20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  

OF THE SECURITIES EXCHANGE ACT OF 1934  

For the fiscal year ended December 31, 2002  

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:

18,935,903 Ordinary Shares, par value NIS 0.01 per share

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.     x  Yes    ¨  No

Indicate by check mark which financial statement item the registrant has elected to follow.     ¨  Item 17    x  Item 18

TABLE OF CONTENTS

Item 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, AND ADVISERS	2
Item 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	2
Item 3.	KEY INFORMATION	2
Item 4.	INFORMATION ON THE COMPANY	11
Item 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	23
Item 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	35
Item 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	41
Item 8.	FINANCIAL INFORMATION	43
Item 9.	THE OFFER AND LISTING	43
Item 10.	ADDITIONAL INFORMATION	46
Item 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	61
Item 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	61
Item 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	61
Item 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	61
Item 15:	CONTROLS AND PROCEDURES	62
Item 16A	AUDIT COMMITTEE FINANCIAL EXPERT	62
Item 16B	CODE OF ETHICS	62
Item 18.	FINANCIAL STATEMENTS	63
Item 19.	EXHIBITS	97

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FORWARD LOOKING STATEMENTS

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

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

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

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

Not applicable.

Item 2: OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3: KEY INFORMATION

A. Selected Financial Data

The following 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, 2002, 2001 and 2000 and the selected consolidated balance sheet data as of December 31, 2002 and 2001 have been derived from our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report. These financial statements have been prepared in accordance with GAAP. The consolidated statements of operations data for the years ended December 31, 1999 and 1998, and the selected consolidated balance sheet data as of December 31, 2000, 1999 and 1998 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 Disclosure about Market Risks” and our consolidated financial statements and the notes thereto included elsewhere in the Annual Report.

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	Year ended December 31,
	2002			2001			2000			1999			1998
	(In thousands, except per share and share data)
Consolidated Statement of Operations Data:
Revenues:
Software licenses	$	9,783		$	10,930		$	15,506		$	8,831		$	6,469
Services		4,518			8,986			6,070			3,362			1,874
Maintenance		7,235			5,630			3,540			2,406			1,145
Total revenues		21,536			25,546			25,116			14,599			9,488
Cost of revenues:
Software licenses		248			520			725			639			342
Services		3,115			4,859			3,636			1,619			1,735
Maintenance		1,247			1,705			1,574			1,121			823
Total cost of revenues		4,610			7,084			5,935			3,379			2,900
Gross profit		16,926			18,462			19,181			11,220			6,588
Operating expenses:
Research and development, net		6,191			6,446			4,979			3,267			2,440
Sales and marketing		9,450			14,619			12,873			6,529			5,411
General and administrative		4,602			5,679			3,624			1,960			1,637
Non-recurring charges		501			2,846			—			—			—
Total operating expenses		20,744			29,590			21,476			11,756			9,488
Operating loss		(3,818	)		(11,128	)		(2,295	)		(536	)		(2,900	)
Financial income (expense), net		909			2,330			3,082			530			(20	)
Income (loss) before income taxes		(2,909	)		(8,798	)		787			(6	)		(2,920	)
Income taxes		—			7			(10	)		—			—
Net income (loss)	$	(2,909	)	$	(8,791	)	$	777		$	(6	)	$	(2,920	)
Basic net earnings (loss) per share	$	(0.16	)	$	(0.48	)	$	0.04		$	(0.00	)	$	(0.81	)
Weighted average number of shares used in computing basic net earnings (loss) per share		18,710,105			18,465,127			18,141,223			6,572,476			3,615,143
Diluted net earnings (loss) per share	$	(0.16	)	$	(0.48	)	$	0.04		$	(0.00	)	$	(0.81	)
Weighted average number of shares used in computing diluted net earnings (loss) per share		18,710,105			18,465,127			19,503,971			6,572,476			3,615,143

	December 31,
	2002		2001		2000		1999		1998
	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	15,319	$	5,982	$	9,360	$	5,141	$	5,613
Working capital		34,448		39,625		46,740		53,315		1,148
Total assets		54,018		56,459		64,797		62,435		11,131
Long-term debt, net of current portion		—		—		—		186		90
Shareholders’ equity		46,464		48,588		56,646		54,854		2,939

Exchange Rates

Not applicable.

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

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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:

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. We do not have a long history of selling our products and we have to devote substantial resources to educating prospective customers about our products’ benefits. The complexity of our products may add time to the process of educating prospective customers. Many prospective customers have made significant investments in internally-developed or customized systems and would incur significant costs in switching to third-party products such as ours. Even if our products are effective, our target customers may not choose them for technical, cost, support or other reasons.

Competition in the market in which we compete is intense. If we are unable to compete effectively, the demand for, or the prices of, our products may be reduced. The market in which we compete is extremely competitive and subject to rapid change. We compete with companies that utilize varying approaches to enable host-centric software applications to be utilized over the Internet. These companies include, Attachmate Corporation, IBM, Seagull Software Ltd., TIBCO Software, Inc., ClientSoft, Inc., WRQ, Inc. and webMethods, Inc. We expect additional competition from other established and emerging companies. Furthermore, our competitors may combine with each other and other companies may enter our markets by acquiring or entering into strategic relationships with our competitors.

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

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

Our software license revenues result from a relatively small number of sales. In addition, our sales cycle is lengthy. Sales of our products are also subject to seasonality. These factors may cause our revenues to fluctuate materially from period to period. If we fail to meet market expectations in any individual period, our stock

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price could decline significantly. Our sales typically involve significant capital investment decisions by prospective customers, as well as a significant amount of time to educate them 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. It may take six months or more from the time we first contact a prospective customer before receiving an initial order. This sales cycle may lengthen in the future.

Sales of our products and services tend to be lower in our first quarter, and higher in our fourth quarter, due to the budgeting and purchasing cycles of our current and prospective customers. It is difficult for us to evaluate the degree to which this seasonality may affect our business in the near future because we cannot be sure whether recent reductions in revenue are due to seasonality or to the effect of the general economic slowdown.

Because of these and other factors, our quarterly revenues may fluctuate materially and may not meet market expectations in any individual period. This would likely cause our stock price to decline. Further, period-to-period comparisons of our revenues will not necessarily be meaningful. As a result, you should not rely upon them as an indication of future performance.

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

The market price of our shares is volatile and you may not be able to resell your shares at or above the price you paid, or at all. The risks described in this Section, combined with a generally sluggish worldwide economy and recently increased geopolitical instability may adversely affect our revenues and share price. If our share price decreases to below $1.00 per share and remains there for 30 consecutive trading days, Nasdaq could initiate procedures to delist our shares from the Nasdaq National Market and onto either the Nasdaq Small Cap Market or the OTC Bulletin Board.

We must expand our sales and marketing efforts in order to increase market awareness of our products and to generate increased revenues. As part of a July 2002 company-wide reduction in personnel, we reduced the size of our sales and marketing staff from 50 to 39. However, expansion of our sales and marketing efforts is essential to increase market awareness of our products and to generate increased revenue. There can be no guarantee that our reduced staff can successfully expand our sales and marketing effort. Furthermore, in addition to increasing our direct sales and marketing efforts, we believe that our future success is dependent upon the expansion of our indirect distribution channels, consisting of our relationships with independent software vendors,

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software distributors and system integrators. We currently have relationships with only a limited number of these parties. However, we have derived, and we anticipate that we will continue to derive, a significant portion of our revenues from these relationships.

Our future growth will be limited if:

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

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

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

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

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

Our revenues could be adversely affected if we fail to retain consultants and sales implementation personnel. We rely on our staff of professional consultants and other technical service personnel to implement our solutions after purchases by our customers. Unless we are able to retain consultants and sales implementation personnel or hire and train qualified consultants and sales implementation personnel to replace those who leaves us, it will be difficult for us to increase or possibly even maintain our present level of sales due to constraints on our capacity to implement additional sales.

Rapid changes and developments in our market could cause our products to become obsolete or require us to redesign our products. The eBusiness enabling software market is characterized by rapid technological change, frequent new product introductions and emerging industry standards. We also expect that the rapid evolution of Internet-based applications and standards, as well as general technology trends such as changes in or introductions of operating systems, will require us to adapt our products to remain competitive. Our products could become obsolete and unmarketable if we are unable to quickly adapt to new technologies or standards. To be successful, we will need to develop and introduce, in a timely manner and on a cost-effective basis, new products and product enhancements that respond to technological changes, evolving industry standards and other market changes and developments. Although we plan to continue to spend substantial amounts for research and development in the future, we cannot assure you that we will develop new products and product enhancements successfully or that our products will achieve broad market acceptance. Our failure to respond in a timely and cost-effective manner to new and evolving technologies and other market changes and developments could adversely impact our business.

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

We expect to be increasingly subject to risks of international operations. We currently market and sell our products and services primarily in North America, from which we received approximately 80% of our total revenues for the year ended December 31, 2002. However, we plan to increase our international operations, particularly in Europe and Latin America. This expansion will require significant management attention and financial resources. Further, we currently have limited experience in marketing and distributing our products internationally. Our inability to successfully increase our international operations could adversely impact our business. In addition, exchange rate fluctuation between the dollar and foreign currencies may adversely affect us. To date, we have not used risk management techniques or “hedged” the risks associated with fluctuations in foreign exchange rates, although we may employ such devices in the future.

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 interruptions could:

• damage our reputation;

• increase our product development costs;

• divert our product development resources;

• cause us to lose future sales; or

• delay or diminish market acceptance of our products.

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

Many of our products contained technology that we acquired from third parties. Because we did not develop the technology ourselves, there may be errors in the

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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 entail 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 internally developed technology. Most of our intellectual property, other than our trademarks, consists of proprietary or confidential information that is not subject to patent or similar protection. Despite our efforts to protect our intellectual property rights, unauthorized third parties may attempt to copy or otherwise obtain and use the technology protected by those rights. Any infringement of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Furthermore, policing unauthorized use of our products is difficult and costly, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States.

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

• be expensive and time-consuming to defend;

• cause product shipment and installation delays;

• divert management’s attention and resources; or

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

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

Risks Related to Our Location in Israel

Israeli courts might not enforce judgments rendered outside of Israel. We are incorporated under the laws of the State of Israel and we maintain significant operations in Israel. Certain of our officers and directors and our Israeli accountants and counsel 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

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a lawsuit in Israel. We have been advised by our Israeli counsel that, subject to certain limitations, Israeli courts may enforce a final executory judgment of a United States court for liquidated amounts in civil matters after a hearing in Israel, provided that certain conditions are met. If a foreign judgment is enforced by an Israeli court, it will be payable in Israeli currency.

Conditions in and around Israel could adversely affect our operations. Because our principal 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. Since October 2000, there has been a significant increase in violence primarily in the West Bank and the Gaza Strip and negotiations between Israel and the Palestinian representatives have ceased for periods of time. In addition, during 2002 both Israel and the Palestinians have intensified their military actions and Israel has undertaken certain military actions in the West Bank and the Gaza Strip. In connection with these actions the Israeli military has instituted a partial mobilization of its reserve forces. There can be no assurance that ongoing or revived hostilities or other factors related to Israel, including any hostilities occurring in or around Iraq, will not have a material adverse effect on us or on our business or adversely affect our share price.

Some of our officers and employees in Israel are obligated to perform 39 days or more of military reserve duty annually and in some cases may be called upon to serve upon short notice. The absence of these employees for significant periods may cause us to experience operating difficulties. Additionally, a number of countries continue to restrict or ban business with Israel or Israeli companies, which may limit our ability to make sales in those countries.

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

Any failure to obtain the tax benefits from the State of Israel that we anticipate receiving could adversely affect our plans and prospects. Pursuant to the Law for the Encouragement of Capital Investments, 1959, the Israeli government has granted “Approved Enterprise” status to our existing capital investment programs. Consequently, we are eligible for certain tax benefits for the first several years in which we generate

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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 were significantly reduced.

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

We cannot assure you that these tax benefits will be continued in the future at their current levels or at all. The termination or reduction of tax benefits could have a material adverse effect on our business, financial condition and results of operations. In addition, in 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.

The government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. From time to time we have received royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel. The terms of these grants prohibit us from manufacturing products or transferring technologies developed using these grants outside of Israel without special approvals. Even if we receive approval to manufacture these products outside of Israel, we may be required to pay increased royalties, up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. The technology developed with these grants may not be transferred to third parties, including in the context of an acquisition of our company, without the prior approval of a governmental committee under the Research and Development Law, and may not be transferred to non-residents of Israel. These restrictions may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies. In addition, if we fail to comply with any of the conditions imposed by the Office of the Chief Scientist, we may be required to refund any grants previously received, together with interest and penalties.

In 2002, the Research and Development Law was amended to, among other things, enable companies applying for grants from the Office of the Chief Scientist to seek prior approval for conducting manufacturing activities outside of Israel without being subject to increased royalties. However, this amendment will not apply to any of our existing grants. In addition, the amendment provides that one of the factors to be taken into consideration by the Office of the Chief Scientist in deciding whether to approve a grant application is the percentage of the manufacturing of the relevant product that will be conducted outside of Israel. Accordingly, should we seek additional grants from the Office of the Chief Scientist in connection with which we also seek prior approval for manufacturing products outside of Israel, we may not receive such grant or may receive a grant in an amount that is less than the amount we sought.

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

We were incorporated in 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 Robert C. Aldworth, 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.

Since October 1999, the Company’s Ordinary Shares have been quoted on the Nasdaq National Market under the symbol “JCDA.” In addition, the Company’s Ordinary Shares have been quoted on the Tel Aviv Stock Exchange under the same symbol or its Hebrew equivalent since June 18, 2001. We develop, market and support software that enables businesses to web-enable, modernize and integrate their existing host-centric software applications to better serve the needs of their users, customers, and partners. We also provide related professional services, including training, consulting, support and maintenance. Our products and services provide our end users with comprehensive eBusiness enabling solutions.

Typical users of our products and services are medium to large businesses with sophisticated technology requirements. Some of the companies that have implemented or are implementing our solutions include AIG, Bank of America, Caterpillar, Delta Air

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Lines, U.S. Department of Interior, The Federal Reserve Bank, Harrahs, Liberty Mutual, Her Majesty’s Land Registry, Lockheed Martin, Manpower, Porsche Cars North America, Prudential Life Insurance Company and Saab Cars.

As a result of the downturn in global economic conditions, the resulting decline in overall business levels and the related impact on our operations, we implemented two worldwide restructuring and cost reduction plans, first during the fourth quarter of 2001 and again in the third quarter of 2002. The plans included the elimination of approximately 45% of our worldwide workforce on a cumulative basis and a general reduction in all operating expenses. Mainly as a result of implementing the plan, by year-end 2002, total employment was reduced to 156 from a peak of 273 in September 2001. During 2002, total costs and expenses, excluding non-recurring expenses            , were reduced by approximately $9.0 million. The cost of implementing the restructuring plans was $1.4 million in 2001 and $0.5 million in 2002.

On July 31, 2002 we acquired certain assets and assumed certain liabilities of Anota Ltd. for an aggregate purchase price of approximately $763,000, including acquisition costs of $123,000 paid in cash, issuance of 367,373 of our Ordinary Shares at a fair value of $ 640,000 and an earnout arrangement on the basis of future revenues. These assets include key technology and intellectual property related to thin-client, web-to-host, emulation software for desktop connectivity. These technologies enable organizations to make their business critical applications easily available over the Web, without installing any software on the host system or client machines.

See Items 5 and 18 for a description of our capital expenditures for the past three fiscal years. We have made no divestitures during the same time period.

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 2001 and 2002.

B. Business Overview

Industry Overview

The Internet has fundamentally changed the way companies think about their business strategies. It has created opportunities for companies to make their applications and data accessible to their employees, customers, suppliers and other third parties quickly and cost-effectively. The strategic importance of eBusiness is driving the demand for solutions that can provide the necessary infrastructure to extend existing applications and data to browser-enabled desktops and to the Internet.

A significant number of the applications that are critical to companies in operating their businesses, such as customer account information applications, sales and inventory management applications, customer order information applications and manufacturing enterprise resource planning applications, are currently held in host-centric environments such as those based on mainframes and mini-computers. Applications for host-centric systems are typically complex and proprietary and tailored to the needs of a specific

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company. These applications were originally designed to be accessible only by a fixed network of users, principally employees. Furthermore, these applications have complicated text-based user interfaces, which lack the flexibility and intuitiveness of today’s graphical user interfaces. Companies continue to rely heavily on and invest a significant amount of resources in host-centric applications and data.

Companies are increasingly seeking to circumvent the limitations of their existing host-centric 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, such as Customer Relationship Management software (CRM), there is an increasing need to easily integrate existing host-centric applications with these new systems.

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 re-use 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 software that enables businesses to web-enable, modernize, and integrate their existing host-centric applications to better serve the needs of their users, customers, and partners. Our solutions provide the following benefits:

• Leverage Existing Information Technology Resources. Our solutions permit companies to access their existing host-centric applications through browser-enabled desktops or over the Internet, and can integrate these existing applications with newer software implementations such as CRM solutions from companies such as Siebel Systems, Inc. and PeopleSoft,

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Inc. This eliminates the need to replace existing applications through time-consuming and expensive custom programming. Additionally, our solutions allow programmers trained in various languages to program in their native software languages and to deliver applications that are web-enabled.

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

• Provide a Complete eBusiness Enabling Solution. Our comprehensive solutions allow companies to conduct eBusiness to the same extent as available by direct connection with the host computer, without purchasing any other products.

Our solutions have been or are being implemented by hundreds of companies worldwide. Our customers receive the following advantages:

• Flexibility to Adapt to Evolving Business Needs. We design our solutions to work effectively even as companies modify existing and add new applications in response to their evolving business needs. As companies program changes into their applications, our solutions automate the changes in the graphical user interface.

• 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.

• Programming Language Independence. Our solutions protect customers from changes in interface development trends by generating multiple interface language standards from the same interface design.

• Platform Independence. Our Java-based solution provides customers with the flexibility to run our products on any Java-enabled platform, including IBM S/390 (zSeries), AS/400 (iSeries), Sun Solaris, HP UX, IBM AIX, Microsoft Windows NT and Microsoft Windows 2000.

Products and Technology

Our products and services provide our customers with a comprehensive eBusiness enabling solution. Our products include:

Jacada^® Interface Server. Jacada Interface Server generates graphical user interfaces for mainframe and midrange software applications without requiring any change to the host applications. By generating Java or HTML graphical interfaces, Jacada Interface Server enables our customers to extend their host-

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centric applications and data to the Internet and their intranets without rewriting these applications. In addition, Jacada Interface Server provides the modern graphical features users expect from today’s applications. Jacada Interface Server also allows customers to enhance their applications to add functionality, integrate with other data sources and link to other Internet applications.

Jacada Interface Server also provides an ability to modernize the architecture of some host-centric applications. Developed in cooperation with IBM, the Jacada Interface Server’s DDS Bridge and Jacada Interface Server for New Development contain innovative technology which enables new or existing applications written in COBOL or RPG to leverage the Jacada presentation technology to deliver graphical “thin client” user screens, replacing the text-based, “green screen” architecture found in legacy applications. Any software developer can utilize the Jacada Interface Server without any special knowledge of any other programming language. This allows organizations to leverage their existing software skills and resources to build modern applications.

Jacada^® Integrator. Jacada Integrator 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.

Jacada has established sales and marketing relationships with Siebel Systems, PeopleSoft, Computer Associates and SeeBeyond, Inc. to utilize Jacada Integrator where a real-time, non-intrusive solution is required to integrate a host-centric application with its CRM or EAI solutions, respectively. Our customers get the benefits of on-line, real-time integration with back-office applications without rewriting any of their existing systems.

Some of Jacada Integrator’s key features include:

• Automated tools for capturing screens and navigation, minimizing the amount of code to be written;

• Support for a wide range of client front-ends, including Java, Windows APIs (such as ActiveX), and C-language libraries;

• Special adapters and validation with Siebel eBusiness Solutions (CRM);

• Special adapter and validation with SeeBeyond (EAI);

• Special adapter for IBM MQSeries;

• Support for XML;

• Support for Application Servers, including WebSphere and WebLogic; and

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• Support for a wide range of back-end host-centric systems, including IBM mainframes (S/390 or zSeries) presenting 3270 screens, IBM AS/400s or iSeries presenting a 5250 interface, and a variety of UNIX, VMS, and other systems presenting a Telnet (VT100/220) interface.

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

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

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

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

Jacada^® Terminal Emulator. Jacada Terminal Emulator, introduced in August 2002, is a full featured, Java-based, thin client terminal emulator that provides companies with a low cost, thin client alternative to traditional fat client emulation software. Jacada Terminal Emulator eliminates the need to install emulation software on each user’s desktop by automatically deploying such

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software from a web server, which lowers the total cost of ownership for terminal access to host systems.

Professional Services

Our professional services include training, consulting and support, and maintenance services. Support and maintenance services are provided to our customers through agreements under which we provide technical support by telephone, fax, email and the Internet and provide updates, upgrades and fixes to our software products. We require our customers to purchase support and maintenance services for 12 months after the initial purchase of a software license, renewable annually thereafter. In addition, customers can elect optional services such as emergency coverage on a 24 hours per day, seven days per week basis and dedicated technical account managers. We also provide customer training at our Atlanta, Georgia facility and other locations, with coursework related to various aspects of our products.

We provide our customers with training services to assist them in learning how to use our products. We also provide our direct customers with consulting services to assist them with installing and integrating our products into their systems, and with managing and enhancing their utilization of our products on an ongoing basis.

We bill for consulting services by the hour plus out of pocket expenses and for training services by the day plus out of pocket expenses. We typically enter into commitments with customers to provide training and consulting services which are billed on time and materials basis. The majority of our trainers and consultants are located in the United States. Our distributors and other resellers typically provide training and consulting services directly to their customers, assisted by us as necessary.

Principal Markets

Our principal markets are North America and Europe. We generate revenues from licensing our software products to customers and providing customers with training, consulting and support, and maintenance services. Software license revenues constituted approximately 45.4%, 42.8% and 61.7% of our total revenues for the years ended December 31, 2002, 2001 and 2000, respectively, while service and maintenance revenues constituted approximately 54.6%, 57.2% and 38.3% of our total revenues, respectively, for the same periods. Software license revenues generated from North American customers constituted approximately 31.4%, 37.3% and 55.6% of our total revenues for the years ended December 31, 2002, 2001 and 2000, respectively, while service and maintenance revenues generated from North American customers constituted approximately 48.3%, 54.5% and 36.9% of our total revenues, respectively, for the same periods. Software license revenues generated from European customers constituted approximately 14.0%, 5.5% and 6.1% of our total revenues for the years ended December 31, 2002, 2001 and 2000, respectively, while service and maintenance revenues generated from European customers constituted approximately 6.3%, 2.7% and 1.4% of our total revenues, respectively, for the same periods. Our gross margins on software

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license revenues have historically been higher than our gross margins on service and maintenance revenues.

Seasonality

Sales of our products and services tend to be lower in our first quarter, and higher in our fourth quarter, due to the budgeting and purchasing cycles of our current and prospective customers. It is difficult for us to evaluate the degree to which this seasonality may affect our business in the near future because we cannot be sure to what extent recent reductions in revenue are due to seasonality or to the effect of the general economic slowdown.

Raw Materials

Not applicable.

Sales and Marketing

We sell our products through our direct sales force in North America, Europe and Latin America, as well as through our indirect distribution channels, consisting of software distributors, independent software vendors and system integrators. We also use indirect distribution channels in countries where we have no direct sales operations. As of December 31, 2002, we had 40 people in our sales and marketing organization, reduced from 53 at December 31, 2001. The reduction in personnel was effected as part of our July 2002 restructuring.

Our indirect distribution channels have capabilities that complement and augment our eBusiness solution and extend our market reach. In particular, independent software vendors often contribute industry-specific and application-specific expertise as well as large scale project management capabilities that enable us to address a broad range of vertical markets. Independent software vendors and system integrators often package or incorporate our products with their products or solutions. This enables us to create combined offerings that address specific needs, particularly for specific vertical markets, and provide more complete and tailored offerings.

Our marketing efforts are focused on developing greater awareness among our target customers of our solution and the benefits it 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 our direct sales force and our indirect distribution channels. These materials include brochures, white papers, case studies, press releases and our Web site.

Customers

Our customers include both end users to whom we sell our products and services directly and distributors and other intermediaries who either resell our products to end users or incorporate our products into their own product offerings. Typical end users of

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our products and services are medium to large businesses with sophisticated technology requirements.

Our customers are using our solutions to rapidly deploy eBusiness applications. Some examples of our customers and their uses of our products include:

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

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

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

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

• Enterprise resource planning software vendors, which use our solutions in concert with their manufacturing applications software to enable their customers to manage the customers’ manufacturing and inventory processes via the Internet.

Research and Development

We believe that strong product development is essential to our strategy of continuing to enhance and expand the capabilities of our products in order to continue to provide our customers with eBusiness enabling solutions. We have invested significant time and resources in creating a structured process for undertaking all product development. This process involves several functional groups at all levels within our organization and is designed to provide a framework for defining and addressing the activities required to bring product concepts and development projects to market successfully. In addition, we have recruited key software engineers and developers with experience in Java, communications, expert systems and Internet technologies.

Our research and development efforts, which include internal development as well as acquisition of technology components, have been primarily focused on enhancing and adding functionality to our existing products and adding new products based on our expectations of future technologies and industry trends.

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Our research and development expenses were $6.2 million for the year ended December 31, 2002, $6.4 million for the year ended December 31, 2001, and $5.0 million for the year ended December 31, 2000. As of December 31, 2002, 49 professionals were engaged in research and development activities, reduced from 62 professionals at December 31, 2001 as part of our July 2002 restructuring.

Dependence on Patents and Licenses

We are the owner of our core technology and the software products we license to customers. We are not dependent on any third party license or patent with respect to such technology or products. While we have two patents pending for our technology, we believe that the failure to obtain such patents would not diminish our ownership rights in our technology or our software products.

Competition

The eBusiness enabling software market is extremely competitive and subject to rapid change. We believe that the competitive factors affecting the market for our products and services include:

• product functionality and features;

• availability of global support;

• existing vendor relationships;

• ease of product implementation;

• quality of customer support services;

• product reputation; and

• financial stability of vendors.

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

We compete with companies that utilize varying approaches to enable host-centric software applications to be utilized over the Internet. These companies include Attachmate Corporation, IBM, Seagull Software Ltd., TIBCO Software Inc., ClientSoft, Inc., WRQ, Inc. and webMethods, Inc. We expect additional competition from other established and emerging companies. Furthermore, our competitors may combine with

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each other, or other companies may enter our markets by acquiring or entering into strategic relationships with our competitors.

Material Effects of Government Regulation in Israel

Pursuant to the Law for the Encouragement of Capital Investments, 1959, the Israeli government has granted “Approved Enterprise” status to our existing capital investment programs. 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 were significantly reduced.

In order to receive tax benefits, we must comply with a number of conditions and criteria. Although we believe that we have operated and will continue to operate in compliance with the required conditions, we cannot guarantee that this will continue. Once we generate taxable income, if we fail to comply in whole or in part with these conditions and criteria, the tax benefits that we receive could be partially or fully canceled and we could be forced to refund the amount of the benefits we received, adjusted for inflation and interest. We cannot assure you that these tax benefits will be continued in the future at their current levels or at all. The termination or reduction of tax benefits could have a material adverse effect on our business, financial condition and results of operations. In addition, in the event that we increase our activities outside the State of Israel, these activities generally will not be eligible for inclusion in Israeli tax benefit programs. Accordingly, our effective corporate tax rate could increase significantly in the future.

From time to time we have received royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel. The terms of these grants prohibit us from manufacturing products or transferring technologies developed using these grants outside of Israel without special approvals. Even if we receive approval to manufacture these products outside of Israel, we may be required to pay increased royalties, up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. The technology developed with these grants may not be transferred to third parties, including in the context of an acquisition of our company, without the prior approval of a governmental committee under the Research and Development Law, and may not be transferred to non-residents of Israel. These restrictions may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies. In addition, if we fail to comply with any of the conditions imposed by the Office of the Chief Scientist, we may be required to refund any grants previously received, together with interest and penalties.

In 2002, the Research and Development Law was amended to, among other things, enable companies applying for grants from the Office of the Chief Scientist to seek prior approval for conducting manufacturing activities outside of Israel without being subject to increased royalties. However, this amendment will not apply to any of our existing grants. In addition, the amendment provides that one of the factors to be

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taken into consideration by the Office of the Chief Scientist in deciding whether to approve a grant application is the percentage of the manufacturing of the relevant product that will be conducted outside of Israel. Accordingly, should we seek additional grants from the Office of the Chief Scientist in connection with which we also seek prior approval for manufacturing products outside of Israel, we may not receive such grant or may receive a grant in an amount that is less than the amount we sought.

The Israeli Companies Law, which came into effect in February 2000, brought about significant changes to Israel’s corporate law. Under this law, there may be uncertainties regarding corporate governance in some areas. In addition, additional uncertainties exist concerning the application of new U.S. corporate governance rules to foreign companies operating and whose shares trade in the U.S. These uncertainties will persist until these laws have been adequately interpreted, and these uncertainties could inhibit takeover attempts or other transactions and inhibit other corporate decisions.

C. Organizational structure

Jacada owns 100% of the stock in Jacada, Inc., a corporation organized under the laws of the state of Delaware, and 100% of the stock in Jacada (Europe) Limited, a company organized under the laws of England. Jacada, Inc. owns 100% of the stock of Jacada Canada, Inc., a federal corporation incorporated under the laws of Canada. Jacada (Europe) Limited owns 100% of the stock of Jacada Deutschland GmbH, a limited liability company organized under the laws of Germany. Jacada is in the process of organizing two additional subsidiaries in Brazil and Mexico; when the organization is completed, 100% of the stock of each such subsidiary will be owned by Jacada.

D. Property and Equipment

As of December 31, 2002, our headquarters and principal administrative, research and development operations were located in approximately 16,000 square feet of leased office space in Herzliya, Israel. The lease expires in March 2007.

In the United States, we lease approximately 18,000 square feet in Atlanta, Georgia which we utilize for administration, marketing, sales, service and technical support. The lease expires in June 2004. In addition, we lease approximately 5,100 square feet in Brooklyn Park, Minnesota which we use for research and development, sales, and technical support. The lease expires in September 2007. We also lease office space in Miami, Florida, Bellevue, Washington and Chicago, Illinois which we utilize for marketing and sales.

We currently lease office space in England, Germany, Brazil and Mexico which we utilize for sales, marketing and services. These leases are renewable on an annual basis.

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Item 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

We develop, market and support software that enables businesses to utilize their existing host-centric software applications to conduct business over the Internet. We also provide related professional services, including training, consulting, support and maintenance.

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

We and our subsidiaries have adopted American Institute of Certified Public Accountants Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. We and our subsidiaries have also adopted SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” for all transactions entered into after January 1, 2000. SOP 98-9 requires that revenue be recognized 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. We derive our revenues from license fees for our products, fees from consulting and training and from maintenance and support. We sell licenses to our customers primarily through our direct sales force and indirectly through resellers. Both our customers and our resellers are considered end users. We are also entitled to revenues from some resellers upon the sublicensing of the software to end users. Revenues from these sublicensing transactions are recognized when such revenues are paid to us upon the sublicensing of the software by the resellers.

Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable, and collectibility is probable. We do not grant a right of return to our customers. We consider all arrangements with payment terms extending beyond one year 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.

Revenues from royalties are recognized when such royalties are paid to us, and our subsidiaries, by the resellers.

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

Transactions that include consulting and training services are evaluated to determine whether those services are essential to the functionality of other elements of the transaction. When services are not considered essential, the revenue allocable to the software services is recognized as the services are performed. To date, we have determined that the consulting and training services are not considered essential to the functionality of other elements of the transaction.

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

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

Cost of software license revenues consists of royalties, including payments to the Office of the Chief Scientist of the State of Israel, amortization of acquired technology, commissions, and costs of duplicating media and documentation. Cost of service and maintenance revenues consists of compensation expense, related overhead and subcontractors costs for personnel engaged in training, consulting, support and maintenance services for our customers.

We have incurred substantial research and development costs and have invested heavily in the expansion of our sales and marketing and professional services organizations to build an infrastructure to support our long-term growth strategy. Our full-time employees increased from 21 as of January 1, 1995 to 156 as of December 31, 2002. At times, the number of full-time employees during 2002 exceeded 156 persons; however, we reduced our workforce in July 2002, in an effort to contain our costs during the economic downturn.

Costs for the development of new software products and substantial enhancements to existing software products are expensed as incurred until technological feasibility has been established, at which time any additional development costs are capitalized. Because we do not incur material costs between the time of completion of development of a software product and the point at which the product is ready for general release, development costs are charged to the statement of operations as incurred.

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A majority of our revenues and that of our subsidiaries is generated in United States dollars. Our management believes that the dollar is the primary currency of the economic environment in which we and our subsidiaries operate. Thus, our functional and reporting currency and the functional and reporting currency of our subsidiaries is the dollar.

The effects of foreign currency exchange rate for the years ended December 31, 2002, 2001, and 2000 were immaterial.

Recently Issued Accounting Pronouncements

For a discussion of applicable recently issued accounting pronouncements, see Note 2 to our financial statements included in Item 18 below.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates are evaluated by us on an on-going basis. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

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

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element of the arrangement based on the relative fair values of the elements. We determine the fair value of each element in multiple-element arrangements based on VSOE.

In judging the probability of collection of software license fees we continuously monitor collection and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. In connection with customers with whom we have no previous experience, we may utilize independent resources to evaluate the creditworthiness of those customers. For some customers, typically those with whom we have long-term relationships, we may grant extended payment terms. We perform on-going credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current creditworthiness, as determined by our review of their current credit information. If the financial situation of any of our customers were to deteriorate, resulting in an impairment of their ability to pay the indebtedness they incur with us, additional allowances may be required.

Our software products do not require significant customization or modification. Service revenues include post-contract customer support, consulting and training. Post-contract customer support arrangements provide for technical support and the right to unspecified upgrades on an if-and-when-available basis. Revenues from those arrangements are recognized ratably over the term of the arrangement, usually one year. Consulting services and training are recognized on a time and material basis as the services are provided.

Impairment of long-lived assets. We and our subsidiaries’ long-lived assets and certain identifiable intangibles are reviewed for impairment in accordance with Statement of Financial Accounting Standard No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No.144”) whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be recoverable. Recoverability of an asset or group of assets to be held and used is measured by a comparison of the carrying amount of an asset or group of assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. We have performed impairment tests on our long-lived assets and as of December 31, 2002, no impairment losses have been identified.

Goodwill. Under Statement of Financial Accounting Standard No.142, “Goodwill and Other Intangible Assets” (“SFAS No, 142”) goodwill acquired in a business combination which closes on or after July 1, 2001 is deemed to have indefinite life and will not be amortized. SFAS No.142 requires goodwill to be tested for impairment on adoption and at least annually thereafter or between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value is determined using market multiples and comparative analysis. Significant estimates used in the methodologies include estimates

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of market multiples for the reportable unit. We have performed impairment tests and determined that our goodwill of $4.6 million is not subject to an impairment charge as of year end 2002.

Our historical operating results for the years ended December 31, 2002, 2001 and 2000 as a percentage of net revenues are as follows:

	Year Ended December 31,
	2002		2001		2000
Revenues:
Software licenses	45.4	%	42.8	%	61.7	%
Services	21.0		35.2		24.2
Maintenance	33.6		22.0		14.1
Total revenues	100.0	%	100.0	%	100.0	%
Cost of revenues:
Software licenses	1.1		2.0		2.9
Services	14.5		19.0		14.4
Maintenance	5.8		6.7		6.3
Total cost of revenues	21.4		27.7		23.6
Gross profit	78.6		72.3		76.4
Operating expenses:
Research and development	28.7		25.2		19.8
Sales and marketing	43.9		57.2		51.2
General and administrative	21.4		22.2		14.4
Restructuring and other non recurring charges	2.3		11.2		0.0
Total operating expenses	96.3		115.8		85.4
Operating loss	(17.7	)	(43.5	)	(9.0	)
Financial and other income (expense), net	4.2		9.1		12.3
Income (loss) before income taxes	(13.5	)	(34.4	)	3.1
Income taxes	0.0		0.0		(0.0	)
Net income (loss)	(13.5	)%	(34.4	)%	3.1	%

Years Ended December 31, 2002, 2001 and 2000

Revenues and Cost of Revenues

Revenues. Revenues were $21.5 million, $25.5 million and $25.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in total revenues in 2002 in relation to the two prior years is primarily due to sluggish global economic conditions. For the year ended December 31, 2002, no customer represented 10% or more of our revenues, while for the years ended December 31, 2001 and 2000, there were one and two such customers, respectively.

Software license revenues were $9.8 million, or 45.4% of revenues for the year ended December 31, 2002, compared to $10.9 million, or 42.8% of revenues, for the year ended December 31, 2001, and compared to $15.5 million, or 61.7% of revenues, for the year ended December 31, 2000. The reduction in software revenues during 2002 and 2001 is directly related to the continuing downturn in global economic conditions, as a

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result of which many customers delayed purchases or placed smaller initial orders for our software products. In addition, during 2002 and 2001, increased pricing pressures as a result of our competitors reducing their prices and of customers more aggressively seeking more favorable prices also impacted overall software revenues.

Service revenues were $4.5 million or 21.0% of revenues for the year ended December 31, 2002 compared to $9.0 million or 35.2% of revenues, for the year ended December 31, 2001 and compared to $6.1 million or 24.2% of revenues for the year ended December 31, 2000. Service revenues are generated primarily from supporting customers during the implementation of projects, including our software products. As a result, service revenues decreased in 2002 due to a decline in our software revenues and to a decrease in average rates charged for services, as we experienced a greater degree of competition from customers’ in house technical resources.

Maintenance revenues were $7.2 million or 33.6% of revenues for the year ended December 31, 2002 compared to $5.6 million or 22.0% of revenues, for the year ended December 31, 2001 and compared to $3.5 million or 14.1% of revenues for the year ended December 31, 2000. The increase in maintenance revenues during 2002 was primarily related to our expanding customer base and related annual maintenance renewals.

Cost of Revenues. Cost of revenues was $4.6 million, or 21.4% of revenues for the year ended December 31, 2002 compared to $7.1 million, or 27.7% of revenues, for the year ended December 31, 2001 and compared to $5.9 million, or 23.6% of revenues, for the year ended December 31, 2000. The changes in cost of revenues during these periods were primarily due to changes in the costs of service and maintenance revenues, discussed below, which together comprise 93% of total cost of revenues.

Cost of software license revenues was $0.3 million, or 1.1% of revenues, for the year ended December 31, 2002 compared to $0.5 million, or 2.0% of revenues, for the year ended December 31, 2001 and compared to $0.7 million, or 2.9% of revenues, for the year ended December 31, 2000. The decrease in cost of software license revenues is due to a decrease in payment of royalties to the Office of the Chief Scientist with respect to certain products and amortization of acquired technology.

Cost of service revenues was $3.1 million, or 14.5% of revenues, for the year ended December 31, 2002, compared to $4.9 million, or 19.0% of revenues, for the year ended December 31, 2001 and $3.6 million, or 14.4% of revenues, for the year ended December 31, 2000. The decrease in cost of service revenues during 2002 was primarily due to the decrease in service revenues and utilization for the period, as we adjusted the number of service professionals in relation to actual and anticipated near term business levels.

Cost of maintenance revenues was $1.2 million, or 5.8% of revenues, for the year ended December 31, 2002, compared to $1.7 million, or 6.7% of revenues, for the year ended December 31, 2001 and $1.6 million, or 6.3% of revenues, for the year ended December 31, 2000. The decline in cost of maintenance, as a percentage of maintenance

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revenues for 2002, is related to efficiencies gained from providing support to an expanding customer base.

Operating Expenses

The changes in total operating expenses to $20.2 million in 2002 from $26.7 million in 2001 and from $21.5 million in 2000, exclusive of non-recurring expenses, were primarily due to changes in manpower and related costs in support of actual and projected business levels. We experienced compounded annual growth rates in excess of 60% during the years prior to 2001 and had similar growth expectations built into our 2001 business plan. The impact of the global economic slowdown did not affect Jacada until late in the second quarter of 2001. As we gained an understanding of the impact of the slow down in the global economy and the anticipated impact on our business, we implemented a restructuring and cost reduction plan described in Restructuring below. The restructuring moves were at least partially responsible for reducing operating expenses (excluding non-recurring charges) as a percentage of revenues to 94.0% in 2002 compared to 104.6% in 2001.

Research and Development. Research and development expenses were $6.2 million, $6.4 million, and $5.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. The increase during 2001 was attributable to the acquisition of Propelis and to increased development programs, quality assurance and documentation, and amortization of capitalized technology associated with acquisitions. As part of our restructuring, we re-focused our development efforts and began supplementing internal development efforts with acquired technology. During the 2002 fourth quarter we acquired technology components for incorporation into our future product suite resulting in approximately $0.4 million of incremental expense, partially offsetting some of our expense reduction efforts. As a percentage of total revenues, research and development expenses were 28.7%, 25.2%, and 19.8% for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in percentage of total 2002 revenues represented by research and development expenses was due to the decline in revenues, which was not offset by the same decrease in research and development expenses.

Sales and Marketing. Sales and marketing expenses were $9.4 million, $14.6 million and $12.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. The changes during these periods were attributable to changes in our sales and marketing personnel in support of business levels, the impact of different revenue levels on variable compensation costs, such as sales commissions and to increased spending on marketing programs aimed at increasing our brand awareness. As a percentage of total revenues, sales and marketing expenses were 43.9%, 57.2% and 51.2% for the years ended December 31, 2002, 2001 and 2000, respectively.

General and Administrative. General and administrative expenses were $4.6 million, $5.7 million and $3.6 million for the years ended December 31, 2002, 2001 and 2000, respectively. The changes in general and administrative expenses were in part due to changes in the number of personnel and related overhead required in support of our operations during the 2000 to 2002 periods. During 2001, we also increased our reserve

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for potential non-collectable trade receivables associated with the worsening global economy. As a percentage of total revenues, general and administrative expenses were 21.4%, 22.2% and 14.4% of total revenues for the years ended December 31, 2002, 2001 and 2000, respectively.

Restructuring and other Non-Recurring Charges. During 2002 we recorded a charge in the amount of $0.5 million, or 2.3% of revenues, associated primarily with a reduction in work force as part of the July 2002 restructuring plan discussed below. During 2001, we recorded a charge of $2.8 million, or 11.2% of revenues, including charges associated with an arbitration award ($0.2 million), the write-off of previously acquired technology ($1.2 million) and the cost of our fourth quarter 2001 restructuring plan ($1.4 million). Each of these charges is discussed in more detail below.

Arbitration Charge. In August 1999 a former distributor filed an arbitration complaint against one of our subsidiaries, alleging, among other things, that the subsidiary breached its agreement with such distributor by directly selling our products to a customer which the distributor claimed that it had the exclusive right to sell, entitling the distributor to damages. The arbitration was held in November 2000 and a decision by the arbitrators was entered on April 3, 2001. The arbitrators awarded the distributor a net amount of $392,000, including costs, to date and 50% of amounts collected from the customer in the future. We had previously established a reserve for a potential settlement of $125,000, representing an amount equal to the limitation of liability clause in the agreement. As a result of the award, we recorded a charge in the first quarter of 2001 of $417,000, representing the award to date plus $150,000 for amounts billed to the customer, less the reserve previously recorded. During the fourth quarter of 2001, we reduced the reserve by $150,000 based on the customer’s failure to pay the amounts billed during the first quarter of 2001.

We have appealed the decision of the arbitrators on the grounds that the decision did not cap the subsidiary’s exposure to the amount set forth in the limitation of liability provision of the agreement. In the interim, pursuant to the arbitrators’ decision, we have accrued and will accrue on a prospective basis as a selling expense an amount equal to 50% of amounts collected from the customer that relate to the agreement that was the subject of the arbitration proceeding.

Technology Write Off. During the third quarter of 2001 and as part of our 2001 restructuring, we revised our product development plan and abandoned the use of technology previously acquired for use in the product development cycle. As a result, we wrote off unamortized technology in the amount of $1.2 million during 2001.

Restructuring. As a result of the downturn in global economic conditions, the resulting decline in overall business levels and the related impact on our operations, we implemented two worldwide restructuring and cost reduction plans, first during the fourth quarter of 2001 and again in the third quarter of 2002. The plans included the elimination of approximately 45% of our worldwide workforce on a cumulative basis and a general reduction in all operating expenses. Mainly as a result of implementing the plan, by year-end 2002, total employment was reduced to 156 from a peak of 273 in September 2001.

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During 2002, total costs and expenses, excluding non-recurring expenses, were reduced by approximately $9.0 million. The cost of implementing the restructuring plans was $1.4 million in 2001 and $0.5 million in 2002.

Financial Income (Expense), Net. Net financial income was $0.9 million for the year ended December 31, 2002, $2.3 million for the year ended December 31, 2001 and $3.1 million for the year ended December 31, 2000. In October 1999, we raised approximately $51 million, net of expenses, in an initial public offering. We maintained most of the funds raised in the public offering throughout 2000 and the first half of 2001. In August 2001 we used approximately $6.9 million for the acquisition of certain assets of Propelis Software, Inc., a business unit of Computer Network Technology Corporation, and related expenses. Most of the financial income was generated from investments of our funds in certain financial instruments, which generate interest and investment income. The decline is also associated with a general reduction in interest rates during the 2000 to 2002 periods.

Income Taxes. As of December 31, 2002, we had approximately $6.0 million of net operating loss carryforward for Israeli tax purposes, approximately $0.8 million of net operating loss carryforward for German tax purposes, approximately $4.2 million of net operating loss carryforward for United States federal tax purposes and approximately $4.9 million of net operating loss carryforward for United Kingdom tax purposes. The carryforwards are available to offset future taxable income. The United States net operating loss carryforward expires in various amounts between the years 2010 and 2022. The Israeli and the United Kingdom net operating loss carryforwards have no expiration date.

Net Income (Loss). As a result of the above factors, our operations resulted in net losses of $2.9 million in 2002 and $8.8 million in 2001. In 2000, we generated net income of $0.8 million.

B. Liquidity and Capital Resources

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

As of December 31, 2002, we had $41.4 million in cash and investments, all of which were interest bearing. During 2002, operating activities provided approximately $0.2 million in cash. One of the major components providing cash during 2002 was a reduction in trade receivables of $1.6 million. Our ability to structure transactions to yield upfront payment and our collection efforts have resulted in a decline in trade receivables expressed in days outstanding from 66 in 2001 to 44 in 2002. Other major components providing cash during 2002 included non-cash depreciation and amortization of $1.6 million and the accrued interest and amortization of premium on marketable securities of $0.4 million. Partially offsetting the provision of cash was the net loss of $2.9 million generated from operations and non-recurring charges and a reduction in accrued expenses and other liabilities of $0.6 million.

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As of December 31, 2001, we had $41.6 million in cash and investments, all of which were interest bearing. During 2001, operating activities used approximately $1.8 million in cash. The major components using cash during 2001 included the net loss of $8.8 million from operations and non-recurring charges and a reduction in trade payables of $1.6 million. Partially offsetting the use of cash was a reduction in trade receivables of $4.4 million at the end of 2001, the non-cash write-off of acquired technology of $1.2 million and non-cash depreciation and amortization of $1.5 million. The reduction in trade receivables resulted from a decline in days sales outstanding from 74 in 2000 to 66 in 2001 and from a reduction in fourth quarter 2001 revenues in relation to fourth quarter 2000 as a result of global economic conditions.

Expenditures on property and equipment were approximately $0.6 million, $1.5 million and $1.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. These expenditures include computer hardware and software used in product development and testing, leasehold improvements relating to new and existing facilities and office equipment in support of our operations. In addition, during 2001 we invested approximately $6.9 million in the acquisition of certain assets of Propelis Software, a business unit of Computer Network Technology Corporation, and $0.7 million to license technology for use in product development. The acquisition of certain assets of Anota Ltd. during 2002 did not involve the payment of cash consideration as part of the purchase price.

The purchase price of the acquisitions has been allocated to the assets acquired and the liabilities assumed based on the estimated fair value of such assets at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill. Fair value of assets acquired and liabilities assumed approximate their book value. Fair value of technology rights was determined using the income approach, which reflects the present value of the projected earnings to be generated by the product which incorporates the technology. Based on the income approach, Propelis technology rights were valued at $1.3 million and determined to have a remaining life of five years, based on the income approach and the product life cycle. Anota technology rights and customer lists were each valued at $0.2 million and determined to have remaining lives of five and three years, respectively.

We have financed our operations and capital requirements through the sale of equity securities and bank borrowings in past years. We have a $2.8 million credit facility with two banks, which is secured by substantially all of our assets in Israel. We have borrowed under the facility from time to time on terms that vary for each borrowing. There were no borrowings outstanding as of December 31, 2002 or 2001 under the facility.

Our capital requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing, marketing, selling and supporting our products, the timing and extent of establishing additional international operations, acquisitions and other factors. Over the next two years, we expect to devote substantial capital resources to expand our sales and marketing channels, and to invest in

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research and development activities. We believe our working capital is sufficient for our present requirements.

We are not party to any material off-balance sheet arrangements.

	Payments due by period
Contractual Obligations	Total	Less than 1 year	1-3 years	3-5 years	More than 5 years
Operating Leases	1,731	525	770	436

Please refer to Item 3.D and Item 10.E for certain information regarding the possible elimination of tax benefits in Israel.

C. Research and Development

We believe that strong product development is essential to our strategy of continuing to enhance and expand the capabilities of our products in order to continue to provide our customers with enabling solutions. We have invested significant time and resources in creating a structured process for undertaking all product development. This process involves several functional groups at all levels within our organization and is designed to provide a framework for defining and addressing the activities required to bring product concepts and development projects to market successfully. In addition, we have recruited key software engineers and developers with experience in Java, communications, expert systems and Internet technologies.

Our research and development efforts have been primarily focused on enhancing and adding functionality to our existing products and adding new products based on our expectations of future technologies and industry trends.

Our research and development expenses were $6.2 million for the year ended December 31, 2002, $6.4 million for the year ended December 31, 2001 and $5.0 million for the year ended December 31, 2000. As of December 31, 2002, 2001 and 2000, respectively, we had 49, 62 and 63 employees engaged in our product development activities.

D. Trend Information

We have been affected by global economic conditions in that existing and potential customers are closely monitoring their capital investments in products such as ours. The early effects of these conditions forced us to temper our business plan objectives and ultimately resulted in a small staff reduction in July 2001 as well as in the restructuring and further staff reductions in 2002 discussed in part A of this Item 5.

Partially as a response to the economic slowdown in the United States, we increased our focus on non-U.S. sales. We believe that this was one of the reasons for the increase in the percentage of our revenues generated by customers in Europe from 8.2% in 2001 to 20.3% in 2002. In the last quarter of 2002, we opened offices in Mexico City, Mexico, and in Sao Paulo, Brazil. We intend to continue this focus on non-U.S. sales in

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2003. This strategy may result in our increasingly being subject to risks of international operations. We have also adopted a strategy of seeking to increase our sales both in and out of the U.S. by utilizing indirect distribution channels.

Our sales cycle generally continues to be at least six months from the date we qualify a prospective customer, but could be longer based on specific circumstances. We have no backlog of orders, as backlog is not a significant factor in our business.

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Item 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

The following table sets forth certain information regarding our executive officers and directors as of February 28, 2003:

Name	Age	Position
Gideon Hollander(1)(2)	38	Chief Executive Officer and Director
Michael J. Potts	40	President
Robert C. Aldworth	50	Chief Financial Officer
David Holmes	47	Executive Vice President, Sales and Marketing
Tzvia Broida	33	Vice President, Finance
Christian Singer	39	Managing Director, Jacada Deutschland GmbH
Michael Warner	42	Managing Director, Jacada (Europe) Limited
Yossie Hollander(1)	45	Chairman of the Board and Director
Amnon Shoham(1)(2)(3)	45	Director
Ohad Zuckerman(3)	38	Director
Naomi Atsmon(3)	50	Director

(1) Member of the Executive Committee

(2) Member of the Compensation Committee

(3) Member of the Audit Committee

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

Michael J. Potts has been President of Jacada Ltd. since January 2001. Prior to his appointment as President, Mr. Potts served as President of Jacada, Inc. and President of World Wide Distribution since 1998. From July 1995 to May 1998, Mr. Potts was a Senior Vice President of Jacada, Inc. From September 1987 to April 1995, Mr. Potts held various sales and sales management positions with Dun & Bradstreet Software, a financial application software company, later acquired by Geac Computer Corporation Limited, until his resignation as Eastern Regional Manager. Mr. Potts and Jacada have entered into an agreement which calls for Mr. Potts to resign from his current position with Jacada effective May 31, 2003, and, from that time through the end of 2004, to provide Jacada with advisory services.

Robert C. Aldworth has been the Chief Financial Officer of Jacada Ltd. since January 2001. From August 1999 to July 2000, he was Chief Financial Officer and a director of Real Estate.com, Inc., an internet service provider to real estate professionals, and from June 1997 to March 1999 he was Chief Financial Officer at Homestead Village Inc., a publicly held provider of extended stay lodging. From January 1996 to June 1997, he was Chief Operating Officer of L.A. T Sportswear Inc., a publicly held manufacturer and distributor of sporting apparel.

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

Tzvia Broida is the Vice President, Finance of Jacada Ltd., having served in this capacity since March 2000. Mrs. Broida has held various positions at Jacada since August 1995. From 1994 to 1995, Mrs. Broida worked as an accountant at the accounting firm of Yehuda Ehrlich & Partners. From 1992 to 1994, Mrs. Broida worked as an accountant at the accounting firm of Vexler, Kodenzick & Partners.

Christian Singer has been Managing Director of Jacada Deutschland GmbH since February 2001. From April 2000 until he joined Jacada, Mr. Singer worked as Business Unit Manager and Director Sales & Marketing for Geac Central Europe. From 1997 to 2000, he held various positions in Baan Company in Germany and the UK, where he successfully established the Baan Automotive Organisation. Between 1992 and 1997, Mr. Singer was employed at Zeuna Stärker GmbH & Co KG, a German Tier 1 automotive supplier with operations on three continents.

Michael Warner has been Managing Director, Jacada (Europe) Limited since August 2001 and Director Channels of Jacada (Europe) Limited since June 2000. From 1995 to June 2000, he held various sales management positions with Sterling Software UK Limited, later acquired by Computer Associates Inc. until his resignation as Regional Manager, Eastern Europe. From 1990 to 1995 he held various sales positions at McDonnell Douglas Information Systems Ltd., an international software provider.

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

Amnon Shoham has served as a director since January 1994. Mr. Shoham is the Managing Director of Cedar Advisors Inc., a position he has held since 2001. From 1997 to 2000, Mr. Shoham was the Managing Director of Cedar Financial Advisors (Israel) Ltd. Mr. Shoham is also associated with Cedar Fund II, a venture fund investing in Israel-related, high technology companies. From 1993 to 1997, Mr. Shoham served as a Managing Partner of Star Ventures, a venture capital firm in Israel. Mr. Shoham serves on the board of directors of several private companies.

Ohad Zuckerman has been a director of Jacada since December 2000. Mr. Zuckerman is the CEO and President of Zeraim Gedera Ltd., an agricultural company which specializes in development and production of vegetable seeds, a position he has held since January 2000. From 1998 to January 2000, Mr. Zuckerman served as the Executive Vice-President of Zeraim Gedera and from 1990 to 1998 he served at the same

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company as the Marketing Manager. Mr. Zuckerman served as a member of the board of directors at Maximal Innovative Intelligence LTD, a provider of software for extracting information from data warehouses, from 1998 to 2002.

Naomi Atsmon has served as a director of Jacada since June 2001. Ms. Atsmon served as a Division President of Amdocs Ltd., a provider of information system solutions to communications companies, from July 1997 to December 2002. From 1994 until 1997, Ms. Atsmon served as a vice president at Amdocs Ltd. Ms. Atsmon has held various positions at Amdocs since 1986.

B. Compensation

The aggregate remuneration we paid for the year ended December 31, 2002 to all executive officers as a group (9 persons including our former CTO, who resigned effective October 2002 and the former president of Jacada, Inc., who resigned effective July 2002), was $1,696,156 in salaries, fees, commissions and bonuses. This amount includes $41,161 set aside or accrued to provide for pension, retirement or similar benefits provided to our executive officers.

As of May 20, 2003, directors (except the CEO) will receive $750 for each meeting of the board of directors attended and each meeting of a committee of the board of directors attended. Prior to such date, directors did not receive cash compensation for their service on the board of directors or any committee of the board of directors. In addition, all directors are entitled to be reimbursed for their expenses incurred in connection with the discharge of their responsibilities as board members, including attending board of directors meetings. Directors also receive options to purchase our ordinary shares.

As of April 30, 2003, options to purchase 1,318,091 ordinary shares granted to our directors and executive officers (11 persons) under our option plans were outstanding. The weighted average exercise price of these options was $3.24 per share.

C. Board Practices

Election and Term of Directors

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

As of the date of filing of this form, we have authorized five directors. In accordance with the terms of our articles of association, the board of directors is divided into three classes, with the following terms of office:

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• Class I directors, whose terms expire at the annual meeting of shareholders to be held in 2003;

• Class II directors, whose terms expire at the annual meeting of shareholders to be held in 2004; and

• Class III directors, whose terms expire at the annual meeting of shareholders to be held in 2005.

Our Class I directors are Amnon Shoham and Ohad Zuckerman. Our Class II director is Naomi Atsmon. Our Class III directors are Gideon Hollander and Yossie Hollander.

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

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

Alternate Directors

Our articles of association provide that a director may appoint, by written notice to us, any individual, whether or not the person is then a member of the board of directors, to serve as an alternate director. The appointment of an alternate director is subject to the consent of the board of directors if the appointee is not then a member of the board of directors. Any alternate director shall have all of the rights and obligations of the director appointing him or her, except the power to appoint an alternate, unless otherwise specifically provided for in the appointment of such alternate. The alternate director may not act at any meeting at which the director appointing him or her is present. The alternate director may act as an alternate for several directors and have the corresponding number of votes. Unless the time period or scope of any appointment is limited by the appointing director, the appointment is effective for all purposes and for a period of time concurrent with the term of the appointing director. Currently, no alternate directors have been appointed.

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Audit Committee

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

The responsibilities of the audit committee include identifying irregularities in the management of our business and approving related-party transactions as required by law.

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

The current members of the audit committee are: Amnon Shoham, Ohad Zuckerman and Naomi Atsmon.

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

Compensation Committee

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

The current members of the compensation committee are: Gideon Hollander and Amnon Shoham.

External Directors

Under the Israeli Companies Law, Israeli companies that are registered under the laws of Israel and whose shares are listed for trading on a stock exchange outside of Israel are treated as public companies. Under this law, a public company, like ours, is required to appoint two external directors. This law provides that a person may not be appointed as an external director if the person or the person’s relative, partner, employer or any entity under the person’s control, has, as of the date of the person’s appointment to

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serve as external director, or had, during the two years preceding that date, any affiliation with the company, any entity controlling the company or any entity controlled by the company or this controlling entity. The term “affiliation” includes an employment relationship, a business or professional relationship maintained on a regular basis, control and service as an office holder. External directors are elected at a shareholders meeting, provided that either the majority of shares voted at the meeting, including at least one third of the shares of non-controlling shareholders voted at the meeting, vote in favor of such election or the total number of shares voted against the election does not exceed one percent of the aggregate voting rights in the company. External directors do not have powers or authority that are different from those granted to all other directors. An external director is appointed for a term of three years.

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

D. Employees

As of December 31, 2002, we had 60 employees in Israel, 86 in the United States, 9 in Europe and 1 in Latin America. Of our 156 employees, 49 were engaged in research and development, 40 in sales, marketing and business development, 35 in professional services and technical support and 32 in finance, administration and operations. During fiscal 2002, we reduced our workforce by a total of 39 primarily through the restructuring implemented in July 2002.

With respect to our Israeli employees, we are subject to Israeli labor laws and regulations. These laws principally concern matters such as paid annual vacation, paid sick days, length of the workday and work week, minimum wages, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment.

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

E. Share Ownership

1. Not applicable.

2. Option Plans. We currently maintain three option plans, the 1994 Option Plan, the 1996 Option Plan and the 1999 Option Plan.

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The purpose of our option plans is to afford an incentive to officers, directors, employees and consultants of ours, or any of our subsidiaries, to acquire a proprietary interest in us, to continue as officers, directors, employees and consultants, to increase their efforts on behalf of us and to promote the success of our business.

We have reserved 5,760,450 ordinary shares under these option plans for issuance upon the exercise of options to be granted to officers, directors, employees and consultants of our subsidiaries. As of December 31, 2002, options to purchase 3,551,382 ordinary shares were outstanding under the option plans. The weighted average exercise price of options outstanding under our option plans is $3.74 as of December 31, 2002.

Our option plans are administered by our board of directors and the compensation committee of our board of directors. Under the option plans, options to purchase our ordinary shares may be granted to officers, directors, employees or consultants of ours or our subsidiaries. In addition, pursuant to the option plans, the exercise price of options shall be determined by our compensation committee but may not be less than the par value of the ordinary shares. The vesting schedule of the options is also determined by our compensation committee but generally the options vest over a three to four year period. Generally, options granted under the option plans are exercisable until the earlier of ten years from the date of the grant of the option or the expiration dates of the respective option plans. The 1994 Option Plan, the 1996 Option Plan and the 1999 Option Plan will expire on December 31, 2003, December 31, 2005 and December 31, 2009, respectively.

Item 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

The following table sets forth, to the best of our knowledge, as of May 19, 2003, those shareholders that own 5% or more of our capital stock.

Name of Beneficial Owner	Number of Shares Owned	Percentage
Yossie Hollander(1)	2,144,010	11.3%
Airbus Foundation(2)	2,025,590	10.7%
Dr. Meir Barel(3)	1,712,814	9.1%
Gideon Hollander(4)	1,189,988	6.4%

(1) Based on a Directors and Officers Questionnaire submitted to us by Mr. Hollander. Represents 1,341,280 ordinary shares owned individually by Mr. Hollander, 302,670 ordinary shares owned by Mr. Hollander’s spouse and 500,060 ordinary shares owned by Dana Hollander Settlement 1991, LLC, a Nevada limited liability company as to which Mr. Hollander is an income beneficiary of a trust holding a 99% membership interest therein. Does not include an aggregate of 1,549,600 ordinary shares owned indirectly by various trusts, as equity holders of certain foreign entities, as to which Mr. Hollander and/or his children, as beneficiaries of such trusts, may be deemed to have interests. Any such interest would be in an indeterminable number of the ordinary shares owned indirectly by such trusts. Mr. Hollander disclaims beneficial ownership of any ordinary shares so held by such trusts. We make no representation as to the accuracy or

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completeness of the information reported. The address of Mr. Hollander is 400 Perimeter Center Terrace, Suite 100, Atlanta, Georgia 30346.

(2) Based on a Schedule 13G/A filed with the Commission on January 9, 2003, this amount represents 2,025,590 ordinary shares held by Airbus Foundation. Based on a Schedule 13G/A filed with the Commission on January 30, 2002, Airbus Foundation held 1,146,300 ordinary shares as of such date. Based on a Schedule 13G filed with the Commission on July 19, 2001, Airbus Foundation held 1,002,500 ordinary shares as of such date. We make no representation as to the accuracy or completeness of the information reported. The address of Airbus Foundation is c/o Allegemeines, Treuunternehmen, P.O. Box 83, FL – 9490 Vaduz, Liechtenstein.

(3) Based on a Schedule 13G/A filed with the Commission on February 11, 2002, this amount represents ordinary shares held by the following entities of which Dr. Barel is the sole director and primary owner: (a) 1,038,278 ordinary shares held by SVM Star Venture Capital Management Ltd. (Star Israel) and (b) 647,242 ordinary shares held by Star Ventures Management GmbH no. 3 (Star Germany). We make no representation as to the accuracy or completeness of the information reported. The address of Dr. Barel is Possartstrasse 9, D-81679, Munich, Germany.

(4) Based on a Schedule 13G filed with Commission on February 13, 2001. We make no representation as to the accuracy or completeness of the information reported. The address of Mr. Hollander is 11 Galgalei Haplada Street, Herzliya, 46722, Israel.

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 May 7, 2003, there were 63 record holders of Jacada shares in the United States, which represented 42.9% of the outstanding shares as of such date.

B. Related Party Transactions

A loan in the amount of $60,000 was made in November 2000 to Tzvia Broida, who is our Vice President of Finance. The loan, which bears interest in accordance with Israeli law at the rate of 4% per annum, is evidenced by a promissory note. The loan is repayable in monthly instalments of 2,000 NIS (about $430) beginning in October 2001. The monthly instalments increased to 5,000 NIS (about $1,100) in February 2002 and to 7,000 NIS (about $1,400) in January 2003. The amount outstanding on such loan on December 31, 2002 was 150,007 NIS (approximately $31,667).

C. Interests of Expert and Counsel

Not applicable.

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Item 8: FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

See Item 18 for audited consolidated financial statements.

Export Sales

The Company generated approximately 80% of its revenues in North America and approximately 20% in Europe during the period beginning January 1, 2002 and ending December 31, 2002.

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

We have no current intention of paying dividends.

B. Significant Changes

There have been no significant changes since the date of our financial statements filed with this Annual Report for the year 2002.

Item 9: THE OFFER AND LISTING

A. Offer and Listing Details

Share History

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

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

Year	Period	High		Low
1999	10/14/99 - 12/31/99	$	37.375	$	8.000
2000	01/01/00 - 12/31/00		33.375		4.375
2001	01/01/01 - 12/31/01		6.300		2.050
2002	01/01/02 - 12/31/02		3.740		1.080

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

Period	High		Low
01/01/01 – 03/31/01	$	6.250	$	4.375
04/01/01 – 06/30/01		6.300		3.437
07/01/01 – 09/30/01		4.240		2.250
10/01/01 – 12/31/01		3.200		2.050
01/01/02 – 03/31/02		3.740		2.820
04/01/02 – 06/30/02		3.500		2.360
07/01/02 – 09/30/02		2.440		1.490
10/01/02 – 12/31/02		1.850		1.080
01/01/03 – 03/31/03		1.710		1.180

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

Month	High		Low
April 2003	$	2.12	$	1.47
March 2003		1.71		1.35
February 2003		1.65		1.20
January 2003		1.52		1.18
December 2002		1.71		1.22
November 2002		1.85		1.08

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 as of December 31, 2002.

Year	Period	High		Low
2001	06/18/01 - 12/31/01	$	3.88	$	1.91
2002	01/01/02 - 12/31/02	$	3.48	$	1.21

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The following table shows the high and low market prices on the TASE for our ordinary shares for each financial quarter since trading commenced.

Period	High		Low
06/18/01 – 06/30/01	$	3.88	$	3.58
07/01/01 – 09/30/01		3.79		2.33
10/01/01 – 12/31/01		2.91		1.91
01/01/02 – 03/31/02		3.48		2.66
04/01/02 – 06/30/02		3.48		2.53
07/01/02 – 09/30/02		2.12		1.56
10/01/02 – 12/31/02		1.58		1.21
01/01/03 – 03/31/03		1.57		1.47

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

Month	High		Low
April 2003	$	1.90	$	1.52
March 2003		1.57		1.54
February 2003		1.54		1.47
January 2003		1.52		1.52
December 2002		1.52		1.46
November 2002		1.58		1.55

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.

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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. In addition, because we are an Israeli company, we are governed by the provisions of the Israeli Companies Law which are described below along with certain provisions of our governing documents.

Approval of Specified Related Party Transactions

The Israeli Companies Law imposes a duty of care and a duty of loyalty on all of a 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 Israeli 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 Israeli 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 Israeli 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 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 Israeli 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.

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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.

Rights, Preferences and Restrictions upon Shares

Our Board of Directors may from time to time declare, and cause the Company 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 the shareholders of the Company, approved by a majority of the shares voting thereon. However, no such resolution shall provide for the payment of an amount exceeding the amount proposed by the Board of Directors for the payment of such final dividend, and no such resolution or any failure to approve a final dividend shall affect any interim dividend theretofore declared and paid. The Board of Directors shall determine the time for payment of such dividends, both interim and final, and the record date for determining the shareholders entitled thereto.

Subject to the provisions of our articles of association and subject to any rights or conditions attached at that time to any share in the capital of the Company granting preferential, special or deferred rights or not granting any rights with respect to dividends, the profits of the Company 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 the Company, 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 the Company is 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, the assets of the Company 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 Israeli 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

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

• Any amendment to the articles of association;

• An increase in the company’s authorized capital;

• A merger; or

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

A shareholder has the general duty to refrain from depriving other shareholders of their rights. Any controlling shareholder, any shareholder that knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder that, under the provisions of the articles of associations, has the power to appoint an office holder in the company, is under a duty to act in fairness towards the company. The Israeli Companies Law does not describe the substance of this duty.

Amendment of Articles

Our articles 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 Israeli 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 Israeli Companies Law provides that the board of a public company is required to convene an extraordinary meeting upon the

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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 Israeli Companies Law in this respect, as under the Israeli 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 Israeli Companies Law provides that a record date may not be more than 40 nor less than four days before the date of the meeting. Each shareholder of record as of the record date determined by the board may vote the shares then held by that shareholder unless all calls and other sums then payable by the shareholder in respect of its shares have not been paid.

Limitation on Ownership of Securities

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

Mergers and Acquisitions; Anti-takeover Provisions

The Israeli 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 each company must approve the merger by a vote of the 75% of the company’s shares, present and voting on the proposed merger at a shareholders’ meeting, provided that the merger is not objected to by a majority of the shares represented at the meeting after excluding shares held by the other party to the merger or any person holding at least a 25% interest in such other party, including related parties or entities under the other party’s control.

The Israeli 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.

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A merger may not be completed unless at least 70 days have passed from the time that a request for the approval of the merger has been filed with the Israeli registrar of companies. This request may be filed once a shareholder meeting has been called to approve the merger.

The Israeli 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 a 50% 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, in the event that the tender offer to acquire that 95% is not successful, the acquirer may not acquire tendered shares if by doing so the acquirer would own more than 90% of the shares of the target company.

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

Changes in Capital

Our articles enable us to increase our share capital. Any such changes are subject to the provisions of the Israeli 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 Israeli 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

In August 2001, we acquired from Computer Network Technology Corporation certain assets and assumed certain liabilities related to its business unit known as Propelis Software pursuant to an Asset Purchase Agreement. The purchase price for Propelis Software was $7,463,000, which includes a warrant issued to Computer Network Technology Corporation to purchase 350,000 ordinary shares of Jacada, the fair value of which was $500,000. Among the assets we acquired from Computer Network Technology Corporation was the software product now known as Jacada Integrator, as

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well as certain software license, maintenance and support, and consulting services agreements with customers.

On July 31, 2002 we acquired certain assets and assumed certain liabilities of Anota Ltd. for an aggregate purchase price of approximately $763,000, including acquisition costs of $123,000 paid in cash, issuance of 367,373 our Ordinary Shares at a fair value of $ 640,000 and an earnout arrangement on the basis of future revenues. These assets include key technology and intellectual property related to thin-client, web-to-host, emulation software for desktop connectivity. These technologies enable organizations to make their business critical applications easily available over the Web, without installing any software on the host system or client machines.

Other than the foregoing, we have entered into no material contracts outside of the ordinary course of business for the two year period ending December 31, 2002.

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 non-residents 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.

Non-residents 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 non-residents, 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,

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published rulings and court decisions, as in effect on the date of this document, as well as the Income Tax Treaty Between the United States of America and Israel, as amended (the Treaty), all of which are subject to change or change in interpretation, possibly with retroactive effect.

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

a citizen or resident of the United States;

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

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

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

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

Information Reporting and Backup Withholding

U.S. information reporting requirements and backup withholding tax generally will apply to payments to some 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 (30% for taxable years beginning in 2003) 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.

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

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

Non-U.S. Holders

A non-U.S. holder is not subject to United States federal income tax with respect to dividends paid on ordinary shares unless 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.

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holder to United States taxation on a net income basis, or 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 of 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 20% if the ordinary shares were held for more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.

Non-U.S. Holders

A non-U.S. holder will not be subject to United States federal income tax on gain recognized on the sale or other disposition of ordinary shares unless 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 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

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passive foreign investment company, then unless a U.S. holder makes a mark-to-market election, gain realized on the sale or other disposition of our ordinary shares would in general not be treated as capital gain. Instead, a U.S. holder would be treated as if the holder had realized such gain and certain “excess distributions” ratably over the holder’s holding period for the shares and would be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year.

Israeli Taxation

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

General Corporate Tax Structure

The general corporate tax rate in Israel is currently 36%, although the tax rate on capital gains was lowered to 25% on January 1, 2003. However, the effective tax rate payable by a company which derives income from an “Approved Enterprise” may be considerably less.

Under the Law for the Encouragement of Industry (Taxes), 1969, which is referred to below as the Industry Encouragement Law, a company qualifies as an “Industrial Company” if it is resident in Israel and at least 90% of its income in a given tax year, determined in NIS, exclusive of income from certain loans, marketable securities, capital gains, interest and dividends, is derived from Industrial Enterprises owned by it. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial manufacturing. We currently qualify as an Industrial Company.

Pursuant to the Industry Encouragement Law, an Industrial Company is entitled to deduct the purchase price of know how, patents or rights over a period of eight years beginning with the year in which such rights were first used, and is also entitled to deduct

55

33.3% per annum of expenses incurred in connection with the issuance of publicly-traded shares over a period of three years from the time the expenses were incurred.

Moreover, Industrial Enterprises which are Approved Enterprises can choose between the regular depreciation rates and accelerated rates of depreciation applied on a straight-line basis in respect of property and equipment, generally ranging from 200% in respect of equipment to 400% of the ordinary depreciation rates in respect of buildings during the first five years of service of the assets, subject to a ceiling of 20% per year with respect to depreciation of buildings.

Qualification as an Industrial Company under the Industrial Encouragement Law is not conditioned upon the receipt of prior approval from any Israeli Government authority. No assurance can be given that we will continue to qualify as an Industrial Company or will in the future be able to avail ourselves of any benefits available to companies so qualifying.

Law for the Encouragement of Capital Investments, 1959

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 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 conferring rights to profits, voting and appointment of directors and the percentage of its combined share and loan capital owned by non-Israeli residents. 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. The period of benefits may in no event, however, exceed the lesser of 12 years from the year in which the production commenced or 14 years from the year of receipt of Approved Enterprise status.

An Approved Enterprise approved after April 1, 1986 may elect to forego any entitlement to the grants otherwise available under the Capital Investments Law and, in

56

lieu of the foregoing, may participate in an Alternative Benefits Program, under which the undistributed income from the Approved Enterprise is fully exempt from corporate tax for a defined period of time. The period of tax exemption ranges between two and ten years commencing in the first year in which the company generates taxable income, depending upon the location within Israel of the Approved Enterprise and the type of the Approved Enterprise. On expiration of the exemption period, the Approved Enterprise would be eligible for the otherwise applicable beneficial tax rates under the Capital Investments Law, ranging from 10% to 25%, for the remainder, if any, of the otherwise applicable 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.

We currently have Approved Enterprise programs under the Capital Investments Law, which entitle us to certain tax benefits. The tax benefit period for these programs has not yet commenced. We have elected the “alternative benefits” program which provides for the waiver of grants in return for tax exemption. Accordingly, our income is tax-exempt for a period of two years commencing with the year we first earn taxable income relating to each expansion program, and is subject to corporate taxes at the reduced rate of 10% to 25%, for an additional period of five years. 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 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 taxed 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 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.

Each application to the Investment Center is reviewed separately, and a decision as to whether or not to approve such application is based, among other things, on the then prevailing criteria set forth in the Capital Investments Law, on the specific objectives of the applicant company set forth in such application and on certain financial criteria of the applicant company. Accordingly, there can be no assurance that any such application will be approved. In addition, 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

57

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.

Other Benefits

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

• loans to Approved Enterprises, approved prior to January 1, 1997, which also qualify as Industrial Companies, from banks and other financial institutions, of up to 70% of approved project expenditures, of which 75% or in certain cases 85%, are State-guaranteed; and

• accelerated depreciation on property and equipment, generally ranging from 200% with respect to equipment to 400% with respect to buildings of the ordinary depreciation rates during the first five tax years of the operation of these assets, subject to a ceiling of 20% per year with respect to depreciation on buildings.

Taxation Under Inflationary Conditions

The Income Tax (Inflationary Adjustment) Law, 1985, which is referred to below as the Inflationary Adjustment Law, attempts to overcome some of the problems presented to a traditional tax system by an economy experiencing rapid inflation, which was the case in Israel at the time the law was enacted. Generally, the Inflationary Adjustments Law provides significant tax deductions and adjustments to depreciation methods and tax loss carry forwards to compensate for loss of value resulting from an inflationary economy. Our taxable income is subject to the provisions of this law.

The Israeli Income Tax Ordinance and the Inflationary Adjustments Law allow “Foreign-Invested Companies,” which maintain their accounts in dollars in compliance with regulations published by the Israeli Minister of Finance, to base their tax returns on their operating results as reflected in the dollar financials statements or to adjust their tax returns based on exchange rate changes rather than changes in the Israeli CPI, in lieu of the principles set forth by the Inflationary Adjustments Law. For these purposes, a “Foreign-Invested Company” is a company, more than 25% of whose share capital, in terms of rights to profits, voting and appointment of directors, and of whose combined share and loan capital is held by persons who are not residents of Israel. A company that elects to measure its results for tax purposes based on the dollar exchange rate cannot change that election for a period of three years following the election. We believe that we qualify as a Foreign Investment Company within the meaning of the Inflationary Adjustment Law. We have elected to measure our results for tax purposes based on the dollar exchange rate beginning with our tax returns for fiscal year 2003.

58

Tax Benefits of Research and Development

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

Withholding and Capital Gains Taxes Applicable to Non-Israeli Shareholders

Nonresidents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. We are generally required to withhold income tax at the rate of 25% on all distributions of dividends, although if the dividend recipient holds 10% 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 2003, capital gains on the sale of our ordinary shares will be subject to Israeli capital gains tax, generally at a rate of 15%. However, as of January 1, 2003 nonresidents of Israel will be exempt from capital gains tax in relation to the sale of our ordinary shares for so long as (a) our ordinary shares are listed for trading on a stock exchange outside of Israel, (b) the capital gains are not accrued or derived by the nonresident shareholder’s permanent enterprise in Israel, (c) the ordinary shares in relation to which the capital gains are accrued or derived were acquired by the nonresident shareholder after the initial listing of the ordinary shares on a stock exchange outside of Israel and (d) neither the shareholder nor the particular capital gain is otherwise subject to certain sections of the Israeli Income Tax Ordinance. As of January 1, 2003 nonresidents of Israel are also exempt from Israeli capital gains tax resulting from the sale of securities on the Tel Aviv Stock Exchange provided that the capital gains are not accrued or derived by the nonresident shareholder’s permanent enterprise in Israel.

In addition, under the income tax treaty between the United States and Israel, a holder of ordinary shares who is a United States resident 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

59

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 the 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 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.

60

Item 11: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We do not use derivative financial instruments for trading purposes and, as of year end, we had no derivative financial instruments of any kind outstanding. Accordingly, we have concluded that there is no material market risk exposure of the type contemplated by Item 11, and that no quantitative tabular disclosures are required. We are exposed to certain other types of market risks, as further described below.

We develop products in Israel and North America and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As most of our sales are currently made in dollars, an increase in the value of the dollar could make our products less competitive in foreign markets. The foreign currency exchange rate effects for the year ended December 31, 2002, 2001, and 2000 were immaterial. Our interest expense is sensitive to changes in LIBOR. Due to the nature and levels of our borrowings, we have concluded that there is no material market risk exposure.

We invest in U.S. Treasury notes, investment grade U.S. corporate securities and dollar deposits with banks. These investments typically carry fixed interest rates. Until September 2001 our marketable securities were designated under FAS 115 as held-to-maturity marketable securities. As a result of unexpected events, we sold our held-to-maturity marketable securities. As of December 31, 2002, our marketable securities were designated as available for sale. If we hold these securities to the maturity date, financial income over the holding period is not sensitive to changes in interest rates.

As of December 31, 2002, we had no other exposure to changes in interest rates and had no interest rate derivative financial instruments outstanding.

Item 12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

Item 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

Item 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

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

61

The effective date of the registration statement (No. 333-10882) for our initial public offering of our ordinary shares, NIS 0.01 par value, 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 the 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, 2002, 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 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

During the 90 day period prior to the filing of this annual report, we performed an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended). Following that evaluation, our management, including the CEO and CFO, concluded that based on the evaluation, the design and operation of our disclosure controls and procedures were effective at that time. Since the evaluation, there have been no significant changes in our internal controls or in factors that could significantly affect internal controls, including, because we have not identified any significant deficiencies or material weaknesses in our internal controls, any corrective actions with regard to significant deficiencies and material weaknesses.

Item 16A: AUDIT COMMITTEE FINANCIAL EXPERT

Not yet applicable

Item 16B: CODE OF ETHICS

Not yet applicable

62

PART III

Item 17: FINANCIAL STATEMENTS

See Item 18.

Item 18: FINANCIAL STATEMENTS

63

JACADA LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2002

IN U.S. DOLLARS

INDEX

	Page
Report of Independent Auditors	65
Consolidated Balance Sheets	66 - 67
Consolidated Statements of Operations	68
Statements of Changes in Shareholders’ Equity	69
Consolidated Statements of Cash Flows	70 - 71
Notes to Consolidated Financial Statements	72 - 96

64

[GRAPHIC APPEARS HERE]

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

JACADA LTD.

We have audited the accompanying consolidated balance sheets of Jacada Ltd. (“the Company”) and its subsidiaries as of December 31, 2002 and 2001 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, 2002. 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 auditing standards generally accepted in the 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2002 and 2001 and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.

Tel-Aviv, Israel	KOST FORER & GABBAY
January 26, 2003	A Member of Ernst and Young Global

65

JACADA LTD.

CONSOLIDATED BALANCE SHEETS

U.S. Dollars in thousands

	December 31,
	2002		2001
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	15,319	$	5,982
Marketable securities		22,326		35,660
Trade receivables (net of allowance for doubtful accounts of $ 398 and $ 1,022 at December 31, 2002 and 2001, respectively)		2,661		4,261
Other current assets		645		626
Total current assets		40,951		46,529
LONG-TERM INVESTMENTS:
Marketable securities		3,737		—
Severance pay fund		576		567
Other long-term assets		79		203
Total long-term investments		4,392		770
PROPERTY AND EQUIPMENT, NET		2,804		3,632
OTHER ASSETS, NET:
Technology (net of accumulated amortization of $ 381 and $ 95 at December 31, 2002 and 2001, respectively)		1,177		1,245
Other intangibles, net (net of accumulated amortization of $ 23 and $ 0 at December 31, 2002 and 2001, respectively)		140		—
Goodwill		4,554		4,283
Total other assets		5,871		5,528
	$	54,018	$	56,459

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

66

JACADA LTD.

CONSOLIDATED BALANCE SHEETS

(A) U.S. Dollars in thousands, except for share and per share data

	December 31,
	2002			2001
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Trade payables	$	760		$	750
Deferred revenues		2,144			2,065
Accrued expenses and other liabilities		3,599			4,089
Total current liabilities		6,503			6,904
LONG-TERM LIABILITIES:
Accrued severance pay		927			967
Accrued expenses		124			—
Total long-term liabilities		1,051			967
SHAREHOLDERS’ EQUITY:
Share capital:
Ordinary shares of NIS 0.01 par value:
Authorized: 30,000,000 shares as of December 31, 2002 and 2001; Issued and outstanding: 18,935,903 and 18,537,704 shares as of December 31, 2002 and 2001, respectively		55			54
Additional paid-in capital		69,143			68,486
Deferred stock compensation		(25	)		(71	)
Accumulated other comprehensive income		81			—
Accumulated deficit		(22,790	)		(19,881	)
Total shareholders’ equity		46,464			48,588
	$	54,018		$	56,459

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

67

JACADA LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. Dollars in thousands, except for share data

	Year ended December 31,
	2002			2001			2000
Revenues:
Software licenses	$	9,783		$	10,930		$	15,506
Services		4,518			8,986			6,070
Maintenance		7,235			5,630			3,540
Total revenues		21,536			25,546			25,116
Cost of revenues:
Software licenses		248			520			725
Services		3,115			4,859			3,636
Maintenance		1,247			1,705			1,574
Total cost of revenues		4,610			7,084			5,935
Gross profit		16,926			18,462			19,181
Operating expenses:
Research and development		6,191			6,446			4,979
Sales and marketing		9,450			14,619			12,873
General and administrative		4,602			5,679			3,624
Restructuring and other non-recurring charges		501			2,846			—
Total operating expenses		20,744			29,590			21,476
Operating loss		(3,818	)		(11,128	)		(2,295	)
Financial income, net		909			2,330			3,082
Income (loss) before taxes on income		(2,909	)		(8,798	)		787
Taxes on income (benefit)		—			(7	)		10
Net income (loss)	$	(2,909	)	$	(8,791	)	$	777
Basic and diluted net earnings (loss) per share	$	(0.16	)	$	(0.48	)	$	0.04

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

68

JACADA LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. Dollars in thousands, except for share data

	Ordinary shares				Additional paid-in capital			Deferred Stock compensation			Accumulated other Comprehensive income		Accumulated deficit			Total Comprehensive income (loss)			Total shareholders’ equity
	Shares	Amount
Balance as of January 1, 2000	17,610,893	$	52		$	66,941		$	(272	)	$	—	$	(11,867	)				$	54,854
Exercise of stock options, net	817,638		2			958			—			—		—						960
Cancellation of deferred stock compensation in respect of forfeited options	—		—			(56	)		56			—		—						—
Amortization of deferred stock compensation	—		—			—			55			—		—						55
Net income	—		—			—			—			—		777		$	777			777
Total comprehensive income																$	777
Balance as of December 31, 2000	18,428,531		54			67,843			(161	)		—		(11,090	)					56,646
Exercise of stock options, net	109,173		—	*)		158			—			—		—						158
Cancellation of deferred stock compensation in respect of forfeited options	—		—			(15	)		15			—		—						—
Amortization of deferred stock compensation	—		—			—			75			—		—						75
Issuance of warrant in respect of the acquisition of Propelis	—		—			500			—			—		—						500
Net loss	—		—			—			—			—		(8,791	)	$	(8,791	)		(8,791	)
Total comprehensive loss																$	(8,791	)
Balance as of December 31, 2001	18,537,704		54			68,486			(71	)		—		(19,881	)					48,588
Exercise of stock options, net	30,826		—	*)		43			—			—		—						43
Cancellation of deferred stock compensation in respect of forfeited options						(25	)		25			—		—						—
Amortization of deferred stock compensation	—		—			—			21			—		—						21
Issuance of Ordinary shares in respect of the acquisition of Anota	367,373		1			639			—			—		—						640
Net loss	—		—			—			—			—		(2,909	)	$	(2,909	)		(2,909	)
Unrealized gains from available for sale marketable securities, net	—		—			—			—			81		—			81			81
Total comprehensive loss																$	(2,828	)
Balance as of December 31, 2002	18,935,903	$	55		$	69,143		$	(25	)	$	81	$	(22,790	)				$	46,464

*) Represents an amount lower than $ 1.

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

69

JACADA LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. Dollars in thousands

	Year ended December 31,
	2002			2001			2000
Cash flows from operating activities:
Net income (loss)	$	(2,909	)	$	(8,791	)	$	777
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		1,619			1,474			987
Write-off of Precise Technology		—			1,188			—
Amortization of deferred stock compensation		21			75			55
Accrued interest on short-term bank deposits		—			49			(92	)
Accrued interest and amortization of premium and discount on marketable securities		356			329			(490	)
Gain on sales of marketable securities		(6	)		(192	)		—
Decrease (increase) in accrued interest on other long-term assets		17			27			(20	)
Increase (decrease) in accrued severance pay, net		(49	)		(88	)		241
Decrease (increase) in trade receivables		1,607			4,439			(2,643	)
Decrease (increase) in other current assets		(36	)		188			(296	)
Increase (decrease) in trade payables		(29	)		(1,596	)		340
Increase (decrease) in deferred revenues		57			246			(1,978	)
Increase (decrease) in accrued expenses and other liabilities		(637	)		877			1,047
Increase in long-term accrued expenses		124			—			—
Other		75			1			1
Net cash provided by (used in) operating activities		210			(1,774	)		(2,071	)
Cash flows from investing activities:
Investment in short-term bank deposits		(7,133	)		—			(5,161	)
Proceeds from sale of short-term bank deposits		7,133			5,260			—
Investment in held to maturity marketable securities		—			(22,825	)		(89,301	)
Investment in available for sale marketable securities		(95,886	)		(35,660	)		—
Redemption of held to maturity marketable securities		—			37,847			102,512
Proceeds from sale and redemption of available for sale of marketable securities		105,214			—			—
Proceeds from sale of held to maturity marketable securities		—			22,639			—
Purchase of property and equipment (b)		(613	)		(1,475	)		(1,717	)
Payment in respect of other assets		—			(700	)		(500	)
Proceeds from sale of property and equipment		213			32			14
Investment in other long-term assets		(18	)		(91	)		(175	)
Cash with respect of Propelis acquisition (c)		—			(6,863	)		—
Cash with respect of Anota acquisition, net of cash acquired (d)		28			—			—
Other		146			86			26
Net cash provided by (used in) investing activities		9,084			(1,750	)		5,698
Cash flows from financing activities:
Exercise of stock options, net		43			158			960
Payment of principal of long-term debt		—			(12	)		(368	)
Net cash provided by financing activities		43			146			592
Increase (decrease) in cash and cash equivalents		9,337			(3,378	)		4,219
Cash and cash equivalents at the beginning of the year		5,982			9,360			5,141
Cash and cash equivalents at the end of the year	$	15,319		$	5,982		$	9,360

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

70

JACADA LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. Dollars in thousands

		Year ended December 31,
		2002			2001			2000
Supplemental disclosure of cash flows activities:
(a)	Cash paid during the year for:
	Interest and charges	$	11		$	60		$	20
(b)	Non-cash activities:
	Purchase of property and equipment	$	33		$	17		$	170
	Purchase of Precise technology	$	—		$	—		$	1,000
(c)	In August 2001, the Company and its subsidiaries acquired certain assets and assumed certain liabilities of Propelis Software, Inc., a business unit of Computer Network Technology Corporation. The estimated net fair value of the assets acquired and liabilities assumed as of the date of acquisition was as follows:
	Working capital, excluding cash and cash equivalents				$	1,355
	Property and equipment					385
	Goodwill					4,283
	Propelis technology					1,340
						7,363
	Less—amounts acquired by issuance of warrant					(500	)
					$	6,863
(d)	In July 2002, the Company acquired certain assets and assumed certain liabilities of Anota Ltd. The estimated net fair value of the assets acquired and liabilities assumed as of the date of acquisition was as follows:
	Working capital deficiency, excluding cash and cash equivalents	$	(181	)
	Property and equipment		141
	Other intangibles		163
	Goodwill		271
	Anota Technology		218
			612
	Less—amounts acquired by issuance of shares		(640	)
		$	(28	)

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

71

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. Dollars in thousands

NOTE 1:- GENERAL

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

b. Jacada Ltd. and its wholly-owned subsidiaries—Jacada (Europe) Limited. (the U.K. subsidiary) and its wholly-owned subsidiary Jacada Deutschland GmbH, (the German subsidiary) Jacada, Inc. (the U.S. subsidiary) and its wholly-owned subsidiary Jacada Canada, Inc.—develop and market web application hosting and business-to-business infrastructure software. The Company and its subsidiaries generate revenues from licensing their software products and from services such as maintenance, support, consulting and training.

The majority of the Company and its subsidiaries sales are made in North America and Europe. As for major customers, see also Note 14.

c. Acquisitions:

1. Acquisition of Propelis Software Inc. (“Propelis”)

On August 23, 2001, the Company and its U.K. and U.S. subsidiaries acquired certain assets and assumed certain liabilities related to Propelis Software Inc., a business unit of Computer Network Technology Corporation, for an aggregate purchase price of approximately $ 7,463 of which $ 6,963 in cash (of which $ 100 were paid in 2002), and a warrant to purchase 350,000 Ordinary shares of the Company at a fair value of $ 500. (See also Note 10e).

Products acquired as part of the Propelis acquisition enable organizations to leverage their existing information assets and infrastructure in highly collaborative e-business solutions that integrate critical business processes, information and people.

The operations of Propelis are included in the consolidated statements from the date of acquisition.

The acquisition was accounted for by the purchase method of accounting, in accordance with Statement of Financial Accounting Standards No. 141 “Business Combination” (“SFAS 141”), and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill.

The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition:

Working capital, net	$	1,455
Property and equipment		385
Goodwill		4,283
Propelis Technology(1)		1,340
Net assets acquired	$	7,463

(1) See also Note 6, 7.

72

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 1:- GENERAL (Cont.)

The following represents the unaudited pro-forma results of operations for the years ended December 31, 2001 and 2000, assuming that the Propelis acquisition had been consummated as of January 1, 2001 and 2000, respectively:

	Year ended December 31,
	2001			2000
Revenues	$	32,507		$	33,451
Net loss	$	(16,686	)	$	(12,743	)
Basic and diluted net loss per share	$	(0.89	)	$	(0.69	)

The pro-forma financial information is not necessarily indicative of the consolidated results that would have been attained had the acquisition taken place at the beginning of 2000 or 2001, nor is it necessarily indicative of future results.

2. Acquisition of Anota Ltd. (“Anota”):

On July 31, 2002, the Company acquired certain assets and assumed certain liabilities related to Anota Ltd. for an aggregate purchase price of approximately $ 763 including acquisition costs of $ 123 in cash, issuance of 367,373 Ordinary shares at a fair value of $ 640 and the right to receive additional cash, based on percentage from certain post-acquisition revenues.

When the contingency is resolved and additional consideration is distributable, the Company shall record the fair value of the consideration paid or to be paid as an additional goodwill.

As of December 31, 2002, no material related revenues were generated and as a result no additional consideration has been paid.

The Company determined the fair value of the issued Ordinary shares using Emerging Issues Task Force No. 99-12 “Determination of the Measurement Date For the Market Price of Acquirer Securities Issued in a Purchase Business Combination” (“EITF No. 99-12”). According to EITF No. 99-12 the fair value is determined based on the average market price of the Company’s ordinary shares close to the acquisition date.

Products acquired as part of the Anota acquisition enable organizations to make their business critical applications available over the Web in a matter of minutes without installing any software on the host system or client machine. Following Anota’s acquisition the Company enhanced the functionality of its existing products and increased its market penetration.

The operations of Anota are included in the consolidated statements from the date of acquisition.

73

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 1:- GENERAL (Cont.)

The acquisition was accounted for by the purchase method of accounting, in accordance with SFAS No. 141, and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired has been recorded as goodwill.

The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition:

Current assets	$	162
Property and equipment		141
Anota Technology		218
Other Intangibles		163
Goodwill		271
Current liabilities		(192	)
Net assets acquired	$	763

The following represents the unaudited pro-forma results of operations for the years ended December 31, 2002 and 2001 assuming that the Anota acquisition had been consummated as of January 1, 2002 and 2001, respectively:

	Year ended December 31,
	2002			2001
Revenues	$	21,546		$	25,675
Net loss	$	(3,587	)	$	(11,163	)
Basic and diluted net loss per share	$	(0.19	)	$	(0.59	)

The pro-forma financial information is not necessarily indicative of the consolidated results that would have been attained had the acquisition taken place at the beginning of 2002 or 2001, nor is it necessarily indicative of future results.

d. Restructuring charges:

1. In October 2001, due to recent events and a slowdown in the software industry, the Company and its subsidiaries made changes in their business strategies, operations and structure in an attempt to improve future operating results, by adopting a restructuring plan.

The plan consisted of the involuntary termination of 56 employees (14 research and development employees, 16 professional services and support employees, 22 sales and marketing employees and 4 administrative employees), the subletting of a portion of the existing office space of the Company and its subsidiaries and decreasing compensation and benefits to the Company’s employees.

74

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 1:- GENERAL (Cont.)

2. In July 2002, the Company and its subsidiaries adopted another restructuring plan in an attempt to improve future operating results. The plan consisted of the involuntary termination of 39 employees (14 research and development employees, 5 professional service and support employees, 11 sales and marketing employees and 9 administrative employees) and the subletting of a portion of the existing office space of the Company.

In connection with the 2002 and 2001 restructuring plans, EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Cost to Exit an Activity (including certain cost in restructuring)” and Staff Accounting Bulletin No. 100 “Restructuring and Impairment Charges” (“SAB No. 100”) were applied and accordingly, the Company and its subsidiaries incurred expenses of $ 501 and $ 1,391, respectively, of which, as of December 31, 2002 and 2001, $ 254 and $ 518 remain accrued.

The major components of restructuring charges are as follows:

	Year ended December 31,
	2002		2001
Employee termination benefits	$	395	$	916
Facilities closures		106		411
Other		—		64
	$	501	$	1,391

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”).

a. Use of estimates:

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

b. Financial statements in U.S. Dollars:

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

75

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

c. Principles of consolidation:

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

d. Cash equivalents:

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

e. Marketable securities:

The Company and its subsidiaries account for their investments in marketable securities using Statement of Financial Accounting Standard No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”).

Management determines the appropriate classification of its investments in debt securities at the time of purchase and re-evaluates such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when the Company and its subsidiaries have the positive intent and ability to hold the securities to maturity and are stated at amortized cost.

The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and interest are included in financial expense (income). The cost of securities sold is based on the specific identification method.

Debt securities for which the Company and its subsidiaries do not have the intent or ability to hold to maturity are classified as available-for-sale, along with any investments in equity securities that have not been classified as “trading securities”.

At December 31, 2002 and 2001 all marketable securities covered by SFAS No. 115 were designated as available for sale. Accordingly, these securities are stated at fair value, with the unrealized gains and losses, reported as a separate component of shareholders’ equity, accumulated other comprehensive income (loss). Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statement of operations.

The Company and its subsidiaries investments in debt securities are diversified among high-credit quality securities in accordance with the Company and its subsidiaries’ investment policy, (see also Note 3).

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JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

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	20 - 33
Office furniture and equipment	6 - 15
Motor vehicles	15
Leasehold improvements	Over the term of the lease

g. Other assets:

1. During 2000, the Company purchased and capitalized technology with accordance to Statement of Financial Accounting Standard No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS No. 86”), in the amount of $ 1,500 (“Precise Technology”).

The Precise Technology was amortized using the straight line method over the estimated economic life of the technology, which was four years.

Due to the slowdown in the software industry and to the purchase of Propelis Technology, the Company and its subsidiaries decided in 2001 to stop the selling and marketing efforts of the Precise Technology’s Product.

Therefore, the unamortized capitalized cost of Precise Technology exceeded the net realizable value and the balance was written off.

As of December 31, 2001, Precise Technology’s unamortized balance was charged as expenses to the statement of operations (see also Note 13).

2. Intangible assets acquired in a business combination for which date is on or after July 1, 2001, should be amortized over their useful life using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”, (“SFAS No. 142”).

In August 2001, as a result of the Propelis acquisition, the Company’s U.S. subsidiary acquired new technology (“Propelis Technology”) in the amount of $ 1,340.

The Propelis Technology is being amortized using the straight-line method over the estimated economic life of the technology rights, which is five years (for impairment see also Note 2h).

77

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

In July 2002, as a result of the Anota Acquisition, the Company acquired other assets in the amount of $ 381, composed of technology rights (“Anota Technology”) in the amount of $ 218 and other intangibles in the amount of $ 163.

The Anota technology is being amortized using the straight-line method over the estimated economic life of the technology rights, which is five years and the other intangibles are amortized over 3 years (for impairment see also Note 2h).

h. Impairment of long-lived assets:

The Company and its subsidiaries’ long-lived assets and certain identifiable intangibles are reviewed for impairment in accordance with Statement of Financial Accounting Standard No.144 “Accounting for the Impairment or Disposal of Long-Lived Assets”(“SFAS No.144”) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2002, no impairment losses have been identified.

i. Goodwill:

Under SFAS No.142, goodwill acquired in a business combination on or after July 1, 2001, is deemed to have indefinite life and shall not be amortized.

SFAS No.142 requires goodwill to be tested for impairment on adoption and at least annually thereafter or between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value is determined using market multiples and comparative analyze. Significant estimates used in the methodologies include estimates of market multiples for the reportable unit. The Company has performed the impairment tests during the third fiscal quarter. As of December 31, 2002, no impairment losses have been identified.

j. Research and development costs:

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 and its subsidiaries product development process, technological feasibility is established upon completion of a working model. Cost incurred by the Company between the completion of the working model and the point at which the products are ready for general release have been insignificant. Therefore, research and development costs are charged to the statement of operations as incurred.

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JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

k. Income taxes:

The Company and its subsidiaries account 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 and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

l. Revenue recognition:

The Company and its subsidiaries generate revenues mainly from license fees for the right to use their software products, maintenance, support and rendering of services including consulting and training. The Company and its subsidiaries sell their products primarily through their direct sales force to customers and indirectly through resellers, both the customers and the resellers are considered end users. The Company and its subsidiaries are also entitled to royalties from some resellers upon the sublicensing of the software to end users.

The Company and its subsidiaries account for software sales in accordance with Statement of Position No. 97-2, “Software Revenue Recognition”, as amended (“SOP No. 97-2”). SOP No. 97-2, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. The Company and its subsidiaries have also adopted Statement of Position No. 98-9, “Modification of Statement of Position 97-2, Software Revenue Recognition with Respect to Certain Transactions” (SOP No. 98-9”), for all multiple element transactions entered into after January 1, 2000. SOP No. 98-9 requires that revenue be recognized under the “residual method” when Vendor Specific Objective Evidence (“VSOE”) of fair value exists for all undelivered elements, no VSOE exists for all of the delivered elements and all other four criteria of SOP 97-2 are met. Under the residual method any discount in the arrangement is allocated to the delivered element.

Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. The Company and its subsidiaries do not grant a right of return to their customers. The Company and its subsidiaries consider all arrangements with payment terms extending beyond one year 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.

Revenues from royalties are recognized when such royalties are paid to the Company and its subsidiaries by the distributors. Such revenues are immaterial to the financial statements results.

79

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

Arrangements that include consulting and training services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. To date, the Company and its subsidiaries had determined that the consulting and training services are not considered essential to the functionality of other elements of the arrangement, therefore, these revenues are recognized as the services are performed.

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

m. Accounting for stock-based compensation:

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

Under SFAS No. 123, pro forma information regarding net loss and net loss per share is required and has been determined as if the Company and its subsidiaries had accounted for its employee stock option under the fair value method of that Statement. The fair value for options granted was estimated at the date of grant using the Black-Scholes option pricing model, with the following weighted-average assumptions for 2002, 2001 and 2000: risk-free interest rate of 2.5% for the year 2002, 4% for the year 2001 and 6% for the year 2000; dividend yields of 0% for each year, volatility factor of the expected market price of the Company’s Ordinary shares of 0.6, 1.14 and 1.253, respectively; and a weighted-average expected life of 2.5 years for each year.

Pro forma information under SFAS 123:

	Year ended December 31,
	2002			2001			2000
Net income (loss) as reported	$	(2,909	)	$	(8,791	)	$	777
Add: Stock-based compensation expenses included in reported net income (loss)	$	21		$	75		$	55
Deduct: Stock-based compensation expense determined under fair value method for all awards	$	3,270		$	2,613		$	1,154
Pro forma net loss	$	(6,158	)	$	(11,329	)	$	(322	)
Basic and diluted net earnings (loss) per share as reported	$	(0.16	)	$	(0.48	)	$	0.04
Pro forma basic and diluted net loss per share	$	(0.33	)	$	(0.61	)	$	(0.03	)

80

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

n. Advertising expenses:

Advertising expenses are charged to the statement of operations, as incurred. Advertising expenses for the years ended December 31, 2002, 2001 and 2000 were $ 539, $ 633 and $ 329, respectively.

o. Severance pay:

The Company’s liability for severance pay is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. 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 financial income (loss) accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies and includes immaterial profits.

Severance pay expenses for the years ended December 31, 2002, 2001 and 2000, were $ 305, $ 566 and $ 502, respectively.

p. Fair value of financial instruments:

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

Cash and cash equivalents, trade receivables and trade payables 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 do not differ significantly from the carrying amount (see Note 3).

The carrying amounts of the Company and its subsidiaries’ other long-term assets approximate their fair values. The fair values were estimated using discounted cash flow analyses, based on the Company and its subsidiaries incremental borrowing rates for similar types of borrowing arrangements.

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JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

q. Basic and diluted net earnings (loss) per share:

Basic net earnings (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with Statement of Financial Accounting Standard No. 128, “Earnings Per Share” (“SFAS No. 128”).

Certain outstanding stock options and warrants have been excluded from the calculation of the diluted net earnings (loss) per Ordinary share because the securities are anti-dilutive for all periods presented. The total weighted average number of shares related to the outstanding stock, options and warrants excluded from the calculations of diluted net earning (loss) per share were 4,296,953, 4,115,720 and 1,094,514 for the years ended December 31, 2002, 2001 and 2000, respectively.

r. Concentrations of credit risk:

Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities trade receivables and other long-term assets.

Cash and cash equivalents are invested in U.S. dollars, European currencies and New Israeli Shekels 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. Management believes that the financial institutions that hold the Company’s and its subsidiaries investments are financially sound, and accordingly, minimal credit risk exists.

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

The Company and its subsidiaries’ trade receivables are mainly derived from sales to customers in North America and Europe. The Company and its subsidiaries perform ongoing credit evaluations of their customers and provide an allowance for doubtful accounts with respect to those amounts that the Company and its subsidiaries have determined to be doubtful of collection. Adjustments to allowance account for the years ended December 31, 2002, 2001 and 2000, were $ (165), $ 903 and $ 164, respectively. Write-offs of uncollectible accounts for the years ended December 31, 2002, 2001 and 2000 were $ 459, $ 85 and $ 0, respectively.

The Company and its subsidiaries have no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

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JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

s. Impact of recently issued accounting standards:

In June 2002, the FASB issues Statement of Financial Accounting Standard No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”), which addresses significant issue regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for all exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its results of operations or financial position.

NOTE 3:- MARKETABLE SECURITIES

The following is a summary of available-for-sale marketable securities:

	December 31,
	2002						2001
	Amortized cost		Gross unrealized gain		Estimated fair value		Amortized cost		Gross unrealized gain		Estimated fair value
Available-for-sale:
U.S. Corporate securities	$	5,498	$	19	$	5,517	$	35,660	$	—	$	35,660
U.S. Treasury notes		20,484		62		20,546		—		—		—
	$	25,982	$	81	$	26,063	$	35,660	$	—	$	35,660

The Company did not realize any gains or losses on redemption of held-to-maturity securities in 2000. During 2001, the Company sold held-to-maturity securities at an amortized cost of $ 22,447, and recorded realized gain in the amount of $ 192. During fiscal year 2002, the Company recorded proceeds from sales and redemption of available for sale securities in the amount of $ 105,214 and related gains of $ 6 in financial income, net.

The marketable securities cost for computing realized gain was determined by using the specific identification method.

Long-term marketable securities mature within two years.

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JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 4:- OTHER CURRENT ASSETS

	December 31,
	2002		2001
Recoverable value added tax	$	61	$	186
Prepaid expenses		443		206
Rent deposits		65		197
Others		76		37
	$	645	$	626

NOTE 5:- PROPERTY AND EQUIPMENT

Composition of property and equipment is as follows:

Cost:
Computers and peripheral equipment	$	4,617	$	4,263
Office furniture and equipment		1,027		1,056
Motor vehicles		1,124		1,445
Leasehold improvements		641		561
		7,409		7,325
Accumulated depreciation		4,605		3,693
Depreciated cost	$	2,804	$	3,632

Depreciation expenses for the years ended December 31, 2002, 2001 and 2000 were $ 1,310, $ 1,193 and $ 861, respectively.

As for charges, see Note 9d.

NOTE 6:- OTHER ASSETS

a. Original amounts:

Propelis Technology and Anota Technology	$	1,558	$	1,340
Other intangibles		163		—
		1,721		1,340
Accumulated amortization:
Propelis technology and Anota technology		381		95
Other intangibles		23		—
		404		95
Amortized cost	$	1,317	$	1,245

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JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 6:- OTHER ASSETS (Cont.)

b. Amortization expense for the years ended December 31, 2002, 2001 and 2000 amounted to $ 309, $ 281 and $ 126, respectively. As of December 31, 2002, the weighted average amortization period is 3.5 years.

c. Estimated amortization expenses for the years ended:

Year ended December 31,
2003	$	366
2004		366
2005		342
2006		225
2007		18

NOTE 7:- GOODWILL

The changes in the carrying amount of goodwill for the year ended December 31, 2002, are as follows:

Balance as of January 1, 2002	$	4,283
Goodwill acquired during the year		271
Balance as of December 31, 2002	$	4,554

NOTE 8:- ACCRUED EXPENSES AND OTHER LIABILITIES

	December 31,
	2002		2001
Employee and payroll accruals	$	1,648	$	1,928
Accrued expenses		904		951
Restructuring accruals(1)		130		518
Precise Technology		300		300
Accrued arbitration charges(2)		617		392
	$	3,599	$	4,089

(1) See also Note 1d.

(2) See also Note 9(e)(1).

85

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES

a. Royalties:

The Company participates in programs sponsored by the Israeli Government for the support of research and development activities. Through December 31, 2002, the Company had obtained grants from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade (“the OCS”) in the aggregate amount of $ 2,178 for certain of the Company’s research and development projects. The Company is obligated to pay royalties to the OCS, amounting to 3%-4% 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.

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, 2002, the Company has paid or accrued royalties to the OCS in the amount of $ 1,731. As of December 31, 2002, the aggregate contingent liability to the OCS amounted to $ 425.

b. Lease commitments:

The Company and its subsidiaries facilities are leased under various operating lease agreements, which expire on various dates, the latest of which is in 2007. Future minimum lease payments under non-cancelable operating leases are as follows:

Year ended December 31,
2003	$	525
2004		442
2005		328
2006		328
2007		108
	$	1,731

Total rent expenses for the years ended December 31, 2002, 2001 and 2000 were approximately $ 1,130, $ 1,164 and $ 902, respectively.

c. Guarantees:

The Company has obtained guarantees, in favor of a lessor in form of a bank credit, totaling $ 140 and $ 200 as of December 31, 2002 and 2001, respectively.

As of December 31, 2002 and 2001 the Company had an unused credit facility in the amount of approximately $ 2,860 and $ 2,800, respectively with a renewal option at the beginning of every year and bearing interest at the rate of Libor + 1.5% and 1.75%, respectively.

86

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

d. Charges:

As collateral for the Company’s unused credit facilities, charges have been placed on all of the Company’s assets in Israel, including insurance rights.

e. Litigation:

1. In August 1999, a former distributor filed an arbitration demand against a subsidiary of the Company. This demand alleged that the subsidiary breached its agreement with the distributor by directly selling products to a customer, while the distributor had an exclusive right to sell products to said customer, and that the distributor was entitled to damages of $ 3,500. A decision by arbitration was entered during 2001. The arbitrators awarded the distributor a net amount of $ 392 and 50% of amounts collected from this customer in the future.

In 1999, the Company made a provision for a potential liability of $ 125. As a result of the arbitration the Company recorded in 2001 a non-recurring charge of $ 267. During 2002, the Company recorded recurring expenses of $ 225 related to the amounts collected from the customer.

On April 24, 2001, the subsidiary of the Company filed a separate action to vacate the arbitration award. Subsequently, the distributor filed an application for enforcement of the arbitration award. As of December 31, 2002, no court has addressed any of the substantive issues in the case.

2. In November 2001, the Company received a claim by a third party (“the claimant”), which has arisen out of the Propelis acquisition, regarding an alleged infringement of a patent. The claimant purported to be the exclusive licensee of the patent which is used by the Company since the Propelis acquisition.

To date, the Company has not responded to the claim nor received any subsequent correspondence from claimant. The Company’s management believes that under the acquisition agreement CNT should indemnify the Company for any such patent infringement.

Since the claim is in its preliminary stages, the Company’s management and its legal advisors are unable to estimate the outcome of the claim.

87

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 10:- SHAREHOLDERS’ EQUITY

a. General:

Since October 1999, the Company’s shares have been traded on the NASDAQ, National Market. Since June 2001, the Company’s shares have been traded on the Tel-Aviv Stock Exchange as well.

Ordinary shares confer upon their holders the right to receive notice to participate and vote in general meetings of the Company, and the right to receive dividends if declared.

b. Composition of share capital:

In July 2002, the Company issued 367,373 Ordinary shares in respect of Anota’s acquisition, at a fair value of $ 640. Issuance expenses were immaterial (see also Note 1c).

c. Stock Option Plans:

As of December 31, 2002, the Company has three Incentive Share Option Plans (the 1994, 1996 and 1999 plans), which provide for the grant of options to officers, management, other key employees, directors, consultants and others of up to 5,760,450 of the Company’s Ordinary shares. The options granted generally become fully exercisable after three to four years and expire ten years from the grant date. Any options which 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 compensation committee but may not be less than the par value of the Ordinary shares.

As of December 31, 2002, an aggregate of 1,225,556 Ordinary shares of the Company are still available for future grant under the Incentive Share Option Plans.

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

	Year ended December 31,
	2002		2001		2000
	Number of options	Weighted average exercise price	Number of options	Weighted average exercise price	Number of options	Weighted average exercise price
		$		$		$
Outstanding—at the beginning of the year	3,596,270	4.52	2,957,787	5.02	2,594,634	3.28
Granted	1,112,352	2.60	1,320,750	4.32	1,379,133	6.53
Exercised	30,826	1.40	109,173	1.45	817,638	1.18
Forfeited and cancelled	1,155,414	5.11	573,094	7.23	198,342	6.12
Outstanding—at the end of the year	3,522,382	3.74	3,596,270	4.52	2,957,787	5.02
Exercisable options at the end of the year	2,042,641	3.83	1,832,792	3.86	1,169,478	2.51

88

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 10:- SHAREHOLDERS’ EQUITY (Cont.)

The exercise price of the options is equal to the market value of the Ordinary shares on the date the option is granted. Weighted average fair value of options granted during 2002, 2001 and 2000, which the exercise price equals the market price on the date of grant, is $ 0.95, $ 2.81 and $ 4.58, respectively.

The options outstanding as of December 31, 2002 have been classified by exercise price, as follows:

Exercise price	Options outstanding as of December 31, 2002	Weighted average remaining contractual life (years)	Weighted average exercise Price	Options exercisable as of December 31, 2002	Weighted average exercise price of options exercisable
$			$		$
0.99 - 1.18	630,632	3.98	1.03	555,132	1.01
1.60 - 2.22	380,702	5.68	2.10	343,202	2.09
2.23 - 3.34	968,287	8.97	2.80	176,741	3.38
4.04 - 5.06	1,139,473	7.96	4.60	661,561	4.60
9.00 - 11.00	403,288	6.91	9.49	306,005	9.49
	3,522,382	7.17	3.74	2,042,641	3.83

The Company has recorded deferred stock compensation in 1999 for options issued with an exercise price below the fair market value of the Ordinary shares, the deferred stock compensation has been amortized and recorded as compensation expense ratably over the vesting period of the options. Compensation expenses of $21, $75 and $55 were recognized during the years ended December 31, 2002, 2001 and 2000, respectively. Options granted to the Chief Executive Officer in 1998 vest over an eight to ten year period, with possible acceleration of vesting if certain criteria are met.

d. Options issued to consultants:

1. The Company’s outstanding options to consultants as of December 31, 2002, are as follows:

Issuance date	Options for Ordinary shares	Exercise price per share	Options exercisable	Exercisable through
		$
1996	7,500	1.13	7,500	*	)
1999	1,500	11.00	1,500	*	)
2000	4,000	4.38	4,000	*	)
2001	5,000	2.89	5,000	*	)
2002	11,000	2.61	11,000	*	)
Total	29,000		29,000

*) 10 years from the date of grant.

The additional disclosures required by FAS 123 (paragraphs 47 and 48) were not provided due to immateriality.

89

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 10:- SHAREHOLDERS’ EQUITY (Cont.)

2. The Company had accounted for its options to consultants under the fair value method of SFAS No. 123 and EITF 96-18. The fair value for these options was estimated using Black-Scholes option-pricing model with the following weighted-average assumptions for 2002, 2001 and 2000: risk-free interest rates of 2.5% for 2002, 4% for 2001 and 6% for 2000, dividend yields of 0% for each year, volatility factors of the expected market price of the Company’s Ordinary shares of 0.6, 1.14 and 1.253, respectively and a weighted-average contractual life of approximately 10 years for each year.

3. Due to immateriality, no compensation expenses have been recorded in the financial statements.

e. Warrant:

During 2001, in connection with the acquisition of Propelis, the Company issued CNT a warrant to purchase 350,000 Ordinary shares of the Company at an exercise price of $ 3.26. This warrant is exercisable until August 2004. As of December 31, 2002, the warrant was not exercised. (See also Note 1c).

The fair value of the warrant was included in the purchase price. The fair value of the warrant amounting to $ 500 was estimated using a Black-Scholes Option-Pricing Model with the following weighted-average assumptions for 2001: risk-free interest rate of 4%, dividend yields of 0%, volatility factors of the expected market price of the Company’s Ordinary shares of 0.808 and a weighted-average expected life of the warrant of approximately 2 years.

f. Dividends:

In the event that cash dividends are declared in the future, such dividends will be paid in NIS. The Company does not intend to pay cash dividends in the foreseeable future.

NOTE 11:- TAXES ON INCOME

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

The production facilities of Jacada Ltd. have been granted the status of “Approved Enterprise” under the law, for four separate investment programs, which were approved in July 1994, July 1995, December 1996 and April 2002. The investment programs expiration dates are July 2007, July 2008 and December 2010, respectively.

As of December 31, 2002, the investments under April 2002 investment program remain in progress and were not completed.

According to the provisions of the law, the Company has elected the “alternative benefits”—waiver of grants in return for 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, (based on the percentage of foreign ownership in each taxable year).

90

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 11:- TAXES ON INCOME (Cont.)

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 instruments of approval for the specific investments in “approved enterprises”. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest.

As of December 31, 2002, management believes that the Company is meeting all of the aforementioned conditions.

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

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

The Company expects that during the period in which these tax losses are utilized, its income would be substantially tax exempt. Accordingly, there will be no tax benefit available from such losses and no deferred income taxes have been provided in these financial statements.

Income not eligible for the “Approved Enterprise” benefits mentioned above, is taxed at the regular corporate rate of 36%.

b. Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:

Results for tax purposes of the Company are measured and reflected in real terms in accordance with the changes in the Israeli Customer Price Index. As explained in Note 2b, the financial statements are presented in U.S. dollars. The difference between the change in the Israeli Customer Price Index and in the NIS/U.S. dollar exchange rate causes a difference between taxable income or loss and the income or loss before taxes reflected in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities.

c. 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 patents and other intangible property rights as a deduction for tax purposes.

91

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 11:- TAXES ON INCOME (Cont.)

d. On July 24, 2002, Amendment 132 to the Israeli Income Tax Ordinance (“the Amendment”) was approved by the Israeli parliament and came into effect on January 1, 2003. The principal objectives of the Amendment were to broaden the categories of taxable income and to reduce the tax rates imposed on employees income.

The material consequences of the Amendment applicable to the Company include, among other things, imposing tax upon all income of Israel residents, individuals and corporations, regardless of the territorial source of income and certain modifications in the qualified taxation tracks of employee stock options.

e. Net operating losses carryforwards:

As of December 31, 2002, Jacada Ltd. had approximately $ 5,970 of Israeli net operating loss carryforwards. The Israeli loss carryforwards have no expiration date.

As of December 31, 2002, the U.K. subsidiary had accumulated losses for income tax purposes in the amount of approximately $ 4,940. These net operating losses may be carried forward and offset against taxable income in the future for an indefinite period.

During 2000, the U.K. subsidiary had interest income that cannot be offset against operating loss; therefore, the U.K. subsidiary had provided for taxes on income the amount of $ 10 which was offset during 2001.

As of December 31, 2002, the U.S. subsidiary had U.S. federal net operating loss carryforwards for income tax purposes in the amount of approximately $ 4,163. Net operating loss carryforwards arising in taxable years beginning before August 6, 1997 can be carried forward and offset against taxable income for 15 years and expire from 2010 to 2012. Net operating loss carryforwards arising in taxable years beginning after August 5, 1997 can be carried forward and offset against taxable income for 20 years and expire from 2017 to 2021.

Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

As of December 31, 2002, Jacada Deutschland GmbH (“German subsidiary”) had accumulated losses for income tax purposes in the amount of approximately $ 761. The net operating loss carryforwards have no expiration date.

92

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 11:- TAXES ON INCOME (Cont.)

f. 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 liabilities and assets are as follows:

	December 31,
	2002			2001
Deferred tax assets:
U.S. operating loss carryforward	$	1,457		$	2,197
U.K. operating loss carryforward		988			784
German operating loss carryforward		190			129
Total deferred tax asset before valuation allowance		2,635			3,110
Valuation allowance		(2,635	)		(3,110	)
Net deferred tax asset	$	—		$	—

The U.S., U.K. and German subsidiaries have provided valuation allowances in respect of deferred tax assets resulting from tax loss carryforwards. Management currently believes that since the subsidiaries have a history of losses it is more likely than not that the deferred tax regarding the loss carryforwards will not be realized in the foreseeable future. During fiscal 2002, the subsidiaries reduced the valuation allowance by $ 475 to $ 2,635.

g. The main reconciling item between the statuary tax rate of the Company and its subsidiaries and the effective tax rate are the non-recognition of tax benefits from accumulated net operating losses carryforward among the various subsidiaries worldwide due to the uncertainty of the realization of such tax benefits and the effect of approved enterprise.

h. Pre-tax income (loss):

	Year ended December 31,
	2002			2001			2000
Domestic (Israel)	$	677		$	4,086		$	76
Foreign		(3,586	)		(12,884	)		711
	$	(2,909	)	$	(8,798	)	$	787

93

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 12:- EARNING PER SHARE

The following table sets forth the computation of basic and diluted net earnings (loss) per share.

a. Numerator:

	Year ended December 31,
	2002			2001			2000
Net income (loss)	$	(2,909	)	$	(8,791	)	$	777
Numerator for basic and diluted net earnings (loss) per share—income available to shareholders of Ordinary shares	$	(2,909	)	$	(8,791	)	$	777

b. Denominator:

Denominator for basic net earnings (loss) per share—weighted average shares	18,710,105		18,465,127		18,141,223
Effect of dilutive securities:
Employee stock options and options to consultants	—	*)	—	*)	1,362,748
Dilutive potential Ordinary shares	—	*)	—	*)	1,362,748
Denominator for diluted net earnings (loss) per share—adjusted weighted average shares, assumed of options exercise	18,710,105		18,465,127		19,503,971

*) The effect of the inclusion of the options in 2002 and 2001 would have been antidilutive.

NOTE 13:- RESTRUCTURING AND OTHER NON-RECURRING CHARGES

	Year ended December 31,
	2002		2001
Restructuring charges(1)	$	501	$	1,391
Arbitration charge(2)		—		267
Write-off of Precise Technology(3)		—		1,188
	$	501	$	2,846

(1) See also Note 1d.

(2) See also Note 9e.

(3) See also Note 2g.

94

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 14:- GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION

Summary information about geographical areas:

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

The following is a summary of operations within geographic areas based on end customer’s location.

	Year ended December 31,
	2002		2001		2000
Revenues from sales to unaffiliated customers:
North America	$	17,158	$	23,451	$	23,235
Europe		4,378		2,095		1,891
	$	21,536	$	25,546	$	25,116
	December 31,
	2002		2001		2000
Long-lived assets:
Israel	$	2,100	$	1,980	$	3,403
North America		6,537		7,016		1,021
United Kingdom		19		136		101
Germany		19		28		—
	$	8,675	$	9,160	$	4,525

Major customer data as a percentage of total revenues:

	Year ended December 31,
	2002		2001		2000
Customer A	—	*)	10	%	12	%
Customer B	—	*)	—	*)	14	%

*) Less than 10% of total revenues.

95

JACADA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

U.S. Dollars in thousands

NOTE 15:- FINANCIAL INCOME (EXPENSES), NET

	December 31,
	2002			2001			2000
Financial expenses:
Foreign currency translation adjustments	$	(59	)	$	(124	)	$	(73	)
Bank charges		(50	)		(85	)		(58	)
		(109	)		(209	)		(131	)
Financial income:
Foreign currency translation adjustments		176			—			—
Interest on short-term deposits		836			2,347			3,213
Gain on sale of marketable securities		6			192			—
		1,018			2,539			3,213
	$	909		$	2,330		$	3,082

--------------

96

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)).
4.2	1994 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.1 from the Company’s Registration Statement filed on Form F-1 (file no. 333-10882)).
4.3	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)).
4.4	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)).
4.5	Restated Employment Agreement of Gideon Hollander with Jacada Ltd. dated as of October 1, 2001.
4.6	Amendment to 1999 Share Option and Incentive Plan.
4.7	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).
4.8	Amendment to 1999 Share Option and Incentive Plan (incorporated by reference to Exhibit 10.2 from the Company’s Registration Statement on Form S-8 (file no. 333-73650)
4.9	Asset Purchase Agreement dated as of August 19, 2001 among the Company and its subsidiaries and Computer Network Technology Corporation and its subsidiaries (incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2001).
4.10	First Amendment to Asset Purchase Agreement among the Company and its subsidiaries and Computer Network Technology Corporation and its subsidiaries dated August 23, 2001(incorporated by reference to Exhibit 4.11 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2001).
4.11	Purchase Agreement dated as of June 28, 2002 among the Company and Anota Ltd.

97

4.11.1	Amendment No. 1 to Purchase Agreement dated as of July 31, 2002 among the Company and Anota Ltd.
8	List of Jacada’s Subsidiaries (incorporated by reference to the Company’s Annual Report on Form 20-F for the year end December 31, 2000).
10	Consent of Kost, Forer and Gabbay, a member of Ernst & Young International.
99.1	Certification of Gideon Hollander and Robert C. Aldworth Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

98

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 2, 2003.

JACADA LTD.

/s/ Robert C. Aldworth         

By: Robert C. Aldworth

       Chief Financial Officer

99

CERTIFICATIONS

CEO CERTIFICATION

I, Gideon Hollander, certify that:

1. I have reviewed this annual report on Form 20-F of Jacada Ltd. (the “registrant”);

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

100

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 2, 2003	/s/ Gideon Hollander
	Gideon Hollander Chief Executive Officer

101

CFO CERTIFICATION

I, Robert C. Aldworth, certify that:

1. I have reviewed this annual report on Form 20-F of Jacada Ltd. (the “registrant”);

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to

102

record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 2, 2003	/s/ Robert C. Aldworth
	Robert C. Aldworth Chief Financial Officer

103

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)).
4.2	1994 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.1 from the Company’s Registration Statement filed on Form F-1 (file no. 333-10882)).
4.3	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)).
4.4	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)).
4.5	Restated Employment Agreement of Gideon Hollander with Jacada Ltd. dated as of October 1, 2001.
4.6	Amendment to 1999 Share Option and Incentive Plan.
4.7	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).
4.8	Amendment to 1999 Share Option and Incentive Plan (incorporated by reference to Exhibit 10.2 from the Company’s Registration Statement on Form S-8 (file no. 333-73650)
4.9	Asset Purchase Agreement dated as of August 19, 2001 among the Company and its subsidiaries and Computer Network Technology Corporation and its subsidiaries (incorporated by reference to Exhibit 4.10 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2001).
4.10	First Amendment to Asset Purchase Agreement among the Company and its subsidiaries and Computer Network Technology Corporation and its subsidiaries dated August 23, 2001 (incorporated by reference to Exhibit 4.11 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2001).
4.11	Purchase Agreement dated as of June 28, 2002 among the Company and Anota Ltd.
4.11.1	Amendment No. 1 to Purchase Agreement dated as of July 31, 2002 among the Company and Anota Ltd.

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8	List of Jacada’s Subsidiaries (incorporated by reference to the Company’s Annual Report on Form 20-F for the year end December 31, 2000).
10	Consent of Kost, Forer and Gabbay, a member of Ernst & Young International.
99.1	Certification of Gideon Hollander and Robert C. Aldworth Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.

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EX-4.5

EXHIBIT 4.5

RESTATED EMPLOYMENT AGREEMENT

This Agreement (the “Restated Agreement”) is entered into and made effective as of October 1, 2001 (the “Effective Date”), as subsequently amended and as reflected herein, between Gideon Hollander (hereinafter referred to as “Employee” or “Hollander”) and Jacada Ltd. and its subsidiaries (hereinafter the “Company”),

Whereas, Employee and the Company are parties to an Employment Agreement dated March 3, 1999, which Employment Agreement was originally entered into by Employee and Jacada, Inc., a subsidiary of the Company (the “Employment Agreement”); and

Whereas, the parties wish to extend Hollander’s employment terms and to amend and restate in its entirety the Employment Agreement in accordance with the terms and conditions of this Restated Agreement.

Now, Therefore, the parties agree to amend and restate the Employment Agreement in its entirety as follows:

1. Position

As of the Effective Date, you shall be employed by the Company in its offices located in Herziliya, Israel and shall fulfill the position of the Chief Executive Officer of the Company. As such, you may be required, from time to time and according to the work load demanded of you, to work beyond the regular working hours and you shall not be entitled to any further compensation other than as specified in this Restated Agreement.

2. Salary

You will be compensated at an annual rate of US $180,000. At the end of a-12 month period your performance will be evaluated and your compensation may be adjusted based on the results of such evaluation.

3. Options

Notwithstanding anything to the contrary herein or in any other agreement between you and the Company, any options to purchase shares of the Company which you received under the Employment Agreement or otherwise during your employment with the Subsidiary, or prior thereto, shall continue to vest during the term of your continued employment with the Company in accordance with the terms of the original grant(s).

4. Bonus

You shall be eligible to receive a target incentive bonus in the gross sum of US$100,000 per each calendar year based on the achievement of certain specified performance goals as shall be determined by the Board of Directors of the Company or a committee thereof, from time to time.

5. Insurance Policies.

The Company shall insure you under an accepted ‘Manager’s Insurance Scheme’ (the “Managers Insurance”) in accordance with the Company’s policy in effect from time to time. The Company shall contribute an amount equal to 5% of your Salary towards the Managers Insurance for your benefit and shall deduct 5% from your Salary and pay such amount towards the Managers Insurance for your benefit. In addition, the Company shall pay an amount equal to 8 ¹/3% of your Salary towards a fund for severance compensation (the “Severance Fund”), and an additional amount, to be determined by the Company in its sole discretion in accordance with its policies, towards disability insurance. In case of termination (including for clarity purposes, any ‘non continuation’ at the end of the 3 year term) of your employment by either party and for any reason under clause 10.1 or 10.2 below you will be entitled to receive all the sums (whether contributed by the Company or by you) accrued in the Managers Insurance.

6. Israeli Educational Fund (“Keren Hishtalmut”).

The Company and you shall open and maintain an Israeli Educational Fund (‘Keren Hishtalmut’) (the “Fund”) in accordance with the Company’s policy in effect from time to time. Subject to the maximum amount stated in Section 3(e) of the Israeli Income Tax Ordinance, as amended from time to time, the Company shall contribute to such Fund an amount equal to 7 ¹/2% of your Salary and you shall contribute to such Fund an amount equal to 2 ¹/2% of your Salary.

7. Vehicle.

As part of your benefits, during the term of your employment, the Company shall provide you with a vehicle in accordance with the Company’s policy as shall be in effect from time to time.

8. Business Expenses

The Company shall pay on your behalf or reimburse you for reasonable business expenses incurred in connection with your employment, subject to the Company’s policy (including without limiting the above, for a mobile telephone, internet connections and one telephone line at your residence).

9. Vacation

You will be eligible to earn up to 23 days of paid vacation per year. You will be allowed to accrue such vacation days from year to year, subject to the Company’s policy with respect to limitations on the maximum number of accrued vacation days.

10. Term and Termination

10.1. The Restated Agreement is for a 3 year term expiring on September 30, 2004. Prior to the above expiration date, Hollander and the Company may negotiate terms for the continuation of employment. In the event that at the expiration of such 3 year period of continued employment acceptable terms for continuation of employment can not be reached by the parties, for any reason, Hollander shall be entitled to receive a one year adjustment period, during

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which period your salary and related benefits will be paid in full by the Company.

10.2. Your employment can be terminated at any time and for any reason by either party. For any termination by either party, a mandatory 12 months written notice will be given by the terminating party prior to termination. The Company may elect to pay you your salary (including all benefits) during this notice period or any remaining portion thereof and terminate your employment at any time during this notice period. If the Company terminates your employment prior to the full 3-year term, the Company shall pay you your salary (including all benefits) for a 12-month adjustment period starting from the date you are released from your work and position in the Company. Should the advance notice and the adjustment periods coincide, you will be eligible to only one of the above, as the case may be. For purposes of options vesting and exercise, termination of your employment shall be considered to be at the end of the advance notice or adjustment period, as the case may be.

10.3. In addition to payments under Section 10.1 and 10.2 above, in case of termination (including for clarity purposes, any ‘non continuation’ at the end of the 3 year term) of your employment by either party and for any reason under clause 10.1 or 10.2 above you will be entitled to severance payments equal to (a) the number of years from May 1991 until the termination day multiplied by your monthly salary at the time of termination, less (c) US$20,000. The Company may pay portions of such severance sums by the transfer to you of the sums accrued in the Severance Fund (as defined in Section 5 above).

11. General

11.1. This Restated Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, proposals, understandings and arrangements, if any, whether oral or written, between the parties hereto with respect to the subject matter hereof, including but not limited to the Employment Agreement, which is hereby terminated and of no further force or effect. Any amendment to this Restated Agreement must be agreed to in writing by the parties.

11.2. This Restated Agreement shall be interpreted and construed in accordance with the laws of the State of Israel. The parties submit to the exclusive jurisdiction of the competent courts of Tel Aviv-Jaffa in any dispute related to this Restated Agreement.

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In Witness Whereof, the undersigned hereunto set their hands and seals as of the Effective Date.

/S/    GIDEON HOLLANDER
Gideon Hollander
Jacada Ltd.
By:	/S/    ROBERT C. ALDWORTH
Robert C. Aldworth
Title: Chief Financial Officer

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EX-4.6

EXHIBIT 4.6

AMENDED AND RESTATED

JACADA LTD.

1999 SHARE OPTION AND INCENTIVE PLAN

Adopted as of September 22, 1999

Amended as of April 25, 2002

1. NAME

This plan, as amended from time to time, shall be known as the Amended and Restated Jacada Ltd. 1999 Share Option Plan.

2. PURPOSE OF 1999 PLAN

The Amended and Restated Jacada Ltd. 1999 Share Option Plan (the “1999 Plan”) is intended as an incentive to retain, on the Board of Directors (the “Board”) and in the employ of Jacada Ltd. (the “Company”) and its Subsidiaries, persons of training, experience, and ability, to attract new directors, employees, consultants and contractors whose services are considered unusually valuable, to encourage the sense of proprietorship of such persons, and to stimulate the active interest of such persons in the development and financial success of the Company by providing them with opportunities to purchase shares in the Company, pursuant to the 1999 Plan approved by the Board and the shareholders of the Company, as adopted as of September 22, 1999 with the approval of the Board and as of October 11, 1999 with the approval of the shareholders of the Company and as further amended by the Board as of April 25, 2002, which is designed to benefit from, and is made, inter alia, pursuant to, the provisions of Section 102 of the Israeli Income Tax Ordinance [New Version] 1961 (“Section 102”) and any regulations, rules, orders or procedures promulgated thereunder with respect to options granted to employees of the Company. The 1999 Plan is intended to enable the Company to issue stock options and other awards under varying tax regimes, including, without limitation (i) incentive stock options (“ISOs”) within the meaning of Section 422(b) of the United States Internal Revenue Code of 1986, as amended (the “Code”), (ii) non-qualified stock options, (iii) options pursuant to the provisions of Section 102 (“102 Stock Options”), (iv) options pursuant to Section 3(I) (“3(I) Stock Options”) of the Ordinance (all 102 Stock Options, 3(I) Stock Options, ISOs and non-qualified stock options are referred to collectively as the “Options”), (v) shares of restricted stock under the 1999 Plan. Apart from issuance under the relevant tax regimes of the United States and the State of Israel, the 1999 Plan contemplates issuances to optionees in other jurisdictions with respect to which the Committee (as defined below) is empowered to make the requisite adjustments in the 1999 Plan and set forth the relevant conditions in the Company’s agreement with the optionee in order to comply with the requirements of the tax regimes in any such jurisdictions. For purposes of this 1999 Plan, “Subsidiary” shall mean any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of

the granting of an Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

3. ADMINISTRATION OF 1999 PLAN

The Board or a Stock Option Committee (the “Committee”) appointed and maintained by the Board shall have the power to administer the 1999 Plan. The Committee shall consist of at least two members who shall serve at the pleasure of the Board, and any member of such Committee shall be eligible to receive Options under the 1999 Plan while serving on the Committee, unless otherwise specified herein. The Board or the Committee shall have full power and authority: (i) to designate participants; (ii) to designate Options or any portion thereof as ISOs; (iii) to determine the terms and provisions of respective option agreements (which need not be identical) including, but not limited to, the number of shares in the Company to be covered by each Option, provisions concerning the time or times when and the extent to which the options may be exercised and the nature and duration of restrictions as to transferability or restrictions constituting substantial risk of forfeiture; (iv) to accelerate the right of an optionee to exercise, in whole or in part, any previously granted Option or ISO; (v) to interpret the provisions and supervise the administration of the 1999 Plan; and (vi) to determine any other matter which is necessary or desirable for, or incidental to administration of the 1999 Plan.

The Board or the Committee shall have the authority to grant in its discretion to the holder of an outstanding Option, in exchange for the surrender and cancellation of such Option, a new Option (in the discretion of the Board or the Committee, the grant of the new Option and the surrender of the outstanding Option may, but need not, occur simultaneously) having a purchase price lower than provided in the Option so surrendered and canceled and containing such other terms and conditions as the Board or the Committee may prescribe in accordance with the provisions of the 1999 Plan.

All decisions and selections made by the Board or the Committee pursuant to the provisions of the 1999 Plan shall be made by a majority of its members except that no member of the Board or Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or Committee relating to any Option to be granted to that member. Any decision reduced to writing and signed by a majority of the members who are authorized to make such decision shall be fully effective as if it had been made by a majority at a meeting duly held.

Each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to

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act in connection with the 1999 Plan unless arising out of such member’s own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as directors or otherwise under the articles of association of the Company, any agreement, any vote of stockholders or disinterested directors, or otherwise.

4. DESIGNATION OF PARTICIPANTS

The persons eligible for participation in the 1999 Plan as recipients of Options shall include any employees of the Company or of any Subsidiary of the Company. Directors of the Company or of any Subsidiary of the Company who are not employees of the Company or its Subsidiaries, and additionally consultants or contractors of the Company or its Subsidiaries, shall also be eligible for participation in the 1999 Plan as recipients of Options (but not ISOs). A person who has been granted an Option hereunder may be granted additional Options, if the Board or the Committee shall so determine.

5. TRUSTEE

The 102 Stock Options which shall be granted to employees of the Company (or if required by law) shall be issued to a trustee nominated by the Board or the Committee (in accordance with the provisions of Section 102) (the “Trustee”) and held for the benefit of the optionees for a period of not less than two years (24 months) from the date of grant. The Trustee may also hold in trust any shares issued upon exercise of such 102 Stock Options pursuant to the provisions of Section 102.

With respect to all Shares (in contrast to unexercised 102 Stock Options) issued upon the exercise of 102 Stock Options purchased by the optionee and held by the Trustee, the optionee shall be entitled to the voting rights in general meetings in accordance with the quantity of such shares.

6. SHARES RESERVED FOR 1999 PLAN

Subject to adjustment as provided in Paragraph 8 hereof, a total of 3,600,000 Ordinary Shares, NIS 0.01 par value per share, of the Company (“Shares”) shall be subject to the 1999 Plan. The Shares subject to the 1999 Plan hereby are reserved for sale for such purpose. Any of such Shares which may remain unsold and which are not subject to outstanding options at the termination of the 1999 Plan shall cease to be reserved for the purpose of the 1999 Plan, but until termination of the 1999 Plan the Company shall at all times reserve a sufficient number of shares to meet the requirements of the 1999 Plan. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the shares theretofore subject to such Option may again be subjected to an Option under the 1999 Plan.

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7. OPTION PRICE

(a) The purchase price of each Share subject to an Option or any portion thereof (which is not designated as an ISO) shall be determined by the Committee in its sole and absolute discretion in accordance with applicable law, subject to guidelines as shall be suggested by the Board from time to time. The purchase price of each Share subject to an ISO shall not be less than 100% (or 110% if at the time of grant the optionee (after taking into account the attribution rules set forth in Code Section 424(d)) owns more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary (a “10% shareholder”)) of the fair market value of such Share on the date the ISO is granted.

(b) The option price shall be payable upon the exercise of the Option in cash, by check, or other form satisfactory to the Board or the Committee.

(c) The proceeds received by the Company from the sale of Shares subject to an Option granted under the 1999 Plan will be added to the general funds of the Company and used for its corporate purposes.

8. ADJUSTMENTS

Upon the occurrence of any of the following described events, an optionee’s rights to purchase Shares under the 1999 Plan shall be adjusted as hereinafter provided:

(a) If the Company is separated, reorganized, merged, consolidated or amalgamated with or into another corporation while unexercised Options remain outstanding under the 1999 Plan, there shall be substituted for the Shares subject to the unexercised portions of such outstanding Options an appropriate number of shares of each class of shares or other securities of the separated, reorganized, merged, consolidated or amalgamated corporation which were distributed to the shareholders of the Company in respect of such shares, and appropriate adjustments shall be made in the purchase price per share to reflect such action, in each case, except as otherwise determined by the Board or the Committee, in a manner intended to comply with the requirements of Code Section 424(a) and the regulations issued thereunder.

(b) If the Company is liquidated or dissolved while unexercised Options remain outstanding under the 1999 Plan, then all such outstanding Options may be exercised in full by the optionees as of the effective

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date of any such liquidation or dissolution of the Company without regard to the installment exercise provisions of Paragraph 9(b), by the optionees giving notice in writing to the Company of their intention to so exercise.

(c) If the outstanding shares of the Company shall at anytime be changed or exchanged by declaration of a stock dividend, stock split, combination or exchange of shares, re-capitalization, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of Shares subject to this 1999 Plan or subject to any Options theretofore granted, and the option prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of Shares without changing the aggregate option price; provided, however, that no adjustment shall be made by reason of the distribution of subscription rights on outstanding stock. Upon the happening of any of the foregoing, the class and aggregate number of shares issuable pursuant to the 1999 Plan (as set forth in paragraph 6 hereof), in respect of which Options have not yet been exercised, shall be appropriately adjusted.

9. TERM AND EXERCISE OF OPTIONS

(a) Options shall be exercised by the optionee by giving written notice to the Company, which exercise shall be effective upon receipt by the Secretary of the Company at its principal office of such notice along with payment for the number of Shares with respect to which the Option is being exercised. The notice shall specify the number of Shares with respect to which the Option is being exercised.

(b) Each Option granted under this 1999 Plan shall be exercisable on the date and for the number of shares as shall be provided in the option agreement evidencing the Option and setting forth the terms thereof. However, (i) no Option shall be exercisable after the expiration of ten years from the date of grant, and (ii) no ISO granted to a person who at the time of grant is a 10% shareholder may be exercisable after the expiration of five years from the date of grant.

(c) Options granted under the 1999 Plan shall not be transferable by optionees other than by will or the laws of descent and distribution, and during an optionee’s lifetime shall be exercisable only by that optionee.

(d) Options granted to employees or directors may not be exercised after the termination of employment and/or service as a director unless (i) prior to the date of such termination, the Board or the Committee shall authorize, in the relevant option agreement or otherwise, an extension of the term of all or part of the option beyond the date of such termination for a period not to exceed the period during which the Option by its terms would otherwise have been exercisable, or (ii) termination is without cause, in which event any options still in force

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and unexpired may be exercised within a period of 90 days from the date of such termination, but only with respect to the number of shares purchasable at the time of such termination, or (iii) termination is the result of death or Disability, in which event any Options still in force and unexpired may be exercised within a period of six (6) months from the date of termination, but only with respect to the number of shares purchasable at the time of such termination or (iv) termination of employment is the result of retirement under any deferred compensation agreement or retirement plan of the Company or of any Subsidiary of the Company or after age 60, while Options granted hereunder are still in force and unexpired, in which case the Board or Committee shall have the discretion to permit any unmatured installments of the Options to be accelerated to the later of the date of retirement or a date one year following the date of grant, and the Options shall thereupon be exercisable in full, without regard to any installment exercise provisions in the option agreement. For purposes of this 1999 Plan, “Disability” shall mean “permanent and total disability” within the meaning of Code Section 22(e)(3).

(e) The holders of Options shall not be or have any of the rights or privileges of shareholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until, following exercise but subject always to the provisions of Section 5 above for 102 Stock Options, certificates representing such shares shall have been issued by the Company and delivered to (or for the account of) such holders.

(f) Any form of option agreement authorized by the 1999 Plan may contain such other provisions not inconsistent with this 1999 Plan as the Board or the Committee may, from time to time, deem advisable. Without limiting the foregoing, the Board or the Committee may, with the consent of the optionee, from time to time cancel all or any portion of any Option then subject to exercise, and the Company’s obligation in respect of such Option may be discharged by (i) payment to the optionee of an amount in cash equal to the excess, if any, of the Fair Market Value of the shares at the date of such cancellation subject to the portion of the Option so canceled over the aggregate purchase price of such shares, (ii) the issuance or transfer to the optionee of Shares of the Company with a Fair Market Value at the date of such transfer equal to any such excess, or (iii) a combination of cash and shares with a combined value equal to any such excess, all as determined by the Board or the Committee in its sole discretion.

10. MAXIMUM ISO AWARD

In case of ISO granted to U.S. employees, the aggregate Fair Market Value of Shares (determined as of the date of the grant of the ISO’s) with respect to which ISO’s are exercisable for the first time by any optionee during any

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calendar year shall not exceed the limitation provided under Section 422(d) of the Code.

11. PURCHASE OF INVESTMENT

Unless Shares covered by the 1999 Plan have been listed for trade on any stock exchange (of any jurisdiction), or the Company has determined that such registration is unnecessary, each person exercising an Option under the 1999 Plan may be required by the Company to give a representation in writing that he is acquiring such shares for his own account, for investment and not with a view to, or for sale in connection with, the distribution of any part thereof.

12. TERM DATE OF 1999 PLAN

The 1999 Plan shall be effective as of September 22, 1999 and shall terminate on December 31, 2009.

13. AMENDMENTS OR TERMINATION

The Board may, at any time and from time to time, amend, alter, or discontinue the 1999 Plan, except that no amendment or alteration shall be made which would impair the rights of the holder of any Option theretofore granted without his consent, and except that no amendment or alteration shall be made, without the approval of the shareholders which would:

(a) Increase the total number of shares reserved for the purposes of the 1999 Plan, except as is provided in Section 6, or change the class of persons eligible to participate in the 1999 Plan as provided in Section 4; or

(b) [intentionally deleted].

14. GOVERNMENT REGULATIONS

The 1999 Plan, and the granting and exercise of Options hereunder, and the obligation of the Company to sell and deliver shares under such Options, shall be subject to all applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the optionee including the registration of the shares under the United States Securities Act of 1933, and to such approvals by any governmental agencies or national securities exchanges as may be required.

15. CONTINUANCE OF EMPLOYMENT

Neither the 1999 Plan nor the option agreement with the optionee shall impose any obligation on the Company or a Subsidiary thereof, to continue any optionee

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in its employ, and nothing in the 1999 Plan or in any Option granted pursuant thereto shall confer upon any optionee any right to continue in the employ of the Company or a Subsidiary thereof or restrict the right of the Company or a Subsidiary thereof to terminate such employment at any time.

16. GOVERNING LAW

This 1999 Plan shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws.

17. TAX CONSEQUENCES

Any tax consequences (other than with respect to the employer portion of any employment taxes) arising from the grant or exercise of any Option, from the payment for Shares issued upon exercise thereof or from any other event or act (of the Company, the Trustee or the Optionee), hereunder, shall be borne solely by the Optionee. The Company and/or the Trustee (if applicable) shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including the withholding of taxes at source. Furthermore, the Optionee shall agree to indemnify the Company and the Trustee (if applicable) and hold them harmless against and from any and all liability for any such tax (other than with respect to the employer portion of any employment taxes) or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Optionee.

ONLY WITH RESPECT TO AN OPTIONEE SUBJECT TO ISRAELI TAXATION:

The Board, the Committee and the Trustee shall not be required to release any stock certificate representing shares issued upon exercise of an Option granted under Section 102 or 3(I), to an Optionee until all required payments have been fully made. The Optionee hereby declares that he or she will not transfer the Shares issued upon exercise of an Option granted under Section 102, nor any other shares received subsequently following any realization of rights resulting from an Option granted under Section 102 or from Shares issued upon exercise of an Option granted under Section 102, by a way of tax-exempt transfer or a transfer under Sections 104 (a), 104 (b) or 97 (a) of the Israeli Income Tax Ordinance.

18. NON-EXCLUSIVITY OF THE 1999 PLAN

The adoption of the 1999 Plan by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangement or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the

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granting of stock options otherwise than under the 1999 Plan, and such arrangements may be either applicable generally or only in specific cases.

19. MULTIPLE AGREEMENTS

The terms of each Option may differ from other Options granted under the 1999 Plan at the same time, or at any other time. The Committee may also grant more than one Option to a given optionee during the term of the 1999 Plan, either in addition to, or in substitution for, one or more Options previously granted to that optionee.

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EX-4.11

EXHIBIT 4.11

PURCHASE AGREEMENT

MADE AS OF JUNE 28, 2002

AMONG

JACADA LTD.

AND

ANOTA LTD.

Purchase Agreement

This Purchase Agreement (this “Agreement”) is entered into as of June 28, 2002, by and among Jacada Ltd., an Israeli company having its main place of business at 11 Galgalei Haplada St., Herziliya, Israel (the “Purchaser”) and Anota Ltd., an Israeli company having its main place of business at 1 Haetgar St. Tirat Hacarmel, Israel (the “Seller”).

WHEREAS, the Seller is engaged in the Seller Business (as defined below); and

WHEREAS, the Purchaser has agreed to purchase from the Seller, and the Seller has agreed to sell to the Purchaser the Assets (as defined below) on the terms and subject to the conditions set forth hereinbelow; and

WHEREAS, in addition to the purchase of the Assets, the Purchaser has agreed to assume the Assumed Liabilities of the Seller (as defined below).

NOW, THEREFORE, in consideration of the mutual promises, covenants, conditions, representations and warranties set forth herein, and intending to be legally bound hereby, the parties agree as follows:

1. Interpretation; Definitions

1.1 The Recitals and Exhibits hereto consist an integral part hereof.

1.2 The headings of the Sections and Subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

1.3 In this Agreement:

1.3.1 “Assets” shall mean all of the rights, title and interests in all the assets of the Seller and any of its subsidiaries, including without limitation, all the Intellectual Property, goodwill, Permits, equipment, material, cash, cash equivalents and property detailed, without limitation, in Exhibit 1.3.1 and all Contracts and Contracts Rights, all as of the Closing Date, and including contracts which relate to the Assets signed until the Closing Date. Notwithstanding the aforesaid, a sum of US$5,000 shall remain in the account of the Seller and shall not be deemed as part of the Assets.

1.3.2 “Assumed Liabilities” shall have the meaning set forth in Section 2.2.

1.3.3 “Certain Employees” means the employees identified in Exhibit 1.3.3 to this Agreement.

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1.3.4 “Closing” means the closing of this Agreement referred to in Section 3.1.

1.3.5 “Closing Date” shall have the meaning set forth in Section 3.1.

1.3.6 “Closing Purchase Price” shall have the meaning set forth in Section 2.3.2.

1.3.7 “Consideration” shall mean the payment by the Purchaser, as set forth in Section 2.3.

1.3.8 “Corporate Documents” means the Seller’s Articles and Memorandum of Association.

1.3.9 “Contract Rights” shall mean all of the Seller’s rights under any Contract or Permit.

1.3.10 “Contract” shall include all contracts which relate to the Assets and the Seller Business, all as set forth in Exhibit 1.3.10.

1.3.11 “DC Earnout” shall have the meaning set forth in Section 2.3.4.

1.3.12 “Indebtedness” means all obligations, contingent or otherwise, in respect of: (a) borrowed money, (b) indebtedness evidenced by notes, debentures or any other similar instruments, (c) capitalized lease obligations, (d) the deferred purchase price of assets, services or securities, including with respect to non-competition, consulting or other obligations, (e) conditional sale or other title retention agreements, (f) reimbursements obligations, whether contingent or matured, with respect to letters of credit, banker’s acceptances, bonds and other financial guarantees, (g) dividend payable, (h) taxes of any kind and nature relating to the conduct of the Seller Business prior to the date of the Closing, (i) interest, premium, penalties and other amounts owed in respect of the items described in the foregoing clauses (a) through (i).

1.3.13 “Intellectual Property” shall have the meaning set forth in Section 6.5.

1.3.14 “Liens” means all mortgages, liens, pledges, charges, security interests, third party rights or other claims or encumbrances of any kind whatsoever.

1.3.15 “Permits” shall mean all licenses, permits, franchises, approvals, authorizations, consent or orders of, or filing with, any governmental authority, or any other person, related to the Seller Business.

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1.3.16 “Seller Business” means the business of developing, marketing, licensing, distributing, enhancing, maintaining and supporting host connectivity software for Mainframes, AS/400 and UNIX/LINUX.

1.3.17 “2003 Earnout” shall have the meaning set forth in Section 2.3.3.

2. Purchase and Sale of the Assets

2.1 Purchase and Sale of Assets

On the terms and subject to the conditions set forth in this Agreement, on the Closing Date, the Seller shall sell, assign, transfer and deliver to the Purchaser, and the Purchaser shall purchase all the Assets, free and clear of any Liens. At the Closing, the Seller shall sign and execute a Bill of Sale and Deed of Assignment substantially in the form of Exhibit 2.1 and such other good and sufficient instruments of assignment and transfer as shall be necessary to vest in Purchaser good and marketable title to the Assets free and clear of any Liens.

2.2 Assumption of Assumed Liabilities and rights under the Contracts

On the terms and subject to the conditions set forth in this Agreement, the Purchaser shall assume, perform, and discharge the liabilities of the Seller set forth in the reviewed balance sheet of the Seller dated June 10, 2002 attached hereto as Exhibit 6.14 and the spread sheet attached hereto as Exhibit 2.2 (the “Assumed Liabilities”). In addition, the Purchaser shall assume the right of the Seller under all of the Contracts to receive any payments of any kind and nature (whether payable as royalties or otherwise) (collectively, the “Payments”) and all such Payments due and/or received in connection with any of the Contracts shall be the sole and absolute property of the Purchaser. Other than such Assumed Liabilities and the liabilities of the Seller under the Contracts, the Purchaser does not assume and shall not be liable for any Indebtedness, obligation or liability of the Seller of any kind and nature, whether financial or otherwise, absolute or contingent.

2.3 Consideration

2.3.1 As consideration for all Assets purchased by the Purchaser hereunder, the Purchaser shall pay the Seller (or any of its shareholders, as instructed by the Seller) the Closing Purchase Price, the 2003 Earnout and the DC Earnout (together, the “Consideration”) (which shall be paid subject to the compliance with the terms of this Agreement and subject to the representations, warranties and undertakings made by the Seller). Only the Closing Purchase Price shall be paid by the Purchaser at the Closing.

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2.3.2 The Closing Purchase Price shall be six hundred and forty thousand US Dollars ($US640,000), payable at the Closing in ordinary shares, par value NIS 0.01 per share, of the Purchaser (“Purchaser Ordinary Shares”). The value of a Purchaser Ordinary Share shall be calculated as the arithmetic average of the closing price of a Purchaser Ordinary Share on The NASDAQ National Market for the ten (10) consecutive trading days ending on the third business day preceding the Closing. In case the liabilities associated with the US activities of the Seller exceed US$10,000, the aggregate amounts of such liabilities shall be deducted from the Closing Purchase Price.

2.3.3 The 2003 Earnout shall equal to seventeen percent (17%) of the revenues related to sales of the Seller’s products to certain potential customers detailed in Exhibit 2.3.3, provided such sales are made subject to binding agreements made prior to March 31, 2003. The 2003 Earnout will be in cash, delivered in two payments, on (i) June 30, 2003; and (ii) September 30, 2003. Each payment shall relate to all the consideration actually received until its date. For avoidance of doubt, in no event shall the Purchaser be required to make payments relating to consideration received by the Purchaser after September 30, 2003. Notwithstanding anything contained herein to the contrary, under no circumstances will the 2003 Earnout exceed one million US Dollars (US$ 1,000,000).

2.3.4 The DC Earnout shall equal to forty seven percent (47%) of the revenues related to sales of the Seller’s products to the European division of DaimlerChrysler AG (“DC Europe”) during the period beginning on the Closing and ending on December 31, 2003. The DC Earnout will be in cash, delivered in two payments, on (i) March 31, 2004 and (ii) June 30, 2004. Each payment shall relate to all the consideration actually received until its date. For avoidance of doubt, in no event shall the Purchaser be required to make payments relating to consideration received by the Purchaser after June 30, 2004. Notwithstanding anything else herein to the contrary and for purpose of clarity, the parties acknowledge that the DC Earnout will be only applicable to sales to DC Europe; any other sales of the Seller’s products to any division of DaimlerChrysler AG except DC Europe will be made part of the 2003 Earnout, if applicable. For avoidance of doubt, no sale of the Seller’s products shall be included in both the 2003 Earnout and the DC Earnout.

2.3.5 The Purchaser shall pay the VAT on the Consideration, if applicable. The Purchaser shall pay such VAT to the Seller in cash two (2) days prior to the date the Seller has to pay such VAT to the VAT authorities.

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2.3.6 For avoidance of doubt, the 2003 Earnout and the DC Earnout shall relate only to sales of software products, and not to maintenance or other services related to such software products.

2.3.7 The Purchaser shall use reasonable commercial efforts to collect the revenues related to sales of the Seller’s products.

2.3.8 The Purchaser shall furnish the Seller with (1) quarterly reports concerning all sales of the Seller’s products entitling the Seller to the 2003 Earnout or the DC Earnout during the preceding quarter, as applicable, until the date when such payments are due and (2) a detailed report, signed by the Chief Executive Officer of the Purchaser, of all sales of the Seller’s products entitling the Seller to the 2003 Earnout or the DC Earnout, as applicable, on the dates when such payments are due.

2.3.9 Should the cash in the bank account of the Seller as of the Closing Date shall be less than US$5,000, the Purchaser shall pay the Seller upon Closing a cash payment of US$5,000 less any positive amount in the bank account of the Seller.

2.3.10 In case the Purchaser incurs any losses or expenses in connection with any claim, demand or litigation brought or threatened against the Purchaser in connection with this Agreement or the transactions contemplated thereby by any of the Seller’s current or past shareholders, exceeding in the aggregate US$5000, such losses or expenses shall be deducted from the 2003 Earnout and/or the DC Earnout, as applicable. Promptly after receipt by the Purchaser of a notice of the commencement of any action as described above, the Purchaser will notify the Seller in writing of the commencement thereof and the Seller shall have the right to participate in, and, to the extent the Seller so desires, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that the Purchaser shall have the right to retain its own counsel, with the fees and expenses to be borne by the Seller, if representation of the Purchaser by the counsel retained by the Seller would be inappropriate due to actual or potential differing interests between the parties. The failure to notify the Seller in writing within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve the Seller of any liability to the Purchaser under this Section 2.3.10.

3. The Closing

3.1 Closing, Date and Location

Upon the terms and subject to the conditions contained in this Agreement, the closing of the transactions contemplated by this

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Agreement (the “Closing”) shall take place at the offices of Meitar, Liquornik, Geva & Co. on July 31, 2002, or such other date, time and place as will be agreed between the parties (the “Closing Date”).

3.2 Deliveries at the Closing

3.2.1 At the Closing, the Seller shall deliver or cause to be delivered to the Purchaser:

3.2.1.1 Executed resolutions of Seller’s Board of Directors approving the execution and delivery of this Agreement by the Seller and the sale, transfer and delivery of the Assets contemplated under this Agreement, in the form of Exhibit 3.2.1.1 hereto;

3.2.1.2 Executed resolutions of Seller’s shareholders approving the execution and delivery of this Agreement by the Seller and the sale, transfer and delivery of the Assets contemplated under this Agreement in the form of Exhibit 3.2.1.2 hereto;

3.2.1.3 One or more executed Bills of Sale and Deeds of Assignment in the form of Exhibit 2.1 transferring and assigning the Assets to Purchaser, and any such other good and sufficient instruments as shall be necessary to vest in the Purchaser good and marketable title in and to all the Assets free and clear of any Liens, including any consents to assignments from third parties obtained by Seller relating to the Contracts which require such consent as shown on Exhibit 3.2.1.3 (collectively, the “Instruments of Assignment”). All Instruments of Assignment to be furnished hereunder shall be in form satisfactory to Purchaser and shall be duly executed and vest effectively and fully in Purchaser good and marketable title to the Assets free and clear of any Liens;

3.2.1.4 The opinion of Weksler, Bregman & Co., counsel to the Seller, substantially in the form of Exhibit 3.2.1.4;

3.2.1.5 Termination Agreements executed between the Seller and each of the employees of the Seller, substantially in the form of Exhibit 3.2.1.5;

3.2.1.6 Employment Agreements, executed between the Purchaser and each of the Certain Employees, substantially in the form of Exhibit 3.2.1.6;

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3.2.1.7 An executed Officer Certificate signed by the Chief Executive Officer of the Seller in the form of Exhibit 3.2.1.7;

3.2.1.8 Approval for the sale of Assets by the Seller to the Purchaser from the Office of the Chief Scientist; and

3.2.1.9 Approval for the assignment of the license agreement with Baltimore Technologies Inc. to the Purchaser.

3.2.1.10 Audited and approved Financial Statements (as defined in Section 6.14).

3.2.2 At the Closing, the Purchaser shall deliver or cause to be delivered to the Seller:

3.2.2.1 The Closing Purchase Price in accordance with the provisions of Section 2.3.2, (including share certificates);

3.2.2.2 Executed resolution of Purchaser’s Board of Directors approving the execution and delivery of this Agreement in the form of Exhibit 3.2.2.2.

3.2.2.3 The opinion of Meitar, Liquornik, Geva & Co, counsel to the Purchaser, substantially in the form of Exhibit 3.2.2.3;

3.2.3 All transactions occurring at the Closing shall be deemed to take place simultaneously and no transaction shall be deemed to have been completed and no document or certificate shall be deemed to have been delivered until all transactions are completed and all documents delivered. Unless otherwise indicated, all documents and certificates shall be dated on or as of the Closing Date.

4. Competition; Confidentiality

4.1 The Seller covenants and agrees to refrain from disclosing to any third party, or use, for its own benefit or that of any third party, without the prior written consent of the Purchaser, and to keep in strict confidence, any non-public information of the Seller, including, without limitation (a) financial, technical or other confidential information or other know-how which is part of the Assets or Intellectual Property of the Seller, including but not limited to any such information about past or current affairs or plans of the Seller, (b) information about suppliers, customers or other persons with whom the Seller has or has had dealings, production and research (the “Confidential Information”). In case the transactions contemplated herein are not consummated, the Purchaser agree not to use or to disclose any Confidential Information.

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Notwithstanding anything else to the contrary in this Section 4.1, the disclosure of information which (i) becomes generally available to the public through no fault or action of the Seller and its agents, representatives, affiliates, associates or employees, or (ii) that the Seller becomes legally compelled to disclose any of the Confidential Information, and after providing the Purchaser with prompt notice so that it may seek a protective order or other appropriate remedy, shall not be deemed disclosure of Confidential Information.

4.2 Without derogating from the above, the Seller covenants and agrees that following the Closing Date it shall not engage, establish, open or in any manner whatsoever become involved, directly or indirectly, either as an employee, owner, partner, agent, 5% or more passive shareholder (without any participation in the management of such company), director, consultant or otherwise, in any business which competes with the Seller Business.

4.3 In addition, the Seller covenants and agrees not to induce any of the Certain Employees that shall be employed by the Purchaser following the Closing to leave his employment therewith.

5. Representations and Warranties of the Purchaser

The Purchaser represents and warrants to the Seller as follows:

5.1 Authority

The Purchaser has all requisite corporate power and authority, and has taken all corporate action necessary, to execute and deliver this Agreement and has full legal capacity to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby and to perform its obligations hereunder. The execution, delivery and performance by the Purchaser of this Agreement has been duly and validly authorized by the Board of Directors of the Purchaser and no other corporate proceedings on the part of the Purchaser are necessary to authorize this Agreement and the transactions contemplated hereby.

5.2 Organization

5.2.1 Purchaser is duly organized and validly existing under the laws of the state of Israel. Purchaser has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. Purchaser has heretofore made available to the Seller accurate and complete copies of the Articles of Association and Memorandum of Association of Purchaser, as currently in full force and effect.

5.2.2 Purchaser is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned,

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leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have a Material Adverse Effect on Purchaser or its business.

5.3 Capitalization of Purchaser and its Subsidiaries

5.3.1 The authorized share capital of Purchaser consists of NIS 300,000, divided into 30,000,000 Ordinary Shares, NIS 0.01 par value per share (“Purchaser Ordinary Shares”), of which, as of June 18, 2002, 18,562,530 Purchaser Ordinary Shares were issued and outstanding. All of the outstanding Purchaser Ordinary Shares have been validly issued and are fully paid, nonassessable and free of preemptive rights. The Purchaser Ordinary Shares to be issued to the Seller will be validly issued, fully paid and nonassessable and free of preemptive rights. As of June 18, 2002, 6,110,450 Purchaser Ordinary Shares were reserved for issuance and 4,640,033 were issuable upon or otherwise deliverable in connection with the exercise of outstanding options and warrants. Except as set forth above or in Purchaser SEC Reports, there are outstanding (i) no shares or other voting securities of Purchaser, (ii) no securities of Purchaser or any of its subsidiaries convertible into or exchangeable or exercisable for shares or other securities of Purchaser, (iii) no options, preemptive or other rights to acquire from Purchaser or any of its subsidiaries, and no obligations of Purchaser or any of its subsidiaries to issue, any shares, voting securities or securities convertible into or exchangeable or exercisable for shares or other securities of Purchaser and (iv) no equity equivalent interests in the ownership or earnings of Purchaser or its subsidiaries or other similar rights (collectively “Purchaser Securities“). As of the date hereof, there are no outstanding rights or obligations of Purchaser or any of its subsidiaries to repurchase, redeem or otherwise acquire any Purchaser Securities. Except as set forth in Purchaser SEC Reports, there are no voting agreements, voting trusts or other agreements or understandings to which Purchaser is a party or by which it is bound relating to the voting or registration of any shares of capital stock of Purchaser.

5.3.2 All of the outstanding capital stock of Purchaser’s subsidiaries is owned by Purchaser, directly or indirectly, free and clear of any Lien or any other limitation or restriction (including any restriction on the right to vote or sell the same except as may be provided as a matter of Applicable Law). There are no (i) securities of Purchaser or any of its subsidiaries convertible into or exchangeable or exercisable for, (ii) options or (iii) other rights to acquire from Purchaser or any of its subsidiaries any

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capital stock or other ownership interests in or any other securities of any subsidiary of Purchaser, and there exists no other contract, understanding, arrangement or obligation (whether or not contingent) providing for the issuance or sale, directly or indirectly, of any such capital stock. There are no outstanding contractual obligations of Purchaser or its subsidiaries to repurchase, redeem or otherwise acquire any outstanding Purchaser Ordinary Shares or other ownership interests in any subsidiary of Purchaser.

5.4 SEC Reports; Financial Statements

5.4.1 Purchaser has filed all required forms, reports and documents (“Purchaser SEC Reports”) with the SEC since October 1999, each of which, complied at the time of filing in all material respects with all applicable requirements of the Securities Act of 1933, as amended and the Exchange Act of 1934, as amended, each law as in effect on the dates such forms, reports and documents were filed. None of such Purchaser SEC Reports, including any financial statements or schedules included or incorporated by reference therein, contained when filed any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein in light of the circumstances under which they were made not misleading, except to the extent superseded by a Purchaser SEC Report filed subsequently and prior to the date hereof. The audited consolidated financial statements of Purchaser included in the Purchaser SEC Reports fairly present in all material respects in conformity with United States generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto) the consolidated financial position of Purchaser and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended.

5.4.2 Except as is provided in the Purchaser SEC Reports, each of the consolidated financial statements (including, in each case, any notes thereto) contained in the Purchaser SEC Reports complied as to form in all material respects with applicable accounting requirements, was prepared in accordance with GAAP applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto) and each presented fairly, in all material respects, the consolidated financial position of the Purchaser and the consolidated Purchaser subsidiaries as at the respective dates thereof and the consolidated results of operations and cash flows of the Purchaser and the consolidated Purchaser subsidiaries for the respective periods indicated therein, except as otherwise noted

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therein (subject, in the case of unaudited statements, to normal and recurring year-end adjustments and the absence of footnotes).

6. Representations and Warranties of the Seller

The Seller hereby represents, warrants and covenants to the Purchaser, as follows:

6.1 Organization and Authority

The Seller is a company duly organized and validly existing under the laws of the State of Israel. The Seller has all requisite corporate power and authority necessary to conduct its business as presently conducted. The Seller has all requisite corporate power and authority and has taken all corporate action necessary to execute and deliver this Agreement and has full legal capacity to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby and to perform its obligations hereunder. The execution, delivery and performance by the Seller of this Agreement and each agreement, certificate or other document that is to be executed and delivered by Seller in connection with the transactions contemplated by this Agreement have been duly and validly authorized by the Seller’s Board of Directors and Shareholders and no other corporate proceedings on the part of the Seller are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Seller and constitutes, and each agreement, certificate or other document that is to be executed and delivered by Seller in connection with the transactions contemplated by this Agreement when executed and delivered by Seller will constitute, a valid and binding agreement of Seller, enforceable against Seller in accordance with its terms.

6.2 Consents and Approvals; No Violations

Except as set forth in Exhibit 6.2, no filing with, and no permit, authorization, consent, approval of, or notice to, any governmental, administrative or judicial authority is necessary for the lawful consummation by the Seller of the transactions contemplated by this Agreement. The execution, delivery and performance of this Agreement by the Seller and the consummation by the Seller of the transactions contemplated hereby, do not and will not (i) conflict with or result in any violation or breach of any provision of its Corporate Documents or any other similar documents of the Seller, (ii) result in the creation or imposition of any Lien on the Assets, (iii) result in any event which (with notice or lapse of time or both) would constitute a breach of or default under (or give rise to any right of termination, cancellation or acceleration) any of the terms, conditions, or provisions of the Contracts, or (iv) violate or conflict with any order, writ, injunction, decree, statute, rule or regulation of any court, public body

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or authority or any other restriction of any kind or character applicable to the Seller or any of the Assets.

6.3 Title to Assets; Encumbrances

The Seller has good, valid and marketable title to all of the Assets, free and clear of any liability, obligation or Lien. The Assets constitute the entire assets and rights used by the Seller in the conduct of the Seller Business. The Seller does not carry on any part of the Seller Business through any subsidiary or any other entity other than the Seller. The Seller has carried on and conducted the Seller Business in compliance with all applicable material laws, statutes, ordinances, rules, regulations or orders.

6.4 Condition of Assets

Exhibit 6.4 contains full and accurate details of the equipment including all software, hardware and all other personal property used in the ordinary course of the Seller Business, as well as all inventory which is part of the Seller Business. In accordance with the prior practice of the Seller the equipment is in operating condition and repair and satisfactory working order, except for normal breakdowns, reasonable wear and use, not materially affecting the Seller Business and is adequate for and not surplus to the requirements of the Seller Business.

6.5 Intellectual Property

6.5.1 Exhibit 6.5.1 sets forth a complete and accurate list of all of the Seller’s and each of its subsidiary’s (i) patents and patent applications; (ii) Trademark registrations and applications and material unregistered Trademarks; and (iii) copyright registrations and applications, indicating for each, the applicable jurisdiction, registration number (or application number) and date issued (or date filed) owned, in whole or in part, including jointly with others, by the Seller or any of its subsidiaries. For purposes of this Agreement, “Intellectual Property“ means: (A) trademarks and service marks (whether registered or unregistered), trade names, designs and general intangibles of like nature, together with all goodwill related to the foregoing (collectively, “Trademarks“); (B) patents (including any continuations, continuations in part, renewals and applications for any of the foregoing) (collectively “Patents“); (C) copyrights (including any registrations and applications therefor and whether registered or unregistered) (collectively “Copyrights“); (D) computer software; databases; works of authorship; mask works; technology; trade secrets and other confidential information, know-how, proprietary processes, formulae, algorithms, models, user interfaces, customer lists, inventions, discoveries, concepts, ideas,

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techniques, methods, source codes, object codes, methodologies and (E) with respect to all of the foregoing, related confidential data or information (collectively, “Trade Secrets“). The Seller’s and each of its subsidiary’s Trademarks, Patents, Copyrights and Trade Secrets are sometimes referred to hereinafter as the “Seller Trademarks,” “Seller Patents,” “Seller Copyrights” and “Seller Trade Secrets,” respectively.

6.5.2 Trademarks.

6.5.2.1 All Seller Trademark registrations are currently in compliance in all material respects with all legal requirements (including, where applicable, the timely post-registration filing of affidavits of use and incontestability and renewal applications) other than any requirement that, if not satisfied, would not result in a cancellation of any such registration or otherwise materially affect the priority and enforceability of the Seller Trademark in question.

6.5.2.2 No material registered Seller Trademark has been within the last three (3) years or is now involved in any opposition or cancellation proceeding in any applicable Governmental Entity.

6.5.2.3 To the knowledge of the Seller, there has been no prior use of any material Seller Trademark by any third party that confers upon such third party superior rights in any such Seller Trademark.

6.5.3 Patents.

6.5.3.1 All Seller Patents are currently in compliance with legal requirements (including payment of filing, examination, and maintenance fees and proofs of working or use) other than any requirement that, if not satisfied, would not result in a revocation or otherwise materially affect the enforceability of the Seller Patent in question.

6.5.3.2 No Seller Patent has been or is now involved in any interference, reissue, reexamination or opposition proceeding in any applicable Governmental Entity. To the Seller’s knowledge, no such action has been threatened in writing within the one (1)-year period prior to the date of this Agreement.

6.5.3.3 To the knowledge of the Seller, there is no patent or patent application of any person that conflicts in any

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material respect with any Seller Patent or invalidates any claim the Seller has in any Seller Patent.

6.5.4 Trade Secrets.

6.5.4.1 The Seller has taken reasonable steps in accordance with normal industry practice to protect the Seller’s rights in Seller’s confidential information and Seller Trade Secrets.

6.5.4.2 Without limiting the generality of Section 6.5.4.1, the Seller enforces and has enforced a policy of requiring each relevant employee, consultant and contractor to execute “work for hire” (or similar arrangements under Applicable Law), proprietary information, confidentiality and assignment agreements substantially in the Seller’s standard forms that effectively and exclusively assign to the Seller or one of its subsidiaries rights to any Intellectual Property relating to the business of the Seller or its subsidiaries created in the course of performance of work for the Seller or one of its subsidiaries. Except under confidentiality obligations, to the knowledge of the Seller there has been no disclosure by the Seller or any subsidiary of material Seller’s confidential information or Seller Trade Secrets.

6.5.5 License Agreements. Exhibit 6.5.5 (1) sets forth a complete and accurate list of all license agreements granting to the Seller or any of its subsidiaries any material right to use or practice any rights under any Intellectual Property, other than software commercially available on reasonable terms to any person for a license fee of no more than Ten Thousand US Dollars ($US10,000) in the aggregate (collectively, the “Seller Inbound License Agreements”), indicating for each the title and the parties thereto. Exhibit 6.5.5 (2) sets forth a complete and accurate list of all license agreements under which the Seller or any of its subsidiaries licenses software or grants other rights in or rights to use or practice under any Intellectual Property, (collectively, the “ Seller Outbound License Agreements,” and with the Seller Inbound License Agreements, the “Seller License Agreements“), indicating for each the title and the parties thereto. There is no material outstanding or, to the Seller’s knowledge, threatened dispute or disagreement with respect to any Seller Inbound License Agreement or any Seller Outbound License Agreement.

6.5.6 Ownership; Sufficiency of IP Assets. The Seller or any of its subsidiaries owns or possesses adequate licenses or other rights to use, free and clear of Liens, orders and arbitration awards, all

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of their Intellectual Property used in their respective businesses as currently conducted. The Intellectual Property identified in Exhibit 6.5.1, together with the Seller’s and its subsidiaries’ rights under the licenses granted to the Seller or any of its subsidiaries under the Seller Inbound License Agreements, constitute all the material Intellectual Property rights used in the operation of the Seller’s and its subsidiaries’ businesses as they are currently conducted.

6.5.7 Protection of IP. The Seller has taken reasonable and customary steps to protect the Intellectual Property of the Seller and its subsidiaries.

6.5.8 No Infringement by the Seller. The products used, manufactured, marketed, sold or licensed by the Seller, and all Intellectual Property used in the conduct of the Seller’s and its subsidiaries’ businesses as currently conducted, do not infringe upon, violate or constitute the unauthorized use of any rights owned or controlled by any third party, including any Intellectual Property of any third party.

6.5.9 No Pending or Threatened Infringement Claims. No litigation is now or, within the three (3) years prior to the date of this Agreement, was pending and, to the Seller’s best knowledge, no notice or other claim has been received by the Seller within the one (1) year prior to the date of this Agreement, nor is the Seller aware of any facts or circumstances that in the Seller’s reasonable judgment could be expected to give rise to any claim, (i) alleging that the Seller or any of its subsidiaries has engaged in any activity or conduct that infringes upon, violates or constitutes the unauthorized use of the Intellectual Property rights of any third party or (ii) challenging the ownership, use, validity or enforceability of any Intellectual Property owned or exclusively licensed by or to the Seller. Except as specifically disclosed in one or more Exhibits of this Agreement, no Intellectual Property owned or licensed by the Seller or any of its subsidiaries is subject to any outstanding order, judgment, decree, stipulation or agreement restricting the use thereof by the Seller or any such subsidiary or, in the case of any Intellectual Property licensed to others, restricting the sale, transfer, assignment or licensing thereof by the Seller or any of its subsidiaries to any person.

6.5.10 No Infringement by Third Parties. To the best knowledge of the Seller, no third party is misappropriating, infringing, diluting or violating any Intellectual Property owned or exclusively licensed by the Seller or any of its subsidiaries, and no such claims have been brought against any third party by the Seller or any of its subsidiaries.

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6.5.11 Assignment; Change of Control. The execution, delivery and performance by the Seller of this Agreement, and the consummation of the transactions contemplated hereby, will not result in the loss or impairment of, or give rise to any right of any third party to terminate, any of the Seller’s or any of its subsidiaries’ rights to own any of its Intellectual Property or their respective rights under the Seller License Agreements, nor require the consent of any Governmental Authority or third party in respect of any such Intellectual Property other than the Office of Chief Scientist and Baltimore Technologies Inc.

6.5.12 Software. The Software owned or purported to be owned by the Seller or any of its subsidiaries, was either (i) developed by employees of the Seller or any of its subsidiaries within the scope of their employment; (ii) developed by independent contractors who have assigned their rights to the Seller or any of its subsidiaries pursuant to written agreements; or (iii) otherwise acquired by the Seller or a subsidiary from a third party. Except as set forth in Exhibit 6.5.12, the Software does not contain any programming code, documentation or other materials or development environments that embody Intellectual Property rights of any person other than the Seller or any of its subsidiaries, except for such materials or development environments obtained by the Seller or any of its subsidiaries from other persons who make such materials or development environments commercially available to purchasers or end-users, and all such materials included in the Software have been used in accordance with their license terms and conditions. For purposes of this Section 6.5.12, “Software“ means any and all (i) computer programs, including any and all software implementations of algorithms, models and methodologies, whether in source code or object code, (ii) databases and compilations, including any and all data and collections of data, whether machine readable or otherwise, (iii) descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing, and (iv) all documentation, including user manuals and training materials, relating to any of the foregoing.

6.5.13 Upon the consummation of the transactions contemplated herein, the Seller will not retain any rights in the Intellectual Property.

6.6 Contracts

All Contracts and all amendments and modifications thereof, are listed on Exhibit 1.3.10 hereto. Other than the Contracts, the Seller is not bound by any contracts or agreements, leases, commitments, written or oral, or any other obligations associated with the Assets. Copies of all

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the Contracts heretofore delivered to the Purchaser, together with all amendments thereto, are accurate and complete as of the date hereof. As of the date hereof, the Seller and to the Seller’s knowledge all third parties are not in breach of any of the Contracts, has performed all of its respective obligations under the Contracts, and Seller is not aware of any event which would constitute a material default on the part of Seller, except such defaults, events of default or other events as to which requisite waivers or consents have been obtained. Exhibit 3.2.1.3 lists all Contracts the assignment of which requires the consent of a third party. Except as set forth in Exhibit 1.3.10, the Contracts are valid and enforceable in accordance with their terms, are in full force and effect and none is subject to recession or amendment. The execution of this Agreement by the Seller and the consummation of the transactions contemplated hereby do not constitute a material default on the part of the Seller under any of the Contracts. The Seller has not received any communication from any of the parties to the Contracts claiming that the Seller has infringed any of the Contracts or that such parties intend to terminate any of the Contracts. To the Seller’s knowledge, none of the parties to the Contracts has any claims with respect to the infringement of any of the Contracts by the Seller. The Seller has not waived any of its rights under any Contract. No Person is renegotiating, or has a right to renegotiate, any amount paid or payable to the Seller under any Contract or any other term or provision of any Contract.

6.7 Grants, Incentives and Subsidies

Exhibit 6.7 provides a complete list of all pending and outstanding grants, incentives and subsidies (collectively, “Grants”) from the Government of the State of Israel or any agency thereof, or from any foreign governmental or administrative agency, granted to the Seller, including, without limitation, (i) Approved Enterprise Status from the Investment Center; (ii) grants from the Office of the Chief Scientist (the “OCS”) and (iii) the Marketing Incentive Fund. The Seller has made available to the Purchaser, prior to the date hereof, correct copies of all documents evidencing Grants submitted by the Seller and of all letters of approval, and supplements thereto, granted to the Seller. Without limiting the generality of the above, Exhibit 6.7 includes the aggregate amounts of each Grant, and the aggregate outstanding obligations thereunder of the Seller with respect to royalties, or the outstanding amounts to be paid by the OCS to the Seller. The Seller is in compliance with the terms and conditions of the respective Grants and, except as disclosed in Exhibit 6.7, has duly fulfilled all the undertakings relating thereto. Other than the transactions contemplated by this Agreement, the Seller is not aware of any event or other set of circumstances which might lead to the revocation or material modification of any of the Grants.

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6.8 Compliance with Laws

The Seller and its subsidiaries hold all material permits, licenses, variances, exemptions, orders and approvals of all governmental entities necessary for the lawful conduct of their respective businesses (the “Seller Permits“) except where the failure to hold any Permit could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect on the Seller. The Seller and its subsidiaries are in material compliance with the terms of the Seller Permits. The businesses of the Seller and its subsidiaries have been and are being conducted, to the best of the Seller’s knowledge, in compliance with all Applicable Laws. No investigation or review by any governmental entity with respect to the Seller or any of its subsidiaries is pending or, to the knowledge of the Seller, threatened, nor, to the knowledge of the Seller, has any governmental entity indicated an intention to conduct the same, except to the extent that any noncompliance could not reasonably be expected, individually or in the aggregate, to have a material adverse effect on the Assets.

6.9 No Other Agreements to Sell the Assets

The Seller has not made or have any commitment or legal obligation, absolute or contingent, to any other person or firm other than to the Purchaser, to sell, assign, transfer or effect a sale of any of the Assets (including but not limited to the Intellectual Property) or to enter into any agreement or cause the entering into any agreement with respect to any of the forgoing.

6.10 Insurance

Exhibit 6.10 contains all the insurance policies of the Seller. The Seller has fully paid all payments under all insurance policies. The Seller has not received notice of any pending or threatened termination with respect to its insurance policies. There are no pending claims against such insurance by the Seller as to which the insurers are defending under reservation of rights or have denied liability.

6.11 Employee Matters

6.11.1 To the Seller’s knowledge, no one of the Certain Employees is obligated under any agreement (including covenants or commitments of any nature) or subject to any judgment, decree or order of any court or of an administrative agency, or any other restriction, that would interfere with the use of his or her best efforts to carry out his or her duties for the Seller prior to the Closing and for the Purchaser following the Closing.

6.11.2 The Seller has paid in full to all of its employees all wages, salaries, commissions, bonuses, benefits and other compensation due and payable to such employees on or prior to

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the Closing Date. None of the Certain Employees is entitled to any severance, pension or other related payments from the Seller with respect to his or her employment with the Seller prior to the date of the Closing.

6.11.3 No collective bargaining agreement or other labor union contract is applicable to any of the Certain Employees.

6.11.4 There are no disputes between the Seller and each of its employees or threatened claims with respect to such employment of the employees. The Seller has not received any written or other notice that the Seller has failed to comply with any laws relating to the employment of the employees, including with respect to wages, work hours, collective bargaining, the payment of other payments, taxes, equal employment opportunities, employment discrimination, employment safety, etc.

6.11.5 Neither the execution, delivery or performance of this Agreement, nor the consummation of any of the other transactions contemplated by this Agreement, will result in any payment (including any bonus or golden parachute) to any current or former employee or director of the Seller (whether or not under any option plan (written or oral) except as set forth in Exhibit 6.15.

6.11.6 The Seller is in compliance in all material respects with all Applicable Laws relating to employment, employment practices, wages, overtime, bonuses and terms and conditions of employment, including employee compensation matters.

6.11.7 Neither the Seller nor any of its subsidiaries has received in the last twenty-four (24) months any demand letters, civil rights charges, suits or drafts of suits with respect to claims made by or on behalf of any of their respective employees; and

6.11.8 Neither the Seller nor any of its subsidiaries is aware of any pending claims, civil rights charges, suits or drafts of suits with respect to claims made by or on behalf of their respective employees.

6.11.9 All amounts that the Seller or any subsidiary is legally or contractually required either (i) to deduct from its employees’ salaries or to transfer to such employees’ pension, managers insurance, life insurance, incapacity insurance, continuing education fund or other similar fund or (ii) to withhold from their employees’ salaries and pay to any governmental entity as required by the Israeli Income Tax Ordinance [New Version] and other Applicable Laws have, in each case, been duly deducted, transferred, withheld and paid, and the Seller does

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not have any outstanding obligation to make any such deduction, transfer, withholding or payment except as set forth in Exhibit 2.2.

6.11.10 The Seller is not liable for any material payment to any trust or other fund or to any Governmental Entity, with respect to unemployment compensation benefits, social security, severance fund or other benefits or obligations for its employees (other than routine payments to be made in the normal course of business and consistent with past practice).

6.12 Litigation

There is no suit, action, charge, claim, inquiry, investigation or proceeding pending or, threatened against or affecting the Seller, or the Assets, nor is there any valid basis to the best knowledge of the Seller for any such suit, action, charge, claim, inquiry, investigation or proceeding, nor is there any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator outstanding against the Seller or related to or affecting the Assets. The foregoing includes, without limitation, actions pending or threatened involving the prior employment of any of the Seller’s employees or use by any of them in connection with the Seller Business of any information, property or techniques allegedly proprietary to any of their former employees. Further, there is no action, suit, proceeding or investigation by the Seller currently pending or that the Seller intends to initiate.

6.13 Product Warranties

There have not been any material deviations from the standard warranties and guaranties of the Seller or any of its subsidiaries currently in effect with respect to its products, as set forth in Exhibit 6.13, and neither the Seller, any of its subsidiaries nor any of their respective salesmen, employees, distributors and agents is authorized to undertake obligations to any customer or to other third parties materially in excess of such warranties or guaranties. To the Seller’s best knowledge, neither the Seller nor any of its subsidiaries has made any material oral warranty or guaranty with respect to its products.

6.14 Financial statements; Absence of Changes

The Seller has furnished the Purchaser with the audited financial statements dated December 31, 2001, unaudited, reviewed, financial statements dated March 31, 2002, and unaudited, reviewed trial balance sheet of the Seller dated as of June 10, 2002 (the “Trial Balance Sheet”) attached hereto as Exhibit 6.14 (collectively, the “Financial Statements”). The Financial Statements are true and correct in all respects, are prepared in accordance with the books and records of the Seller, fairly and accurately present the financial position of the

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Seller as of such date and the results of its operations for the periods then ended, and have been (other than the Trial Balance Sheet) prepared by E&Y Israel in accordance with United States generally accepted accounting principles (“GAAP”) consistently applied. The Seller does not have any liabilities, debts or obligations, whether accrued, absolute or contingent other than (i) liabilities reflected or reserved against in the Financial Statements or (ii) liabilities (no greater than $5,000 per liability and no greater than $25,000 in aggregate) incurred since March 31, 2002 (the “Balance Sheet Date”), in the ordinary and usual course of business. Except as set forth in the Financial Statements, neither the Seller nor any of its subsidiaries has any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, that would be required by United States generally accepted accounting principles to be reflected on a consolidated balance sheet of the Seller (including the notes thereto). Since the Balance Sheet Date, the Seller has been operated in the ordinary and usual course of business, and there has not been:

(i) any material change in the assets, liabilities, condition (financial or otherwise) or business of the Seller from that reflected in the Financial Statements;

(ii) any material damage, destruction or loss, whether or not covered by insurance, materially affecting the assets, business, properties, condition (financial or otherwise) or operating results of the Seller as such business is presently conducted;

(iii) any material waiver by the Seller of a valuable right or of a material debt owed to it;

(iv) any material satisfaction or discharge of any Lien, claim or encumbrance or payment of any obligation by the Seller, except in the ordinary course of business;

(v) any material change or amendment to a material contract or arrangement by which the Seller or any of its assets is bound or subject;

(vi) any material change in any compensation arrangement or agreement with any employee of the Seller;

(vii) any loans made by the Seller to its employees, officers or directors;

(viii) any sale, transfer or lease of, or mortgage or pledge or imposition of lien on, any of the Seller’s material assets;

(ix) any change in the accounting methods or accounting principles or practices employed by the Seller;

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(x) any material transactions between the Seller and any other person or party related to the Seller which adversely affects the assets, business, properties, condition (financial or otherwise) or operating results of the Seller;

(xi) declaration, setting aside or payment of any dividend or other distribution in respect of the capital stock of the Seller or any of its subsidiaries (other than wholly-owned subsidiaries) or any repurchase, redemption or other acquisition by the Seller or any of its subsidiaries of any outstanding shares of capital stock or other securities of, or other ownership interests in, the Seller or any of its subsidiaries; or

(xii) labor dispute, other than routine individual grievances, or any activity or proceeding by a labor union or representative thereof to organize any employees of the Seller or any of its subsidiaries, or any lockouts, strikes, slowdowns, work stoppages or threats thereof by or with respect to such employees.

6.15 Brokers

Except as set forth in Exhibit 6.15, no broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Seller.

6.16 Disclosure

No representation or warranty by the Seller in this Agreement and no statement contained in any document (including, without limitation, the Exhibits, certificate or other documents furnished by the Seller during the due diligence process to the Purchaser or in connection with the transactions contemplated hereby) contains any untrue statement of material fact or omits to state any material fact necessary in light of the circumstances under which it was made, in order to make the statements herein or therein not false or misleading. There is no material fact or information relating to the Seller Business, condition (financial or otherwise), affairs, operations, or Assets of the Seller that has not been disclosed to the Purchaser in writing.

7. Covenants of the Parties

7.1 Conduct of Business

7.1.1 Except as contemplated by this Agreement and for the performance of the transactions contemplated hereunder, during the period from the date hereof to the Closing Date, the Seller will conduct its business solely within the normal course of business and will not undertake any transaction nor incur any liability other than those arising from the ordinary and normal

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course of the Seller Business or agreed in advance with the Purchaser.

7.1.2 Prior to Closing, the Seller will promptly supplement or amend any Exhibit or any other material information furnished in connection with the contemplation of this Agreement with respect to any matter which if existing or occurring at the date hereof of this Agreement, would have been required to be set forth or described in any of the Exhibits attached to this Agreement.

7.2 Registration of the Patents and Trademarks

As of the Closing Date and provided the Closing has occurred, the Purchaser shall be entitled to use all the patents and trademarks of the Seller as the owner thereof. The Seller shall inform his IP attorneys to that effect and shall sign all documents required in order to transfer and register such patents (whether registered or applied for registration) and trademarks, in the name of the Purchaser. The Purchaser shall bear the costs relating the execution of this Section 7.2. Notwithstanding the above, in the event the Purchaser decides, at any time, to appoint a different lawyer for the purpose of registration of the patents and trademarks in his name and upon such decision the Seller shall sign all documents required, if any, in order to transfer and register such patents and trademarks and, at the request of the Purchaser, instruct its IP attorneys to furnish to the Purchaser the documents required for this purpose, which are in their possession. Following the Closing the Seller shall not be entitled to use any of the Intellectual Property, which shall be the sole and absolute property of the Purchaser.

7.3 Best Efforts

Each of the parties to this Agreement will after, as well as before and upon the Closing Date, do, or cause to be done, all acts and things and sign and execute all documents and deeds requisite for the purpose of implementing the transactions contemplated hereunder. Each of the parties will use their best efforts to obtain all relevant consents and approvals and shall cooperate with each other with the object of completing the transactions contemplated herein as early as possible. The Seller shall use his reasonable efforts to assist the Purchaser in receiving the consent of the parties to the Contracts to the assignment of such Contracts to the Purchaser.

7.4 Public Announcements

Neither party shall issue any press release or otherwise make any public statements or inform any person with respect to the transactions contemplated by this Agreement, without the prior consent of the other party, except, as may be necessary in the written opinion of outside counsel to avoid violation of Applicable Law, or by the rules and

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regulations of, or pursuant to any agreement with, The Nasdaq National Market, provided that any party required to make a press release or public announcement pursuant to law, regulation or stock exchange or NASDAQ rule shall give prior notice to the other party and a reasonable opportunity for the other party to review and comment on such press release or public announcement. The first public announcement of this Agreement shall be a joint press agreed upon by the parties.

7.5 Expenses

All costs and expenses incurred by the Purchaser in connection with this Agreement and the transactions contemplated hereby shall be paid by the Purchaser, and all costs and expenses incurred by the Seller in connection with this Agreement and the transactions contemplated hereby (including taxes associated with or amounts due as a result of the distribution of the Consideration by the Seller) shall be paid by the Seller. Provided, however, that the Seller’s aggregated legal and other expenses with respect to the transactions contemplated under this Agreement shall not exceed an aggregate amount of $US 10,000.

Without derogating from the other obligations of Seller detailed in this Agreement, the Seller shall use its reasonable efforts to the extent requested by the Purchaser to assist the Purchaser in receiving the consent of the parties to the Contracts to the assignment of such contracts from the Seller to the Purchaser, if applicable. The Purchaser will reimburse the Seller for the reasonable out-of-pocket expenses incurred by the Seller in connection with actions set forth above that the Seller is required by the Purchaser to perform after the Closing Date.

7.6 Nasdaq National Market Matters

7.6.1 None of the Purchaser Ordinary Shares to be issued as part of the Consideration will be registered pursuant to the Securities Act, and the certificates representing the Purchaser Ordinary Shares shall bear a legend to such effect.

7.6.2 Notwithstanding the foregoing, if the Purchaser at any time proposes to register any of its securities, other than in a registration on Form S-8 under the Securities Act, it shall give notice to the holders of Purchaser Ordinary Shares issued under this Agreement (for the purpose of this Section 7.6, the “Holders”) of such intention. Upon the written request of any Holder given within ten (10) days after receipt of any such notice, the Purchaser shall include in such registration the Purchaser Ordinary Shares held by such Holder as indicated in such request, so as to permit the disposition of the Purchaser Ordinary Shares so registered. Notwithstanding any other provision of this Section, (i) if the managing underwriter (if

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applicable) advises the Purchaser in writing that marketing factors require a limitation of the number of shares to be underwritten, then the Purchaser Ordinary Shares held by the Holders shall be excluded from such registration prior to any other shares of the Purchaser, and (ii) if within the three months period prior to the date of the registration the Holders were entitled to sell Purchaser Ordinary Shares in any stock market without the requirement for a registration statement, than the Holders shall not be able to utilize the piggyback rights hereunder with respect to such Purchaser Ordinary Shares.

7.7 Access to Information

Between the date hereof and the Closing Date or the early termination of this Agreement, the Seller will give Purchaser and its officers, directors, employees, agents, counsel, accountants, financial advisors, consultants and other authorized representatives (the “Authorized Representative”) and provided such Authorized Representative had signed a proper NDA or is otherwise bound by similar restraints, access to all employees, plants, offices, warehouses and other facilities and to all books and records of the Seller and its subsidiaries as Purchaser may reasonably require, and will cause its officers and those of its subsidiaries to furnish Purchaser with such financial and operating data and other information with respect to the business and properties of the Seller and its subsidiaries as Purchaser may from time to time reasonably request. Between the date hereof and the Closing Date or the early termination of this Agreement, Purchaser shall make available to the Seller, as reasonably requested by the Seller, a designated officer of Purchaser to answer questions and make available such public information regarding Purchaser and its subsidiaries as is reasonably requested by the Seller taking into account the nature of the transactions contemplated by this Agreement.

7.8 No Discussions with Others

From the date hereof continuing through the Closing Date or the early termination of this Agreement, the Seller shall not, nor shall it permit any of its subsidiaries to, nor shall it or any of its subsidiaries authorize or permit any director or officer of the Seller and the Seller shall direct and use its reasonable best efforts to cause its subsidiaries’ employees, agents and representatives, including any investment banker, attorney, accountant or other advisor or representative of the Seller or any of its subsidiaries, to, directly or indirectly: (i) solicit, initiate, negotiate or encourage, or take any other action to facilitate, any inquiry, offer or the making of any proposal for (or which may reasonably be expected to lead to) any acquisition or purchase of assets or equity interest in the Seller or any of its subsidiaries or any merger, consolidation, amalgamation, arrangement, business combination, sale of all or a significant portion of assets, sale of securities, recapitalization, tender

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or exchange offer for securities of, liquidation, dissolution, winding up, extraordinary dividend or distribution, share repurchase or other similar transaction involving the Seller or any of its subsidiaries or any other corporate transaction the consummation of which would, or could reasonably be expected to, impair, impede, frustrate, interfere with, prevent or delay the consummation of this Agreement (each a “Takeover Proposal”) or (ii) propose, continue, enter into or participate in any discussions or negotiations regarding any of the foregoing, or terminate, modify or waive, or fail to enforce any provisions of any standstill or similar agreement (other than involving Purchaser or its affiliates), or furnish to another person any information with respect to the Seller’s or any of its subsidiaries’ business, properties or assets in connection with or relating to any of the foregoing, or where it might reasonably be likely to lead to any of the foregoing, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, an effort or attempt by any person (other than Purchaser and its affiliates) to do or seek any of the foregoing. In the event the Seller or any of its subsidiaries’ directors, officers, employees, agents or representatives receives a Takeover Proposal, the Seller shall promptly inform Purchaser of all material terms and conditions thereof and the identity of the person making such Takeover Proposal and shall keep Purchaser promptly and reasonably informed of the status and details of any such Takeover Proposal. The Purchaser shall receive similar obligation from Koor Corporate VC.

7.9 Undertakings Towards The Office Of The Chief Scientist

The Purchaser shall assume all the undertakings and obligations of the Seller towards the Office of the Chief Scientist set forth in Exhibit 7.9.

7.10 Employees

The Seller shall instruct its employees set forth in Exhibit 7.10 to cooperate with the Purchaser and perform the duties assigned to them by the Purchaser as long as they are employed by the Seller, including during the advance notice period. Nothing herein shall be interrupted or construed as creating or establishing employer-employee relationship between the Purchaser and such employees. Notwithstanding the aforesaid, the Purchaser acknowledges that the premises of the Seller shall be returned to their rightful owner by August 31, 2002 and that after such date the employees will not have a place upon which they could perform any actions required by the Purchaser. The Purchaser further acknowledges that the Seller cannot demand the employees to commute to Herzliya without their consent. The Purchaser further agrees that any expenses due to its demand to further utilize the services of such employees which would impose any expense on the Seller shall be borne exclusively by the Purchaser.

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7.11 Liability

The liability of the Seller towards the Purchaser in connection with this Agreement, including with regard to breach of the Seller’s representations, warranties, undertakings or covenants made under this Agreement, shall not exceed the Consideration, except when such breach results from fraudulent actions of the Seller.

7.12 Survival of Representations

All representations, warranties, undertakings, covenants and agreements made by any party to this Agreement or pursuant hereto shall survive the Closing Date, and shall remain in force until June 30, 2004.

8. Closing Conditions

8.1 Conditions to Each Party’s Obligations

The respective obligations of each party to consummate the transactions contemplated hereby shall be subject to the fulfillment at or prior to the Closing Date of the following conditions, any of which may be waived, in whole or in part, by the parties:

8.1.1 The absence of any effective injunction, writ, or preliminary restraining order of a court of competent jurisdiction directing that the transactions provided for herein not be consummated.

8.1.2 No action, suit, proceeding or investigation by or before any court, administrative agency or other governmental authority shall have been instituted which may materially affect the right of the Purchaser to own, operate or control, after the Closing Date, all or any material portion of the Assets of the Seller or the Seller Business.

8.2 Conditions to the Obligations of the Purchaser

The obligations of the Purchaser to consummate the transactions contemplated hereby shall be further subject to the fulfillment at or prior to the Closing Date of the following conditions, any one or more of which may be waived, in whole or in part, by the Purchaser.

8.2.1 The Seller shall have performed and complied in all material respects with the agreements contained in this Agreement required to be performed and complied with by it at or prior to the Closing Date, and the representations and warranties of the Seller set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at and as of the Closing Date (except as otherwise contemplated by this Agreement).

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8.2.2 The execution of Employment Agreements between the Purchaser and each of the Certain Employees.

8.2.3 There shall not have been, in the reasonable judgement of the Purchaser, a material adverse change in the Seller Business or the Assets.

8.2.4 The Seller’s net cash, as of the Closing Date, shall be as set forth in the working sheet attached as Exhibit 8.2.4 hereto.

8.2.5 All the documents and consents set forth in Section 3.2 have been delivered to the Purchaser.

8.3 Conditions to the Obligations of the Seller

The obligations of the Seller to consummate the transactions contemplated hereby shall be further subject to the fulfillment at or prior to the Closing Date of the following conditions, any one or more of which may be waived, in whole or in part, by the Seller:

8.3.1 The Purchaser shall have performed and complied in all material respects with the agreements contained in this Agreement required to be performed and complied with by it at or prior to the Closing Date, and the representations and warranties of the Purchaser set forth in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as though made at and as of the Closing Date (except as otherwise contemplated by this Agreement).

8.3.2 There shall not have been, in the reasonable judgement of the Seller, a material adverse change in the business of the Purchaser, except for any adverse change, event or effect that is demonstrated to be directly caused by conditions affecting the United States or Israeli stock market generally.

9. Termination

9.1 This Agreement may be terminated at any time prior to the Closing Date:

(a) by mutual written consent of the Seller and Purchaser;

(b) by Seller or Purchaser if (i) any court of competent jurisdiction or other federal or state or foreign governmental entity shall have issued a final order, decree or ruling, or taken any other final action, restraining, enjoining or otherwise prohibiting the sale of the Assets and such order, decree, ruling or other action is or shall have become nonappealable, or (ii) the sale of the Assets has not been consummated by August 31, 2002 (the “Final Date“); provided that no

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party may terminate this Agreement pursuant to this clause (ii) if such party’s failure to fulfill any of its obligations under this Agreement shall have been a principal reason that the Closing shall not have occurred on or before said date;

(c) by Purchaser if (i) there shall have been a breach of any representations or warranties on the part of Seller in this Agreement or if any representations or warranties of the Seller have become untrue such that the conditions set forth in Section 8.2.1 be incapable of being satisfied by the Final Date, provided that Purchaser has not breached any of its obligations hereunder in any material respect; (ii) there shall have been a breach by Seller of one or more of its covenants or agreements hereunder having a Material Adverse Effect on Seller and the Seller has not cured such breach within five (5) business days after notice by Purchaser thereof, provided that Purchaser has not breached any of its obligations hereunder in any material respect; (iii) Seller shall have ceased using reasonable best efforts to call, give notice of, or convene or hold a shareholders’ meeting to vote on the Agreement as promptly as practicable after the date hereof or shall have adopted a resolution not to effect any of the foregoing; (iv) Seller shall have convened a meeting of its shareholders to vote upon the Agreement and shall have failed to obtain the required majority at such meeting (including any adjournments thereof); or (v) Seller has breached the provisions of Section 7.8 above.

(d) by Seller if (i) there shall have been a breach of any representations or warranties on the part of Purchaser set forth in this Agreement or if any representations or warranties of Purchaser shall have become untrue such that the conditions set forth in Section 8.3.1 would be incapable of being satisfied by the Final Date, provided that Seller did not breach any of its obligations hereunder in any material respect; (ii) there shall have been a breach by Purchaser of one or more of their respective covenants or agreements hereunder having a Material Adverse Effect on the Purchaser, and the Purchaser did not cure such breach within five (5) business days after notice by Seller thereof, provided that Seller did not breach any of it obligations hereunder in any material respect;

9.2 Effect of Termination

In the event of the termination and abandonment of this Agreement pursuant to Section 9.1, this Agreement shall forthwith become void and have no effect without any liability on the part of any party hereto or its affiliates, directors, officers or shareholders. Nothing contained in this Section 9.2 shall relieve any party from liability for any breach of this Agreement prior to such termination. Notwithstanding the above, in the event of the termination of this Agreement by Purchaser pursuant to Section 9.1(c)(v), Seller shall pay the Purchaser,

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immediately upon termination of the Agreement, an amount of $US100,000 as agreed compensation for the Purchaser’s expenses incurred in connection with this Agreement.

10. Miscellaneous Provisions

10.1 Amendment and Modification

Subject to applicable law, this Agreement may be amended, modified or supplemented only by written agreement signed by both of the parties hereto.

10.2 Waiver of Compliance; Consents

Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, covenant, agreement or condition herein may be waived by the party or parties entitled to the benefits thereof only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or stopped with respect to, any subsequent or other failure. Whenever this Agreement requires or permits, consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 10.2.

10.3 Certain Definitions

For the purposes of this Agreement the term:

(a) “Applicable Law“ means, with respect to any person, any domestic or foreign, federal, state or local statute, law, ordinance, rule, regulation, order, writ, injunction, judgment, decree or other requirement of any governmental entity existing as of the date hereof or as of the Closing Date applicable to such Person or any of its respective properties, assets, officers, directors, employees, consultants or agents;

(b) “business day“ means any day other than a day on which the Nasdaq National Market is closed;

(c) “capital stock“ means ordinary shares, preferred shares, partnership interests, limited liability company interests or other ownership interests entitling the holder thereof to vote with respect to matters involving the issuer thereof;

(d) “knowledge” or “known” means, with respect to any matter in question, the actual knowledge of such matter of any executive officer of the Seller, and each of such persons shall be deemed to have actual

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knowledge of all books and records of the Seller, as the case may be, to which they have reasonable access;

(e) “best knowledge” means, with respect to any matter in question, the knowledge of such matter of any executive officer of the Seller after diligent inquiry;

(f) “Material Adverse Effect“ means on or with respect to the Seller or Purchaser, as the case may be, any circumstance, change in, or effect on (or circumstance, change in, or effect involving a prospective change on) the Seller and its subsidiaries, taken as a whole, or Purchaser and its subsidiaries, taken as a whole, as the case may be, that is, or is reasonably likely in the future to be, materially adverse to the operations, assets or liabilities (including contingent liabilities), earnings, prospects or results of operations, or the business (financial or otherwise), of the Seller and its subsidiaries, taken as a whole, or Purchaser and its subsidiaries, taken as a whole, as the case may be, excluding any such effect resulting from or arising in connection with this Agreement, the transactions contemplated hereby or the announcement or pendency hereof or thereof;

(g) “person“ means an individual, corporation, partnership, limited liability company, association, trust, unincorporated organization or other legal entity including any governmental entity;

(h) “subsidiary“ or “subsidiaries” of a corporation means any corporation, partnership, limited liability company, association, trust, unincorporated association or other legal entity in which such corporation (either alone or through or together with any other subsidiary), owns, directly or indirectly, 50% or more of the capital stock the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity;

(i) “Securities Act” means the Securities Act of 1933, as amended.

10.4 Notices

All notices and other communications hereunder shall be in writing and shall be deemed given, at delivery, if delivered personally or if sent by registered mail within seven (7) business days following the date it was sent by registered (return receipt requested), postage prepaid, to the parties at the following addresses (or at such other address for a party as shall be specified by written notice; provided that notices of a change of address shall be effective only upon deemed receipt thereof):

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(a) if to the Purchaser, to

Jacada Ltd.

11 Galgalei Haplada St.

Herziliya 46766

Israel

Attention: Robert C. Aldworth, CFO

with a copy to:

Meitar, Liquornik, Geva & Co.

16 Abba Hillel Silver Rd.

Ramat Gan, 52506, Israel

Tel: 972-3-6103100

Fax: 972-3-6103111

Attention: Dan Geva, Adv.

(b) if to the Seller, to

Anota Ltd.

1 Haetgar St. Tirat Hacarmel

Israel

Attn: Cheli Afflalo Karpel, CEO.

with a copy to:

Weksler, Bergman & Co.

9 Achad Ha’am St.

Tel Aviv

Israel

Attention: Gal Lizra, Adv.

10.5 Severability

If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with, and permitted by, applicable law.

10.6 Assignment

This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder (except as set forth in Section 2.3.1) shall be assigned by any of the parties hereto without the

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prior written consent of the other parties, nor is this Agreement intended to confer upon any other person except the parties hereto any rights or remedies hereunder.

10.7 Governing Law and Jurisdiction

This Agreement shall be governed by and construed in accordance with the laws of the State of Israel. The parties irrevocably submit to the jurisdiction of the applicable courts in Tel-Aviv any suit, action or proceeding arising from this Agreement.

10.8 Counterparts

This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

10.9 Interpretation

The article and section headings in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or interpretation of this Agreement.

10.10 Entire Agreement

This Agreement, including the exhibits attached hereto and the documents, schedules, certificates and instruments referred to herein, embody the entire agreement and understanding of the parties hereto in respect of the transactions contemplated by this Agreement. There are no restrictions, promises, representations, warranties, covenants or undertakings, other than those expressly set forth or referred to herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such transactions.

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written.

Jacada Ltd.		Anota Ltd.
By:	/S/    ROBERT C. ALDWORTH	By:	/S/    YIFTACH ATIR
Its:	Chief Financial Officer	Its:	Chairman

Note:    The exhibits/schedules referenced in this agreement are not filed herewith. The Registrant agrees to furnish supplementally a copy of any omitted exhibit/schedule to the Commission upon request.

EX-4.11.1

EXHIBIT 4.11.1

Amendment No. 1 to the

Purchase Agreement

among

Jacada Ltd.

and

Anota Ltd.

This Amendment No. 1 (the “Amendment”) to the Purchase Agreement dated June 28, 2002, by and between Jacada Ltd. and Anota Ltd. (the “Agreement”) is entered into as of July 31, 2002.

WHEREAS, The parties have entered into the Agreement; and

WHEREAS, The parties agree to add another category to be part of the Consideration paid under the Agreement.

NOW, THEREFORE, The parties agree to amend the Agreement as follows:

1. The first sentence of Section 2.3.1. shall be replaced in its entirety with the following sentence: “As consideration for all Assets purchased by the Purchaser hereunder, the Purchaser shall pay the Seller (or any of its shareholders, as instructed by the Seller) the Closing Purchase Price, the 2003 Earnout, the DC Earnout and the Army Earnout (together, the “Consideration”) (which shall be paid subject to the compliance with the terms of this Agreement and subject to the representations, warranties and undertakings made by the Seller).”

2. Section 2.3.4. shall be replaced in its entirety with the following section: “The DC Earnout shall equal to forty seven percent (47%) of the revenues related to sales of the Seller’s products to the European division of DaimlerChrysler AG (“DC Europe”), to the Brazilian division of DaimlerChrysler AG (“DC Brazil”) and to the South-African division of DaimlerChrysler AG (“DC South Africa”) during the period beginning on the Closing and ending on December 31, 2003. The DC Earnout will be in cash, delivered in two payments, on (i) March 31, 2004 and (ii) June 30, 2004. Each payment shall relate to all the consideration actually received until its date. For avoidance of doubt, in no event shall the Purchaser be required to make payments relating to consideration received by the Purchaser after June 30, 2004. Notwithstanding anything else herein to the contrary and for purpose of clarity, the parties acknowledge that the DC Earnout will be only applicable to sales to DC Europe, DC Brazil and DC South Africa; any other sales of the Seller’s products to any division of DaimlerChrysler AG except DC Europe, DC Brazil or DC South Africa will be made part of the 2003 Earnout, if applicable. For avoidance of doubt, no sale of the Seller’s products shall be included in both the 2003 Earnout and the DC Earnout.”

3. Section 2.3.4.1 shall be added to the Agreement: “2.3.4.1. The Army Earnout shall equal to forty seven percent (47%) of the revenues related to sales of the Seller’s products to the U.S. Military Transport Management Command (“U.S. Army”), less any costs and expenses related to such sales, including but not limited to, further development of the Seller’s products for the U.S. Army (which shall be calculated as follows: all actual development costs incurred (including, without limitation, salaries and consulting fees) plus normal overhead, all multiplied by 4) and selling expenses (including commissions), provided such sales are made subject to binding agreements made prior to August 31, 2002. The Army Earnout will be in cash, delivered in two payments, on (i) November 30, 2002; and (ii) February 28, 2003. Each payment shall relate to all the consideration actually received until its date. For avoidance of doubt, in no event shall the Purchaser be required to make payments relating to consideration received by the Purchaser after February 28, 2003, and no sale of the Seller’s products shall be included in more than one category of earnout.”

4. Section 2.3.6. shall be replaced in its entirety with the following section: “For avoidance of doubt, the 2003 Earnout, the DC Earnout and the Army Earnout shall relate only to sales of software products, and not to maintenance or other services related to such software products.”

5. Section 2.3.8. shall be replaced in its entirety with the following section: “The Purchaser shall furnish the Seller with (1) quarterly reports concerning all sales of the Seller’s products entitling the Seller to the 2003 Earnout, the DC Earnout or the Army Earnout during the preceding quarter, as applicable, until the date when such payments are due and (2) a detailed report, signed by the Chief Executive Officer of the Purchaser, of all sales of the Seller’s products entitling the Seller to the 2003 Earnout, the DC Earnout or the Army Earnout, as applicable, on the dates when such payments are due.”

6. All the other provisions of the Agreement shall not be amended and shall remain in full force and effect.

7. All capitalized terms used but not otherwise defined herein shall have the meaning assigned to such terms in the Agreement.

2

IN WITNESS WHEREOF, this Amendment No. 1 to the Purchase Agreement has been duly executed on the date hereinabove set forth.

JACADA LTD.
By:	/S/    ROBERT C. ALDWORTH
Name:	Robert C. Aldworth
Title:	Chief Financial Officer

ANOTA LTD
By:	/S/    YIFTACH ATIR
Name:	Yiftach Atir
Title:	Chairman

3

EX-10

EXHIBIT 10

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Registration Statement on Form S-8 (Registration Statement No. 333-34420 and 333-73650), pertaining to the Jacada Ltd. 1999 Share Option and Incentive Plan, the Jacada Ltd 1996 Share Option Plan and to the Jacada Ltd. 1994 Stock Option Plan, of our report, dated January 26, 2003 with respect to the consolidated financial statements of Jacada Ltd. included in its Annual Report (Form 20-F) for the year ended December 31, 2002.

Tel Aviv

May 29, 2003

        Kost, Forer & Gabbay

KOST, FORER and GABBAY

A Member of Ernst & Young Global

EX-99.1

EXHIBIT 99.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 20-F of Jacada Ltd. (the “Company”) for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Gideon Hollander, Chief Executive Officer of the Company, and Robert C. Aldworth, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

1. The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:
	/s/ Gideon Hollander
	Gideon Hollander Chief Executive Officer June 2, 2003
	/s/ Robert C. Aldworth
	Robert C. Aldworth Chief Financial Officer June 2, 2003