UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 FORM
20-F
  o
              REGISTRATION
      STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
      OF 1934
 
 OR
 
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
2007
 
 OR
 
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 OR
 
 o
              SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
  Date of
event requiring this shell company
report.............................
   For the
transition period from ____________ to ______________
  
 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:
  20,600,865
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 (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 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 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
  Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
 
 xYes
                oNo
 
  TABLE
      OF CONTENTSITEM
      1:
                IDENTITY OF DIRECTORS,
      SENIOR MANAGEMENT, ADVISERS ANDAUDITORS
                2ITEM
      2:
                OFFER
      STATISTICS AND EXPECTED TIMETABLE
                2ITEM
      3:
                KEY
      INFORMATION
                2ITEM
      4:
                INFORMATION
      ON THE COMPANY
                12ITEM
      5:
                OPERATING AND
      FINANCIAL REVIEW AND PROSPECTS
                24ITEM
      6:
                DIRECTORS,
      SENIOR MANAGEMENT AND EMPOYEES
                35ITEM
      7:
                MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                42ITEM
      8:
                FINANCIAL
      INFORMATION
                43ITEM
      9:
                THE OFFER AND
      LISTING
                44ITEM
      10:
                ADDITIONAL
      INFORMATION
                46ITEM
      11:
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES
      ABOUT MARKET RISK
                62ITEM
      12:
                DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES
                62ITEM
      13:
                DEFAULTS,
      DIVIDEND ARREARAGES AND
      DELINQUENCIES
                63ITEM
      14:
                MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
                63ITEM
      15:
                CONTROLS AND
      PROCEDURES
                63ITEM
      15T:
                CONTROLS
      AND PROCEDURES
                64ITEM
      16A:
                AUDIT
      COMMITTEE FINANCIAL EXPERT
                64ITEM
      16B:
                CODE OF
      ETHICS
                64ITEM
      16C:
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
                65ITEM
      16D:
                EXEMPTIONS FROM THE
      LISTING STANDARDS FOR AUDITCOMMITTEES
                66ITEM
      16E:
                PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATEDPURCHASERS
                66ITEM
      17:
                FINANCIAL
      STATEMENTS
                67ITEM
      18:
                FINANCIAL
      STATEMENTS
                67ITEM
      19:
                EXHIBITS
                68
  
  
 
 FORWARD
LOOKING STATEMENTS
  This
Annual Report contains forward-looking statements. These statements include all
statements that are not statements of historical facts 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, many of which are beyond the
Company’s ability to control and that actual results may differ materially from
those in the forward-looking statements as a result of various factors and other
information contained in this Annual Report, including the performance and
continued acceptance of our products, general economic conditions and other risk
factors identified under the heading “Risk Factors” including “The sale of our legacy business may
result in the reduction of revenues and impact our ability to achieve
profitability”, “Our
business model is focused on continued growth in a market in which we have only
four years of experience and failure to continue our early penetration into this
market would negatively impact our results of operations.”,“We must continue our significant
investment in our sales and marketing efforts, including our indirect
distributionchannels,
in order to increase market awareness of our products and to generate increased
revenues”, “We do not
have a proven business model for the customer services and support 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 JacadaFusionand Jacada WorkSpace may be harmed
or we will experience a further delay in generating revenues from these
products”, “Revenues
from our customer service and support market products might 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”, “Competition in the market in which
we operate is intense. If we are unable to compete effectively, the demand for,
or the prices of, our products may be reduced“, and ”We rely on our key personnel and key
management members, whose knowledge of our business and technical expertise
would be extremely difficult to replace”.
  The
results of operations in this annual report relate to our customers services and
support business. As a result of the sale of our traditional market business on
effective as of January 1, 2008, the results of the traditional market business
were reclassified to one line item in the statement of operations as “Income
from discontinued operations”.
  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, 2007, 2006 and 2005 and the selected consolidated
balance sheet data as of December 31, 2007 and 2006 have been derived from our
audited consolidated financial statements and the notes thereto included
elsewhere in this Annual Report.  As a result of the agreement to sell
our traditional market business on December 19, 2007, which closed on January 1,
2008, the results of the traditional market business for all prior periods were
reclassified to one line item in the statement of operations as “Net income from
discontinued operations, net of taxes”. The financial statements included in
this Annual Report have been prepared in accordance with US GAAP. The
consolidated statements of operations data for the year ended December 31, 2004
and 2003, except for the reclassification to discontinued operations, and the
selected consolidated balance sheet data as of December 31, 2005, 2004 and 2003
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
      31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(in
      thousands)Consolidated
      Statement of Operations Data:Revenues:Software licenses
              
              $
              3,706
              
              
              $
              3,668
              
              
              $
              3,632
              
              
              $
              855
              
              
              
              -Services
              
              
              7,824
              
              
              
              3,482
              
              
              
              617
              
              
              
              159
              
              
              
              -Maintenance
              
              
              1,812
              
              
              
              1,356
              
              
              
              984
              
              
              
              117
              
              
              
              -Total
      revenues
              
              
              13,342
              
              
              
              8,506
              
              
              
              5,233
              
              
              
              1,131
              
              
              
              -Cost
      of revenues:Software  licenses
              
              
              449
              
              
              
              244
              
              
              
              312
              
              
              
              86
              
              
              
              -Services
              
              
              6,354
              
              
              
              3,218
              
              
              
              2,411
              
              
              
              83
              
              
              
              -Maintenance
              
              
              745
              
              
              
              662
              
              
              
              643
              
              
              
              -
              
              
              
              -Total cost of
      revenues
              
              
              7,548
              
              
              
              4,124
              
              
              
              3,366
              
              
              
              169
              
              
              
              -Gross
      profit
              
              
              5,794
              
              
              
              4,382
              
              
              
              1,867
              
              
              
              962
              
              
              
              -Operating
      expenses:Research and
      development
              
              
              4,402
              
              
              
              3,838
              
              
              
              3,743
              
              
              
              2,639
              
              
              
              510Sales and
marketing
              
              
              9,787
              
              
              
              9,759
              
              
              
              10,046
              
              
              
              1,884
              
              
              
              99General and
      administrative
              
              
              5,249
              
              
              
              5,108
              
              
              
              5,388
              
              
              
              4,724
              
              
              
              4,645Total
      operating expenses
              
              
              19,438
              
              
              
              18,705
              
              
              
              19,177
              
              
              
              9,247
              
              
              
              5,254Operating
      loss
              
              
              (13,644
              )
              
              
              (14,323
              )
              
              
              (17,310
              )
              
              
              (8,285
              )
              
              
              (5,254
              )Financial  income,
      net
              
              
              1,548
              
              
              
              1,372
              
              
              
              830
              
              
              
              786
              
              
              
              1,037Pretax
      loss from continuing operations
              
              
              (12,096
              )
              
              
              (12,951
              )
              
              
              (16,480
              )
              
              
              (7,499
              )
              
              
              (4,217
              )Tax
      benefit
              
              
              8,672
              
              
              
              3,117
              
              
              
              4,055
              
              
              
              981
              
              
              
              833Net
      loss from continuing operations
              
              
              (3,424
              )
              
              
              (9,834
              )
              
              
              (12,425
              )
              
              
              (6,518
              )
              
              
              (3,384
              )Net
      income from discontinued operations, net of taxes
              
              
              7,540
              
              
              
              7,262
              
              
              
              7,467
              
              
              
              905
              
              
              
              1,235Net
      Income (loss)
              
              $
              4,116
              
              
              $
              (2,572
              )
              
              $
              (4,958
              )
              
              $
              (5,613
              )
              
              $
              (2,149
              )Basic
      and diluted net earnings (loss) per shareContinuing
      operations
              
              $
              (0.17
              )
              
              $
              (0.50
              )
              
              $
              (0.63
              )
              
              $
              (0.34
              )
              
              $
              (0.18
              )Discontinued
      operations
              
              $
              0.37
              
              
              $
              0.37
              
              
              $
              0.38
              
              
              $
              0.05
              
              
              $
              0.07Basic
      and diluted net earnings (loss) per share
              
              $
              0.20
              
              
              $
              (0.13
              )
              
              $
              (0.25
              )
              
              $
              (0.29
              )
              
              $
              (0.11
              )Weighted
      average number of shares used in
                computing
      basic and diluted net earning (loss) per share
              
              
              20,364,752
              
              
              
              19,827,852
              
              
              
              19,497,726
              
              
              
              19,282,800
              
              
              
              19,011,435
 
 
 
 2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
              
              $
              5,960
              
              
              $
              4,735
              
              
              $
              3,461
              
              
              $
              3,552
              
              
              $
              9,845Cash
      and investments
              
              
              33,824
              
              
              
              35,922
              
              
              
              35,651
              
              
              
              37,613
              
              
              
              41,793Working
      capital
              
              
              19,316
              
              
              
              10,722
              
              
              
              12,638
              
              
              
              19,885
              
              
              
              14,664Total
      assets
              
              
              52,101
              
              
              
              45,710
              
              
              
              45,612
              
              
              
              49,230
              
              
              
              53,387Shareholders’
      equity
              
              
              39,904
              
              
              
              33,395
              
              
              
              34,475
              
              
              
              39,089
              
              
              
              44,504Dividends
      per share
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
  3
 
 Exchange
Rates
  Not
applicable.
  B.           Capitalization
and Indebtedness
  Not
applicable.
  C.           Reasons
for the Offer and Use of Proceeds
  Not
applicable.
  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 sale of our
legacy business may result in the reduction of revenues and impact our ability
to achieve profitability.
In January 2008 we sold the intellectual property and related customer contracts
associated with the following Jacada products:  Jacada Interface
Server and Jacada Integrator, also known as Jacada HostFuse, Jacada Studio,
Jacada Innovator and Jacada Terminal Emulator.  These activities
associated with these products comprised our application modernization and
legacy integration business, which we refer to as our traditional or legacy
business. Revenues from our legacy business, which were derived from sales of
licenses, professional services and maintenance services, represented a
substantial portion of our revenues, in the years 2005, 2006 and 2007. We cannot
assure you that the growth of revenues from our customer service and support
business, from which we expect to generate almost all of our revenues in the
future will offset the loss of revenues resulting from the sale of our
traditional market business . Furthermore, the costs associated with our legacy
business were relatively fixed at levels that resulted in that business
achieving profitability on a stand-alone basis. We have and intend to continue
to invest in our customer service and support business, meaning that unless we
are successful in achieving significant growth in revenues from that business,
we cannot assure you 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.”
 
 Our business
model is focused on continued growth in a market in which we have only four
years of experience and failure to continue our early penetration into this
market would negatively impact our results of operations. We have elected
to focus our business on the sale of our software products and solution in the
customer services and support market. In the second quarter of 2004, we
introduced Jacada Fusion, our 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, a solution 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.Our
license to sell our traditional market products, on a stand alone basis, is
limited to sales for the use by our customers in their customer services and
support business. However, we have limited experience in this
market.  Our limited experience and knowledge regarding the customer
services and support market may impede our ability to sell our products and
result in decreased revenues and increased losses.
 4
  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. We believe that our future
success is dependent upon the expansion of our indirect distribution channels,
consisting of our relationships with partners, system integrators, call center
infrastructure providers, call center outsourcers, resellers and distributors.
Significant continued investment in indirect distribution channels and in our
direct sales and marketing efforts is essential to increase market awareness of
our products and to generate increased revenues, in relation to such
products.  We currently have relationships with a limited number of
these parties.
  Our future
growth will be limited if:
  ·
              we
      fail to work effectively with our indirect distribution partners;
      or
  ·
              there
      is a decrease in the willingness or ability of our indirect distribution
      partners to devote sufficient resources and efforts to market, sale and
      support our products or;
  ·
              we
      fail to increase the number of indirect distribution partners with which
      we have relationships.
  If any of
these circumstances occurs, we will have to devote substantially more resources
to the sales, marketing, distribution, implementation, customization and support
of our products than we otherwise would. However, our own efforts, limited
resources, limited experience in delivering significant and complex
implementation and customization projects and relative lack of contacts within
the customer services and support market in comparison with some of our
potential indirect distribution channels, may not be as effective as those of
our indirect distribution channels.
 
 We do not have a
proven business model for the customer services and support 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 JacadaFusionand 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 products is different than the business model we
used for our traditional market products. To date we have had limited number of
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.
  Revenues from our
customer services and support products might 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
market products were generated from a relatively large number of sales to a wide
number of customers.  During 2005, 2006 and 2007 revenues from the
Jacada Fusion and Jacada WorkSpace products derived from large orders from a
small number of customers. In the year 2007 two customers represented 41% of our
total revenues, in the year 2006 three customers represented 57% of our total
revenues and in the year 2005, one customer represented 83% of our total
revenues. Currently we cannot assure that we will make repeat sales to these
customers. To the extent that this trend continues, our revenues will be
dependent on a relatively limited number of significant customers. We also
cannotassure
you that new 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.
 5
  Competition in
the market in which we operate is intense. If we are unable to compete
effectively, the demand for, or the prices of, our products may be
reduced.The market in which we
operate are competitive and subject to changes. Our products compete with other
contact center solutions offered by other vendors including Microsoft, Corizon
and Graham Technology. 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, our potential customers may choose to deploy traditional CRM
application software, or utilize their own information technology personnel or
system integrators to write new code or rewrite existing applications in an
effort to develop their own customer service and support 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 us 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.
  We rely on our
key personnel and key management members, 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. Competition
for qualified personnel is intense in the markets in which we recruit. As a
result, our ability to recruit and retain qualified candidates may be
limited.
  Our revenues
could be adversely affected if we fail to recruit and retain consultants and
other technical service personnel.Sales of our
Jacada Fusion and Jacada WorkSpace products require in many cases advance sales
activity involving consultants and post-sale implementation and customization.
We rely on our staff of professional consultants, other technical service
personnel and subcontractors to implement our solutions after being purchased by
our customers. Unless we are able to recruit and retain professional
consultants, other technical service personnel and subcontractors or hire and
train such personnel and subcontractors to replace those who leave us, it will
be difficult for us to implement our solutions and obtain customer acceptance
and to increase or possibly even maintain our present level of sales due to
constraints on our capacity to implement sales. In addition, a growing number of
our transactions require implementation of our solutions.  In these
transactions, the implementation and customization services performed by these
personnel are especially important.  If we are unable to hire and
retain these personnel, it may adversely impact our ability to successfully
close such transactions.
 6
  Our future growth
will be adversely affected and our future operating results may be adversely
affected if we fail to develop and introduce new functionality for our products
and new products for the customer service and support market or if our new
products fail to achieve market acceptance.In order to
achieve sales growth we will need to develop and introduce new functionality for
our customer service and support products and new products for such market. Our
ability to develop and introduce new functionality for our customer service and
support products and new products for this market 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
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.
  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. Even if our products are
effective, our target customers may not choose them for technical, cost, support
or other reasons.
  Failure to
deliver professional services efficiently could negatively impact our gross
margins.Our limited experience and knowledge regarding the customer
services and support market generally and the delivery of our products and
solutions for this new market specifically may impact the efficiency of our
professional services deliveries, as we may need to expend more resources in the
delivery of professional services to a customer than we had originally
estimated.  Any such expending of more resources may negatively impact
our professional services gross margins and our ability to achieve or maintain
profitability.
 
 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: our ability to
deliver our implementation and customization projects, customer acceptance of
our products and solutions, the size and timing of orders, general economic
conditions, market awareness, 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, the 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.
 7
  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. In addition, our share price may be adversely affected
by changes in estimates of our financial results or recommendations by
securities analysts, changes in the quarterly financial results of companies
perceived to be similar to us, and changes in market valuations of similar
companies. In addition, if the market for stocks in our industry, or the stock
market in general, experiences a loss of investor confidence, the trading price
of our ordinary shares could decline for reasons unrelated to our business,
financial condition or results of operations. 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 expect to be
subject to increasing risks of international operations.Currently we market and
sell our products and services primarily in North America and Europe, from which
areas we received approximately 96.4% of our total revenues for the year ended
December 31, 2007. Managing our operations in North America and Europe 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 have adversely affected us in the year 2007 and may
continue to adversely affect us. Although we utilize currency exchange forward
contracts to hedge our New Israeli Shekel (NIS) expenses associated with our
Israeli operation and the payments from our material Euro and English Pound
(GBP) - denominated transactions, some of our foreign currency-denominated
revenues are still not hedged. Accordingly, we are still exposed to the risks
that our revenues will decrease in the event that those foreign currencies
weakness against the dollar or that our expenses will increase in the event that
those foreign currencies strengthen against the dollar. See “-Exchange rate fluctuations between
the dollar and theNISmay negatively affect our
earnings” for a discussion of risks associated with fluctuations in the
dollar-NIS exchange rate.
  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;
  ·
              damage
      our ability to deliver our solutions to the customer;
  or
  ·
              delay
      or diminish market acceptance of our
products.
  8
  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 or licensed 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.
  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.
  We incorporate
open source technology in our products which may expose us to liability and have
a material impact on our product development and sales.  Some of our
products utilize open source technologies.  These technologies are licensed
to us on varying license structures but include the general public license.
 This license and others like it pose a potential risk to products that are
integrated with these technologies.  For example, in the event we integrate
into one of our products a technology covered under the general public license,
we may be required to disclose our source code for the integrated product.
 Disclosing our source code could enable our competitors to eliminate any
technological advantage our products may have over theirs, and therefore
materially adversely affect our competitive advantage and impact our business
results of operations and financial condition. In addition, from time to time
there have been claims challenging the ownership of open source software against
companies that incorporate open source software into their products. We use a
limited amount of open source software in our products and may use more open
source software in the future. As a result, we could be subject to suits by
parties claiming ownership of what we believe to be open source
software.
 9
  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.
  We
may fail to maintain effective internal controls in accordance with
Section
 404 of the
Sarbanes-Oxley Act of 2002.The Sarbanes-Oxley Act of 2002 imposes
certain duties on us and our executives and directors. Our efforts to comply
with the requirements of Section 404 may result in increased general and
administrative expense and a diversion of management time and attention. If we
fail to maintain the adequacy of our internal controls, we may not be able to
ensure that we can conclude on an ongoing basis that we have effective internal
controls over financial reporting. In the Future we may identify material
weaknesses in our controls over financial reporting. Failure to maintain
effective internal controls over financial reporting could result in
investigation or sanctions by regulatory authorities, and could have a material
adverse effect on our operating results, investor confidence in our reported
financial information, and the market price of our ordinary shares.
 
 We might
recognize a loss with respect to our investments in financial
instruments.We
invest most of our cash in a variety of financial instruments. If the obligor of
any of the instruments we hold defaults or undergoes a reorganization in
bankruptcy, we may lose a portion of such investment and our financial income
may decrease. In addition, to the extent there is a general downturn in the
credit markets, which could adversely affect the liquidity of our investments,
or if the credit rating of our investments is downgraded, we might recognize
some loss. For information on the types of our investments, including an
investment we made in 2008 in an auction rate security, see Item 11,
“Quantitative and Qualitative Disclosures About Market Risk” in this annual
report.
 
 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 aroundIsraelcould 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 in the
Palestinian Parliament and the tension among the different Palestinian factions
may create additional unrest and uncertainty.  Hamas does not
recognize Israel's right to exist as a state and Israel considers Hamas to be a
terrorist organization. During the summer of 2006, Israel was engaged in an
armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and
political party. This conflict involved missile strikes against civilian targets
in northern Israel, and negatively affected business conditions in Israel. 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.
 10
  Generally,
all non-exempt male adult citizens and permanent residents of Israel under the
age of 45 (or older, for citizens with certain occupations), including some of
our officers, directors and employees, are obligated to perform military reserve
duty annually, and are subject to being called to active duty at any time under
emergency circumstances.  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 theNISmay 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 or fluctuations in the U.S. dollar-New Israeli
Shekel (NIS) exchange rate 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.  During the year
2007, the NIS appreciated against the U.S. dollar, which resulted in an increase
in the U.S. dollar cost of our operations in Israel, and this trend has
continued in early 2008. As a result of this differential, from time to time we
may experience increases in the costs of our Israeli operations, as expressed in
dollars, which could have an adverse effect on our results of operations and
financial condition. 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 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 ofIsraelthat 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, we will not be entitled to the tax benefits.  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.
 11
  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 four classes, three of which 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.
  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 unified service desktop and
process optimization solutions that simplify and automate customer service
processes.  By bridging disconnected systems into a single,
“intelligent” workspace, our solutions create greater operational efficiency and
increase agent and customer satisfaction.  Our traditional market
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 customer service and support 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.
  12
  In January
2008 we sold the intellectual property and related customer contracts associated
with the following Jacada products:  Jacada Interface Server and
Jacada Integrator, also known as Jacada HostFuse, Jacada Studio, Jacada
Innovator and Jacada Terminal Emulator in consideration for 26 million Dollars
in cash. These activities associated with these products comprised our
application modernization and legacy integration business, which we refer to as
our traditional or legacy business. Under the terms of the transaction we
retained the right to develop, market, sell and support Jacada Interface Server
and Jacada HostFuse in support of our customer service and support
business.
  Typical
users of the Jacada Fusion or 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,
WestTelemarketing,
Cox Communications, Capita Business Services, Lillian Vernon, Quelle Contact
Vertrieb, Embratel – Empresa Brasileira de Telecomunicações, Omnium Worldwide,
Harrah's Entertainment, Central Hudson Gas & Electric, Station Casinos and
O2 UK.
  Typical
users of our traditional market products and services are medium to large
businesses with sophisticated technology requirements. Some of the companies
that have implemented 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 the Spanish social security
authorities. Our agreements with these customers have been assigned as part of
the sale of our traditional market business.
  See Items
5 and 18 for a description of our capital expenditures for the past three fiscal
years.  Other than the sale of our legacy business as described in
this Item above, we have made no divestitures during the same time period. In
addition, we are not currently engaged in a capital divestiture and our current
capital expenditures are for computers, software and peripheral
equipment.  These capital expenditures are financed with our internal
cash resources.
  In
February 2008 our board of directors authorized the use of up to $10 million of
our available cash to repurchase our ordinary shares. Purchases shall be made
from time to time at the discretion of our management in the open market or in
privately negotiated transactions, subject to, among other factors, market
conditions, trading volume and our share price. No time limit was set for the
repurchase program and the program may be suspended from time to time or
discontinued. See Item 16E Purchases of Equity Securities by
the Issuer and Affiliated Purchasers for disclosure regarding our
repurchase program.
  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 2006 and 2007.
  13
  B.           Business
Overview
  Industry
Overview
  In 2004, we introduced Jacada Fusion
and elected to target corporate customer contact centers.  In the
third quarter of 2005, we introduced Jacada WorkSpace, a solution specifically
designed for the customer contact center market.   We refer to
this market as the “customer service and support market”. Prior to the
introduction of our customer service and support market products we have
been operating in the application integration and web-enablement market for 16
years. We refer to this market as our “traditional market.”
  Customer
Service and Support 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.
 
 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.
  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 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.
 14
  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 require extensive
      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 of
      applications.
   Our
Solutions
  We
develop, market and support unified service desktop and process optimization
solutions that simplify and automate customer service processes.  By
bridging disconnected systems into a single, “intelligent” workspace, our
customer service and support market solutions create greater operational
efficiency and increase agent and customer satisfaction. Our customer service
and support market products, Jacada Fusion and Jacada Workspace simplify the
desktop of customer service representatives to reduce operational costs and
improve the customer experience. Our customer service and support market
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.
  Our
traditional market products enable businesses to Web-enable, modernize and
integrate their existing software applications to better serve the needs of
their users, customers and partners.
  15
  Benefits
  Our
solutions for the customer service and support market provide the following
business benefits:
 
 ·
              Reducing average handle
      times. Because Jacada Fusion and Jacada Workspace 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 agent
      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
      solutions allow 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 and Jacada Workspace enable 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.
  
 Our
technology and approach to delivering solutions provide the following
implementation benefits:
 
 ·
              Leverage Existing Information
      Technology Resources.Our solutions permit
      companies to integrate their existing applications without modifying or
      replacing any existing systems.  This eliminates the need for
      time-consuming and expensive custom programming or application upgrades or
      replacement projects.
  ·
              Allow Rapid
      Implementation.We design our solutions to be
      implemented rapidly, which results in faster time-to-market than
      internally developed solutions or packaged application software
      implementations.
  ·
              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. 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 application code or
  data.
  16
  ·
              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.
  Products
and Technology
  Our
products include:
  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 representativesto
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 a
desktop maze by providing an 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.
  Jacada® Fusion.Jacada
Fusion, a bundling of two Jacada products: Jacada HostFuse and Jacada WinFuse
mentioned, 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 client/server and web-based
applications without modifying or changing anything in the existing
application.  Jacada WinFuse enables organizations to leverage their
existing Windows client/server and web-based 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 and
web or browser-based application.
  Jacada
WinFuse web service-enables Windows client/server or web-based 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 or web pages, 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.
  By service-enabling any Windows-based or
web-based application, Jacada WinFuse provides for the rapid adoption of
service-oriented architectures (SOA), enabling IT to rapidly deliver new
functionality.
  Jacada® Interaction Manager.Jacada Interaction Manager guides the customer service agent through an
optimized interaction with the customer. A typical contact center interaction
contains elements of “guidance language” presented to the agent as a best
practice suggestion regarding how to answer the customer's inquiry, mandatory
language that must be read for compliance reasons, business rules to determine
what the agent may offer or do next, and workflow between these steps to ensure
that all necessary information is gathered and presented to the customer. Jacada
Interaction Manager deploys in conjunction with Jacada WorkSpace ensuring
seamless cooperation between the customer interaction workflow and the multiple
business systems controlled by Jacada WorkSpace.
  17
  JacadaÒHostFuse (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.
  JacadaÒInterface
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.
  Our
intellectual property rights in the Jacada Interface Server and the Jacada
HostFuse products were sold in January 2008 as part of the sale of our
traditional market business. We are licensed to develop and sell these products
under an irrevocable license agreement. Our license to sell our traditional
market products, on a stand alone basis, is limited to sales for the use by our
customers in their customer services and support business. See Item 4A History and Development of the
Company.
 
  Professional
Services
  Our
professional services include training, consulting services (which include
installation, implementation, integration and customization of our solutions),
solution support services and product support and maintenance
services.
  We provide
our direct customers and our partners with professional services to assist them
with installing, integrating, implementing and customizing our products into the
customers’ systems, and with managing and enhancing their utilization of our
products on an ongoing basis. We also provide customer and partner training
services to assist our customers and partners in learning how to use our
products at our Atlanta, Georgia facility and other locations, with coursework
related to various aspects of our products. In addition we provide our customers
with solution support services for the work product deliverables that were
provided as part of our professional services.
  We bill
for our professional consulting services (which includes installation,
implementation, integration and customization of our solutions), and for our
solution support 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.
  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. Our customers may
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 on-site dedicated technical
representative.
  18
  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, professional, and product support and maintenance
services. Software licenses revenues constituted approximately 27.8%, 43.1% and
69.4% of our total revenues for the years ended December 31, 2007, 2006 and
2005, respectively, while service and maintenance revenues constituted
approximately 72.2%, 56.9% and 30.6% of our total revenues, respectively, for
the same periods.  Software licenses revenues generated from North
American customers constituted approximately 11.2%, 19.6% and 6.6% of our total
revenues for the years ended December 31, 2007, 2006 and 2005, respectively,
while service and maintenance revenues generated from North American customers
constituted approximately 29.4%, 27.8% and 7.3% of our total revenues,
respectively, for the same periods.  Software license revenues
generated from European customers constituted approximately 14.3%, 19.9% and
62.9% of our total revenues for the years ended December 31, 2007, 2006 and
2005, respectively, while service and maintenance revenues generated from
European customers constituted approximately 41.4%, 28.5% and 23.0% of our total
revenues, respectively, for the same periods.
  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 system integrators,
partners, call center infrastructure providers and call center outsourcers. We
also use indirect distribution channels in countries where we have no direct
sales operations such as Latin America and Australia. As of December 31, 2007,
we had 44 people in our sales and marketing organization, compared to 48 as of
December 31, 2006.
  In October
2007 we recruited our new senior vice president and general manager, of our
European operations, who is responsible for our sales, field services, business
development and marketing activities in Europe. In addition, during 2007 we made
changes in our European sales staff. During 2007 we continued to invest
significantly in the establishment of strategic indirect sales channels for our
customer service and support products, such as through system integrators,
alliances with major contact center infrastructure and applications vendors and
outsourcers for the contact center market. As part of such investment we signed
a global alliance agreement with Accenture, a global management consulting,
technology services and outsourcing provider and partnership agreement with
IBM. It is our expectation
that our indirect distribution channels will extend our market reach by
increasing market awareness to our solution and presenting us to potential
customers. We intend to continue to invest in 2008 in the development of our
indirect sales channels, including through broadening the relations with our
existing partners.
  19
  Our
marketing efforts are focused on generating leads for potential transactions
involving our solutions and 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,
system integrators, partners, 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.
  Some
examples of customers’ uses of our products include:
  ·
              Telecommunications
      providers, which use our solution to assist in streamlining and automating
      their customer service process, billing inquiries, account changes, and to
      generally improve the productivity and efficiency of their contact
      center.
  ·
              Contact
      Center Outsourcers; which utilize our solutions to reduce their
      operational costs, to provide better service for their customers, to
      implement new customers into production faster,  and to provide
      a differentiated service when they compete for new
    business.
  ·
              Retailers,
      which use our solutions in their contact centers or their back-office
      software applications in order to reduce their operational costs, as well
      as to provide better service for their customers, to simplify complex
      ordering and customization interactions, and 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.
  ·
              Insurance
      companies, which use our solutions to modernize their contact 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.
  ·
              Public
      utility providers use our solutions to automate critical call processes
      and integrate their existing business systems into a simplified customer
      service desktop, reduce customer service agent desktop complexity and
      optimize key customer service processes in their contact centers in order
      to reduce agent training time, increase agent productivity and improve
      overall customer service.
  ·
              Entertainment,
      gaming and hospitality companies use our solutions to simplify and
      automate the customer service desktop for their call center agents to
      drive incremental revenue through up-sell and cross-sell
      activities.


20




Research and Development












Dependence on Patents and
Licenses




History and Development of the
Company








Competition






●




●


21




●




●




●




●




●





●









Material Effects of
Government Regulation in Israel












22






C.           
Organizational structure






D.           
Property, Plants and Equipment








23


Item 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS












Revenues




Cost of Revenues








24


Research and Development
Costs






Critical Accounting
Policies












Discontinued Operations.








Revenues




25
















26
 
  Impairment of property and
equipment


Impairment of intangible assets.


Goodwill


Valuation of investment in
marketable securities.






●
            Our
      ability and intent to retain the investment for a period of time
      sufficient to allow for a recovery in
  value;




●
            The duration and
      extent to which the fair value has been less than cost;
  and




●
            The financial
      condition and prospects of the
issuer.








Contingencies


27












2007
            
            
            2006
            
            
            2005Revenues:Software
      Licenses
            
            
            27.8
            %
            
            
            43.1
            %
            
            
            69.4
            %Services
            
            
            58.6
            
            
            
            40.9
            
            
            
            11.8Maintenance
            
            
            13.6
            
            
            
            16.0
            
            
            
            18.8Total
      revenues
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of revenues:Software
      Licenses
            
            
            3.4
            
            
            
            2.9
            
            
            
            6.0Services
            
            
            47.6
            
            
            
            37.8
            
            
            
            46.1Maintenance
            
            
            5.6
            
            
            
            7.8
            
            
            
            12.3Total
      cost of revenues
            
            
            56.6
            
            
            
            48.5
            
            
            
            64.4Gross
      profit
            
            
            43.4
            
            
            
            51.5
            
            
            
            35.6Operating
      expenses:Research
      and development
            
            
            33.0
            
            
            
            45.1
            
            
            
            71.5Sales
      and marketing
            
            
            73.4
            
            
            
            114.7
            
            
            
            192.0General
      and administrative
            
            
            39.3
            
            
            
            60.1
            
            
            
            103.0Total
      operating expenses
            
            
            145.7
            
            
            
            219.9
            
            
            
            366.5Operating
      loss
            
            
            (102.3
            )
            
            
            (168.4
            )
            
            
            (330.9
            )Financial
      income, net
            
            
            11.6
            
            
            
            16.1
            
            
            
            15.9Pretax
      loss from continuing operations
            
            
            (90.7
            )
            
            
            (152.3
            )
            
            
            (315.0
            )Tax
      benefit
            
            
            65
            
            
            
            36.6
            
            
            
            77.5Net
      loss from continuing operations
            
            
            (25.7
            )
            
            
            (115.7
            )
            
            
            (237.5
            )Net
      income from discontinued operations, net of taxes
            
            
            56.5
            
            
            
            85.4
            
            
            
            142.7Net
      income (loss)
            
            
            30.8
            
            
            
            (30.3
            )
            
            
            (94.8
            )




28




A doption of new accounting
standard




Recently
Issued Accounting Pronouncements










Years Ended December 31, 2007, 2006
and 2005


Revenues and Cost of
Revenues


Revenues.








29
 
  Software licenses revenues.


Service revenues.


Maintenance revenues.


Total Cost of Revenues.




Failure to
deliver professional services efficiently could negatively impact our gross
margins.”




30


Total Operating
Expenses




Research and Development.


Sales and Marketing.


General and Administrative.


Financial Income, Net.




Pre-tax Loss from our Continuing
Operations.




31


Tax benefit.


Net Income from Discontinued
Operations net of taxes.


Net Income (Loss)


B.           
Liquidity and Capital Resources










32








Derivative Financial
Instruments


Impact of Taxation.


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






33


D.           
Trend Information


Our business model is focused on
continued growth in a market in which we have only four years of experience and
failure to continue our early penetration into this market would negatively
impact our results of operations” and We do not have a proven business
model for the customer services and support 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”


“ Revenues from Jacada Fusion and
Jacada Workspace, our customer services and support products, might 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 ”


Our revenues could be adversely
affected if we fail to recruit and retain consultants and other technical
service personnel”.


E Off-balance sheet
arrangements Material Effects of
Government Regulation in Israel”


F.Tabular Disclosure of Contractual Obligations. :


Payments
      due by period (in thousands)Contractual Obligations
            Total
            
            Less
      than 1 year
            
            1-3
      years
            
            3-5
      years
            
            More
      than 5 yearsFacilities
            $
            1,469
            
            $
            804
            
            $
            665
            
            
            -
            
            
            -Vehicles
            $
            654
            
            $
            299
            
            $
            355
            
            
            -
            
            
            -Severance
      pay*
            $
            1,522
            
            
            -
            
            
            -
            
            
            -
            
            
            -






34


Item 6: DIRECTORS, SENIOR MANAGEMENT AND
EMPLOYEES
  A.           
Directors and Senior Management






Name
              
              Age
              
              PositionPaul
      O’Callaghan
              
              52
              
              Chief
      Executive OfficerTzvia
      Broida
              
              39
              
              Chief
      Financial OfficerDavid
      Holmes
              
              53
              
              Senior
      Vice President, Global MarketingGuy
      Tweedale
              
              46
              
              Senior
      Vice President Sales and General Manager of European
      OperationsEyal
      Shpin
              
              36
              
              Vice
      President of Research and DevelopmentGideon
      Hollander(1)
              
              43
              
              Chairman
      of the Board and DirectorYossie
      Hollander
              
              50
              
              DirectorOhad
      Zuckerman(2)(1)
              
              43
              
              DirectorNaomi
      Atsmon(2)
              
              55
              
              DirectorDan
      Falk (2)
              
              63
              
              DirectorAvner
      Atsmon(2)
              
              45
              
              Director








Paul O’Callaghan




Tzvia Broida




David Holmes




35




Guy Tweedale


Eyal Shpin




Gideon Hollander


Yossie Hollander




Ohad Zuckerman




Naomi Atsmon




Dan Falk




36




Avner Atsmon




B.           
Compensation








C. Board Practices




Election and Term of
Directors












37




●




●




●




●




















Audit
Committee








38




















Options Committee












External Directors








39














Nomination Committee Charter –
Exemption








40




Compensation Committee – Exemption
    D.           
Employees




Period
      ending December 31,
            2007
            2006
            2005Research and
      Development
            38
            41
            36Marketing, Sales,
      Services and Customer Support
            93
            80
            77Administration
      Management and Information Systems
            32
            30
            25Discontinued
      Operation
            8
            8
            7Total
            171
            159
            145




E.            
Share Ownership
   41
    Item 7: MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
  A.           
Major Shareholders
  Name
      of Beneficial Owner
                Number
      of Shares Owned
                PercentageYossie
      Hollander (1)
                2,244,010
                10.82%Gideon
      Hollander  (2)
                2,139,987
                10.11%Emancipation
      Capital, LP (3)
                2,423,053
                11.76%
     42
    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 as of such date. 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.  The address of Airbus Foundation is c/o Allegemeines,
Treuunternehmen, P.O. Box 83, FL – 9490 Vaduz, Liechtenstein.
 
 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 March 28, 2008, there were 54 record holders
of our shares in the United States, which represented approximately 47% 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
  On
November 29, 2007 our shareholders’ general meeting approved the extension of
the employment agreement with Mr. Gideon Hollander effective as of September
2006 and the grant of additional thirty thousand options to our directors Ms.
Naomi Atsmon, Mr. Ohad Zukerman, Mr. Yossie Hollander and Mr. Dan Falk. In
December 2007 Mr. Gideon Hollander’s Employment as our chief executive officer
was terminated and we continue to make compensation payments in accordance with
the terms and conditions of such agreement. In February 2008, our audit
committee and board of directors authorized us to enter into a services
agreement with Mr. Gideon Hollander under which he would continue to provide us
with investor relations services. In accordance with the requirements of Israeli
law, this agreement will be brought for approval at our next annual shareholders
meeting.
 
 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 41% of our revenues in North and Latin America and
approximately 57% in Europe through wholly owned subsidiaries during the
period beginning January 1, 2007 and ending December 31, 2007. Our export sales
consist mainly of intercompany transactions with our subsidiaries.
 
 43
  Legal
Proceedings
  We are,
from time to time, a party to legal proceedings that are incidental to our
business.
  We do not
believe that any legal proceeding to which we currently are a party is likely to
have a material impact upon us.
  Dividend
Policy
  Our policy
has been not to pay dividends. See Item 10.B Memorandum and Articles of
Association for disclosure regarding the procedures for dividend distribution
and Item 16.E  Purchases of Equity Securities by the Issuer and
Affiliated Purchasers for disclosure regarding our repurchase
program.
  B.           Significant
Changes
  In January
2008 we sold the intellectual property and related customer contracts associated
with the following Jacada products:  Jacada Interface Server and
Jacada Integrator, also known as Jacada HostFuse, Jacada Studio, Jacada
Innovator and Jacada Terminal Emulator. See Item 4A History and Development of
the Company.
  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
                  
                  Low2003
                  
                  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
                  
                  1.9302006
                  
                  01/01/06
      – 12/31/06
                  
                  3.100
                  
                  2.0602007
                  
                  01/01/07
      – 12/31/07
                  
                  4.270
                  
                  2.460




44


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
              
              Low01/01/06
      – 03/31/06
              
              2.98
              
              2.4304/01/06
      – 06/30/06
              
              3.10
              
              2.2507/01/06
      – 09/30/06
              
              2.63
              
              2.1010/01/06
      – 12/31/06
              
              2.78
              
              2.0601/01/07
      – 03/31/07
              
              3.40
              
              2.4604/01/07
      – 06/30/07
              
              3.98
              
              3.1207/01/07
      – 09/30/07
              
              4.34
              
              3.1010/01/07
      – 12/31/07
              
              4.27
              
              3.5601/01/08
      – 03/31/08
              
              4.07
              
              2.76
 
 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
              
              Low12/07
              
              4.15
              
              3.5901/08
              
              4.07
              
              3.4402/08
              
              3.87
              
              3.2903/08
              
              3.49
              
              2.7604/08
              
              3.58
              
              3.0605/08
              
              3.74
              
              3.19
 
 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
              
              Low2003
              
              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
              
              1.862006
              
              01/01/06
      – 12/31/06
              
              3.11
              
              2.192007
              
              01/01/07
      – 12/31/07
              
              4.38
              
              2.48
 
 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
              
              Low01/01/06 – 03/31/06
              
              2.94
              
              2.4304/01/06
      – 06/30/06
              
              3.11
              
              2.3507/01/06
      – 09/30/06
              
              2.37
              
              2.1910/01/06
      – 12/31/06
              
              2.78
              
              2.2901/01/07 – 03/31/07
              
              3.34
              
              2.4804/01/07
      – 06/30/07
              
              3.98
              
              3.1207/01/07
      – 09/30/07
              
              4.06
              
              3.3810/01/07
      – 12/31/07
              
              4.38
              
              3.5201/01/08 –03/31/08
              
              4.14
              
              2.9
 45
  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
                
                Low12/07
                
                4.16
                
                5.5201/08
                
                4.14
                
                3.6502/08
                
                3.64
                
                3.3003/08
                
                3.52
                
                2.9004/08
                
                3.65
                
                3.2105/08
                
                3.81
                
                3.56
  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.
  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.
 46
  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.
  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.
  47
  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.
 
 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.
 48
 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.
 
 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, August 2004 and October 2006, 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.
  49
  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.
  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.
  50
  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.
  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.
  51
 
 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. Our
articles differ from the Companies Law in this respect, as under the law mergers
require approval only of a majority of the voting power of a company represented
at the relevant shareholders meeting and voting thereon 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.
 
 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.
 
 52
  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.
  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.
  53
  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.
  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” 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.
  54
  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.
  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.
  55
  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 inIsrael, 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.
  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.
  56
  General
Corporate Tax Structure
  Generally,
Israeli companies are subject to corporate tax at the rate of 31% on taxable
income and are subject to real 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
  The Law
for the Encouragement of Industry (Taxes), 1969, generally referred to as the
Industry Encouragement Law, provides several tax benefits for industrial
companies. 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.
  Under some
tax laws and regulations, an industrial enterprise may be eligible for special
depreciation rates for machinery, equipment and buildings. These rates differ
based on various factors, including the date the operations begin and the number
of work shifts. An industrial company owning an approved enterprise may choose
between these special depreciation rates and the depreciation rates available to
the approved enterprise.
 
 Eligibility
for benefits under the Industry Encouragement Law is not 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.
 
 We believe
that we currently qualify as an industrial company within the definition of the
Industry Encouragement Law. We cannot assure you that the Israeli tax
authorities will agree that we qualify, or, if we qualify, that we will continue
to qualify as an industrial company or that the benefits described above will be
available to us in the future.
 
 57
  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. We believe that our capital investments qualify to receive tax
benefits as an Approved Enterprise, however no assurance can be given that such
investments will be approved as in fact qualifying for such tax benefits by the
Israeli tax authorities. Additionally, 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.
 
 58
  We
currently have Approved Enterprise programs under the Capital Investments Law,
which to our belief, 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.
  59
  ·
                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.
  ·
                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.
 
 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 20% 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 10% or more 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 traded on a recognized stock exchange;
provided that the capital gains are not accrued or derived by the nonresident
shareholder’s permanent enterprise in Israel.
  60




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.
  I.           Subsidiary
Information
  Not
applicable.
  61
  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. During
the year ended December 31, 2007, the NIS appreciated against the U.S. dollar,
which resulted in an increase in the U.S. dollar cost of our operations in
Israel, and this trend has continued in early 2008. The foreign currency
exchange rate effects for the years ended December 31, 2006 and 2005 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 and GBP -
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.  Based on our past
experience we have concluded that there is no material foreign exchange rate
exposure. As of December 31, 2007, we had forward contracts to sell up to
$3,262,366 for a total amount of NIS 12,547,060 that matured prior to October 1,
2008.
  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.  Our exposure to market risk for changes in interest rates
relates primarily to our investment in marketable securities. Our marketable
securities portfolio includes US government debt instruments and corporate debt
instruments. The fair value of our long and short-term securities is based upon
their market values as of December 31, 2007.
  At the
beginning of 2008, we purchased an auction rate security or ARS in a principal
amount of $3 million. Auction rate securities are long-term bonds that provide
liquidity through a Dutch auction process that resets the applicable interest
rate at pre-determined calendar intervals, generally every 28 days. This
mechanism allows existing investors either to roll over their holdings, whereby
they will continue to own their respective securities, or liquidate their
holding by selling such securities at par. The ARS we purchased is guaranteed by
the US government.
  The
recent uncertainties in credit markets have affected the liquidity of our
holdings in our ARS, as auctions for this ARS failed in February and March of
2008, but at the same time we continue to receive interest every 28 days. While
the issuer of the ARS we purchased is rated AAA and the ARS is guaranteed by the
US government, at this time we are uncertain as to whether or when the liquidity
issues relating to this investment will worsen or improve. We do not believe
that it is necessary at this time to adjust the fair value of our investment of
such auction rate security, but we have decided to classify it as a long-term
investment on our balance sheet.
  As of
December 31, 2007, 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.
  62
  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.
  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, 2007, 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. Our chief executive officer and chief
financial officer, after evaluating the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated
under the Exchange Act) as of December 31, 2007, have concluded that, as of
such date, our disclosure controls and procedures were effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, to allow
timely decisions regarding required disclosure and is recorded, processed,
summarized and reported within the periods specified by the SEC’s rules and
forms.
  (b)
Management Annual Report on Internal Control over Financial Reporting. Our board
of directors and audit committee are responsible for establishing and
maintaining adequate internal control over financial reporting. Our internal
control system was designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation and fair presentation of
our consolidated financial statements for external purposes in accordance with
generally accepted accounting principles. Our chief executive officer and chief
financial officer assessed the effectiveness of our internal control over
financial reporting (as defined in Rule 13a-15(f) and Rule 15d-(f) promulgated
under the Exchange Act) as of December 31, 2007. In making this assessment, they
used the criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this assessment, our chief executive officer and chief financial
officer have concluded that, as of December 31, 2007, our internal control over
financial reporting is effective based on those criteria. Notwithstanding the
foregoing, all internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
may not prevent or detect misstatements and can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
  63
  (c) This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management’s report in this annual report.
  (d)
Changes in Internal Control over Financial Reporting. During the period covered
by this annual report, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
  Item 15T: CONTROLS AND
  PROCEDURES
  Not
applicable
  Item 16A:  AUDIT COMMITTEE FINANCIAL
      EXPERT
  At our
annual shareholders meeting in November 2007, the shareholders re-elected Dan
Falk to the Company’s Board of Directors to serve for a one year term. 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.
  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.
  64
  Item 16C:  PRINCIPAL ACCOUNTANT FEES AND
      SERVICES
  Audit
Fees
  2006
                $115,0002007
                $130,000
  Audit
Related Fees
  2006
                $10,0002007
                $0
  Tax
Fees
  2006
                $24,0002007
                $10,000
  Other
Fees
  2006
                $02007
                $1,400
  The
Audit Related Fees we incurred in 2006 are related to on
going consultations.The tax fees we incurred in 2006 are related to
preparation of tax returns and consultations regarding international tax and the
tax fees we incurred in 2007 are related to preparation of tax returns.
  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.
  65
  Item 16D:  EXEMPTIONS FROM THE LISTING STANDARDS FOR
      AUDIT COMMITTEES
   Not
applicable.
  Item 16E: PURCHASES OF EQUITY SECURITIES BY THE
      ISSUER AND AFFILIATED PURCHASERS
   Issuer Purchases of Equity
Securities(1)
  Period
                
                Total
      Number of
                  Ordinary
      Shares
                  Purchased
                
                Average
      Price
                  Paid
      per Share
                
                Total
      Number of
                  Shares
      Purchased as
                  Part
      of Publicly
                  Announced
      Plans or
                  Programs
                
                Maximum
      Number (or
                  Approximate
      Dollar
                  Value)
      of Shares that
                  May
      Yet Be Purchased
                  Under
      the Plans or
                  ProgramsMay
      2008
                
                
                118,267
                
                
                $3.63
                
                
                118,267
                
                
                US$10,000,000
 
 (1)
                Represents
      ordinary share repurchases. In February 2008 our board of directors has
      authorized the use of up to $10 million of our available cash to
      repurchase our ordinary shares. Pursuant to a requirement of Israeli law,
      we have obtained the approval of the Tel Aviv District Court in Israel for
      such purchase. Purchases shall be made from time to time at the discretion
      of our management in the open market or in privately negotiated
      transactions, subject to, among other factors, market conditions, trading
      volume and our share price. No time limit was set for the repurchase
      program and the program may be suspended from time to time or
      discontinued.
  66
 PART
III
  Item 17: FINANCIAL
  STATEMENTS
  See Item
18.
  Item 18: FINANCIAL
  STATEMENTS
  67




JACADA
LTD. AND ITS SUBSIDIARIES
 
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 
 AS
OF DECEMBER 31, 2007
 
 
 U.S.
DOLLARS IN THOUSANDS
  
 
 INDEX
 
 
 PageReport of Independent Registered Public Accounting
      Firm
              F-2Consolidated Balance Sheets
              F-3 - F-4Consolidated Statements of Operations
              F-5Consolidated Statements of Changes in Shareholders'
      Equity
              F-6Consolidated Statements of Cash Flows
              F-7- F-8Notes to Consolidated Financial
      Statements
              F-9 - F-32
 
 
 
 
 -
- - - - - - - - - - - - - -
 
 
 
 
  
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 To
the Shareholders and Board of Directors of
 
 JACADA
LTD.
 
 
 We have
audited the accompanying consolidated balance sheets of Jacada Ltd. and its
subsidiaries ("the Company") as of December 31, 2007 and 2006 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, 2007.
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 audits
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 as
of December 31, 2007 and 2006 and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2007, in conformity with U.S. generally accepted accounting
principles.
 
 As
discussed in Note 2 to the consolidated financial statements, in 2006, the
Company adopted Statement of Financial Accounting Standards Board No. 123(R),
"Share-Based Payment."
 
 
 
 
 
 
 Tel-Aviv,
      Israel
              KOST
      FORER GABBAY & KASIERERJune
      17, 2008
              A
      Member of Ernst & Young Global
 
 F -
2
   JACADA
LTD. AND ITS SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 
 U.S.
dollars in thousands
 
 
 December
      31,2007
              
              
              2006ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              5,960
              
              
              $
              4,735Marketable
      securities
              
              
              10,869
              
              
              
              12,338Trade
      receivables (net of allowance for doubtful accounts of $ 0 and
      $ 8 at December 31, 2007 and 2006, respectively)
              
              
              3,613
              
              
              
              958Assets
      of discontinued operations
              
              
              7,752
              
              
              
              2,378Other
      current assets
              
              
              1,736
              
              
              
              933Total current
      assets
              
              
              29,930
              
              
              
              21,342LONG-TERM
      INVESTMENTS:Marketable
      securities
              
              
              16,995
              
              
              
              18,849Severance
      pay fund
              
              
              970
              
              
              
              1,040Total long-term
      investments
              
              
              17,965
              
              
              
              19,889PROPERTY
      AND EQUIPMENT, NET
              
              
              992
              
              
              
              930OTHER
      ASSETS, NET:Other
      intangibles, net
              
              
              118
              
              
              
              453Goodwill
              
              
              3,096
              
              
              
              3,096Total other
      assets, net
              
              
              3,214
              
              
              
              3,549Total
      assets
              
              $
              52,101
              
              
              $
              45,710
 
 
 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
      31,2007
              
              
              2006LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIES:Trade
      payables
              
              $
              1,167
              
              
              $
              1,202Deferred
      revenues
              
              
              1,893
              
              
              
              2,754Accrued
      expenses and other liabilities
              
              
              3,308
              
              
              
              2,573Liabilities
      of  discontinued operations
              
              
              4,246
              
              
              
              4,091Total current
      liabilities
              
              
              10,614
              
              
              
              10,620LONG-TERM
      LIABILITIES:Deferred
      revenues
              
              
              61
              
              
              
              154Accrued
      severance pay
              
              
              1,522
              
              
              
              1,541Total long-term
      liabilities
              
              
              1,583
              
              
              
              1,695COMMITMENTS
      AND CONTINGENT LIABILITIES (Note 7)SHAREHOLDERS'
      EQUITY:Share
      capital -Ordinary
      shares of NIS 0.01 par value -Authorized:
      30,000,000 shares at December 31, 2007 and 2006;
                Issued
      and outstanding: 20,600,865 and 20,132,164 shares at
                December
      31, 2007 and 2006, respectively
              
              
              59
              
              
              
              58Additional
      paid-in capital
              
              
              73,393
              
              
              
              71,547Accumulated
      other comprehensive income (loss)
              
              
              418
              
              
              
              (128
              )Accumulated
      deficit
              
              
              (33,966
              )
              
              
              (38,082
              )Total
      shareholders' equity
              
              
              39,904
              
              
              
              33,395Total
      liabilities and shareholders' equity
              
              $
              52,101
              
              
              $
              45,710
 
 
 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 31,2007
              
              
              2006
              
              
              2005Revenues:Software
      licenses
              
              $
              3,706
              
              
              $
              3,668
              
              
              $
              3,632Services
              
              
              7,824
              
              
              
              3,482
              
              
              
              617Maintenance
              
              
              1,812
              
              
              
              1,356
              
              
              
              984Total
      revenues
              
              
              13,342
              
              
              
              8,506
              
              
              
              5,233Cost
      of revenues:*)Software
      licenses
              
              
              449
              
              
              
              244
              
              
              
              312Services
              
              
              6,354
              
              
              
              3,218
              
              
              
              2,411Maintenance
              
              
              745
              
              
              
              662
              
              
              
              643Total cost of
      revenues
              
              
              7,548
              
              
              
              4,124
              
              
              
              3,366Gross
      profit
              
              
              5,794
              
              
              
              4,382
              
              
              
              1,867Operating
      expenses:*)Research
      and development
              
              
              4,402
              
              
              
              3,838
              
              
              
              3,743Sales
      and marketing
              
              
              9,787
              
              
              
              9,759
              
              
              
              10,046General
      and administrative
              
              
              5,249
              
              
              
              5,108
              
              
              
              5,388Total operating
      expenses
              
              
              19,438
              
              
              
              18,705
              
              
              
              19,177Operating
      loss
              
              
              (13,644
              )
              
              
              (14,323
              )
              
              
              (17,310
              )Financial
      income, net
              
              
              1,548
              
              
              
              1,372
              
              
              
              830Loss
      from continuing operations before taxes
              
              
              (12,096
              )
              
              
              (12,951
              )
              
              
              (16,480
              )Tax
      benefit
              
              
              8,672
              
              
              
              3,117
              
              
              
              4,055Net
      loss from continuing operations
              
              
              (3,424
              )
              
              
              (9,834
              )
              
              
              (12,425
              )Net
      income from discontinued operations, net of taxes
              
              
              7,540
              
              
              
              7,262
              
              
              
              7,467Net
      income (loss)
              
              $
              4,116
              
              
              $
              (2,572
              )
              
              $
              (4,958
              )Basic
      and diluted net earnings (loss) per share:From
      continuing operations
              
              $
              (0.17
              )
              
              $
              (0.50
              )
              
              $
              (0.63
              )From
      discontinued operations
              
              $
              0.37
              
              
              $
              0.37
              
              
              $
              0.38Basic
      and diluted net earnings (loss) per share
              
              $
              0.20
              
              
              $
              (0.13
              )
              
              $
              (0.25
              )Weighted
      average number of shares used in computing basic and diluted net earnings
      (loss) per share
              
              
              20,364,752
              
              
              
              19,827,852
              
              
              
              19,497,726*) Includes
      stock-based compensation to employees and directors in the following
      items:Cost
      of revenues
              
              $
              97
              
              
              $
              67Research
      and development
              
              
              77
              
              
              
              79Sales
      and marketing
              
              
              252
              
              
              
              123General
      and administrative
              
              
              365
              
              
              
              402Total
      stock-based compensation expenses
              
              $
              791
              
              
              $
              671
 
 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
 
 AccumulatedAdditional
              
              
              other
              
              
              
              
              
              Total
              
              
              TotalOrdinary
      shares
              
              
              paid-in
              
              
              comprehensive
              
              
              Accumulated
              
              
              comprehensive
              
              
              shareholders'Shares
              
              
              Amount
              
              
              capital
              
              
              income
      (loss)
              
              
              deficit
              
              
              income
      (loss)
              
              
              equityBalance
      as of January 1, 2005
              
              
              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
              )Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (5,127
              )Balance
      as of December 31, 2005
              
              
              19,619,806
              
              
              
              57
              
              
              
              70,297
              
              
              
              (369
              )
              
              
              (35,510
              )
              
              
              
              
              
              
              34,475Exercise
      of stock options
              
              
              512,358
              
              
              
              1
              
              
              
              572
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              573Stock-based
      compensation related to options granted to employees and
      directors
              
              
              -
              
              
              
              -
              
              
              
              671
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              671Stock
      compensation related to options granted to non-employees
              
              
              -
              
              
              
              -
              
              
              
              7
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              7Comprehensive
      loss:Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,572
              )
              
              $
              (2,572
              )
              
              
              (2,572
              )Unrealized
      income from available-for-sale marketable securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              227
              
              
              
              -
              
              
              
              227
              
              
              
              227Unrealized
      income from derivatives
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              14
              
              
              
              -
              
              
              
              14
              
              
              
              14Total
      comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (2,331
              )Balance
      as of December 31, 2006
              
              
              20,132,164
              
              
              
              58
              
              
              
              71,547
              
              
              
              (128
              )
              
              
              (38,082
              )
              
              
              
              
              
              
              33,395Exercise
      of stock options
              
              
              468,701
              
              
              
              1
              
              
              
              1,016
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              1,017Stock-based
      compensation related to options granted to employees and
      directors
              
              
              -
              
              
              
              -
              
              
              
              791
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              791Stock
      compensation related to options granted to non-employees
              
              
              -
              
              
              
              -
              
              
              
              39
              
              
              
              -
              
              
              
              -
              
              
              
              
              
              
              
              39Comprehensive
      income:Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,116
              
              
              $
              4,116
              
              
              
              4,116Unrealized
      income from available-for-sale marketable securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              411
              
              
              
              -
              
              
              
              411
              
              
              
              411Unrealized
      income from derivatives
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              135
              
              
              
              -
              
              
              
              135
              
              
              
              135Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              4,662Balance
      as of December 31, 2007
              
              
              20,600,865
              
              
              $
              59
              
              
              $
              73,393
              
              
              $
              418
              
              
              $
              (33,966
              )
              
              
              
              
              
              $
              39,904Accumulated other
      comprehensive income as of December 31, 2007:Accumulated
      unrealized income from derivatives
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              161Accumulated
      unrealized income from available-for-sale securities
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              257$
              418
 
 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 31,2007
              
              
              2006
              
              
              2005Cash flows from
      operating activities:Net
      income (loss)
              
              $
              4,116
              
              
              $
              (2,572
              )
              
              $
              (4,958
              )Less:
      net income from discontinued operations
              
              
              (7,540
              )
              
              
              (7,262
              )
              
              
              (7,467
              )Net
      loss from continuing operations
              
              
              (3,424
              )
              
              
              (9,834
              )
              
              
              (12,425
              )Adjustments
      required to reconcile net loss from continuing operations to net cash used
      in operating activities from continuing operations:Depreciation
      and amortization
              
              
              746
              
              
              
              642
              
              
              
              675Stock-based
      compensation related to options granted to employees and
      directors
              
              
              791
              
              
              
              671
              
              
              
              -Stock-based
      compensation expenses related to options granted to
      non-employees
              
              
              39
              
              
              
              7
              
              
              
              28Accrued
      interestand
      amortization of premium on marketable securities
              
              
              (155
              )
              
              
              (302
              )
              
              
              (675
              )Increase
      (decrease) in accrued severance pay, net
              
              
              51
              
              
              
              93
              
              
              
              (90
              )Decrease
      (increase) in trade receivables, net
              
              
              (2,655
              )
              
              
              (225
              )
              
              
              385Increase
      in other current assets
              
              
              (668
              )
              
              
              (14
              )
              
              
              (158
              )Deferred
      tax
              
              
              (5,404
              )
              
              
              -
              
              
              
              -Increase
      (decrease) in trade payables
              
              
              (35
              )
              
              
              221
              
              
              
              (15
              )Increase
      (decrease) in deferred revenues
              
              
              (954
              )
              
              
              809
              
              
              
              1,943Increase
      (decrease) in accrued expenses and other liabilities
              
              
              735
              
              
              
              381
              
              
              
              (341
              )Other
              
              
              (18
              )
              
              
              48
              
              
              
              (52
              )Net
      cash used in operating activities from continuing
    operations
              
              
              (10,951
              )
              
              
              (7,503
              )
              
              
              (10,725
              )Net
      cash provided by operating activities from discontinued
      operations
              
              
              7,725
              
              
              
              7,114
              
              
              
              7,871Net
      cash used in operating activities
              
              
              (3,226
              )
              
              
              (389
              )
              
              
              (2,854
              )Cash flows from
      investing activities:Investment
      in available-for-sale marketable securities
              
              
              (12,566
              )
              
              
              (16,748
              )
              
              
              (27,536
              )Proceeds
      from redemption of available-for-sale marketable
securities
              
              
              16,455
              
              
              
              18,280
              
              
              
              29,957Purchase
      of property and equipment
              
              
              (478
              )
              
              
              (461
              )
              
              
              (258
              )Proceeds
      from sale of property and equipment
              
              
              23
              
              
              
              19
              
              
              
              115Net
      cash provided by investing activities from continuing operations
      *)
              
              
              3,434
              
              
              
              1,090
              
              
              
              2,278
 
 *)          There
were no cash flows from investing and financing activities related to
discontinued operations.
 
 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 31,2007
              
              
              2006
              
              
              2005Cash flows from
      financing activities:Proceeds
      from exercise of stock options
              
              
              1,017
              
              
              
              573
              
              
              
              485Net
      cash provided by financing activities from continuing operations
      *)
              
              
              1,017
              
              
              
              573
              
              
              
              485Increase
      (decrease) in cash and cash equivalents
              
              
              1,225
              
              
              
              1,274
              
              
              
              (91
              )Cash
      and cash equivalents at the beginning of the year
              
              
              4,735
              
              
              
              3,461
              
              
              
              3,552Cash
      and cash equivalents at the end of the year
              
              $
              5,960
              
              
              $
              4,735
              
              
              $
              3,461Supplemental disclosure of cash flows
      activities:Cash
      paid during the year for:Taxes
      on income
              
              $
              22
              
              
              $
              130
              
              
              $
              18
 
 *)          There
were no cash flows from investing and financing activities related to
discontinued operations.
 
 The
accompanying notes are an integral part of the consolidated financial
statements.
  F -
8
  NOTE 1:-
              GENERAL
 
 a.
              Jacada
      Ltd. ("the Company") was incorporated under the laws of Israel in December
      1990.
 
 The
Company develops, markets and supports unified service desktop and process
optimization solutions that simplify and automate customer service
processes.  The Company generates revenues from licensing its software
products and from services such as implementation and customization, consulting,
training and maintenance and support.
 
 The
majority of the Company's sales are made in North America and
Europe.
 
 b.
              Discontinued
      operations:
 
 On
December 19, 2007, the Company signed an agreement for the sale of its
traditional market business. The agreement was subject to closing which took
place on January 1, 2008.
 
 The
proceeds from the sale amounted to $ 26,000, of which $ 2,600 will be held in
escrow by a third party through July 2009 as a security for payment of potential
indemnification claims. All these amounts were received in 2008. The capital
gain, net of taxes, which was recorded in 2008, amounted to approximately $
20,500.
 
 In
accordance with the provisions of Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144"), the activity of the disposed traditional market business was
classified as discontinued operations in these consolidated financial
statements.
 
 The
carrying amounts of the major classes of assets and liabilities included as part
of the discontinued operations are as follows:
 
 December
      31,2007
              
              
              2006Trade
      receivables
              
              $
              808
              
              
              $
              723Other
      current assets
              
              
              6
              
              
              
              -Deferred
      tax
              
              
              5,404
              
              
              
              -Other
      intangible assets, net
              
              
              -
              
              
              
              121Goodwill
              
              
              1,534
              
              
              
              1,534Assets
      of discontinued operation
              
              $
              7,752
              
              
              $
              2,378Accrued
      expenses and other liabilities
              
              $
              996
              
              
              $
              1,240Deferred
      revenues
              
              
              3,217
              
              
              
              2,825Accrued
      severance pay
              
              
              33
              
              
              
              26Liabilities
      of discontinued operation
              
              $
              4,246
              
              
              $
              4,091
  F -
9
  NOTE
      1:-
              GENERAL
      (Cont.)
 
 The
results of the discontinued operations for the years ended December 31, 2007,
2006 and 2005 are presented below:
 
 Year
      ended December 31,2007
              
              
              2006
              
              
              2005Revenues
              
              $
              12,455
              
              
              $
              12,175
              
              
              $
              14,709Cost
      of revenues
              
              
              1,000
              
              
              
              938
              
              
              
              1,512Gross
      profit
              
              
              11,455
              
              
              
              11,237
              
              
              
              13,197Operating
      expenses
              
              
              561
              
              
              
              604
              
              
              
              1,633Net
      income before taxes on income
              
              
              10,894
              
              
              
              10,633
              
              
              
              11,564Taxes
      on income
              
              
              3,354
              
              
              
              3,371
              
              
              
              4,097Net
      income
              
              $
              7,540
              
              
              $
              7,262
              
              
              $
              7,467
 
 The
disposal of the traditional market business meets the criteria of discontinued
operations under EITF 03-13, "Applying the Conditions in Paragraph 42 of FASB
Statement No. 144 in Determining Whether to Report Discontinued Operations",
because, among other things, no significant cash outflow or cash inflow are
expected to be generated or paid by the Company in respect of the discontinued
operations and the Company will not have significant continuing involvement in
the operations of the traditional market business after its
disposal.
 
 c.
              As
      for major customers, see Note 10b.
 
 
 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 and expenses of the Company and its subsidiaries are generated
in United States dollars ("dollars"). The Company's management believes that the
dollar is the currency of the primary economic environment in which the Company
and its subsidiaries operate. Thus, the functional and reporting currency of the
Company is the U.S. dollar.
 F -
10
  NOTE
      2:-
              SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 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 original maturities of three months or less at
acquisition.
 
 e.
              Investments
      in marketable securities:
 
 The
Company accounts for investments in marketable securities in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities".
 
 Management
determines the appropriate classification of its investments at the time of
purchase and reevaluates such determinations at each balance sheet
date.
 
 The
Company classifies all of its securities as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported in "accumulated other comprehensive
income (loss)" in shareholders' equity. The amortized cost of marketable
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. Such amortization is included in financial income, net. Interest on
securities is included in financial income, net. Realized gains and losses on
sale of investments are included in earnings and are derived using the specific
identifications method for determining the cost of securities.
 
 Impairment
losses are recognized as realized or when the Company has determined that
other-than-temporary decline in fair value has occurred. FASB Staff Position
("FSP") No. 115-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investment" ("FSP 115-1") and  SAB Topic 5M,
"Other Than Temporary Impairment of Certain Investments in Debt and Equity
Securities" provides guidance for determining when an investment is considered
impaired, whether impairment is other-than temporary, and measurement of an
impairment loss. An investment is considered impaired if the fair value of the
investment decreased below its cost in an other-than-temporary manner. If, after
consideration of all available evidence to evaluate the realizable value of its
investment, impairment is determined to be other-than-temporary, then an
impairment loss should be recognized equal to the difference between the
investment's cost and its fair value. FSP 115-1
nullifies  certain  provisions  of Emerging Issues
Task  Force ("EITF") Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("EITF  03-1") while retaining the disclosure requirements of EITF
03-1.
 
 F -
11
   NOTE
      2:-
              SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 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
              25 -
      33Office
      furniture and equipment
              6 -
      15Motor
      vehicles
              15Leasehold
      improvements
              Over
      the shorter of the related lease
                period
      or the life of the asset
 
 g.
              Other
      intangible assets:
 
 Intangible
assets are amortized using the straight-line method over their estimated
economic life which is five years.
 
 h.
              Impairment
      of property and equipment:
 
 The
Company's property and equipment are reviewed for impairment in accordance with
SFAS No. 144 whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  During 2007, 2006
and 2005, no impairment losses were identified in accordance with SFAS No.
144.
 
 i.
              Impairment
      of intangible assets:
 
 The
carrying value of the Company's identifiable intangible assets is periodically
reviewed by management, based on the expected future undiscounted operating cash
flows over the remaining amortization period. If this review indicates that an
intangible asset will not be recoverable, its carrying value is reduced to
estimated fair value. During 2007, the Company recorded an impairment loss in
the amount of $ 155. During 2006 and 2005, no impairment losses were
identified.
 
 j.
              Goodwill:
 
 Goodwill
represents the excess of the cost of businesses acquired over the fair value of
the net assets acquired in the acquisition.
 
 Statement
of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 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.
 F -
12
  NOTE
      2:-
              SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 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 the Company's market capitalization. The Company performs
the impairment tests during the third fiscal quarter. In addition, following the
sale of its traditional market business, the Company tested for impairment the
goodwill related to continuing operations in accordance with the provisions of
SFAS No. 142. During 2007, 2006 and 2005, no impairment losses were
identified.
 
 k.
              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.
 
 l.
              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.
 
 In July
2006, the Financial Accounting Standards Board ("FASB") issued Financial
Interpretation No. 48, "Accounting for Uncertainly in Income Taxes" ("FIN 48"),
which applies to all tax positions related to income taxes subject to SFAS No.
109. FIN 48 requires a new evaluation process for all tax positions taken. If
the probability for sustaining said tax position is greater than 50%, then the
tax position is recorded and recognition should be at the highest amount that is
greater than 50% likely of being realized upon ultimate settlement.
  F -
13
  NOTE
      2:-
              SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 FIN 48
requires expanded disclosure at each annual reporting period, unless a
significant change occurs in an interim period. Differences between the amount
recognized in the statements of financial position prior to the adoption of FIN
48 and the amounts reported after adoption should be accounted for as an
adjustment to the beginning balance of retained earnings (or accumulated
deficit). FIN 48 is effective for fiscal years beginning after December 15,
2006. The adoption of FIN 48 did not have a material impact on the Company's
consolidated financial statements.
 
 m.
              Revenue
      recognition:
 
 The
Company derives revenues from the sale of software licenses, rendering services
and the provision of support and maintenance. Services include consulting
services, implementation and customization services and training. Maintenance
includes telephone support, bug fixes, and rights to receive upgrade and
enhancements to licensed software on a when-and-if-available basis. 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.
 
 The
Company accounts for sales of software licenses in accordance with Statement of
Position No. 97-2, "Software Revenue Recognition", as amended ("SOP No. 97-2").
Sales of software licenses are recognized when all criteria outlined in SOP No.
97-2 (as amended by SOP 98-9, as defined bellow) 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.
 
 The
Company considers all arrangements with payment terms extending beyond six
months from the delivery of the elements, 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. The Company does not grant a right of return to its
customers.
 
 In
transactions where a customer's contractual terms include a provision for
customer acceptance, revenues are recognized either when such acceptance has
been obtained or as the acceptance provision has lapsed.
 
 With
regard to software arrangements involving multiple elements, the Company applies
Statement of Position No. 98-9, "Modification of SOP No. 97-2, Software
Revenue Recognition with Respect to Certain Transactions" ("SOP No. 98-9").
According to SOP No. 98-9, revenues should be allocated to the different
elements in the arrangement under the "residual method" when Vendor Specific
Objective Evidence ("VSOE") of fair value exists for all undelivered elements
and no VSOE exists for the delivered elements. Under the residual method, at the
outset of the arrangement with the customer, the Company defers revenue for the
fair value of its undelivered elements (maintenance and other services) and
recognizes revenue for the remainder of the arrangement fee attributable to the
elements initially delivered in the arrangement (software licenses) when the
basic criteria in SOP No. 97-2 have been met. Any discount in the
arrangement is allocated to the delivered element. VSOE of fair value for
maintenance and other services is determined based on the price charged for the
undelivered element when sold separately.
  F -
14
  NOTE
      2:-
              SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 Maintenance
and support revenue is deferred and recognized on a straight-line basis over the
term of the maintenance agreement.
 
 Deferred
revenues include unearned amounts received under maintenance and support
contracts and amounts received from customers but not recognized as
revenues.
 
 In
arrangements which include software and services a determination is made whether
the service are considered essential to the functionality of the software. When
services are considered essential to the functionality of the
software,  the Company accounts for the services together with the
software under contract accounting in accordance with Statement of Position No.
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" ("SOP 81-1").
 
 Revenues
recognized in accordance with SOP 81-1 are accounted for using either the
completed contract or percentage of completion method. The percentage of
completion method is used when the required services are quantifiable, based on
the estimated number of labor hours necessary to complete the project, and under
that method revenues are recognized using labor hours incurred as the measure of
progress towards completion but is limited to revenue that has been earned by
the attainment of any milestones included in the contract. The completed
contract method is used when the required services are not quantifiable, and
under that method revenues are recognized only when final acceptance from the
customer has been received or, when no such acceptance is not required under the
contract terms, upon the Company's compliance with performance specifications
under the contract terms.
 
 Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined in the amount of the estimated loss on the entire
contract. As of December 31, 2007, 2006 and 2005, no such estimated losses were
identified.
 
 n.
              Accounting
      for stock-based compensation:
 
 On January
1, 2006, the Company adopted SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS No. 123(R)"), which requires the measurement and recognition of
compensation expense based on estimated fair values for all stock-based payment
awards made to employees and directors. SFAS No. 123(R) supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"("APB
No. 25"), for periods beginning in fiscal year 2006. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS No. 123(R). The Company has applied the provisions
of SAB 107 in its adoption of SFAS No. 123(R). SFAS No. 123(R) requires
companies to estimate the fair value of equity-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the
requisite service periods in the Company's consolidated statements of
operations.
  F -
15
  NOTE
      2:-
              SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 Prior to
the adoption of SFAS No. 123(R), the Company accounted for equity-based awards
to employees and directors using the intrinsic value method in accordance with
APB No. 25 as allowed under SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Pursuant to these accounting standards, the
Company recorded deferred compensation for stock options granted to employees at
the date of grant equal to the excess of the market value of the underlying
shares at that date over the exercise price of the options.
 
 The
Company adopted SFAS No. 123(R) using the modified prospective transition
method, which requires the application of the accounting standard starting the
first day of the Company's fiscal year 2006. Under that transition method,
compensation cost recognized in the years ended December 31, 2006 and 2007,
includes: (a) compensation cost for all stock-based payments granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all stock-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R).
 Results
for prior periods have not been restated.
 
 The
Company recognizes compensation expenses for the value of its awards based on
the accelerated attribution method over the requisite service period of each of
the awards, net of estimated forfeitures. SFAS No. 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Estimated forfeitures
are based on actual historical pre-vesting forfeitures.
 
 The
Company selected the Black-Scholes option pricing model as the most appropriate
fair value method for its stock-options awards. The fair value for options
granted in 2007, 2006 and 2005 was estimated at the date of grant using the
following weighted average assumptions:
 
 2007
              
              2006
              
              2005Dividend
      yield
              
              0%
              
              0%
              
              0%Expected
      volatility
              
              46%
              
              54%
              
              60%Risk-free
      interest
              
              4.03%
              
              4.7%
              
              3.65%Expected
      life (years)
              
              4.5
              
              4.8
              
              4
 
 The
Company has historically not paid dividends.
 
 The
Company used its historical stock price for calculating volatility in accordance
with SFAS No. 123(R).
 
 The
risk-free interest rate assumption is based on the rate of zero-coupon U.S.
government appropriate for the expected term of the Company's employee stock
options.
 
 The
Company determined the expected life of the options according to the simplified
method, average of vesting and the contractual term of the Company's stock
option.
  F -
16
 NOTE
      2:-
                SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 The
following table illustrates the effect on 2005 net income and earnings per
share, assuming that the Company had applied the fair value recognition
provision of SFAS No. 123 on its stock-based employee compensation:
 
 2005Net
      loss as reported
                
                $
                (4,958
                )Deduct:
      Stock-based compensation expense determined under fair value method for
      all awards
                
                
                (738
                )Pro
      forma net loss
                
                $
                (5,696
                )Basic
      and diluted net loss per share as reported
                
                $
                (0.25
                )Pro
      forma basic and diluted net loss per share
                
                $
                (0.29
                )
 
 o.
                Advertising
      expenses:
 
 Advertising
expenses are charged to the statement of operations, as incurred. Advertising
expenses for the years ended December 31, 2007, 2006 and 2005 were $ 574,
$ 488 and $ 653, respectively.
 
 p.
                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.
 
 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.
 
 Commencing
from 2005, new employees of the Company are subject to Section 14 of the
Severance Pay Law, under which the payments to the pension funds and insurance
companies discharge the Company's obligation to the employees. Accumulated
amounts in the pension funds and with the insurance companies are not under the
control or administration of the Company, and accordingly, neither those amounts
nor the corresponding accrual for severance pay are reflected in the balance
sheet. The obligation of the Company, under law and labor agreements, for
termination benefits to employees not covered by the aforementioned pension or
insurance plans are included in the balance sheet.
 
 The
severance pay expense for the years ended December 31, 2007, 2006 and 2005
amounted to $ 435, $ 502 and $ 739,
respectively.
  F -
17
  NOTE
      2:-
                SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 q.
                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 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.
 
 r.
                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
(loss) 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.
 
 To protect
against the impairment of 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 impairment of 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.
  F -
18
  NOTE
      2:-
                SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 At
December 31, 2007, the Company expects to reclassify $ 161 of net gains on
derivative instruments from accumulated other comprehensive income to earnings
during the next year, due to actual payments to suppliers and payroll
payment.
 
 s.
                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 share from continuing operations 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 were 3,646,461, 3,602,673 and 3,600,918 for the years ended
December 31, 2007, 2006 and 2005, respectively.
 
 t.
                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.
 
 The
Company's marketable securities include investments in debentures of U.S.
corporations, U.S. government securities, other government securities, U.S.
government sponsored enterprises securities and other securities. The Company's
investment policy limits the amount the Company may invest in any one type of
issuer, except U.S. government securities, thereby reducing credit risk
concentrations.
 
 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 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.
Provisions for doubtful accounts were recorded in general and administrative
expenses.
 F -
19
  NOTE
      2:-
                SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)
 
 u.
                New
      accounting pronouncements:
 
 In
September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, "Fair Value Measurements" ("SFAS No. 157"). This Standard defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value
measurements. The provisions of SFAS No. 157 are effective for the
Company beginning January 1, 2008. The FASB issues a FASB Staff Position
(FSP) to defer the effective date of SFAS No. 157 for one year for all
nonfinancial assets and nonfinancial liabilities, except for those items that
are recognized or disclosed at fair value in the financial statements on a
recurring basis. The Company does not expect the adoption will have material
impact on its consolidated financial statements.
 
 In
December 2007, the U.S. Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 110 (SAB 110) to amend the SEC's views
discussed in Staff Accounting Bulletin 107 (SAB 107) regarding
the use of the simplified method in developing an estimate of expected life of
share options in accordance with SFAS No. 123(R). SAB 110 is
effective for the Company beginning in the first quarter of fiscal year 2008.
The Company is currently assessing the potential impact that the adoption of SAB
110 could have on its consolidated financial statements.
 
 
 NOTE
      3:-
                MARKETABLE
      SECURITIES
 
 The
      following is a summary of the Company's investment in marketable
      securities:
 
 December
      31, 2007
                
                
                December
      31, 2006Amortized
                
                
                Gross
                  unrealized
                
                
                Gross
                  unrealized
                
                
                Fair
                  market
                
                
                Amortized
                
                
                Gross
                  unrealized
                
                
                Gross
                  unrealized
                
                
                Fair
                  marketcost
                
                
                gain
                
                
                losses
                
                
                value
                
                
                cost
                
                
                gain
                
                
                losses
                
                
                valueAvailable-for-sale:Corporate
      debentures
                
                $
                23,637
                
                
                $
                226
                
                
                $
                (16
                )
                
                $
                23,847
                
                
                $
                18,713
                
                
                $
                28
                
                
                $
                (134
                )
                
                $
                18,607U.S.
      government securities
                
                
                1,002
                
                
                
                5
                
                
                
                -
                
                
                
                1,007
                
                
                
                8,897
                
                
                
                10
                
                
                
                (36
                )
                
                
                8,871States
      of the U.S securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                450
                
                
                
                -
                
                
                
                -
                
                
                
                450Other
      government securities
                
                
                997
                
                
                
                -
                
                
                
                (2
                )
                
                
                995
                
                
                
                998
                
                
                
                -
                
                
                
                (15
                )
                
                
                983U.S.
      government sponsored enterprises securities
                
                
                1,159
                
                
                
                29
                
                
                
                -
                
                
                
                1,188
                
                
                
                1,472
                
                
                
                -
                
                
                
                (7
                )
                
                
                1,465Other
      securities
                
                
                812
                
                
                
                15
                
                
                
                -
                
                
                
                827
                
                
                
                811
                
                
                
                -
                
                
                
                -
                
                
                
                811$
                27,607
                
                
                $
                275
                
                
                $
                (18
                )
                
                $
                27,864
                
                
                $
                31,341
                
                
                $
                38
                
                
                $
                (192
                )
                
                $
                31,187
 
 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, 2007 and 2006:
  F -
20
  NOTE
      3:-
                MARKETABLE
      SECURITIES (Cont.)
 
 December
      31, 2007Less
      than 12 months
                
                
                12
      months or greater
                
                
                TotalFair
                  value
                
                
                Unrealized
                  losses
                
                
                Fair
                  value
                
                
                Unrealized
                  losses
                
                
                Fair
                  value
                
                
                Unrealized
                  lossesCorporate
      debentures
                
                $
                -
                
                
                $
                -
                
                
                $
                6,558
                
                
                $
                (16
                )
                
                $
                6,558
                
                
                $
                (16
                )Other
      government securities
                
                
                -
                
                
                
                -
                
                
                
                995
                
                
                
                (2
                )
                
                
                995
                
                
                
                (2
                )$
                -
                
                
                $
                -
                
                
                $
                7,553
                
                
                $
                (18
                )
                
                $
                7,553
                
                
                $
                (18
                )
 
 
 December
      31, 2006Less
      than 12 months
                
                
                12
      months or greater
                
                
                TotalFair
                  value
                
                
                Unrealized
                  losses
                
                
                Fair
                  value
                
                
                Unrealized
                  losses
                
                
                Fair
                  value
                
                
                Unrealized
                  lossesCorporate
      debentures
                
                $
                5,253
                
                
                $
                (17
                )
                
                $
                10,942
                
                
                $
                (118
                )
                
                $
                16,195
                
                
                $
                (135
                )U.S.
      government securities
                
                
                989
                
                
                
                (2
                )
                
                
                5,172
                
                
                
                (33
                )
                
                
                6,161
                
                
                
                (35
                )Other
      government securities
                
                
                -
                
                
                
                -
                
                
                
                983
                
                
                
                (15
                )
                
                
                983
                
                
                
                (15
                )U.S.
      government sponsored enterprises securities
                
                
                1,465
                
                
                
                (7
                )
                
                
                -
                
                
                
                -
                
                
                
                1,465
                
                
                
                (7
                )Other
      securities
                
                
                811
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                811
                
                
                
                -$
                8,518
                
                
                $
                (26
                )
                
                $
                17,097
                
                
                $
                (166
                )
                
                $
                25,615
                
                
                $
                (192
                )
 
 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.
Since the Company has the ability and intent to hold these investments until a
recovery of fair value, which may be maturity, the marketable securities were
not considered to be other than temporarily impaired at December 31,
2007.
 
 The
amortized cost and fair value of marketable securities as of December 31,
2007, by contractual maturity, are shown below:
  December
      31, 2007Amortized
                  cost
                
                
                Fair
                  market valueMatures
      in one year
                
                $
                10,563
                
                
                $
                10,869Matures
      after one year through three years
                
                
                17,044
                
                
                
                16,995Total
                
                $
                27,607
                
                
                $
                27,864
  F -
21
  NOTE
      4:-
                PROPERTY
      AND EQUIPMENT, NET
 
  Composition
      of property and equipment is as follows:December
      31,2007
                
                
                2006Cost:Computers
      and peripheral equipment
                
                $
                4,507
                
                
                $
                4,053Office
      furniture and equipment
                
                
                926
                
                
                
                914Motor
      vehicles
                
                
                14
                
                
                
                98Leasehold
      improvements
                
                
                530
                
                
                
                5185,977
                
                
                
                5,583Accumulated
      depreciation
                
                
                4,985
                
                
                
                4,653Depreciated
      cost
                
                $
                992
                
                
                $
                930
  Depreciation
expenses for the years ended December 31, 2007, 2006 and 2005 were $ 411,
$ 462 and $ 495, respectively.
 
 
 NOTE
      5:-
                OTHER
      INTANGIBLES, NET
 
  a.
                Composition:December
      31,2007
                
                
                2006Original
      amounts:Technology
                
                $
                900
                
                
                $
                900Accumulated
      amortization:Technology
                
                
                782
                
                
                
                447Amortized
      cost
                
                $
                118
                
                
                $
                453
 
 b.
                Amortization
      expense for the years ended December 31, 2007, 2006 and 2005 amounted to
      $ 335, $ 180 and $ 180, respectively, and were recorded in
      cost of revenues in the Company's statements of operations. As of December
      31, 2007, the remaining amortization period is 1.5
  years.
 
 c.
                As
      of December 31, 2007, the Company recognized an impairment loss in the
      amount of $ 155, which was recorded as part of the amortization
      expenses in the year 2007.
 
 d.
                Estimated
      amortization expenses for the years
ended:
 
 2008
                
                $
                792009
                
                
                39$
                118
  F -
22
  NOTE
      6:-
                ACCRUED
      EXPENSES AND OTHER LIABILITIES
 
 December
      31,2007
                
                
                2006Employees
      and payroll accruals
                
                $
                2,539
                
                
                $
                1,653Accrued
      expenses
                
                
                769
                
                
                
                920$
                3,308
                
                
                $
                2,573
 
 
 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,
      2007, the Company had obtained grants from the Office of the Chief
      Scientist of Israel's Ministry of Industry, Trade and Labor ("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, 2007, the Company has paid or accrued royalties to the OCS in the
amount of $ 1,886. As of December 31, 2007, the aggregate contingent
liability to the OCS amounted to $ 400.
 
 In
December 2007, as part of the sale of the Company's traditional market business
(see Note 1b), the Company transferred its obligation to the OCS to the buyer
and committed to reimburse the buyer for that future obligation.
 
 The
royalties accrued and paid are presented as part of the discontinued
operations.
 
 2.
                The
      Company's subsidiary is obligated to pay 50% of the sales of a specific
      product to a former distributor. As of December 31, 2007 and 2006, the
      Company has accrued an amount of $ 673 related to this obligation. This
      accrual is presented as part of the liabilities of discontinued
      operations.
 
 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:
  F -
23
  NOTE
      7:-
                COMMITMENTS
      AND CONTINGENT LIABILITIES (Cont.)
 
 Year ended December
      31,2008
                
                $
                8042009
                
                
                5952010
                
                
                70$
                1,469
  Total rent
expenses for the years ended December 31, 2007, 2006 and 2005 were approximately
$ 916, $ 898 and $ 853, respectively.
 
 
 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 also been traded on the
Tel-Aviv Stock Exchange. 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, 2007, the Company has three Incentive Share Option Plans (the 1996,
1999 and 2003 plans), which provide for the grant of options to officers,
management, employees and 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 between 7 to 10
years from the grant date. Any options from 1999 and 2003 plans 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 or the Company's option committee but may not be
less than the par value of the Ordinary shares.
 
 As of
December 31, 2007, an aggregate of 1,335,875 Ordinary shares of the Company are
still available for future grant under the Incentive Share Option
Plans.
 
 A summary
of the Company's option activity and related information with respect to options
granted to employees for the year ended December 31, 2007 is as
follows:
  F -
24
  NOTE
      8:-
                SHAREHOLDERS'
      EQUITY (Cont.)
 
 Number
                  of
      options
                
                
                Weighted-
                  average
                  exercise
                  price
                
                
                Weighted-
                  average
                  remaining
                  contractual
                  term
      (in
                  years)
                
                
                Aggregate
                  intrinsic
                  valueOutstanding
      at the beginning of the year
                
                
                3,625,151
                
                
                $
                3.49
                
                
                
                4.82
                
                
                $
                574Granted
                
                
                844,800
                
                
                $
                3.68Exercised
                
                
                (468,701
                )
                
                $
                2.17Forfeited
      and cancelled
                
                
                (279,667
                )
                
                $
                4.22Outstanding
      at the end of the year
                
                
                3,721,583
                
                
                $
                3.35
                
                
                
                4.94
                
                
                $
                2,778Exercisable
      options at the end of the year
                
                
                2,274,730
                
                
                $
                3.43
                
                
                
                4.17
                
                
                $
                1,902Vested
      and expected-to-vest at the end of the year
                
                
                3,242,243
                
                
                $
                3.36
                
                
                
                4.77
                
                
                $
                2,474
  The
weighted-average estimated grant date fair value of employee stock options
granted during the years 2007, 2006 and 2005, was $ 1.58, $ 1.4 and $ 1.11
per share, respectively.
  The
aggregate intrinsic value in the table above represents the total intrinsic
value that would have been received by the option holders had all the in
the-money option holders exercised their options on December 31,
2007.
  The total
intrinsic value of stock options exercised during 2007, 2006 and 2005 were
$ 616,  $ 620 and $ 281, respectively.
  The
options outstanding as of December 31, 2007 have been classified by exercise
price, as follows:
 
 Weighted
                
                
                WeightedOptions
                
                
                Weighted
                
                
                
                
                
                Options
                
                
                average
                
                
                averageoutstanding
                
                
                average
                
                
                Weighted
                
                
                exercisable
                
                
                exercise
                
                
                remainingas
      of
                
                
                remaining
                
                
                average
                
                
                as
      of
                
                
                price
      of
                
                
                contractualExercise
                
                
                December
      31,
                
                
                contractual
                
                
                exercise
                
                
                December
      31,
                
                
                options
                
                
                lifeprice
                
                
                2007
                
                
                life
      (years)
                
                
                price
                
                
                2007
                
                
                exercisable
                
                
                (years)$0.99
      - $ 1.18
                
                
                
                3,000
                
                
                
                4.87
                
                
                $
                1.18
                
                
                
                3,000
                
                
                $
                1.18
                
                
                
                4.87$1.20
      - $ 1.40
                
                
                
                151,264
                
                
                
                4.68
                
                
                $
                1.28
                
                
                
                151,264
                
                
                $
                1.28
                
                
                
                4.68$1.60
      - $ 2.22
                
                
                
                158,873
                
                
                
                0.93
                
                
                $
                2.18
                
                
                
                121,373
                
                
                $
                2.17
                
                
                
                0.92$2.28
      - $ 3.18
                
                
                
                2,180,020
                
                
                
                5.48
                
                
                $
                2.72
                
                
                
                1,360,961
                
                
                $
                2.71
                
                
                
                5.22$3.41
      - $ 5.06
                
                
                
                1,076,326
                
                
                
                4.97
                
                
                $
                4.23
                
                
                
                486,032
                
                
                $
                4.56
                
                
                
                2.72$9.00
      - $ 11.00
                
                
                
                152,100
                
                
                
                1.49
                
                
                $
                9.47
                
                
                
                152,100
                
                
                $
                9.47
                
                
                
                1.493,721,583
                
                
                
                4.94
                
                
                $
                3.35
                
                
                
                2,274,730
                
                
                $
                3.43
                
                
                
                4.17
  F -
25
  NOTE
      8:-
                SHAREHOLDERS'
      EQUITY (Cont.)
 
 Stock-based
compensation expense in respect of options granted to employees amounted
to   $ 791 and $ 671 for the years ended December 31, 2007 and
2006, respectively.
 
 c.
                Extension
      of the exercise period:
 
 On October
5, 2006, the Company's shareholders approved the extension of the exercise
period of options to certain of the Company's directors to a period of two years
from the date of termination (instead of 90 days). As a result, in 2006, the
Company recorded additional compensation cost in the amount of
$ 96.
 
 d.
                Options
      issued to consultants:
 
 The
Company's outstanding options to consultants as of December 31, 2007, are as
follows:
 
 Grant
      date
                
                Options
      for
                  Ordinary
                  shares
                
                
                Exercise
                  priceper
                  share
                
                
                Options
                  exercisable
                
                
                Exercisable
                  through1999
                
                
                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
                
                
                
                30,000
                
                
                20142007
                
                
                40,000
                
                
                $
                3.18
                
                
                
                20,000
                
                
                2011Total
                
                
                92,250
                
                
                
                
                
                
                
                72,250
  In March
2007, the Company granted 40,000 options to a consultant. On the grant date,
10,000 options were fully vested and the remaining options will vest over a
period of 1.5 years, commencing on the grant date, 10,000 options every six
months.
  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 the Black-Scholes option-pricing model, with the following assumptions:
risk free interest rate was 3.9%, dividend yield 0%, volatility factors of the
expected market price of the Company's Ordinary shares was  0.33 and
contractual life of  3.8 years.
  Stock-based
compensation expense in respect of options granted to non employees amounted to
$ 39, $ 7 and $ 28 for the years ended December 31, 2007, 2006 and 2005,
respectively.
 
 e.
                As
      of December 31, 2007, there was $ 1,250 of total unrecognized compensation
      cost related to non-vested share-based compensation arrangements granted
      under the Company's stock option plans. That cost is expected to be
      recognized over a weighted-average period of 1.49
  years.
  F -
26
 
 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 an
"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.
 
 According
to the provisions of the law, the Company has elected the "alternative benefits"
track - the 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 letters 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, 2007, 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 on 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"). As of December 31, 2007, the accumulated deficit of the
Company does not include tax-exempt income earned by the Company's "Approved
enterprise".
 
 Income not
eligible for the "Approved Enterprise" benefits mentioned above is taxed at the
regular corporate tax rate.
   F -
27
  NOTE
      9:-
                TAXES
      ON INCOME (Cont.)
 
 An
amendment to the law, which has been officially published effective 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 provision of the Amendment. As of December 31,
2007, there is no income attributed to the Amendment.
 
 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, 2007, the Company had a U.S. net operating loss carryforward for
income tax purposes of approximately $ 9,000. The net operating loss
carryforward expires within 12 to 20 years.
 
 Utilization
of U.S. net operating losses may be subject to substantial annual limitations
due to the "change in ownership" provisions of the Internal Revenue Code of 1986
and similar state provisions. The annual limitation may result in the expiration
of net operating losses before utilization.
 
 The
Israeli Company has net operating losses carryforward for income tax purposes,
as of December 31, 2007, of approximately $ 22,000 which can be carried
forward and offset against taxable income with no expiration date.
 
 d.
                Theoretical
      tax:
 
 In 2007,
the main reconciling item between the statutory tax rate of the Company and the
effective tax rate is the tax benefit from the reduction in valuation allowance
in respect of deferred tax assets resulting from the expected utilization of the
net operating losses carryforward in respect of the sale of its traditional
market business.
 
 In 2006
and 2005, the main reconciling items between the statutory tax rate of the
Company and the effective tax rate are the non-recognition of tax benefits from
accumulated net operating losses carries forward among the various subsidies
worldwide due to the uncertainty of the realization of such tax
benefits.
  F -
28
  NOTE
      9:-
                TAXES
      ON INCOME (Cont.)
 
 e.
                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
      31,2007
                
                
                2006Deferred
      tax assets:Operating
      loss carryforward
                
                $
                10,579
                
                
                $
                9,723Reserves
      and allowances
                
                
                1,902
                
                
                
                2,061Total
      deferred tax asset before valuation allowance
                
                
                12,481
                
                
                
                11,784Valuation
      allowance
                
                
                (7,077
                )
                
                
                (11,784
                )Net
      deferred tax asset
                
                $
                5,404
                
                
                $
                -
 
 The
Company has provided valuation allowances in respect of deferred tax assets
resulting from tax loss carryforward 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 carryforward will not
be realized in the foreseeable future, except for the loss carryforward that
will be realized against the Company's capital gain from the sale of its
traditional market business on January 1, 2008 (see Note 1b). During fiscal
2007, the Company reduced the valuation allowance by $ 5,300 mainly due to
the expected utilization of the net operating losses carryforward in respect of
the sale of its traditional market business.
 
 f.         
Loss from continuing operations before taxes is comprised as
follows:
 
 Year
      ended December 31,2007
                
                
                2006
                
                
                2005Domestic
      (Israel)
                
                $
                (9,722
                )
                
                $
                (7,784
                )
                
                $
                (8,421
                )Foreign
                
                
                (2,374
                )
                
                
                (5,167
                )
                
                
                (8,059
                )$
                (12,096
                )
                
                $
                (12,951
                )
                
                $
                (16,480
                )
 
 g.
                Changes
      in tax rates in Israel:
 
 The
regular corporate tax rate in Israel in 2007 was 29%. The corporate tax rate is
to be gradually reduced as follows: in 2008 - 27%, in 2009 - 26% and in 2010 and
onward - 25%.
  F -
29
  NOTE
      9:-
                TAXES
      ON INCOME (Cont.)
 
 h.
                Taxes
      on income from continuing operations are comprised as
    follows:
 
 Year
      ended December 31,2007
                
                
                2006
                
                
                2005Deferred
      tax income
                
                $
                5,404
                
                
                $
                -
                
                
                $
                -Tax
      benefit from continuing operations
                
                
                3,300
                
                
                
                3,246
                
                
                
                4,055Current
      income tax expenses
                
                
                (32
                )
                
                
                (129
                )
                
                
                -8,672
                
                
                
                3,117
                
                
                
                4,055Domestic
                
                
                4,910
                
                
                
                1,850
                
                
                
                1,640Foreign
                
                
                3,762
                
                
                
                1,267
                
                
                
                2,415$
                8,672
                
                
                $
                3,117
                
                
                $
                4,055
 
 Due to the
presentation of discontinued operations, the Company recorded tax benefit
related to current losses from continuing operations against tax expenses
related to current profits from discontinued operations for the years 2007, 2006
and 2005 in accordance with SFAS No. 109 (see Note 1b for discontinued
operations).
 
 
 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 the
end-customer's location:
 
 Year
      ended December 31,2007
                
                
                2006
                
                
                2005Revenues
      from sales to unaffiliated customers:North
      America
                
                $
                5,419
                
                
                $
                4,028
                
                
                $
                725Europe
      and other
                
                
                7,923
                
                
                
                4,478
                
                
                
                4,508$
                13,342
                
                
                $
                8,506
                
                
                $
                5,233
 
 
 F -
30
  NOTE
      10:-
                GEOGRAPHIC
      INFORMATION (Cont.)
 
 December
      31,2007
                
                
                2006
                
                
                2005Long-lived
      assets:Israel
                
                $
                3,786
                
                
                $
                4,035
                
                
                $
                3,361North
      America
                
                
                400
                
                
                
                420
                
                
                
                1,346United
      Kingdom
                
                
                12
                
                
                
                20
                
                
                
                20Germany
                
                
                8
                
                
                
                4
                
                
                
                -$
                4,206
                
                
                $
                4,479
                
                
                $
                4,727
 
 b.
                Major
      customers' data as a percentage of total
  revenues:
 
 Year
      ended December 31,2007
                
                
                2006
                
                
                2005Customer
      A
                
                
                26
                %
                
                
                4
                %
                
                
                -Customer
      B
                
                
                15
                %
                
                
                -
                
                
                
                -Customer
      C
                
                
                7
                %
                
                
                24
                %
                
                
                83
                %Customer
      D
                
                
                2
                %
                
                
                19
                %
                
                
                -Customer
      E
                
                
                2
                %
                
                
                14
                %
                
                
                -
   NOTE
      11:-
                  SUPPLEMENTARY
      DATA ON SELECTED STATEMENTS OF
INCOME
   a.
                Financial
      income (expenses), net:
 
 Year
      ended December 31,2007
                
                
                2006
                
                
                2005Financial
      expenses:Bank
      charges
                
                $
                (76
                )
                
                $
                (93
                )
                
                $
                (96
                )Foreign
      currency translation adjustments
                
                
                -
                
                
                
                -
                
                
                
                (113
                )(76
                )
                
                
                (93
                )
                
                
                (209
                )Financial
      income:Foreign
      currency translation adjustments
                
                
                29
                
                
                
                103
                
                
                
                -Interest
      on marketable securities
                
                
                1,595
                
                
                
                1,362
                
                
                
                1,0391,624
                
                
                
                1,465
                
                
                
                1,039$
                1,548
                
                
                $
                1,372
                
                
                $
                830
  F -
31
   NOTE
      11:-
                  SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF
      INCOME (Cont.)
 
 b.
                Provision
      for doubtful accounts:
 
 The change
in the provision for doubtful accounts for the years ended December 31, 2007,
2006 and 2005, is as follows:
  
 Year
      ended December 31,2007
                
                
                2006
                
                
                2005Balance
      at the beginning of the year
                
                $
                8
                
                
                $
                76
                
                
                $
                -Doubtful
      accounts provision
                
                
                (7
                )
                
                
                (63
                )
                
                
                76Bad-debts
      written-off
                
                
                (1
                )
                
                
                (5
                )
                
                
                -Balance
      at the end of the year
                
                $
                -
                
                
                $
                8
                
                
                $
                76
   NOTE
      12:-
                  SUBSEQUENT
      EVENTS
 In
February 2008, the Company's board of directors authorized the use of up to $ 10
million of the Company's available cash to repurchase its Ordinary shares. In
March 2008, the Company obtained the approval of the Tel Aviv District Court in
Israel under the Companies Law for such purchase. Purchases shall be made from
time to time at the discretion of the Company's management. No time limit was
set for the repurchase program and the program may be suspended from time to
time or discontinued.
 
 -
- - - - - - - - - - - - - -
   F -
32






Item 19:
              EXHIBITS
  Exhibit
      Number
                Description of
      Document
  1.1
              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,
      2001
 
 4.5
              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.
 
 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 Officer and 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.
    68
   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 17, 2008.
   JACADA
    LTD./s/Tzvia BroidaBy:
                Tzvia Broida
                  Chief
      Financial Officer
 
 
  EXHIBIT
INDEX
   Exhibit
                    Number
                  Description of
      Document
 1.1
              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,
      2001).
 
  4.5
              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 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.
 
 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 ExecutiveOfficer and 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.