exhibit
                  3.2
                  from the Company’s Registration Statement filed on Form F-1 (file no.
                  333-10882)).1.3
              Amendments
                  to the Company’s Articles of Association, dated August 24, 2003
                  (incorporated by reference to Exhibit 1.3 to the Company’s Annual Report
                  on Form 20-F for the year ended December 31, 2003).1.4
              Amendments
                  to the Company’s Articles of Association, dated August 25, 2004
                  (incorporated by reference to Exhibit 1.3 to the Company’s Annual Report
                  on Form 20-F for the year ended December 31, 2004).4.2
              1996
                  Stock Option and Incentive Plan (incorporated by reference to Exhibit
                  10.2
                  from the Company’s Registration Statement filed on Form F-1 (file no.
                  333-10882)).4.3
              1999
                  Share Option and Incentive Plan (incorporated by reference to Exhibit
                  10.3
                  from the Company’s Registration Statement filed on Form F-1 (file no.
                  333-10882)).4.4
              Restated
                  Employment Agreement of Gideon Hollander with Jacada Ltd. dated
                  as of
                  October 1, 2001 (incorporated by reference to Exhibit 4.5 to the
                  Company’s
                  Annual Report on Form 20-F for the year ended December 31,
                  20014.5
              Technology
                  and Product License Agreement between the Company and Cortlandt
                  Reade
                  Technical Corporation dated May 25, 2000 (incorporated by reference
                  to the
                  Company’s Annual Report on Form 20-F for the year ended December 31,
                  2000).4.6
              Amendment
                  to 1999 Share Option and Incentive Plan (incorporated by reference
                  to
                  Exhibit 10.2 to the Company’s Registration Statement on Form S-8 (file no.
                  333-73650)).4.7
              2003
                  Share Option Plan (incorporated by reference to Exhibit 99.1 to
                  the
                  Company’s Registration Statement on Form S-8 (file no.
                  333-111303)).8
              List
                  of Jacada’s Subsidiaries (incorporated by reference to the Company’s
                  Annual Report on Form 20-F for the year end December 31, 2000).11
              Code
                  of Ethics of the Company (incorporated by reference to Exhibit
                  11 to the
                  Company’s Annual Report on Form 20-F for the year ended December 31,
                  2003).12.1
              Certificate
                  of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule
                  15d-14(a).12.2
              Certificate
                  of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule
                  15d-14(a).13.1
              Certification
                  of Chief Executive Officerand
                  Chief Financial Officer pursuant to 18 U.S.C. Section
                  1350.14.1
              Consent
                  of Kost, Forer, Gabbay and Kasierer, a member of Ernst & Young
                  Global.
  69




**SIGNATURES**
 
 The
        registrant hereby certifies that it meets all of the requirements for filing
        on
        Form 20-F and it has duly caused and authorized the undersigned to sign this
        Annual Report on its behalf on June 27, 2006.
 **JACADA
                LTD**./s/ Tzvia
                BroidaBy: TzviaBroidaChief
                Financial Officer
  70


**EXHIBIT
                INDEX**ExhibitNumber
            Description
                of Document1.1
            Memorandum
                of Association of the Company (incorporated by reference to Exhibit
                3.1
                from the Company’s Registration Statement filed on Form F-1 (file no.
                333-10882)).1.2
            Articles
                of Association of the Company (incorporated by reference to Exhibit
                3.2
                from the Company’s Registration Statement filed on Form F-1 (file no.
                333-10882)).1.3
            Amendments
                to the Company’s Articles of Association, dated August 24, 2003
                (incorporated by reference to Exhibit 1.3 to the Company’s Annual Report
                on Form 20-F for the year ended December 31, 2003).1.4
            Amendments
                to the Company’s Articles of Association, dated August 25, 2004
                (incorporated by reference to Exhibit 1.3 to the Company’s Annual Report
                on Form 20-F for the year ended December 31, 2004).4.2
            1996
                Stock Option and Incentive Plan (incorporated by reference to Exhibit
                10.2
                from the Company’s Registration Statement filed on Form F-1 (file no.
                333-10882)).4.3
            1999
                Share Option and Incentive Plan (incorporated by reference to Exhibit
                10.3
                from the Company’s Registration Statement filed on Form F-1 (file no.
                333-10882)).4.4
            Restated
                Employment Agreement of Gideon Hollander with Jacada Ltd. dated as
                of
                October 1, 2001 (incorporated by reference to Exhibit 4.5 to the
                Company’s
                Annual Report on Form 20-F for the year ended December 31,
                20014.5
            Technology
                and Product License Agreement between the Company and Cortlandt Reade
                Technical Corporation dated May 25, 2000 (incorporated by reference
                to the
                Company’s Annual Report on Form 20-F for the year ended December 31,
                2000).4.6
            Amendment
                to 1999 Share Option and Incentive Plan (incorporated by reference
                to
                Exhibit 10.2 to the Company’s Registration Statement on Form S-8 (file no.
                333-73650)).4.7
            2003
                Share Option Plan (incorporated by reference to Exhibit 99.1 to the
                Company’s Registration Statement on Form S-8 (file no.
                333-111303)).8
            List
                of Jacada’s Subsidiaries (incorporated by reference to the Company’s
                Annual Report on Form 20-F for the year end December 31, 2000).11
            Code
                of Ethics of the Company (incorporated by reference to Exhibit 11
                to the
                Company’s Annual Report on Form 20-F for the year ended December 31,
                2003).12.1
            Certificate
                of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule
                15d-14(a).12.2
            Certificate
                of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule
                15d-14(a).13.1
            Certification
                of Chief Executive Officerand
                Chief Financial Officer pursuant to 18 U.S.C. Section
                1350.14.1
            Consent
                of Kost, Forer, Gabbay and Kasierer, a member of Ernst & Young
                Global.




71