UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 20-F

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

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007

OR

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

OR

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

Date of event requiring this shell company report.............................

For the transition period from ____________ to ______________

Commission file number 000-30342

JACADA LTD.

(Exact name of Registrant as specified in its charter)

Israel

(Jurisdiction of incorporation or organization)

11 Galgalei Haplada St.

P.O. Box 12175

Herzliya 46722, Israel

(Address of principal executive offices)

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

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

NIS 0.01 per share

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

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

20,600,865 Ordinary Shares, par value NIS 0.01 per share

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

o Yes x No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes x No

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 o No

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

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

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

o Item 17 x Item 18

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

o Yes x No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

x Yes o No

TABLE OF CONTENTS
ITEM 1:	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT, ADVISERS AND AUDITORS	2
ITEM 2:	OFFER STATISTICS AND EXPECTED TIMETABLE	2
ITEM 3:	KEY INFORMATION	2
ITEM 4:	INFORMATION ON THE COMPANY	12
ITEM 5:	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	24
ITEM 6:	DIRECTORS, SENIOR MANAGEMENT AND EMPOYEES	35
ITEM 7:	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	42
ITEM 8:	FINANCIAL INFORMATION	43
ITEM 9:	THE OFFER AND LISTING	44
ITEM 10:	ADDITIONAL INFORMATION	46
ITEM 11:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	62
ITEM 12:	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	62
ITEM 13:	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	63
ITEM 14:	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	63
ITEM 15:	CONTROLS AND PROCEDURES	63
ITEM 15T:	CONTROLS AND PROCEDURES	64
ITEM 16A:	AUDIT COMMITTEE FINANCIAL EXPERT	64
ITEM 16B:	CODE OF ETHICS	64
ITEM 16C:	PRINCIPAL ACCOUNTANT FEES AND SERVICES	65
ITEM 16D:	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	66
ITEM 16E:	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	66
ITEM 17:	FINANCIAL STATEMENTS	67
ITEM 18:	FINANCIAL STATEMENTS	67
ITEM 19:	EXHIBITS	68

FORWARD LOOKING STATEMENTS

This Annual Report contains forward-looking statements. These statements include all statements that are not statements of historical facts regarding the intent, belief, or current expectations of the Company, its directors or its officers with respect to, among other things:  (i) the Company’s financing plans; (ii) trends affecting the Company’s financial condition or results of operations; and (iii) the Company’s growth strategy and operating strategy (including the development of its products and services).  The words “may,” “could,” “would,” “will,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions or variations thereof are intended to identify forward-looking statements.  Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond the Company’s ability to control and that actual results may differ materially from those in the forward-looking statements as a result of various factors and other information contained in this Annual Report, including the performance and continued acceptance of our products, general economic conditions and other risk factors identified under the heading “Risk Factors” including “The sale of our legacy business may result in the reduction of revenues and impact our ability to achieve profitability”, “Our business model is focused on continued growth in a market in which we have only four years of experience and failure to continue our early penetration into this market would negatively impact our results of operations.”,“We must continue our significant investment in our sales and marketing efforts, including our indirect distribution channels, in order to increase market awareness of our products and to generate increased revenues”, “We do not have a proven business model for the customer services and support market; if our business model is inappropriate for this market and our estimations regarding the sales cycle for this market are incorrect, our efforts to successfully commercialize Jacada Fusion and Jacada WorkSpace may be harmed or we will experience a further delay in generating revenues from these products”, “Revenues from our customer service and support market products might be concentrated in a few large orders and a small number of customers, meaning that the loss of a significant customer or a failure to make even a small number of such sales could harm our results of operations”, “Competition in the market in which we operate is intense. If we are unable to compete effectively, the demand for, or the prices of, our products may be reduced“, and ”We rely on our key personnel and key management members, whose knowledge of our business and technical expertise would be extremely difficult to replace”.

The results of operations in this annual report relate to our customers services and support business. As a result of the sale of our traditional market business on effective as of January 1, 2008, the results of the traditional market business were reclassified to one line item in the statement of operations as “Income from discontinued operations”.

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

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

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

Not applicable.

Item 2: OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3: KEY INFORMATION

A.           Selected Financial Data

The following table sets forth selected financial data from our consolidated statements of operations and balance sheets for the periods indicated.  The selected consolidated statement of operations data for the years ended December 31, 2007, 2006 and 2005 and the selected consolidated balance sheet data as of December 31, 2007 and 2006 have been derived from our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report.  As a result of the agreement to sell our traditional market business on December 19, 2007, which closed on January 1, 2008, the results of the traditional market business for all prior periods were reclassified to one line item in the statement of operations as “Net income from discontinued operations, net of taxes”. The financial statements included in this Annual Report have been prepared in accordance with US GAAP. The consolidated statements of operations data for the year ended December 31, 2004 and 2003, except for the reclassification to discontinued operations, and the selected consolidated balance sheet data as of December 31, 2005, 2004 and 2003 are derived from audited consolidated financial statements that are not included herein. The following selected financial data are qualified by reference to and should be read in conjunction with the sections entitled “Item 5:  Operating and Financial Review and Prospects” and “Item 11: Quantitative and Qualitative Disclosures about Market Risk” and our consolidated financial statements and the notes thereto included elsewhere in the Annual Report.

2

	Year ended December 31,
	2007			2006				2005			2004			2003
							(in thousands)
Consolidated Statement of Operations Data:
Revenues:
Software licenses	$	3,706		$	3,668			$	3,632		$	855			-
Services		7,824			3,482				617			159			-
Maintenance		1,812			1,356				984			117			-
Total revenues		13,342			8,506				5,233			1,131			-
Cost of revenues:
Software  licenses		449			244				312			86			-
Services		6,354			3,218				2,411			83			-
Maintenance		745			662				643			-			-
Total cost of revenues		7,548			4,124				3,366			169			-
Gross profit		5,794			4,382				1,867			962			-
Operating expenses:
Research and development		4,402			3,838				3,743			2,639			510
Sales and marketing		9,787			9,759				10,046			1,884			99
General and administrative		5,249			5,108				5,388			4,724			4,645
Total operating expenses		19,438			18,705				19,177			9,247			5,254
Operating loss		(13,644	)		(14,323	)			(17,310	)		(8,285	)		(5,254	)
Financial  income, net		1,548			1,372				830			786			1,037
Pretax loss from continuing operations		(12,096	)		(12,951	)			(16,480	)		(7,499	)		(4,217	)
Tax benefit		8,672			3,117				4,055			981			833
Net loss from continuing operations		(3,424	)		(9,834	)			(12,425	)		(6,518	)		(3,384	)
Net income from discontinued operations, net of taxes		7,540			7,262				7,467			905			1,235
Net Income (loss)	$	4,116		$	(2,572	)		$	(4,958	)	$	(5,613	)	$	(2,149	)
Basic and diluted net earnings (loss) per share
Continuing operations	$	(0.17	)	$	(0.50	)		$	(0.63	)	$	(0.34	)	$	(0.18	)
Discontinued operations	$	0.37		$	0.37			$	0.38		$	0.05		$	0.07
Basic and diluted net earnings (loss) per share	$	0.20		$	(0.13	)		$	(0.25	)	$	(0.29	)	$	(0.11	)
Weighted average number of shares used in computing basic and diluted net earning (loss) per share		20,364,752			19,827,852				19,497,726			19,282,800			19,011,435

	2007		2006		2005		2004		2003
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	5,960	$	4,735	$	3,461	$	3,552	$	9,845
Cash and investments		33,824		35,922		35,651		37,613		41,793
Working capital		19,316		10,722		12,638		19,885		14,664
Total assets		52,101		45,710		45,612		49,230		53,387
Shareholders’ equity		39,904		33,395		34,475		39,089		44,504
Dividends per share		-		-		-		-		-

3

Exchange Rates

Not applicable.

B.           Capitalization and Indebtedness

Not applicable.

C.           Reasons for the Offer and Use of Proceeds

Not applicable.

D.           Risk Factors

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

Risks Related to Our Business

The sale of our legacy business may result in the reduction of revenues and impact our ability to achieve profitability. In January 2008 we sold the intellectual property and related customer contracts associated with the following Jacada products:  Jacada Interface Server and Jacada Integrator, also known as Jacada HostFuse, Jacada Studio, Jacada Innovator and Jacada Terminal Emulator.  These activities associated with these products comprised our application modernization and legacy integration business, which we refer to as our traditional or legacy business. Revenues from our legacy business, which were derived from sales of licenses, professional services and maintenance services, represented a substantial portion of our revenues, in the years 2005, 2006 and 2007. We cannot assure you that the growth of revenues from our customer service and support business, from which we expect to generate almost all of our revenues in the future will offset the loss of revenues resulting from the sale of our traditional market business . Furthermore, the costs associated with our legacy business were relatively fixed at levels that resulted in that business achieving profitability on a stand-alone basis. We have and intend to continue to invest in our customer service and support business, meaning that unless we are successful in achieving significant growth in revenues from that business, we cannot assure you that we will achieve or maintain profitability in the future. Our ability to increase revenues and maintain profitability will be affected by the other risks and uncertainties described in this section and in the sections entitled “Item 5: Operating and Financial Review and Prospects” and “Item 11:  Quantitative and Qualitative Disclosures about Market Risk.”

Our business model is focused on continued growth in a market in which we have only four years of experience and failure to continue our early penetration into this market would negatively impact our results of operations. We have elected to focus our business on the sale of our software products and solution in the customer services and support market. In the second quarter of 2004, we introduced Jacada Fusion, our solution that is designed to integrate different applications residing on host, Windows and Web-based platforms, and allow non-invasive access to those applications through a single user interface.  In the third quarter of 2005, we introduced Jacada WorkSpace, a solution designed to be a single agent console that unifies customer interaction tools with a single access point to all the mission-critical applications required by the customer service representative to effectively complete a customer interaction.Our license to sell our traditional market products, on a stand alone basis, is limited to sales for the use by our customers in their customer services and support business. However, we have limited experience in this market.  Our limited experience and knowledge regarding the customer services and support market may impede our ability to sell our products and result in decreased revenues and increased losses.

4

We must continue our significant investment in our sales and marketing efforts, including our indirect distribution channels, in order to increase market awareness of our products and to generate increased revenues. We believe that our future success is dependent upon the expansion of our indirect distribution channels, consisting of our relationships with partners, system integrators, call center infrastructure providers, call center outsourcers, resellers and distributors. Significant continued investment in indirect distribution channels and in our direct sales and marketing efforts is essential to increase market awareness of our products and to generate increased revenues, in relation to such products.  We currently have relationships with a limited number of these parties.

Our future growth will be limited if:

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

·   there is a decrease in the willingness or ability of our indirect distribution partners to devote sufficient resources and efforts to market, sale and support our products or;

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

If any of these circumstances occurs, we will have to devote substantially more resources to the sales, marketing, distribution, implementation, customization and support of our products than we otherwise would. However, our own efforts, limited resources, limited experience in delivering significant and complex implementation and customization projects and relative lack of contacts within the customer services and support market in comparison with some of our potential indirect distribution channels, may not be as effective as those of our indirect distribution channels.

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

Revenues from our customer services and support products might be concentrated in a few large orders and a small number of customers, meaning that the loss of a significant customer or a failure to make even a small number of such sales could harm our results of operations.  Historically, revenues from our traditional market products were generated from a relatively large number of sales to a wide number of customers.  During 2005, 2006 and 2007 revenues from the Jacada Fusion and Jacada WorkSpace products derived from large orders from a small number of customers. In the year 2007 two customers represented 41% of our total revenues, in the year 2006 three customers represented 57% of our total revenues and in the year 2005, one customer represented 83% of our total revenues. Currently we cannot assure that we will make repeat sales to these customers. To the extent that this trend continues, our revenues will be dependent on a relatively limited number of significant customers. We also cannotassure you that new customers will purchase our products and services in the future. The failure to secure new key customers, the loss of key customers or the occurrence of significant reductions in sales from a key customer would cause our revenues to significantly decrease and make it significantly more difficult for us to become profitable.

5

Competition in the market in which we operate is intense. If we are unable to compete effectively, the demand for, or the prices of, our products may be reduced.The market in which we operate are competitive and subject to changes. Our products compete with other contact center solutions offered by other vendors including Microsoft, Corizon and Graham Technology. We expect additional competition from other established and emerging companies. Furthermore, our competitors may combine with each other and other companies may enter our markets by acquiring or entering into strategic relationships with our competitors.

In addition, our potential customers may choose to deploy traditional CRM application software, or utilize their own information technology personnel or system integrators to write new code or rewrite existing applications in an effort to develop their own customer service and support solutions. As a result, prospective clients may decide against purchasing and implementing externally-developed solutions such as ours.

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

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

Our revenues could be adversely affected if we fail to recruit and retain consultants and other technical service personnel.  Sales of our Jacada Fusion and Jacada WorkSpace products require in many cases advance sales activity involving consultants and post-sale implementation and customization. We rely on our staff of professional consultants, other technical service personnel and subcontractors to implement our solutions after being purchased by our customers. Unless we are able to recruit and retain professional consultants, other technical service personnel and subcontractors or hire and train such personnel and subcontractors to replace those who leave us, it will be difficult for us to implement our solutions and obtain customer acceptance and to increase or possibly even maintain our present level of sales due to constraints on our capacity to implement sales. In addition, a growing number of our transactions require implementation of our solutions.  In these transactions, the implementation and customization services performed by these personnel are especially important.  If we are unable to hire and retain these personnel, it may adversely impact our ability to successfully close such transactions.

6

Our future growth will be adversely affected and our future operating results may be adversely affected if we fail to develop and introduce new functionality for our products and new products for the customer service and support market or if our new products fail to achieve market acceptance.  In order to achieve sales growth we will need to develop and introduce new functionality for our customer service and support products and new products for such market. Our ability to develop and introduce new functionality for our customer service and support products and new products for this market requires us to invest significant resources in research and development and in the sales and marketing of a new product.  If we fail to develop and market new products successfully, we may not be able to recover our research and development expenditures or our sales and marketing expenditures, which would adversely impact our operating results.

Because our products are complex and generally involve significant capital expenditures by customers, we may invest significant time and expense in trying to make a sale to a potential customer that ultimately chooses not to purchase our products. Our sales typically involve significant capital investment decisions by prospective customers, and often require us to expend a significant amount of time to educate prospective customers as to the benefits of our products. As a result, before purchasing our products, companies spend a substantial amount of time performing internal reviews and obtaining approvals. Even if our products are effective, our target customers may not choose them for technical, cost, support or other reasons.

Failure to deliver professional services efficiently could negatively impact our gross margins. Our limited experience and knowledge regarding the customer services and support market generally and the delivery of our products and solutions for this new market specifically may impact the efficiency of our professional services deliveries, as we may need to expend more resources in the delivery of professional services to a customer than we had originally estimated.  Any such expending of more resources may negatively impact our professional services gross margins and our ability to achieve or maintain profitability.

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

7

  The market price of our shares is volatile and the volume of the daily trading of our shares is very low; therefore you may not be able to resell your shares at or above the price you paid, or at all.The risks described in this Item 3.D may adversely affect our share price.  Our share price, like that of many technology companies, may be subject to volatility. In addition, our share price may be adversely affected by changes in estimates of our financial results or recommendations by securities analysts, changes in the quarterly financial results of companies perceived to be similar to us, and changes in market valuations of similar companies. In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our ordinary shares could decline for reasons unrelated to our business, financial condition or results of operations. If our share price decreases to below $1.00 per share and remains there for 30 consecutive trading days, Nasdaq could initiate procedures to de-list our shares from the Nasdaq National Market and onto either the Nasdaq Small Cap Market or the OTC Bulletin Board.  Furthermore, because of the low volume of daily trading in our shares, you may be unable to sell your shares in the market due to low or no demand for such shares.

We expect to be subject to increasing risks of international operations. Currently we market and sell our products and services primarily in North America and Europe, from which areas we received approximately 96.4% of our total revenues for the year ended December 31, 2007. Managing our operations in North America and Europe requires significant management attention and financial resources. Further, we currently have limited experience in marketing and distributing our products in regions other than North America and Europe.  Our inability to increase our worldwide operations successfully could adversely impact our business.  In addition, exchange rate fluctuations between the dollar and foreign currencies have adversely affected us in the year 2007 and may continue to adversely affect us. Although we utilize currency exchange forward contracts to hedge our New Israeli Shekel (NIS) expenses associated with our Israeli operation and the payments from our material Euro and English Pound (GBP) - denominated transactions, some of our foreign currency-denominated revenues are still not hedged. Accordingly, we are still exposed to the risks that our revenues will decrease in the event that those foreign currencies weakness against the dollar or that our expenses will increase in the event that those foreign currencies strengthen against the dollar. See “-Exchange rate fluctuations between the dollar and the NIS may negatively affect our earnings” for a discussion of risks associated with fluctuations in the dollar-NIS exchange rate.

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

·   damage our reputation;

·   increase our product development costs;

·   divert our product development resources;

·   expose us to monetary damages;

·   cause us to lose future sales;

·   damage our ability to deliver our solutions to the customer; or

·   delay or diminish market acceptance of our products.

8

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

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

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

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

·   be expensive and time-consuming to defend;

·   cause product shipment and installation delays;

·   divert management’s attention and resources; or

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

We incorporate open source technology in our products which may expose us to liability and have a material impact on our product development and sales.  Some of our products utilize open source technologies.  These technologies are licensed to us on varying license structures but include the general public license.  This license and others like it pose a potential risk to products that are integrated with these technologies.  For example, in the event we integrate into one of our products a technology covered under the general public license, we may be required to disclose our source code for the integrated product.  Disclosing our source code could enable our competitors to eliminate any technological advantage our products may have over theirs, and therefore materially adversely affect our competitive advantage and impact our business results of operations and financial condition. In addition, from time to time there have been claims challenging the ownership of open source software against companies that incorporate open source software into their products. We use a limited amount of open source software in our products and may use more open source software in the future. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software.

9

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

We may fail to maintain effective internal controls in accordance with Section

404 of the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors. Our efforts to comply with the requirements of Section 404 may result in increased general and administrative expense and a diversion of management time and attention. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting. In the Future we may identify material weaknesses in our controls over financial reporting. Failure to maintain effective internal controls over financial reporting could result in investigation or sanctions by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial information, and the market price of our ordinary shares.

We might recognize a loss with respect to our investments in financial instruments.We invest most of our cash in a variety of financial instruments. If the obligor of any of the instruments we hold defaults or undergoes a reorganization in bankruptcy, we may lose a portion of such investment and our financial income may decrease. In addition, to the extent there is a general downturn in the credit markets, which could adversely affect the liquidity of our investments, or if the credit rating of our investments is downgraded, we might recognize some loss. For information on the types of our investments, including an investment we made in 2008 in an auction rate security, see Item 11, “Quantitative and Qualitative Disclosures About Market Risk” in this annual report.

Risks Related to Our Location in Israel 

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

 Conditions in and around Israel could adversely affect our operations. Because our research and development facilities are located in Israel, we are directly influenced by the political, economic and military conditions affecting Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could materially adversely affect our operations. Despite the negotiations towards peace between Israel and certain of its Arab neighbors, the future of these peace efforts is uncertain.  From October 2000 until recently, there was a significant increase in violence primarily in the West Bank and the Gaza Strip and negotiations between Israel and Palestinian representatives have ceased for periods of time. In January 2006, Hamas, the Islamic Resistance Movement, won the majority of the seats in the Parliament of the Palestinian Authority. The election of a majority of Hamas-supported candidates in the Palestinian Parliament and the tension among the different Palestinian factions may create additional unrest and uncertainty.  Hamas does not recognize Israel's right to exist as a state and Israel considers Hamas to be a terrorist organization. During the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. This conflict involved missile strikes against civilian targets in northern Israel, and negatively affected business conditions in Israel. Any renewed hostilities or other factors related to Israel could have a material adverse effect on us or on our business or adversely affect our share price.

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Generally, all non-exempt male adult citizens and permanent residents of Israel under the age of 45 (or older, for citizens with certain occupations), including some of our officers, directors and employees, are obligated to perform military reserve duty annually, and are subject to being called to active duty at any time under emergency circumstances.  The absence of these employees for significant periods may cause us to experience operating difficulties.  Additionally, a number of countries continue to restrict or ban business with Israel or Israeli companies, which may limit our ability to make sales in those countries.

Exchange rate fluctuations between the dollar and 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 or fluctuations in the U.S. dollar-New Israeli Shekel (NIS) exchange rate will have the effect of increasing the U.S. dollar cost of our operations in Israel, unless it is offset on a timely basis by a devaluation of the NIS relative to the U.S. dollar.  During the year 2007, the NIS appreciated against the U.S. dollar, which resulted in an increase in the U.S. dollar cost of our operations in Israel, and this trend has continued in early 2008. As a result of this differential, from time to time we may experience increases in the costs of our Israeli operations, as expressed in dollars, which could have an adverse effect on our results of operations and financial condition. We cannot predict any future trends in the rate of inflation in Israel or the rate of valuation of the NIS against the U.S. dollar. Although we hedge partially against risks associated with fluctuations in the dollar-NIS exchange rate, if the dollar cost of our operations in Israel increases, our U.S. dollar-measured results of operations will still be adversely affected.

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

In order to receive tax benefits, we must comply with a number of conditions and criteria. If we fail to comply in whole or in part with these conditions and criteria, we will not be entitled to the tax benefits.  Although we believe that we have operated and will continue to operate in compliance with the required conditions, we cannot assure you that this will continue.

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

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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 four classes, three of which serving three-year terms.  In addition, certain provisions of the Israeli Companies Law, which we refer to as the Companies Law, could also delay or otherwise make more difficult a change in control.  The provisions of the Companies Law relating to mergers and acquisitions are discussed in greater detail in “Item 10.B: Memorandum and Articles of Association.”

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

Item 4: INFORMATION ON THE COMPANY

A.           History and Development of the Company

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

Since October 1999, our Ordinary Shares have been quoted on the Nasdaq National Market under the symbol “JCDA.”  In addition, our Ordinary Shares have been quoted on the Tel Aviv Stock Exchange under the same symbol or its Hebrew equivalent since June 18, 2001.  We develop, market and support unified service desktop and process optimization solutions that simplify and automate customer service processes.  By bridging disconnected systems into a single, “intelligent” workspace, our solutions create greater operational efficiency and increase agent and customer satisfaction.  Our traditional market products enable businesses to Web-enable, modernize and integrate their existing software applications to better serve the needs of their users, customers and partners.  Our customer service and support products, Jacada Fusion and Jacada WorkSpace, introduced in May 2004 and September 2005, respectively, target organizations that struggle to reduce operational costs and deliver high quality customer service due to the complexity of the customer service representative’s desktop. Our solutions provide our customers with a simplified interaction designed to improve the efficiency of the user and the experience of the user’s customer.

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In January 2008 we sold the intellectual property and related customer contracts associated with the following Jacada products:  Jacada Interface Server and Jacada Integrator, also known as Jacada HostFuse, Jacada Studio, Jacada Innovator and Jacada Terminal Emulator in consideration for 26 million Dollars in cash. These activities associated with these products comprised our application modernization and legacy integration business, which we refer to as our traditional or legacy business. Under the terms of the transaction we retained the right to develop, market, sell and support Jacada Interface Server and Jacada HostFuse in support of our customer service and support business.

Typical users of the Jacada Fusion or Jacada WorkSpace products and services are medium to large businesses with inbound contact centers that typically have in excess of 100 agents (customer service representatives). Some of the companies that have purchased Jacada Fusion and Jacada WorkSpace products include Vodafone, WestTelemarketing, Cox Communications, Capita Business Services, Lillian Vernon, Quelle Contact Vertrieb, Embratel – Empresa Brasileira de Telecomunicações, Omnium Worldwide, Harrah's Entertainment, Central Hudson Gas & Electric, Station Casinos and O2 UK.

Typical users of our traditional market products and services are medium to large businesses with sophisticated technology requirements. Some of the companies that have implemented our traditional solutions include AIG, Bank of America, Caterpillar, Delta Air Lines, U.S. Department of Interior, The Federal Reserve Bank, Liberty Mutual Insurance, Manpower, Porsche Cars North America, Prudential Life Insurance Company, Raytheon, The Hartford, and the Spanish social security authorities. Our agreements with these customers have been assigned as part of the sale of our traditional market business.

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

In February 2008 our board of directors authorized the use of up to $10 million of our available cash to repurchase our ordinary shares. Purchases shall be made from time to time at the discretion of our management in the open market or in privately negotiated transactions, subject to, among other factors, market conditions, trading volume and our share price. No time limit was set for the repurchase program and the program may be suspended from time to time or discontinued. See Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers for disclosure regarding our repurchase program.

We are not aware of any public takeover offers by third parties in respect of our shares, and we have made no public takeover offers in respect of other companies’ shares during fiscal years 2006 and 2007.

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B.           Business Overview

Industry Overview

In 2004, we introduced Jacada Fusion and elected to target corporate customer contact centers.  In the third quarter of 2005, we introduced Jacada WorkSpace, a solution specifically designed for the customer contact center market.   We refer to this market as the “customer service and support market”. Prior to the introduction of our customer service and support market products we have been operating in the application integration and web-enablement market for 16 years. We refer to this market as our “traditional market.”

Customer Service and Support Market

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

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

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

The complex customer service representative desktop results in:

·   Long average call handle times, or AHT;

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

·   High customer service representative turnover; and

·   Poor customer satisfaction and low customer retention.

Traditional Market

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

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

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

An effective solution to extend and integrate existing applications should:

·   be able to be implemented rapidly;

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

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

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

Our Solutions

 We develop, market and support unified service desktop and process optimization solutions that simplify and automate customer service processes.  By bridging disconnected systems into a single, “intelligent” workspace, our customer service and support market solutions create greater operational efficiency and increase agent and customer satisfaction. Our customer service and support market products, Jacada Fusion and Jacada Workspace simplify the desktop of customer service representatives to reduce operational costs and improve the customer experience. Our customer service and support market solutions are designed to provide our customers with a simplified interaction to improve the efficiency of the user and the experience of the user’s customer.

Our traditional market products enable businesses to Web-enable, modernize and integrate their existing software applications to better serve the needs of their users, customers and partners.

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Benefits

Our solutions for the customer service and support market provide the following business benefits:

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

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

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

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

Our technology and approach to delivering solutions provide the following implementation benefits:

·   Leverage Existing Information Technology Resources.   Our solutions permit companies to integrate their existing applications without modifying or replacing any existing systems.  This eliminates the need for time-consuming and expensive custom programming or application upgrades or replacement projects.

·   Allow Rapid Implementation.   We design our solutions to be implemented rapidly, which results in faster time-to-market than internally developed solutions or packaged application software implementations.

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

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

Products and Technology

Our products include:

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

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

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

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

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

Jacada® Interaction Manager. Jacada Interaction Manager guides the customer service agent through an optimized interaction with the customer. A typical contact center interaction contains elements of “guidance language” presented to the agent as a best practice suggestion regarding how to answer the customer's inquiry, mandatory language that must be read for compliance reasons, business rules to determine what the agent may offer or do next, and workflow between these steps to ensure that all necessary information is gathered and presented to the customer. Jacada Interaction Manager deploys in conjunction with Jacada WorkSpace ensuring seamless cooperation between the customer interaction workflow and the multiple business systems controlled by Jacada WorkSpace.

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

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

Our intellectual property rights in the Jacada Interface Server and the Jacada HostFuse products were sold in January 2008 as part of the sale of our traditional market business. We are licensed to develop and sell these products under an irrevocable license agreement. Our license to sell our traditional market products, on a stand alone basis, is limited to sales for the use by our customers in their customer services and support business. See Item 4A History and Development of the Company.

Professional Services

Our professional services include training, consulting services (which include installation, implementation, integration and customization of our solutions), solution support services and product support and maintenance services.

We provide our direct customers and our partners with professional services to assist them with installing, integrating, implementing and customizing our products into the customers’ systems, and with managing and enhancing their utilization of our products on an ongoing basis. We also provide customer and partner training services to assist our customers and partners in learning how to use our products at our Atlanta, Georgia facility and other locations, with coursework related to various aspects of our products. In addition we provide our customers with solution support services for the work product deliverables that were provided as part of our professional services.

We bill for our professional consulting services (which includes installation, implementation, integration and customization of our solutions), and for our solution support services either on a fixed fee basis or by the hour plus out-of-pocket expenses, and for training services by the day plus out-of-pocket expenses.  The majority of our trainers and consultants are located in the United States.

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

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Principal Markets

Our principal markets are North America and Europe.We generate revenues from licensing our software products and solutions to customers and providing customers with training, professional, and product support and maintenance services. Software licenses revenues constituted approximately 27.8%, 43.1% and 69.4% of our total revenues for the years ended December 31, 2007, 2006 and 2005, respectively, while service and maintenance revenues constituted approximately 72.2%, 56.9% and 30.6% of our total revenues, respectively, for the same periods.  Software licenses revenues generated from North American customers constituted approximately 11.2%, 19.6% and 6.6% of our total revenues for the years ended December 31, 2007, 2006 and 2005, respectively, while service and maintenance revenues generated from North American customers constituted approximately 29.4%, 27.8% and 7.3% of our total revenues, respectively, for the same periods.  Software license revenues generated from European customers constituted approximately 14.3%, 19.9% and 62.9% of our total revenues for the years ended December 31, 2007, 2006 and 2005, respectively, while service and maintenance revenues generated from European customers constituted approximately 41.4%, 28.5% and 23.0% of our total revenues, respectively, for the same periods.

Seasonality

Not applicable.

Sources and Availability of Raw Materials

Not applicable.

Sales and Marketing

We sell our products through our direct sales force in North America and Europe, as well as through our indirect distribution channels, consisting of system integrators, partners, call center infrastructure providers and call center outsourcers. We also use indirect distribution channels in countries where we have no direct sales operations such as Latin America and Australia. As of December 31, 2007, we had 44 people in our sales and marketing organization, compared to 48 as of December 31, 2006.

In October 2007 we recruited our new senior vice president and general manager, of our European operations, who is responsible for our sales, field services, business development and marketing activities in Europe. In addition, during 2007 we made changes in our European sales staff. During 2007 we continued to invest significantly in the establishment of strategic indirect sales channels for our customer service and support products, such as through system integrators, alliances with major contact center infrastructure and applications vendors and outsourcers for the contact center market. As part of such investment we signed a global alliance agreement with Accenture, a global management consulting, technology services and outsourcing provider and partnership agreement with IBM. It is our expectation that our indirect distribution channels will extend our market reach by increasing market awareness to our solution and presenting us to potential customers. We intend to continue to invest in 2008 in the development of our indirect sales channels, including through broadening the relations with our existing partners.

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

Customers

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

Some examples of customers’ uses of our products include:

·   Telecommunications providers, which use our solution to assist in streamlining and automating their customer service process, billing inquiries, account changes, and to generally improve the productivity and efficiency of their contact center.

·   Contact Center Outsourcers; which utilize our solutions to reduce their operational costs, to provide better service for their customers, to implement new customers into production faster,  and to provide a differentiated service when they compete for new business.

·   Retailers, which use our solutions in their contact centers or their back-office software applications in order to reduce their operational costs, as well as to provide better service for their customers, to simplify complex ordering and customization interactions, and to enable existing back-office software applications to be used to receive and process orders from customers and to send orders to suppliers via the Internet.

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

·   Public utility providers use our solutions to automate critical call processes and integrate their existing business systems into a simplified customer service desktop, reduce customer service agent desktop complexity and optimize key customer service processes in their contact centers in order to reduce agent training time, increase agent productivity and improve overall customer service.

·   Entertainment, gaming and hospitality companies use our solutions to simplify and automate the customer service desktop for their call center agents to drive incremental revenue through up-sell and cross-sell activities.

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Research and Development

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

Our research and development expenses were $4.4 million for the year ended December 31,2007, $3.8 million for the year ended December 31, 2006 and $3.7 million for the year ended December 31, 2005.  As of December 31, 2007, 38 professionals were engaged in research and development activities, a decrease compared to 41 professionals at December 31, 2006, however, we are also using third party service providers for some of our research and development activities. See also “Item 5. Operating and Financial Review and Prospects, A. Operating Results, Total Operating Expenses.”

Dependence on Patents and Licenses

We are generally not dependent on any third party license or patent with respect to our technology for the customer service and support products. However, sales of our customer services and support products often include licenses to our traditional market products as part of the solution we provide to our customers. Our rights to develop and sell our traditional market products are granted to us under an irrevocable license agreement which we have entered into as part of the sale of our traditional market business. Our license to sell our traditional market products, on a stand alone basis, is limited to sales for the use by our customers in their customer services and support business. See Item 4A History and Development of the Company. As part of that asset sale we have also sold the two patents we had on portions of our traditional market products technology.  While we have a patent pending with respect to our customer service and support products technology, we believe that the failure to obtain such patent would not diminish our ownership rights in our technology or our software products.

Our rights to sell, market and support the Jacada Interaction Manager product, which is an ancillary product to our customer service and support products, are governed by a license agreement we entered into in April 2007.

Competition

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

● relationships with key distribution partners;

● product functionality and features;

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● availability of global support;

● existing vendor relationships;

● ease of product implementation;

● quality of customer support services;

● product reputation; and

● financial stability of vendors.

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

Our customer service and support products compete with other contact center solutions offered by vendors including Microsoft, OpenSpan, Corizon and Graham Technology. We expect additional competition from other established and emerging companies.Furthermore, our competitors may combine with each other, or other companies may enter our markets by acquiring or entering into strategic relationships with our competitors. In addition, our potential customers may choose to deploy traditional CRM application software, or utilize their own information technology personnel or system integrators to write new code or rewrite existing applications in an effort to develop their own customer service and support solutions.

Material Effects of Government Regulation in Israel

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

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

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

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

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

From time to time we have received royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry and Trade of the Government of Israel, or OCS.  We have used these grants to develop portion of our traditional market products, which we sold in January 2008. The State of Israel does not own proprietary rights in technology developed with OCS funding and there is no restriction on the export of products manufactured using technology developed with OCS funding.  The technology developed with OCS funding is, however, subject to transfer restrictions, which we complied with in connection with the sale of the intellectual property rights in the traditional market products.  As of December 31, 2007 our outstanding royalty obligations to the OCS were in an aggregate amount of approximately $0.4 million. As part of the sale of our traditional market business, we transferred such obligation to the buyer and committed to reimburse the buyer for these future payments.

C.            Organizational structure

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

D.            Property, Plants and Equipment 

As of December 31, 2007, our headquarters and principal administrative, research and development operations were located in approximately 13,000 square feet of leased office space in Herzliya, Israel. The lease expires in March 2010.

In the United States, we lease approximately 18,500 square feet in Atlanta, Georgia, which we utilize for marketing, sales, administration, service and technical support. The lease expires in June 2009, and we have the right to extend the lease for an additional five-year term. 

In the UK, we lease approximately 800 square feet, which we utilize for sales, marketing and services. The lease expires in October 2009. In addition, we lease office space in Germany, which is utilized for sales and marketing activities. The lease expires in April 2009 and is not material.

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Item 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.            Operating Results

We develop, market and support unified service desktop and process optimization solutions that simplify and automate customer service processes.  By bridging disconnected systems into a single, “intelligent” workspace, our solutions create greater operational efficiency and increase agent and customer satisfaction. We also provide related professional services, including training, consulting, support and maintenance. 

We were incorporated in December 1990. In 2004, we introduced Jacada Fusion and elected initially to target corporate customer contact centers, however Jacada Fusion may be also used by our customer for back office applications.  In the third quarter of 2005, we introduced a solution specifically for customer service representatives called Jacada WorkSpace. We refer to this market as the “customer service and support market”. Prior to the introduction of our customer service and support market products we have been operating in the legacy application integration and web-enablement market for 16 years.  We refer to this market as our “Traditional Market.”  Customers of our customer service and support market products may also use our traditional market products.

In January 2008 we sold the intellectual property and related customer contracts associated with the following Jacada products:  Jacada Interface Server and Jacada Integrator, also known as Jacada HostFuse, Jacada Studio, Jacada Innovator and Jacada Terminal Emulator in consideration for 26 million Dollars in cash. These activities associated with these products comprised our application modernization and legacy integration business, which we refer to as our traditional or legacy business. Under the terms of the transaction we retained the right to develop, market, sell and support Jacada Interface Server and Jacada HostFuse in support of our customer service and support business. The results of the traditional market business were reclassified to one line item in the statement of operations as “Net income from discontinued operations, net of taxes”.

Revenues

We derive our revenues from license fees for our software products, including software products that require significant customization, as well as from fees from professional services (which include installation, implementation, integration and customization of our solutions) and training and from maintenance and support services.  We sell licenses to our customers primarily through our direct sales force and indirectly through resellers and partners.  Both our customers and our resellers are considered end users. 

Cost of Revenues

Our costs of revenues are comprised of (a) costs of software licenses, (b) costs of services and (c) costs of maintenance.

Cost of software licenses revenues consists of royalties, amortization of acquired technology and costs of duplicating media and documentation.

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

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Research and Development Costs

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

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

Critical Accounting Policies

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

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

Discontinued Operations. In January 2008, we sold our traditional market business. We recognized such transaction as a divestiture of operations and therefore the results of the traditional market business for all reported periods were reclassified into one-line item in the statement of operations as "Net income from discontinued operations, net of taxes". The assets and liabilities related to the traditional market business as of December 31, 2007 and 2006 were reclassified in our balance sheets as assets and liabilities of discontinued operations, respectively. In addition, the cash flow of the traditional market business was disclosed separately in our statements of cash flows for the years 2007, 2006 and 2005.

We evaluated our qualifications for the discontinued operations presentation in light of continuing operations and cash flows and continuing involvement provisions as discussed in EITF 03-13 and allocated all operations, cash flow, assets and liabilities related to the discontinued operations according to SFAS 144 provisions.

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. 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.

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We recognize revenues from software license in accordance with SOP 97-2 as amended and modified by SOP 98-9. Revenues from software license fees are recognized when persuasive evidence of an arrangement exists, either by written agreement or a purchase order, the software product has been delivered, the license fees are fixed and determinable, collection of the license fees is considered probable and no significant obligations with regard to implementation remain. License fees from software arrangements which involve multiple elements, such as post-contract customer support, consulting and training, are allocated to each element of the arrangement under the “residual method” when Vendor Specific Objective Evidence (VSOE) of fair value exists for all undelivered elements. We determine the fair value of each undelivered element in multiple-element arrangements based on the Vendor Specific Objective Evidence (VSOE) of fair value of each undelivered element when sold separately.

In arrangements which include software and services, a determination is made as to whether the services are considered essential to the functionality of the software. When services are considered essential to the functionality of the software, we account for the services together with the software under contract accounting in accordance with Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production - Type Contracts" ("SOP 81-1").

Revenues recognized in accordance with SOP 81-1 are accounted for using either the completed contract or percentage of completion method. The percentage of completion method is used when the required services are quantifiable, based on the estimated number of labor hours necessary to complete the project, and under that method revenues are recognized using labor hours incurred as the measure of progress towards completion but is limited to revenue that has been earned by the attainment of any milestones included in the contract. The completed contract method is used when the required services are not quantifiable, and under that method revenues are recognized only when final acceptance from the customer has been received or, when such acceptance is not required under the contract terms, upon our compliance with performance specifications under the contract terms. In judging the probability of collection of software license fees we continuously monitor collection and payments from our customers and maintain a provision for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In connection with customers with whom we have no previous experience, we may evaluate the creditworthiness of those customers. For some customers we may grant extended payment terms.  We perform initial credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s creditworthiness, as determined by our review of their credit information. We consider all arrangements with payment terms extending beyond six months not to be fixed or determinable.  If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer provided that all other revenue recognition criteria have been met.

Service revenues include consulting, training and post-contract customer support. Consulting services, which include installation, implementation and customization services and training, are recognized either on a time and materials basis as the services are provided, on a fixed fee basis as per percentage of completion or completed contract accounting. Where the contractual terms include a provision for customer acceptance, revenues are recognized either when such acceptance has been obtained or when the acceptance provision has lapsed. 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.

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Impairment of property and equipment. We review our property and equipment for impairment in accordance with SFAS No. 144 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  During 2007, 2006 and 2005, no impairment losses were identified in accordance with SFAS No. 144.

Impairment of intangible assets. The carrying value our identifiable intangible assets is periodically reviewed by our management, based on the expected future undiscounted operating cash flows over the remaining amortization period. If this review indicates that an intangible asset will not be recoverable, its carrying value is reduced to estimated fair value. During 2007, we recorded an impairment loss in the amount of $155,000. During 2006 and 2005, no impairment losses were identified.

Goodwill. Under Statement of Financial Accounting Standard No.142, “Goodwill and Other Intangible Assets” (“SFAS No, 142”) goodwill is not amortized. SFAS No.142 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value is determined using our market capitalization. We have performed impairment tests during the third fiscal quarter and, following the sale of our traditional market business at the end of the year. Following the tests we determined that our goodwill of $3.1 million was not subject to impairment during fiscal year 2007.

Valuation of investment in marketable securities.  Fair values of marketable securities are estimated using quoted market prices. As of December 31, 2007 we had no investments in illiquid markest. Based on our intent with respect to a particular investment at the time of investment, we are generally required to classify our investments into one of three investment categories under GAAP: (i) trading; (ii) held to maturity; or (iii) available for sale. The classification of the investment may affect our reported results. We classify the investments as available for sale. Available for sale investments are carried at fair value. Changes in the fair value of investments classified as available for sale are not recognized to income during the period, but rather are recognized as a separate component of equity until realized. We regularly review our investments for factors that may indicate that a decline in the fair value of an investment below its cost or amortized cost is other than temporary. Some factors considered in evaluating whether or not a decline in fair value is other than temporary include:

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

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

● The financial condition and prospects of the issuer.

        Such reviews are inherently uncertain in that the value of the investment may not fully recover or may decline further in future periods resulting in realized losses.

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

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Equity-based compensation expense. We account for equity-based compensation in accordance with SFAS No. 123(R), "Share-Based Payment" beginning January 1, 2006. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Determining the fair value of share-based awards at the grant date requires the exercise of judgment, including the amount of share-based awards that are expected to be forfeited. If actual results differ from these estimates, equity- based compensation expense and our results of operations could be impacted.

Our historical operating results for the years ended December 31, 2007, 2006 and 2005 as a percentage of total revenues are as follows:

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

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Adoption of new accounting standard

In July 2006, the FASB issued Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), an interpretation of FASB Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes"("SFAS No. 109"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax provision taken or expected to be taken in a tax return. Also, the interpretation provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 is effective for fiscal periods beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on our financial statements.

Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We do not expect the adoption will have material impact on our consolidated financial statements.

In December 2007, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (SAB 110) to amend the SEC’s views set forth Staff Accounting Bulletin 107 (SAB 107) regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123(R). SAB 110 is effective in relation to us beginning in the first quarter of 2008. We are currently assessing the potential impact that the adoption of SAB 110 may have on our financial statements.

Years Ended December 31, 2007, 2006 and 2005

Revenues and Cost of Revenues

Revenues.  Revenues were $13.3 million, $8.5 million and $5.2 million for the years ended December 31, 2007, 2006 and 2005, respectively. The increases in total revenues in 2007 as compared to 2006 and in 2006 as compared to 2005 were due to the growth in sales of our customer service and support market solutions. The growth results mainly from our increased penetration of the customer service and support market, increased number of customers and ability to sell and deliver to our customers strategic solutions which are heavily weighted with services components, in addition to growth in our recurring maintenance revenue. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined in the amount of the estimated loss on the entire contract. As of December 31, 2007, 2006 and 2005, no such estimated losses were identified

In each of 2007, 2006 and 2005, a significant portion of our revenues were derived from a few large orders. In 2007 two customers represented 41% of our total revenues, in 2006 three customers represented 57% of our total revenues, and in 2005, which was the first year in which we sold our customer service and support products, one customer represented 83% of our total revenues.

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Software licenses revenues. Software license revenues were $3.70 million, or 27.8 % of revenues for the year ended December 31, 2007, compared to $3.7 million, or 43.1% of revenues for the year ended December 31, 2006, and $3.6 million, or 69.4% of revenues for the year ended December 31, 2005. Although software license revenues were flat during 2005, 2006 and 2007, total revenues increased year over year. The decrease in the proportion of the software license revenues out of total revenues resulted from the increased amount of service revenues in certain of our transactions over these years.

Service revenues. Service revenues were $7.8 million or 58.6% of revenues for the year ended December 31, 2007, compared to $3.5 million or 40.9% of revenues for the year ended December 31, 2006, and $0.6 million or 11.8% of revenues for the year ended December 31, 2005. Service revenues are generated primarily from installation, implementation and customization of our software products. The increase in service revenues in 2007 and 2006 resulted from an increase in the size and complexity of certain deals due to higher process improvement requirements resulting in services revenues comprising a higher proportion of the total revenues for the deal.

Maintenance revenues. Maintenance revenues were $1.81 million or 13.6% of revenues for the year ended December 31, 2007, compared to $1.4 million or 16.0% of revenues for the year ended December 31, 2006 and $0.98 million or 18.8% of revenues for the year ended December 31, 2005. The increase in maintenance revenues in 2007 and 2006 was related to the increased number of customers using our customer service and support market products.

Total Cost of Revenues. Total cost of revenues was $7.5 million or 56.6% of revenues for the year ended December 31, 2007, compared to $4.1 million or 48.5% of revenues for the year ended December 31, 2006 and $3.4 million or 64.4% of revenues for the year ended December 31, 2005. The increases in cost of revenues during 2007 and 2006 were primarily due to an increase in the cost of services revenues as discussed below.  

Cost of software licenses revenues was $0.4 million or 3.4% of revenues for the year ended December 31, 2007, compared to $0.2 million or 2.9% of revenues for the year ended December 31, 2006 and $0.3 million or 6.0% of revenues for the year ended December 31, 2005. The increase in cost of software licenses in 2007 compared to 2006 was mainly due to an impairment in the amount of $0.2 million related to a technology we purchased in June 2004, which we subsequently stopped selling to new customers. The decrease in costs of software licenses in 2006 compared to 2005 was mainly due to payments of royalties to our software vendors in 2005.  

Cost of service revenues was $6.4 million or 47.6% of revenues for the year ended December 31, 2007, compared to $3.2 million or 37.8% of revenues for the year ended December 31, 2006 and $2.4 million or 46.1% of revenues for the year ended December 31, 2005. The increase in cost of services revenues in 2007 and 2006 was due to an increase in services personnel, as we grew from 22 services professionals at year end 2005 to 25 at year end 2006 and to 43 at year end 2007, resulting in increase in compensation costs, related recruitment fees and the use of subcontractors in order to support the increase in services revenue. See Risk Factor entitled: “Failure to deliver professional services efficiently could negatively impact our gross margins.”

Cost of maintenance revenues was $0.7 million or 5.6% of revenues for the year ended December 31, 2007, compared to $0.7 million or 7.8% of revenues for the year ended December 31, 2006, and compared to $0.7 million or 12.3% of revenues for the year ended December 31, 2005.

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Total Operating Expenses

Total operating expenses in 2007 were $19.4 million, representing an increase from $18.7 million in 2006.  This increase was mainly due to an increase in an amount of $0.4 million in our research and development expenses in support of the continuing development of our customer service and support market products, and an increase in expenses, in an amount of $0.2 million due to the appreciation of the Israeli New Shekel against the U.S. dollar.  Total operating expenses in 2005 were $19.2 million. The decrease of total operating expenses in 2006 was achieved primarily by a decrease in sales and marketing expenses in the amount of approximately $0.3 million and a decrease in general and administrative expenses in the amount of approximately $0.3 million.

Research and Development.  Research and development expenses were $4.4 million, $3.8 million and $3.8 million for the years ended December 31, 2007, 2006 and 2005, respectively. The increase in research and development expenses between 2006 and 2007 resulted mainly from salary adjustments, the appreciation of the Israeli New Shekel against the U.S dollar, cost associated with licensed technology components for incorporation into our products suite  and the establishment of our offshore development team through a third party service provider in order to support the continuing development of our customer service and support market products.  As a percentage of total revenues, research and development expenses were 33.0%, 45.1% and 71.5% for the years ended December 31, 2007 2006 and 2005, respectively. 

Sales and Marketing.  Sales and marketing expenses were $9.8 million, $9.8 million and $10.0 million for the years ended December 31, 2007, 2006 and 2005, respectively. The decrease in 2006 compared to 2005 was primarily due to decrease in commission and incentive payments, which was slightly offset by stock based compensation expenses resulted from the adoption of SFAS 123(R). As a percentage of total revenues, sales and marketing expenses were 73.4%, 114.7% and 192% for the years ended December 31, 2007, 2006 and 2005, respectively.

General and Administrative.  General and administrative expenses were $5.2 million, $5.1 million and $5.4 million for the years ended December 31, 2007, 2006 and 2005, respectively. As a percentage of total revenues, general and administrative expenses were 39.3%, 60.1% and 103% of total revenues for the years ended December 31, 2007, 2006 and 2005, respectively. The increase in 2007 compared to 2006 was primarily related to compensation expense related to the separation agreement with our former chief executive officer offset by reduction in ordinary course of business expenses. The decrease in 2006 compared to 2005 was primarily due to reduction in ordinary course of business expenses, which was partially offset by stock based compensation expenses resulted from the adoption of SFAS 123(R).

Financial Income, Net.  Financial income, net, was $1.6 million for the year ended December 31, 2007, $1.4 million for the year ended December 31, 2006 and $0.8 million for the year ended December 31, 2005. Most of the financial income was generated from investments of our funds in certain financial instruments, which generate interest income. The increase from 2005 to 2006 and from 2006 to 2007 is primarily due to the increase in interest paid on marketable securities.

Pre-tax Loss from our Continuing Operations. As a result of the above factors, our continuing customer service and support operations resulted in net losses of $12.1 million in 2007, $12.95 million in 2006 and $16.5 million in 2005.

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Tax benefit. In 2007, our tax benefit in the amount of $8.7 million is composed of $5.4 million in deferred tax income and $3.3 million in tax benefit from continuing operations. The deferred tax income of $5.4 million was recorded due to the expected utilization of the net operating losses carryforward in respect of the sale of our traditional market business for the amount of $26 million.  The tax benefit of $3.3 million relates to current losses of the continuing operation. The tax benefits in 2006 and 2005 in the amounts of $3.1 million and $4.1 million respectively, relates to current losses of the continuing operation.

Net Income from Discontinued Operations net of taxes. The income from discontinued operation for the years ended December 31, 2007, 2006 and 2005 in the amounts of $7.5 million, $7.2 million and $7.5 million, respectively, include the activities of the traditional market business.

Net Income (Loss). As a result of the above factors, our operations resulted in net income of $4.1 in 2007, and net losses of $2.6 million in 2006 and $5.0 million in 2005.

B.            Liquidity and Capital Resources

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

As of December 31, 2007, we had $33.8 million in cash and investments, all of which were interest bearing. During 2007, operating activities (including discontinued operations) used approximately $3.2 million in cash, composed of $10.9 million net cash used in continuing operations which was offset by $7.7 million net cash provided by discontinued operations. The major components using cash in the continuing operations were the net loss of $3.4 million from continuing operations, the $5.4 million deferred tax assets that was created in 2007, the increase of $2.6 million in trade receivables and the decrease of $1.0 million in deferred revenue that was partly offset by the non-cash depreciation and amortization of $0.7 million and the non-cash expenses for stock compensation related to options granted to employees and officers of $0.8 million. The major components using cash in discontinued operations was net income of $7.5 million. Net cash provided by investing activities was $3.4 million in 2007. It consisted primarily of net proceeds from marketable securities in the amount of $3.9 million and was partly offset by the purchase of property and equipment in the amount of $0.5 million. Net cash provided by financing activities was attributed to the $1.0 million proceeds received from the exercise of stock options.

In January 2008, in consideration for the sale of our traditional business, we received $26 million, of which $2.6 million is held in escrow by a third party through July 2009 as a security for payment of potential indemnification claims under the sale agreement. Expenses associated with the transaction were approximately $1.2 million.

As of December 31, 2006, we had $35.9 million in cash and investments, all of which were interest bearing. During 2006, operating activities (including discontinued operations) used approximately $0.4 million in cash, composed of $7.5 million net cash used in continuing operations which was offset by $7.1 million net cash provided by discontinuing operations. The major component using cash in the continuing operations were the net loss of $9.8 million from continuing operations which was partially offset by the non-cash depreciation and amortization of $0.6 million, the non-cash expenses for stock compensation related to options granted to employees of  $0.7, increase in deferred revenues of $0.8 million and proceeds from exercise of stock options of $0.6 million.

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As of December 31, 2005, we had $35.7 million in cash and investments, all of which were interest bearing. During 2005, operating activities (including discontinued operations) used approximately $2.9 million in cash, composed of $10.7 million net cash used in continuing operations which was offset by $7.8 net cash provided by discontinuing operations. The major component using cash in the continuing operations were the net loss of $12.4 million from continuing operations which was partially offset by the non-cash depreciation and amortization of $0.7 million, an increase in deferred revenue of $1.9 million, proceeds from exercise of stock options of $0.5 million and decrease in trade receivables of $0.9 million.

Expenditures for property and equipment were approximately $0.5 million, $0.5 million and $0.3 million for the years ended December 31, 2007, 2006 and 2005, respectively.  These expenditures include computer hardware and software used in product development and testing, leasehold improvements relating to new and existing facilities and office equipment in support of our operations.

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

Derivative Financial Instruments. Since our financial results are reported in dollars, fluctuations in the rates of exchange between the dollar and non-dollar currencies may have a material effect on our results of operations. We therefore may use currency exchange forward contracts to hedge the impact of the variability in the exchange rates on accounts receivable and future cash flows from certain Euro and GBP -denominated transactions as well as certain NIS-denominated expenses. The counter-parties to our forward contracts are major financial institutions with high credit ratings. As of December 31, 2007, we had forward contracts to sell up to $3,262,366 for a total amount of NIS 12,547,060 maturing prior to October 1, 2008.

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

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

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

Our research and development expenses were $4.4 million for the year ended December 31, 2007, $3.8 million for the year ended December 31, 2006 and $3.7 million for the year ended December 31, 2005. As of December 31, 2007, 2006 and 2005, respectively, we had 38, 41 and 36 employees engaged in our product development activities, however, we are also using third party service providers for some of our research and development activities.

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D.            Trend Information

 Our sales cycle for our customer service and support market products might be longer than we expect. Therefore, we are unable to determine if our business model will support our forecasted revenue.  See “Risk Factor “Our business model is focused on continued growth in a market in which we have only four years of experience and failure to continue our early penetration into this market would negatively impact our results of operations” and  “We do not have a proven business model for the customer services and support market; if our business model is inappropriate for this market and our estimations regarding the sales cycle for this market are incorrect, our efforts to successfully commercialize Jacada Fusion and Jacada WorkSpace may be harmed or we will experience a further delay in generating revenues from these products” for a discussion of the potential effects of this trend.

Our customer service and support market products might generate revenues from a smaller number of deals with larger average dollar amounts compared to our traditional market products.    See “Risk Factor: “Revenues from Jacada Fusion and Jacada Workspace, our customer services and support products, might be concentrated in a few large orders and a small number of customers, meaning that the loss of a significant customer or a failure to make even a small number of such sales could harm our results of operations”for a discussion of the risks our business and prospects for growth face in connection with our contact center market products.

We anticipate that a growing number of our future contact center market products deals will involve substantial customization and implementation services of our solutions. Where the contractual terms of such deals include a provision for customer acceptance, revenues will be recognize either when such acceptance has been obtained or when the acceptance provision has lapsed. See “Risk Factor: Our revenues could be adversely affected if we fail to recruit and retain consultants and other technical service personnel”.

E.             Off-balance sheet arrangements. We are not party to any off-balance sheet arrangements. See Item 4b. “Material Effects of Government Regulation in Israel”.

F.Tabular Disclosure of Contractual Obligations. The following table summarizes our contractual obligations and commercial commitments as of December 31, 2007:

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

*Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor laws. For employees whose employment commencement date is prior to January 1, 2005 these obligations are payable only upon the termination of the respective employee and may be reduced if the employee’s termination is voluntary, however it is not our practice to reduce such amounts in cases of voluntary termination. As of December 31, 2007, the severance pay funds were $1.0 million and will be used to satisfy a portion of our obligations.

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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 May 15, 2008:

Name	Age	Position
Paul O’Callaghan	52	Chief Executive Officer
Tzvia Broida	39	Chief Financial Officer
David Holmes	53	Senior Vice President, Global Marketing
Guy Tweedale	46	Senior Vice President Sales and General Manager of European Operations
Eyal Shpin	36	Vice President of Research and Development
Gideon Hollander(1)	43	Chairman of the Board and Director
Yossie Hollander	50	Director
Ohad Zuckerman(2)(1)	43	Director
Naomi Atsmon(2)	55	Director
Dan Falk (2)	63	Director
Avner Atsmon(2)	45	Director

(1)           Member of the Options Committee

(2)           Member of the Audit Committee

Paul O’Callaghan has been our Chief Executive Officer since January 2008, having served as our President since May 2006.  Mr. O’Callaghan has more than26 years of executive experience in the international software, Internet and network infrastructure markets. From February 2003 to May 2006 Mr. O’Callaghan was Senior Vice President of Worldwide Sales & Field Services for Optio Software a provider of software solutions that enable organizations to improve functionality and quality in their inbound and outbound document processes. Mr. O'Callaghan also held that position from May 2001 to November 2001. From July 2000 to February 2001 Mr. O’Callaghan was Senior Vice President of Worldwide Sales and Services for Idapta Inc. From November 1997 to July 2000 Mr. O’Callaghan was Vice President of Sales for XACCT Technologies (acquired by Amdocs Limited). From December 1994 to November 1997 Mr. O’Callaghan was Area Vice President for Southeastern Operations, Cisco Systems. From November 1993 to December 1994 Mr. O’Callaghan was Vice President of Sales for Network Systems Corporation. From January 1990 to November 1993 Mr. O’Callaghan was Senior Vice President of Sales and Marketing for Imnet Systems. From January 1982 to January 1990 Mr. O’Callaghan was Country Manager (UK)/Southern Region Sales Vice President Network Systems Corporation (acquired by StorageTek).

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

David Holmes joined us in 1995, and has served as our marketing executive since then. 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 senior manager for Deloitte & Touche Consulting.

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Guy Tweedale joined us on October 2007 as our Senior Vice President and General Manager of our European operations. Mr. Tweedale has more than 18 years of experience in the IT industry and his background includes a strong focus on business process automation and enhancement in key areas such as customer management, field-based activities and financial control. From January 2004 to June 2007 Mr. Tweedale served as Managing Director for Saratoga Systems in Northern Europe for their CRM and Mobile Data Access divisions. Prior to January 2004 Mr. Tweedale has held a number of key senior management roles with companies such as Extensity, Microsoft (Visio), TDK (mobile communications hardware), and Toshiba (mobile computing platforms).

Eyal Shpin joined us in November 2007 as our Vice President of Research and Development. From September 2004 to October 2007, Mr. Shpin served as Director of CRM and PLM development at Infor/SSA. From February 2001 to August 2004 Mr. Shpin served as VP R&D of C-Ark/Baan Israel. Mr. Shpin holds a Bachelor of Science in Computer Science and Physics from Ben Gurion University in Israel.

Gideon Hollander was a co-founder of Jacada in 1990. Mr. Hollander has been our Chairman of the Board of Directors since January 2008, having served as our Chief Executive officer from 1990 to December 2007.  From 1988 to 1990, Mr. Hollander worked in the area of research and development at Comverse Technology. From 1982 to 1987, Mr. Hollander served in various technology and management positions in an elite unit of the Israeli Defense Forces, where he specialized in expert systems and user interface design. Two of the projects that Mr. Hollander managed won the most prominent Israeli award for technological innovations.  Gideon Hollander is Yossie Hollander’s brother.

Yossie Hollander has been Chairman of the Board of Directors from November 1995 to December 2007 and a director since 1990. Mr. Hollander was a founder, and from 1983 to 1994 served as the Chief Executive Officer, of New Dimension Software Ltd., an enterprise system and management software company that was acquired by BMC Software in April 1999. Mr. Hollander is a member of the executive committee of the Weizman Institute. Yossie Hollander is Gideon Hollander’s brother.

Ohad Zuckerman has served as a director since December 2000.  Mr. Zuckerman owns and manages Beyond Service Ltd., a consulting and investment banking company. Between January 2000 and March 2008 Mr. Zuckerman served as the CEO and President of Zeraim Gedera Ltd., an agricultural company which specializes in breeding  of vegetable varieties as well as in production and marketing to the seeds of such varieties, a position he has held since January 2000.  From 1998 to January 2000, Mr. Zuckerman served as the ExecutiveVice President of Zeraim Gedera and from 1990 to 1998 he served at the same company as theMarketingManager.  Mr. Zuckerman served as a member of the board of directors at Maximal Innovative Intelligence LTD, a provider of software for extracting information from data warehouses, from 1998 to 2002.

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

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

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Avner Atsmon joined us in October 2006 as a director. Mr. Atsmon served as Vice President of Engineering of Starhome Ltd. from January 2000 to June 2002. From December 1993 to December 1999 Mr. Atsmon served in several positions at Comverse Infosys including as a Chief Operating Officer. From November 1991 to November 1993 Mr. Atsmon was Fax Application Manager of National Semi-Conductors, Palo Alto California. Naomi Atsmon and Avner Atsmon have notified us that they are not related.

B.            Compensation 

The aggregate remuneration we paid for the year ended December 31, 2007 to all executive officers as a group was $1.44 millions in salaries, fees, commissions and bonuses. This group include our former Senior Vice President Sales and Managing Director of EMEA & APAC and our former Chief Technology Officer. This also includes $0.144 millions set aside or accrued to provide for pension, retirement or similar benefits provided to our executive officers, including salary and severance and adjustment payments made to our former chief executive officer in accordance with the terms and conditions of his employment agreement dated March 3, 1999, as amended.  As of May 20, 2003, directors who are not our employees each receive $750 for each meeting of the board of directors attended and each meeting of a committee of the board of directors attended.  In addition, all directors are entitled to be reimbursed for their expenses incurred in connection with the discharge of their responsibilities as board members, including attending board of directors meetings.  Directors also receive options to purchase our ordinary shares.

As of May 1, 2008 options to purchase 2,458,750 ordinary shares granted to our directors and executive officers (13 persons), including our former  Senior Vice President Sales and Managing Director of EMEA & APAC, our former Chief Technology Officer and a director Amnon Shoam under our option plans were outstanding. The weighted average exercise price of these options was $3.30 per share ranging from $1.20 to $11.00, and the expiration dates of the options range from July 16, 2008 to May 9, 2016.

C.            Board Practices

Election and Term of Directors

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

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

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●  Class I directors, whose terms expire at the annual meeting of shareholders to be held in 2009;

●  Class II directors, whose terms expire at the annual meeting of shareholders to be held in 2010;

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

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

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

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

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

We do not have service contracts with any of our directors; however, Gideon Hollander, our Chief Executive Office and a member of our board of directors was party to an employment agreement with us until December 2007. In February 2008, our audit committee and board of directors authorized us to enter into a services agreement with Gideon Hollander under which he would continue to provide us with investor relations services. This agreement will be brought for approval at our next annual shareholders meeting.

Audit Committee

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

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

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

The current members of the audit committee are: Ohad Zuckerman, Naomi Atsmon, Dan Falk and Avner Atsmon.

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

Options Committee

The responsibilities of the options committee include granting of options under our stock options plans in accordance with policies determined by our board of directors.

The current members of the options committee are Gideon Hollander and Ohad Zuckerman.

External Directors

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

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

The Companies Law requires that at least one external director have financial and accounting expertise and that the other external director meet certain professional qualifications.  Certain regulations promulgated under the Companies Law set out the conditions and criteria for a director qualifying as having a "financial and accounting expertise" or a "professional qualification". A director with financial and accounting expertise is a director who, due to his education, experience and skills, possesses capabilities relating to and an understanding of business and accounting matters and financial statements, which enable him to understand in depth the company’s financial statements and to initiate a debate regarding the manner in which the company’s financial information is presented. However, a public company whose shares are also registered for trading in certain stock exchanges outside of Israel, like ours, is not required to appoint an external director with financial and accounting expertise, if at such time there is another director serving on the board of directors of such company who has financial and accounting expertise and who is an independent director for purposes of membership on the audit committee thereof, in accordance with the applicable laws of the state in which such shares are registered (and the rules and regulations of such foreign stock exchange). Our Board of Directors has determined that Mr. Dan Falk has financial and accounting expertise. Mr. Falk also meets the requirements of the NASDAQ Stock Market listing standards to be an “independent” director and audit committee member. Therefore we are not required to appoint an external director, under the Company’s Law, with financial and accounting expertise. A director who meets certain professional qualifications is a director who satisfies one of the following requirements: (i) the director holds an academic degree in either economics, business administration, accounting, law or public administration, (ii) the director either holds another academic degree or has obtained other high education in the company’s primary field of business or in an area that is relevant to his position, (iii) the director has at least five (5) years of experience serving in one of the following capacities or an aggregate of at least five (5) years of experience in two or more of the following capacities: (a) a senior business management position of a company with a substantial scope of business, (b) a senior position in the primary field of business of the company or (c) a senior public administration position. A proposed external director must submit to the company a declaration as to his or her compliance with the requirements for his or her election as an external director (including with respect to such person’s financial and according expertise or professional qualification).

Nomination Committee Charter – Exemption

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

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Compensation Committee – Exemption

As a foreign private issuer we are entitled to follow our home country practice in lieu of compliance with the NASD rule that requires that the compensation of the chief executive officer and all other executive officers of the company be determined, or recommended to the board for determination, either by a majority of the independent directors, or by a compensation committee comprised solely of independent directors. Under the Companies Law, the compensation of such officers is determined by the full board of directors, and there is no requirement for a recommendation or determination by independent directors or a compensation committee.

D.            Employees

As of December 31, 2007, we had 72 employees in Israel, 76 in the United States, 23 in Europe and 2 in Latin America. Of our 171 employees, 38 were engaged in research and development, 44 in sales, marketing and business development, 49 in professional services and technical support and 32 in finance, administration and operations and 8 in the discontinued operation.  With respect to our Israeli employees, we are subject to Israeli labor laws and regulations. These laws principally concern matters such as paid annual vacation, paid sick days, length of the workday and work week, minimum wages, pay for overtime, insurance for work-related accidents, severance pay and other conditions of employment.

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

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

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

E.             Share Ownership

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

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

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As of March 31, 2008 we had 1,244,091 ordinary shares available for future grants under these option plans to be granted to officers, directors, employees and consultants. As of December 31, 2007, options to purchase 3,813,833 ordinary shares were outstanding under the option plans. As of December 31, 2007, the weighted average exercise price of options outstanding under our option plans is $3.35. Our option plans are administered by our board of directors and the options committee of our board of directors. Under the option plans, options to purchase our ordinary shares may be granted to officers, directors, employees or consultants. In addition, pursuant to the option plans, the exercise price of options shall be determined by our board of directors or our options committee but may not be less than the par value of the ordinary shares and is typically the fair market value on the date of grant.  The vesting schedule of the options is also determined by our board of directors or our options committee but generally the options vest over a four year period.  Generally, options granted under the option plans are exercisable until seven to ten years from the date of the grant.  The 1996 Option Plan expired on December 31, 2005. The 1999 Option Plan and the 2003 Share Option Plan will expire on December 31, 2009 and December 31, 2012, respectively.

Item 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.            Major Shareholders

The following table sets forth, to the best of our knowledge, as of March 31, 2008, those shareholders that own 5% or more of our capital stock

Name of Beneficial Owner	Number of Shares Owned	Percentage
Yossie Hollander (1)	2,244,010	10.82%
Gideon Hollander  (2)	2,139,987	10.11%
Emancipation Capital, LP (3)	2,423,053	11.76%

(1)           Based on a Directors and Officers Questionnaire submitted to us by Mr. Hollander.  Represents 1,301,280 ordinary shares owned individually by Mr. Hollander, 302,670 ordinary shares owned by Mr. Hollander’s spouse and 500,060 ordinary shares owned individually by Dana Hollander Settlement 1991, LLC, a Nevada limited liability company, as to which Mr. Hollander is an income beneficiary of a trust holding a 99% membership interest therein.  Includes 140,000 ordinary shares issuable pursuant to options held by Mr. Hollander which are exercisable within 60 days of the date hereof. Does not include 480,000 ordinary shares owned by Mr. Hollander’ mother as Mr. Hollander disclaims beneficial ownership of such shares and an aggregate of 1,549,600 ordinary shares owned indirectly by various trusts, as equity holders of certain foreign entities, as to which Mr. Hollander and/or his children, as beneficiaries of such trusts, may be deemed to have interests.  Any such interest would be in an indeterminable number of the ordinary shares owned indirectly by such trusts.  Mr. Hollander disclaims beneficial ownership of any ordinary shares so held by such trusts. We make no representation as to the accuracy or completeness of the information reported.  The address of Mr. Hollander is 400 Perimeter Center Terrace, Suite 100, Atlanta, Georgia 30346.

(2)           Based on a Schedule 13G filed with the Commission on February 14, 2007.  Represents 1,564,987 ordinary shares owned individually by Mr. Hollander, and 575,000 ordinary shares issuable pursuant to options held by Mr. Hollander which are exercisable within 60 days of the date hereof. Does not include 480,000 ordinary shares owned by Mr. Hollander’ mother as Mr. Hollander disclaims beneficial ownership of such shares. 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.

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(3)           Based on a Schedule 13G filed with the Commission on February 13, 2008, this amount represents ordinary shares held by the following entities, (i) 2,081,612,ordinary shares held by Emancipation Capital Funds and (ii) 341,441 ordinary shares held by Hurley Capital, LLC, constituting, in the aggregate, 11.76% of our outstanding capital stock. We make no representation as to the accuracy or completeness of the information reported.  The address of Emancipation Capital, LP and of Hurley Capital, LLC is 1120 Avenue of the Americas, Suite 1504 New York, NY  10036, USA.

Based on a Schedule 13G/A filed with the Commission on November 30, 2005, Airbus Foundation held 888,708 of our ordinary shares as of such date, constituting 4.5% of our capital stock as of such date. Accordingly Airbus Foundation has been removed from the above table. Based on a Schedule 13G/A filed with the Commission on January 14, 2005, Airbus Foundation held 1,802,692 of our ordinary shares as of such date, constituting 9.3% of our capital stock as of such date.  The address of Airbus Foundation is c/o Allegemeines, Treuunternehmen, P.O. Box 83, FL – 9490 Vaduz, Liechtenstein.

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

Based on information available to us, as of March 28, 2008, there were 54 record holders of our shares in the United States, which represented approximately 47% of the outstanding shares as of such date. To our knowledge, no corporation, foreign government or other natural or legal person directly or indirectly controls Jacada.

B.           Related Party Transactions

On November 29, 2007 our shareholders’ general meeting approved the extension of the employment agreement with Mr. Gideon Hollander effective as of September 2006 and the grant of additional thirty thousand options to our directors Ms. Naomi Atsmon, Mr. Ohad Zukerman, Mr. Yossie Hollander and Mr. Dan Falk. In December 2007 Mr. Gideon Hollander’s Employment as our chief executive officer was terminated and we continue to make compensation payments in accordance with the terms and conditions of such agreement. In February 2008, our audit committee and board of directors authorized us to enter into a services agreement with Mr. Gideon Hollander under which he would continue to provide us with investor relations services. In accordance with the requirements of Israeli law, this agreement will be brought for approval at our next annual shareholders meeting.

C.           Interests of Expert and Counsel

Not applicable.

Item 8: FINANCIAL INFORMATION

A.           Consolidated Statements and Other Financial Information

See Item 18 for audited consolidated financial statements.

Export Sales

We generated approximately 41% of our revenues in North and Latin America and approximately 57% in Europe through wholly owned subsidiaries during the period beginning January 1, 2007 and ending December 31, 2007. Our export sales consist mainly of intercompany transactions with our subsidiaries.

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Legal Proceedings

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

We do not believe that any legal proceeding to which we currently are a party is likely to have a material impact upon us.

Dividend Policy

Our policy has been not to pay dividends. See Item 10.B Memorandum and Articles of Association for disclosure regarding the procedures for dividend distribution and Item 16.E  Purchases of Equity Securities by the Issuer and Affiliated Purchasers for disclosure regarding our repurchase program.

B.           Significant Changes

In January 2008 we sold the intellectual property and related customer contracts associated with the following Jacada products:  Jacada Interface Server and Jacada Integrator, also known as Jacada HostFuse, Jacada Studio, Jacada Innovator and Jacada Terminal Emulator. See Item 4A History and Development of the Company.

Item 9: THE OFFER AND LISTING

A.           Offer and Listing Details

Share History

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

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

Year	Period	High	Low
2003	01/01/03 – 12/31/03	3.740	1.180
2004	01/01/04 – 12/31/04	4.730	2.120
2005	01/01/05 – 12/31/05	3.580	1.930
2006	01/01/06 – 12/31/06	3.100	2.060
2007	01/01/07 – 12/31/07	4.270	2.460

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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
01/01/06 – 03/31/06	2.98	2.43
04/01/06 – 06/30/06	3.10	2.25
07/01/06 – 09/30/06	2.63	2.10
10/01/06 – 12/31/06	2.78	2.06
01/01/07 – 03/31/07	3.40	2.46
04/01/07 – 06/30/07	3.98	3.12
07/01/07 – 09/30/07	4.34	3.10
10/01/07 – 12/31/07	4.27	3.56
01/01/08 – 03/31/08	4.07	2.76

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

Month	High	Low
12/07	4.15	3.59
01/08	4.07	3.44
02/08	3.87	3.29
03/08	3.49	2.76
04/08	3.58	3.06
05/08	3.74	3.19

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

Year	Period	High	Low
2003	01/01/03 – 12/31/03	3.87	1.59
2004	01/01/04 – 12/31/04	4.73	2.12
2005	01/01/05 – 12/31/05	3.37	1.86
2006	01/01/06 – 12/31/06	3.11	2.19
2007	01/01/07 – 12/31/07	4.38	2.48

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

Period	High	Low
01/01/06 – 03/31/06	2.94	2.43
04/01/06 – 06/30/06	3.11	2.35
07/01/06 – 09/30/06	2.37	2.19
10/01/06 – 12/31/06	2.78	2.29
01/01/07 – 03/31/07	3.34	2.48
04/01/07 – 06/30/07	3.98	3.12
07/01/07 – 09/30/07	4.06	3.38
10/01/07 – 12/31/07	4.38	3.52
01/01/08 – 03/31/08	4.14	2.9

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

Month	High	Low
12/07	4.16	5.52
01/08	4.14	3.65
02/08	3.64	3.30
03/08	3.52	2.90
04/08	3.65	3.21
05/08	3.81	3.56

B. Plan of distribution

Not applicable.

C. Markets

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

D.           Selling Shareholders

Not applicable.

E.           Dilution

Not applicable.

F.           Expenses of the Issue

Not applicable.

Item 10: ADDITIONAL INFORMATION

A.           Share Capital

Not applicable.

B.           Memorandum and Articles of Association

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

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Objects and Purposes

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

Approval of Specified Related Party Transactions

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

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

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

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

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Insurance, Indemnification, and Exculpation of Directors and Officers

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

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

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

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

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

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

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

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

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

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

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

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

·   a fine levied against the office holder.

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

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

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

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

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

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

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

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

Required Approvals

              Under the Companies Law, indemnification of, and procurement of insurance coverage for office holders must be approved by the audit committee and board of directors and, in specified circumstances, by the shareholders of a company.  In August 2003, August 2004 and October 2006, our shareholders approved indemnification agreements with our directors under which we have undertaken to indemnify our directors to the fullest extent permitted under the Companies Law. In July 2005, our audit committee and board of directors approved an indemnification agreement with our chief financial officer under which we have undertaken to indemnify our chief financial officer to the fullest extent permitted under the Companies Law.

Rights, Preferences and Restrictions upon Shares

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

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

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

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

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

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

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

·   Any amendment to the articles of association;

·   An increase in the company’s authorized capital;

·   A merger; or

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

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

Amendment of Articles of Association

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

Shareholders Meetings and Resolutions

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

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

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

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Limitation on Ownership of Securities

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

Mergers and Acquisitions; Anti-takeover Provisions

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

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

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

The Companies Law also provides that the acquisition of shares in a public company on the open market must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 25% shareholder of the company.  The rule does not apply if there already is another 25% shareholder of the company.  Similarly, the law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser would become a 45% shareholder of the company, unless there already is another 45% shareholder of the company.

If, following any acquisition of shares, the purchaser would hold 90% or more of the shares of the company that acquisition must be made by means of a tender offer for all of the target company’s shares.  An acquirer who wishes to eliminate all minority shareholders must do so by means of a tender offer and acquire 95% of all shares not held by or for the benefit of the acquirer prior to the acquisition.  However, the acquirer may not acquire in such tender offer any tendered shares to the extent that the acquisition of those shares would bring the acquirer’s ownership to more than 90% but less than 95% of the shares of the target company. In addition, in the event that the tender offer to acquire that 95% is not successful, the acquirer may not acquire tendered shares if by doing so the acquirer would own more than 90% of the shares of the target company.

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

Changes in Capital

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

C.           Material Contracts

None.

D.           Exchange Controls

In 1998, the Israeli currency control regulations were liberalized significantly, so that Israeli residents generally may freely deal in foreign currency and foreign assets, and nonresidents may freely deal in Israeli currency and Israeli assets.  There are currently no Israeli currency control restrictions on remittances of dividends on the ordinary shares or the proceeds from the sale of the shares provided that all taxes were paid or withheld; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.

Nonresidents of Israel may freely hold and trade our securities.  Neither our Memorandum of Association nor our Articles of Association nor the laws of the State of Israel restrict in any way the ownership or voting of ordinary shares by nonresidents, except that such restrictions may exist with respect to citizens of countries which are in a state of war with Israel.  Israeli residents are allowed to purchase our ordinary shares.

E.           Taxation

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

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

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

a citizen or resident of the United States;

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

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

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

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

Information Reporting and Backup Withholding

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

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

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

Dividends and Distributions

U.S. Holders

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

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

Non-U.S. Holders

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

Sale or Exchange of Ordinary Shares

U.S. Holders

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

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Non-U.S. Holders

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

Passive Foreign Investment Company Rules

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

Israeli Taxation

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

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.

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General Corporate Tax Structure

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

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

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

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

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

·   Accelerated depreciation rates on equipment and buildings; and

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

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

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

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

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Law for the Encouragement of Capital Investments, 1959

Tax benefits prior March 2005 Amendment

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

Tax Benefits

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

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

Tax benefits Subsequent to the March 2005 Amendment

In March 2005, the government of Israel passed an amendment to the Investment Law in which it revised the criteria for investments qualified to receive tax benefits as an Approved Enterprise. Among other things, companies that meet the criteria of the alternate package of tax benefits will receive those benefits without prior approval. We believe that our capital investments qualify to receive tax benefits as an Approved Enterprise, however no assurance can be given that such investments will be approved as in fact qualifying for such tax benefits by the Israeli tax authorities. Additionally, no assurance can be given that we will, in the future, be eligible to receive additional tax benefits under this law. See “Risk Factors, and specifically - “Any failure to obtain the tax benefits from the State of Israel that we anticipate receiving could adversely affect our plans and prospects” and “The government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions” for a discussion of the risks our business and prospects for growth face in connection with Tax benefits under Israeli law.

58

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

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

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

Foreign investor’s Company (“FIC”)

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

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

59

·   An additional period of reduced corporate tax liability at rates ranging between 10% and 25%, depending on the level of foreign (i.e., non-Israeli) ownership of our shares.

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

Measurement of Taxable Income

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

Tax Benefits of Research and Development

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

Withholding and Capital Gains Taxes Applicable to Non-Israeli Shareholders

Nonresidents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. We are generally required to withhold income tax at the rate of 20% on all distributions of dividends, although, with respect to U.S. taxpayers, if the dividend recipient holds 10% or more of our voting stock for a certain period prior to the declaration and payment of the dividend, we are only required to withhold at a 12.5% rate. Notwithstanding the foregoing, with regard to dividends generated by an Approved Enterprise, we are required to withhold income tax at the rate of 15%.

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

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

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

Israel presently has no estate or gift tax.

F.           Dividends and Paying Agents

Not applicable.

G.           Statement by Experts

Not applicable.

H.           Documents on Display

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

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

I.           Subsidiary Information

Not applicable.

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Item 11:   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in Israel and sell them worldwide.  As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. During the year ended December 31, 2007, the NIS appreciated against the U.S. dollar, which resulted in an increase in the U.S. dollar cost of our operations in Israel, and this trend has continued in early 2008. The foreign currency exchange rate effects for the years ended December 31, 2006 and 2005 were immaterial.

In addition, since our financial results are reported in dollars, fluctuations in the rates of exchange between the dollar and non-dollar currencies may have a material effect on our results of operations. We therefore use currency exchange forward contracts to hedge the impact of the variability in the exchange rates on accounts receivable and future cash flows from certain Euro and GBP - denominated transactions as well as certain NIS-denominated expenses. The counter-parties to our forward contracts are major financial institutions with high credit ratings. Our hedging program reduces, but does not eliminate, the impact of foreign currency rate movements.  Based on our past experience we have concluded that there is no material foreign exchange rate exposure. As of December 31, 2007, we had forward contracts to sell up to $3,262,366 for a total amount of NIS 12,547,060 that matured prior to October 1, 2008.

We invest in U.S. Treasury notes, investment grade U.S. corporate securities and dollar deposits with banks. These investments typically carry fixed interest rates.  Our exposure to market risk for changes in interest rates relates primarily to our investment in marketable securities. Our marketable securities portfolio includes US government debt instruments and corporate debt instruments. The fair value of our long and short-term securities is based upon their market values as of December 31, 2007.

At the beginning of 2008, we purchased an auction rate security or ARS in a principal amount of $3 million. Auction rate securities are long-term bonds that provide liquidity through a Dutch auction process that resets the applicable interest rate at pre-determined calendar intervals, generally every 28 days. This mechanism allows existing investors either to roll over their holdings, whereby they will continue to own their respective securities, or liquidate their holding by selling such securities at par. The ARS we purchased is guaranteed by the US government.

 The recent uncertainties in credit markets have affected the liquidity of our holdings in our ARS, as auctions for this ARS failed in February and March of 2008, but at the same time we continue to receive interest every 28 days. While the issuer of the ARS we purchased is rated AAA and the ARS is guaranteed by the US government, at this time we are uncertain as to whether or when the liquidity issues relating to this investment will worsen or improve. We do not believe that it is necessary at this time to adjust the fair value of our investment of such auction rate security, but we have decided to classify it as a long-term investment on our balance sheet.

As of December 31, 2007, we had no other exposure to changes in interest rates and had no interest rate derivative financial instruments outstanding.

Item 12:  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

62

PART II

Item 13:  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

           None.

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

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

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

The net proceeds that we received as a result of the offering were $50,568,390.  As of December 31, 2007, the net proceeds have been used to invest in a variety of financial instruments and for general corporate purposes.  More specifically, a portion of the proceeds, $6.9 million, was used in August 2001 to purchase certain assets of Propelis Software, Inc., a business unit of Computer Network Technology Corporation.  None of the net proceeds of the offering was paid directly or indirectly to any director, officer, general partner of ours or to their associates, persons owning ten percent or more of any class of our equity securities, or to any of our affiliates.

Item 15:  CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Exchange Act) as of December 31, 2007, have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the periods specified by the SEC’s rules and forms.

(b) Management Annual Report on Internal Control over Financial Reporting. Our board of directors and audit committee are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our chief executive officer and chief financial officer assessed the effectiveness of our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-(f) promulgated under the Exchange Act) as of December 31, 2007. In making this assessment, they used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, our chief executive officer and chief financial officer have concluded that, as of December 31, 2007, our internal control over financial reporting is effective based on those criteria. Notwithstanding the foregoing, all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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(c) This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this annual report.

(d) Changes in Internal Control over Financial Reporting. During the period covered by this annual report, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 Item 15T:  CONTROLS AND PROCEDURES

Not applicable

Item 16A:  AUDIT COMMITTEE FINANCIAL EXPERT

At our annual shareholders meeting in November 2007, the shareholders re-elected Dan Falk to the Company’s Board of Directors to serve for a one year term. Our Board of Directors has determined that Mr. Falk qualifies as an audit committee financial expert, and Mr. Falk was appointed by the Board to serve on the audit committee. Mr. Falk also meets the requirements of the NASDAQ Stock Market listing standards to be an “independent” director and audit committee member.

Item 16B:  CODE OF ETHICS

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

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Item 16C:  PRINCIPAL ACCOUNTANT FEES AND SERVICES

           Audit Fees

2006	$115,000
2007	$130,000

           Audit Related Fees

2006	$10,000
2007	$0

           Tax Fees

2006	$24,000
2007	$10,000

           Other Fees

2006	$0
2007	$1,400

           The Audit Related Fees we incurred in 2006 are related to on going consultations.The tax fees we incurred in 2006 are related to preparation of tax returns and consultations regarding international tax and the tax fees we incurred in 2007 are related to preparation of tax returns.

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

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

           Not applicable.

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

           Issuer Purchases of Equity Securities(1)

Period	Total Number of Ordinary Shares   Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
May 2008		118,267		$3.63		118,267		US$10,000,000

(1)  Represents ordinary share repurchases. In February 2008 our board of directors has authorized the use of up to $10 million of our available cash to repurchase our ordinary shares. Pursuant to a requirement of Israeli law, we have obtained the approval of the Tel Aviv District Court in Israel for such purchase. Purchases shall be made from time to time at the discretion of our management in the open market or in privately negotiated transactions, subject to, among other factors, market conditions, trading volume and our share price. No time limit was set for the repurchase program and the program may be suspended from time to time or discontinued.

66

PART III

Item 17:  FINANCIAL STATEMENTS

See Item 18.

Item 18:  FINANCIAL STATEMENTS

67

JACADA LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007

U.S. DOLLARS IN THOUSANDS

INDEX

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3 - F-4
Consolidated Statements of Operations	F-5
Consolidated Statements of Changes in Shareholders' Equity	F-6
Consolidated Statements of Cash Flows	F-7- F-8
Notes to Consolidated Financial Statements	F-9 - F-32

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

JACADA LTD.

We have audited the accompanying consolidated balance sheets of Jacada Ltd. and its subsidiaries ("the Company") as of December 31, 2007 and 2006 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2007 and 2006 and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, in 2006, the Company adopted Statement of Financial Accounting Standards Board No. 123(R), "Share-Based Payment."

Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
June 17, 2008	A Member of Ernst & Young Global

F - 2

JACADA LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	December 31,
	2007		2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	5,960	$	4,735
Marketable securities		10,869		12,338
Trade receivables (net of allowance for doubtful accounts of $ 0 and $ 8 at December 31, 2007 and 2006, respectively)		3,613		958
Assets of discontinued operations		7,752		2,378
Other current assets		1,736		933
Total current assets		29,930		21,342
LONG-TERM INVESTMENTS:
Marketable securities		16,995		18,849
Severance pay fund		970		1,040
Total long-term investments		17,965		19,889
PROPERTY AND EQUIPMENT, NET		992		930
OTHER ASSETS, NET:
Other intangibles, net		118		453
Goodwill		3,096		3,096
Total other assets, net		3,214		3,549
Total assets	$	52,101	$	45,710

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

F - 3

JACADA LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	December 31,
	2007			2006
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables	$	1,167		$	1,202
Deferred revenues		1,893			2,754
Accrued expenses and other liabilities		3,308			2,573
Liabilities of  discontinued operations		4,246			4,091
Total current liabilities		10,614			10,620
LONG-TERM LIABILITIES:
Deferred revenues		61			154
Accrued severance pay		1,522			1,541
Total long-term liabilities		1,583			1,695
COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)
SHAREHOLDERS' EQUITY:
Share capital -
Ordinary shares of NIS 0.01 par value -
Authorized: 30,000,000 shares at December 31, 2007 and 2006; Issued and outstanding: 20,600,865 and 20,132,164 shares at December 31, 2007 and 2006, respectively		59			58
Additional paid-in capital		73,393			71,547
Accumulated other comprehensive income (loss)		418			(128	)
Accumulated deficit		(33,966	)		(38,082	)
Total shareholders' equity		39,904			33,395
Total liabilities and shareholders' equity	$	52,101		$	45,710

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

F - 4

JACADA LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Year ended December 31,
	2007			2006			2005
Revenues:
Software licenses	$	3,706		$	3,668		$	3,632
Services		7,824			3,482			617
Maintenance		1,812			1,356			984
Total revenues		13,342			8,506			5,233
Cost of revenues:*)
Software licenses		449			244			312
Services		6,354			3,218			2,411
Maintenance		745			662			643
Total cost of revenues		7,548			4,124			3,366
Gross profit		5,794			4,382			1,867
Operating expenses:*)
Research and development		4,402			3,838			3,743
Sales and marketing		9,787			9,759			10,046
General and administrative		5,249			5,108			5,388
Total operating expenses		19,438			18,705			19,177
Operating loss		(13,644	)		(14,323	)		(17,310	)
Financial income, net		1,548			1,372			830
Loss from continuing operations before taxes		(12,096	)		(12,951	)		(16,480	)
Tax benefit		8,672			3,117			4,055
Net loss from continuing operations		(3,424	)		(9,834	)		(12,425	)
Net income from discontinued operations, net of taxes		7,540			7,262			7,467
Net income (loss)	$	4,116		$	(2,572	)	$	(4,958	)
Basic and diluted net earnings (loss) per share:
From continuing operations	$	(0.17	)	$	(0.50	)	$	(0.63	)
From discontinued operations	$	0.37		$	0.37		$	0.38
Basic and diluted net earnings (loss) per share	$	0.20		$	(0.13	)	$	(0.25	)
Weighted average number of shares used in computing basic and diluted net earnings (loss) per share		20,364,752			19,827,852			19,497,726
*) Includes stock-based compensation to employees and directors in the following items:
Cost of revenues	$	97		$	67
Research and development		77			79
Sales and marketing		252			123
General and administrative		365			402
Total stock-based compensation expenses	$	791		$	671

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

F - 5

JACADA LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

U.S. dollars in thousands, except share data

							Accumulated
					Additional		other						Total			Total
	Ordinary shares				paid-in		comprehensive			Accumulated			comprehensive			shareholders'
	Shares		Amount		capital		income (loss)			deficit			income (loss)			equity
Balance as of January 1, 2005		19,326,010	$	56	$	69,785	$	(200	)	$	(30,552	)				$	39,089
Exercise of stock options		293,796		1		484		-			-						485
Stock compensation related to options granted to non-employees		-		-		28		-			-						28
Comprehensive loss:
Net loss		-		-		-		-			(4,958	)	$	(4,958	)		(4,958	)
Unrealized loss from available-for-sale marketable securities		-		-		-		(125	)		-			(125	)		(125	)
Unrealized loss from derivatives		-		-		-		(44	)		-			(44	)		(44	)
Total comprehensive loss													$	(5,127	)
Balance as of December 31, 2005		19,619,806		57		70,297		(369	)		(35,510	)					34,475
Exercise of stock options		512,358		1		572		-			-						573
Stock-based compensation related to options granted to employees and directors		-		-		671		-			-						671
Stock compensation related to options granted to non-employees		-		-		7		-			-						7
Comprehensive loss:
Net loss		-		-		-		-			(2,572	)	$	(2,572	)		(2,572	)
Unrealized income from available-for-sale marketable securities		-		-		-		227			-			227			227
Unrealized income from derivatives		-		-		-		14			-			14			14
Total comprehensive loss													$	(2,331	)
Balance as of December 31, 2006		20,132,164		58		71,547		(128	)		(38,082	)					33,395
Exercise of stock options		468,701		1		1,016		-			-						1,017
Stock-based compensation related to options granted to employees and directors		-		-		791		-			-						791
Stock compensation related to options granted to non-employees		-		-		39		-			-						39
Comprehensive income:
Net income		-		-		-		-			4,116		$	4,116			4,116
Unrealized income from available-for-sale marketable securities		-		-		-		411			-			411			411
Unrealized income from derivatives		-		-		-		135			-			135			135
Total comprehensive income													$	4,662
Balance as of December 31, 2007		20,600,865	$	59	$	73,393	$	418		$	(33,966	)				$	39,904
Accumulated other comprehensive income as of December 31, 2007:
Accumulated unrealized income from derivatives							$	161
Accumulated unrealized income from available-for-sale securities								257
							$	418

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

F - 6

JACADA LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2007			2006			2005
Cash flows from operating activities:
Net income (loss)	$	4,116		$	(2,572	)	$	(4,958	)
Less: net income from discontinued operations		(7,540	)		(7,262	)		(7,467	)
Net loss from continuing operations		(3,424	)		(9,834	)		(12,425	)
Adjustments required to reconcile net loss from continuing operations to net cash used in operating activities from continuing operations:
Depreciation and amortization		746			642			675
Stock-based compensation related to options granted to employees and directors		791			671			-
Stock-based compensation expenses related to options granted to non-employees		39			7			28
Accrued interestand amortization of premium on marketable securities		(155	)		(302	)		(675	)
Increase (decrease) in accrued severance pay, net		51			93			(90	)
Decrease (increase) in trade receivables, net		(2,655	)		(225	)		385
Increase in other current assets		(668	)		(14	)		(158	)
Deferred tax		(5,404	)		-			-
Increase (decrease) in trade payables		(35	)		221			(15	)
Increase (decrease) in deferred revenues		(954	)		809			1,943
Increase (decrease) in accrued expenses and other liabilities		735			381			(341	)
Other		(18	)		48			(52	)
Net cash used in operating activities from continuing operations		(10,951	)		(7,503	)		(10,725	)
Net cash provided by operating activities from discontinued operations		7,725			7,114			7,871
Net cash used in operating activities		(3,226	)		(389	)		(2,854	)
Cash flows from investing activities:
Investment in available-for-sale marketable securities		(12,566	)		(16,748	)		(27,536	)
Proceeds from redemption of available-for-sale marketable securities		16,455			18,280			29,957
Purchase of property and equipment		(478	)		(461	)		(258	)
Proceeds from sale of property and equipment		23			19			115
Net cash provided by investing activities from continuing operations *)		3,434			1,090			2,278

*)          There were no cash flows from investing and financing activities related to discontinued operations.

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

F - 7

JACADA LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2007		2006		2005
Cash flows from financing activities:
Proceeds from exercise of stock options		1,017		573		485
Net cash provided by financing activities from continuing operations *)		1,017		573		485
Increase (decrease) in cash and cash equivalents		1,225		1,274		(91	)
Cash and cash equivalents at the beginning of the year		4,735		3,461		3,552
Cash and cash equivalents at the end of the year	$	5,960	$	4,735	$	3,461
Supplemental disclosure of cash flows activities:
Cash paid during the year for:
Taxes on income	$	22	$	130	$	18

*)          There were no cash flows from investing and financing activities related to discontinued operations.

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

F - 8

NOTE 1:- GENERAL

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

The Company develops, markets and supports unified service desktop and process optimization solutions that simplify and automate customer service processes.  The Company generates revenues from licensing its software products and from services such as implementation and customization, consulting, training and maintenance and support.

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

b. Discontinued operations:

On December 19, 2007, the Company signed an agreement for the sale of its traditional market business. The agreement was subject to closing which took place on January 1, 2008.

The proceeds from the sale amounted to $ 26,000, of which $ 2,600 will be held in escrow by a third party through July 2009 as a security for payment of potential indemnification claims. All these amounts were received in 2008. The capital gain, net of taxes, which was recorded in 2008, amounted to approximately $ 20,500.

In accordance with the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), the activity of the disposed traditional market business was classified as discontinued operations in these consolidated financial statements.

The carrying amounts of the major classes of assets and liabilities included as part of the discontinued operations are as follows:

	December 31,
	2007		2006
Trade receivables	$	808	$	723
Other current assets		6		-
Deferred tax		5,404		-
Other intangible assets, net		-		121
Goodwill		1,534		1,534
Assets of discontinued operation	$	7,752	$	2,378
Accrued expenses and other liabilities	$	996	$	1,240
Deferred revenues		3,217		2,825
Accrued severance pay		33		26
Liabilities of discontinued operation	$	4,246	$	4,091

F - 9

NOTE 1:- GENERAL (Cont.)

The results of the discontinued operations for the years ended December 31, 2007, 2006 and 2005 are presented below:

	Year ended December 31,
	2007		2006		2005
Revenues	$	12,455	$	12,175	$	14,709
Cost of revenues		1,000		938		1,512
Gross profit		11,455		11,237		13,197
Operating expenses		561		604		1,633
Net income before taxes on income		10,894		10,633		11,564
Taxes on income		3,354		3,371		4,097
Net income	$	7,540	$	7,262	$	7,467

The disposal of the traditional market business meets the criteria of discontinued operations under EITF 03-13, "Applying the Conditions in Paragraph 42 of FASB Statement No. 144 in Determining Whether to Report Discontinued Operations", because, among other things, no significant cash outflow or cash inflow are expected to be generated or paid by the Company in respect of the discontinued operations and the Company will not have significant continuing involvement in the operations of the traditional market business after its disposal.

c. As for major customers, see Note 10b.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

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

a. Use of estimates:

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

b. Financial statements in U.S. dollars:

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

F - 10

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

c. Principles of consolidation:

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

d. Cash equivalents:

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

e. Investments in marketable securities:

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

Management determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations at each balance sheet date.

The Company classifies all of its securities as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in "accumulated other comprehensive income (loss)" in shareholders' equity. The amortized cost of marketable securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in financial income, net. Interest on securities is included in financial income, net. Realized gains and losses on sale of investments are included in earnings and are derived using the specific identifications method for determining the cost of securities.

Impairment losses are recognized as realized or when the Company has determined that other-than-temporary decline in fair value has occurred. FASB Staff Position ("FSP") No. 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investment" ("FSP 115-1") and  SAB Topic 5M, "Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities" provides guidance for determining when an investment is considered impaired, whether impairment is other-than temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment decreased below its cost in an other-than-temporary manner. If, after consideration of all available evidence to evaluate the realizable value of its investment, impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investment's cost and its fair value. FSP 115-1 nullifies  certain  provisions  of Emerging Issues Task  Force ("EITF") Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF  03-1") while retaining the disclosure requirements of EITF 03-1.

F - 11

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

f. Property and equipment:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets at the following annual rates:

	%
Computers and peripheral equipment	25 - 33
Office furniture and equipment	6 - 15
Motor vehicles	15
Leasehold improvements	Over the shorter of the related lease period or the life of the asset

g. Other intangible assets:

Intangible assets are amortized using the straight-line method over their estimated economic life which is five years.

h. Impairment of property and equipment:

The Company's property and equipment are reviewed for impairment in accordance with SFAS No. 144 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  During 2007, 2006 and 2005, no impairment losses were identified in accordance with SFAS No. 144.

i. Impairment of intangible assets:

The carrying value of the Company's identifiable intangible assets is periodically reviewed by management, based on the expected future undiscounted operating cash flows over the remaining amortization period. If this review indicates that an intangible asset will not be recoverable, its carrying value is reduced to estimated fair value. During 2007, the Company recorded an impairment loss in the amount of $ 155. During 2006 and 2005, no impairment losses were identified.

j. Goodwill:

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

Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, while the second phase (if necessary) measures impairment.

F - 12

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

Goodwill attributable to the Company's single reporting unit as defined under SFAS No. 142, was tested for impairment by comparing its fair value with its carrying value.

Fair value is determined using the Company's market capitalization. The Company performs the impairment tests during the third fiscal quarter. In addition, following the sale of its traditional market business, the Company tested for impairment the goodwill related to continuing operations in accordance with the provisions of SFAS No. 142. During 2007, 2006 and 2005, no impairment losses were identified.

k. Research and development costs:

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

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

l. Income taxes:

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

In July 2006, the Financial Accounting Standards Board ("FASB") issued Financial Interpretation No. 48, "Accounting for Uncertainly in Income Taxes" ("FIN 48"), which applies to all tax positions related to income taxes subject to SFAS No. 109. FIN 48 requires a new evaluation process for all tax positions taken. If the probability for sustaining said tax position is greater than 50%, then the tax position is recorded and recognition should be at the highest amount that is greater than 50% likely of being realized upon ultimate settlement.

F - 13

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

FIN 48 requires expanded disclosure at each annual reporting period, unless a significant change occurs in an interim period. Differences between the amount recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for as an adjustment to the beginning balance of retained earnings (or accumulated deficit). FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on the Company's consolidated financial statements.

m. Revenue recognition:

The Company derives revenues from the sale of software licenses, rendering services and the provision of support and maintenance. Services include consulting services, implementation and customization services and training. Maintenance includes telephone support, bug fixes, and rights to receive upgrade and enhancements to licensed software on a when-and-if-available basis. The Company sells its products primarily through its direct sales force to customers and indirectly through resellers. Both the customers and the resellers are considered end users.

The Company accounts for sales of software licenses in accordance with Statement of Position No. 97-2, "Software Revenue Recognition", as amended ("SOP No. 97-2"). Sales of software licenses are recognized when all criteria outlined in SOP No. 97-2 (as amended by SOP 98-9, as defined bellow) are met. Accordingly, revenue from software license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collectibility is probable.

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

In transactions where a customer's contractual terms include a provision for customer acceptance, revenues are recognized either when such acceptance has been obtained or as the acceptance provision has lapsed.

With regard to software arrangements involving multiple elements, the Company applies Statement of Position No. 98-9, "Modification of SOP No. 97-2, Software Revenue Recognition with Respect to Certain Transactions" ("SOP No. 98-9"). According to SOP No. 98-9, revenues should be allocated to the different elements in the arrangement under the "residual method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists for all undelivered elements and no VSOE exists for the delivered elements. Under the residual method, at the outset of the arrangement with the customer, the Company defers revenue for the fair value of its undelivered elements (maintenance and other services) and recognizes revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (software licenses) when the basic criteria in SOP No. 97-2 have been met. Any discount in the arrangement is allocated to the delivered element. VSOE of fair value for maintenance and other services is determined based on the price charged for the undelivered element when sold separately.

F - 14

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

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

In arrangements which include software and services a determination is made whether the service are considered essential to the functionality of the software. When services are considered essential to the functionality of the software,  the Company accounts for the services together with the software under contract accounting in accordance with Statement of Position No. 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts" ("SOP 81-1").

Revenues recognized in accordance with SOP 81-1 are accounted for using either the completed contract or percentage of completion method. The percentage of completion method is used when the required services are quantifiable, based on the estimated number of labor hours necessary to complete the project, and under that method revenues are recognized using labor hours incurred as the measure of progress towards completion but is limited to revenue that has been earned by the attainment of any milestones included in the contract. The completed contract method is used when the required services are not quantifiable, and under that method revenues are recognized only when final acceptance from the customer has been received or, when no such acceptance is not required under the contract terms, upon the Company's compliance with performance specifications under the contract terms.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined in the amount of the estimated loss on the entire contract. As of December 31, 2007, 2006 and 2005, no such estimated losses were identified.

n. Accounting for stock-based compensation:

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123(R)"), which requires the measurement and recognition of compensation expense based on estimated fair values for all stock-based payment awards made to employees and directors. SFAS No. 123(R) supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"("APB No. 25"), for periods beginning in fiscal year 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS No. 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS No. 123(R). SFAS No. 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's consolidated statements of operations.

F - 15

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Prior to the adoption of SFAS No. 123(R), the Company accounted for equity-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 as allowed under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Pursuant to these accounting standards, the Company recorded deferred compensation for stock options granted to employees at the date of grant equal to the excess of the market value of the underlying shares at that date over the exercise price of the options.

The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard starting the first day of the Company's fiscal year 2006. Under that transition method, compensation cost recognized in the years ended December 31, 2006 and 2007, includes: (a) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R).

Results for prior periods have not been restated.

The Company recognizes compensation expenses for the value of its awards based on the accelerated attribution method over the requisite service period of each of the awards, net of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.

The Company selected the Black-Scholes option pricing model as the most appropriate fair value method for its stock-options awards. The fair value for options granted in 2007, 2006 and 2005 was estimated at the date of grant using the following weighted average assumptions:

	2007	2006	2005
Dividend yield	0%	0%	0%
Expected volatility	46%	54%	60%
Risk-free interest	4.03%	4.7%	3.65%
Expected life (years)	4.5	4.8	4

The Company has historically not paid dividends.

The Company used its historical stock price for calculating volatility in accordance with SFAS No. 123(R).

The risk-free interest rate assumption is based on the rate of zero-coupon U.S. government appropriate for the expected term of the Company's employee stock options.

The Company determined the expected life of the options according to the simplified method, average of vesting and the contractual term of the Company's stock option.

F - 16

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The following table illustrates the effect on 2005 net income and earnings per share, assuming that the Company had applied the fair value recognition provision of SFAS No. 123 on its stock-based employee compensation:

	2005
Net loss as reported	$	(4,958	)
Deduct: Stock-based compensation expense determined under fair value method for all awards		(738	)
Pro forma net loss	$	(5,696	)
Basic and diluted net loss per share as reported	$	(0.25	)
Pro forma basic and diluted net loss per share	$	(0.29	)

o. Advertising expenses:

Advertising expenses are charged to the statement of operations, as incurred. Advertising expenses for the years ended December 31, 2007, 2006 and 2005 were $ 574, $ 488 and $ 653, respectively.

p. Severance pay:

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

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

Commencing from 2005, new employees of the Company are subject to Section 14 of the Severance Pay Law, under which the payments to the pension funds and insurance companies discharge the Company's obligation to the employees. Accumulated amounts in the pension funds and with the insurance companies are not under the control or administration of the Company, and accordingly, neither those amounts nor the corresponding accrual for severance pay are reflected in the balance sheet. The obligation of the Company, under law and labor agreements, for termination benefits to employees not covered by the aforementioned pension or insurance plans are included in the balance sheet.

The severance pay expense for the years ended December 31, 2007, 2006 and 2005 amounted to $ 435, $ 502 and $ 739, respectively.

F - 17

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

q. Fair value of financial instruments:

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

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

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

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

r. Derivative instruments:

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

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

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

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

F - 18

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

At December 31, 2007, the Company expects to reclassify $ 161 of net gains on derivative instruments from accumulated other comprehensive income to earnings during the next year, due to actual payments to suppliers and payroll payment.

s. Net loss per share:

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

All outstanding stock options and warrants have been excluded from the calculation of the diluted net loss per share from continuing operations because the securities are anti-dilutive for all periods presented. The total weighted average number of shares related to the outstanding stock options and warrants excluded from the calculations of diluted net loss per share due to their anti-dilutive effect were 3,646,461, 3,602,673 and 3,600,918 for the years ended December 31, 2007, 2006 and 2005, respectively.

t. Concentrations of credit risk:

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

Cash and cash equivalents are invested in U.S. dollars with major banks in the United States, England, Germany and Israel. Such cash and cash equivalents in the United States may be in excess of insured limits and are not insured in other jurisdictions.

The Company's marketable securities include investments in debentures of U.S. corporations, U.S. government securities, other government securities, U.S. government sponsored enterprises securities and other securities. The Company's investment policy limits the amount the Company may invest in any one type of issuer, except U.S. government securities, thereby reducing credit risk concentrations.

The Company's trade receivables are mainly derived from sales to customers in North America and Europe. In connection with customers with whom the Company does not have previous experience, it may evaluate the creditworthiness of those customers. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. Provisions for doubtful accounts were recorded in general and administrative expenses.

F - 19

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

u. New accounting pronouncements:

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008. The FASB issues a FASB Staff Position (FSP) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company does not expect the adoption will have material impact on its consolidated financial statements.

In December 2007, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 110 (SAB 110) to amend the SEC's views discussed in Staff Accounting Bulletin 107 (SAB 107) regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with SFAS No. 123(R). SAB 110 is effective for the Company beginning in the first quarter of fiscal year 2008. The Company is currently assessing the potential impact that the adoption of SAB 110 could have on its consolidated financial statements.

NOTE 3:- MARKETABLE SECURITIES

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

	December 31, 2007									December 31, 2006
	Amortized		Gross unrealized		Gross unrealized			Fair market		Amortized		Gross unrealized		Gross unrealized			Fair market
	cost		gain		losses			value		cost		gain		losses			value
Available-for-sale:
Corporate debentures	$	23,637	$	226	$	(16	)	$	23,847	$	18,713	$	28	$	(134	)	$	18,607
U.S. government securities		1,002		5		-			1,007		8,897		10		(36	)		8,871
States of the U.S securities		-		-		-			-		450		-		-			450
Other government securities		997		-		(2	)		995		998		-		(15	)		983
U.S. government sponsored enterprises securities		1,159		29		-			1,188		1,472		-		(7	)		1,465
Other securities		812		15		-			827		811		-		-			811
	$	27,607	$	275	$	(18	)	$	27,864	$	31,341	$	38	$	(192	)	$	31,187

The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other than temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2007 and 2006:

F - 20

NOTE 3:- MARKETABLE SECURITIES (Cont.)

	December 31, 2007
	Less than 12 months				12 months or greater					Total
	Fair value		Unrealized losses		Fair value		Unrealized losses			Fair value		Unrealized losses
Corporate debentures	$	-	$	-	$	6,558	$	(16	)	$	6,558	$	(16	)
Other government securities		-		-		995		(2	)		995		(2	)
	$	-	$	-	$	7,553	$	(18	)	$	7,553	$	(18	)

	December 31, 2006
	Less than 12 months					12 months or greater					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses
Corporate debentures	$	5,253	$	(17	)	$	10,942	$	(118	)	$	16,195	$	(135	)
U.S. government securities		989		(2	)		5,172		(33	)		6,161		(35	)
Other government securities		-		-			983		(15	)		983		(15	)
U.S. government sponsored enterprises securities		1,465		(7	)		-		-			1,465		(7	)
Other securities		811		-			-		-			811		-
	$	8,518	$	(26	)	$	17,097	$	(166	)	$	25,615	$	(192	)

The contractual cash flows of these investments are either guaranteed by the U.S. government or an agency of the U.S. government or were issued by highly rated corporations. Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company's investment. Since the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the marketable securities were not considered to be other than temporarily impaired at December 31, 2007.

The amortized cost and fair value of marketable securities as of December 31, 2007, by contractual maturity, are shown below:

	December 31, 2007
	Amortized cost		Fair market value
Matures in one year	$	10,563	$	10,869
Matures after one year through three years		17,044		16,995
Total	$	27,607	$	27,864

F - 21

NOTE 4:- PROPERTY AND EQUIPMENT, NET

Composition of property and equipment is as follows:
	December 31,
	2007		2006
Cost:
Computers and peripheral equipment	$	4,507	$	4,053
Office furniture and equipment		926		914
Motor vehicles		14		98
Leasehold improvements		530		518
		5,977		5,583
Accumulated depreciation		4,985		4,653
Depreciated cost	$	992	$	930

Depreciation expenses for the years ended December 31, 2007, 2006 and 2005 were $ 411, $ 462 and $ 495, respectively.

NOTE 5:- OTHER INTANGIBLES, NET

a.	Composition:
		December 31,
		2007		2006
Original amounts:
Technology		$	900	$	900
Accumulated amortization:
Technology			782		447
Amortized cost		$	118	$	453

b. Amortization expense for the years ended December 31, 2007, 2006 and 2005 amounted to $ 335, $ 180 and $ 180, respectively, and were recorded in cost of revenues in the Company's statements of operations. As of December 31, 2007, the remaining amortization period is 1.5 years.

c. As of December 31, 2007, the Company recognized an impairment loss in the amount of $ 155, which was recorded as part of the amortization expenses in the year 2007.

d. Estimated amortization expenses for the years ended:

2008	$	79
2009		39
	$	118

F - 22

NOTE 6:- ACCRUED EXPENSES AND OTHER LIABILITIES

	December 31,
	2007		2006
Employees and payroll accruals	$	2,539	$	1,653
Accrued expenses		769		920
	$	3,308	$	2,573

NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES

a. Royalties:

1. The Company participated in programs sponsored by the Israeli Government for the support of research and development activities. Through December 31, 2007, the Company had obtained grants from the Office of the Chief Scientist of Israel's Ministry of Industry, Trade and Labor ("the OCS") in the aggregate amount of $ 2,178 for certain of the Company's research and development projects. The Company is obligated to pay royalties to the OCS, amounting to 3%-5% of the sales of the products and other related revenues generated from such projects, up to 100%-150% of the grants received, linked to the U.S. dollar and for grants received after January 1, 1999 also bearing interest at the rate of LIBOR. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales no payment is required.

Through December 31, 2007, the Company has paid or accrued royalties to the OCS in the amount of $ 1,886. As of December 31, 2007, the aggregate contingent liability to the OCS amounted to $ 400.

In December 2007, as part of the sale of the Company's traditional market business (see Note 1b), the Company transferred its obligation to the OCS to the buyer and committed to reimburse the buyer for that future obligation.

The royalties accrued and paid are presented as part of the discontinued operations.

2. The Company's subsidiary is obligated to pay 50% of the sales of a specific product to a former distributor. As of December 31, 2007 and 2006, the Company has accrued an amount of $ 673 related to this obligation. This accrual is presented as part of the liabilities of discontinued operations.

b. Lease commitments:

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

F - 23

NOTE 7:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

Year ended December 31,
2008	$	804
2009		595
2010		70
	$	1,469

Total rent expenses for the years ended December 31, 2007, 2006 and 2005 were approximately $ 916, $ 898 and $ 853, respectively.

NOTE 8:- SHAREHOLDERS' EQUITY

a. General:

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

b. Stock Option Plans:

As of December 31, 2007, the Company has three Incentive Share Option Plans (the 1996, 1999 and 2003 plans), which provide for the grant of options to officers, management, employees and key employees, directors, consultants and others of up to 7,760,450 of the Company's Ordinary shares. The options granted generally become fully exercisable after two to four years and expire between 7 to 10 years from the grant date. Any options from 1999 and 2003 plans that are forfeited or canceled before expiration become available for future grants.

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

As of December 31, 2007, an aggregate of 1,335,875 Ordinary shares of the Company are still available for future grant under the Incentive Share Option Plans.

A summary of the Company's option activity and related information with respect to options granted to employees for the year ended December 31, 2007 is as follows:

F - 24

NOTE 8:- SHAREHOLDERS' EQUITY (Cont.)

	Number of options			Weighted- average exercise price		Weighted- average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at the beginning of the year		3,625,151		$	3.49		4.82	$	574
Granted		844,800		$	3.68
Exercised		(468,701	)	$	2.17
Forfeited and cancelled		(279,667	)	$	4.22
Outstanding at the end of the year		3,721,583		$	3.35		4.94	$	2,778
Exercisable options at the end of the year		2,274,730		$	3.43		4.17	$	1,902
Vested and expected-to-vest at the end of the year		3,242,243		$	3.36		4.77	$	2,474

The weighted-average estimated grant date fair value of employee stock options granted during the years 2007, 2006 and 2005, was $ 1.58, $ 1.4 and $ 1.11 per share, respectively.

The aggregate intrinsic value in the table above represents the total intrinsic value that would have been received by the option holders had all the in the-money option holders exercised their options on December 31, 2007.

The total intrinsic value of stock options exercised during 2007, 2006 and 2005 were $ 616,  $ 620 and $ 281, respectively.

The options outstanding as of December 31, 2007 have been classified by exercise price, as follows:

									Weighted		Weighted
	Options		Weighted				Options		average		average
	outstanding		average		Weighted		exercisable		exercise		remaining
	as of		remaining		average		as of		price of		contractual
Exercise	December 31,		contractual		exercise		December 31,		options		life
price	2007		life (years)		price		2007		exercisable		(years)
$0.99 - $ 1.18		3,000		4.87	$	1.18		3,000	$	1.18		4.87
$1.20 - $ 1.40		151,264		4.68	$	1.28		151,264	$	1.28		4.68
$1.60 - $ 2.22		158,873		0.93	$	2.18		121,373	$	2.17		0.92
$2.28 - $ 3.18		2,180,020		5.48	$	2.72		1,360,961	$	2.71		5.22
$3.41 - $ 5.06		1,076,326		4.97	$	4.23		486,032	$	4.56		2.72
$9.00 - $ 11.00		152,100		1.49	$	9.47		152,100	$	9.47		1.49
		3,721,583		4.94	$	3.35		2,274,730	$	3.43		4.17

F - 25

NOTE 8:- SHAREHOLDERS' EQUITY (Cont.)

Stock-based compensation expense in respect of options granted to employees amounted to   $ 791 and $ 671 for the years ended December 31, 2007 and 2006, respectively.

c. Extension of the exercise period:

On October 5, 2006, the Company's shareholders approved the extension of the exercise period of options to certain of the Company's directors to a period of two years from the date of termination (instead of 90 days). As a result, in 2006, the Company recorded additional compensation cost in the amount of $ 96.

d. Options issued to consultants:

The Company's outstanding options to consultants as of December 31, 2007, are as follows:

Grant date	Options for Ordinary shares		Exercise price per share		Options exercisable		Exercisable through
1999		1,500	$	11.00		1,500	2009
2000		4,750	$	4.38		4,750	2010
2001		5,000	$	2.89		5,000	2011
2002		11,000	$	2.61		11,000	2012
2004		30,000	$	2.94		30,000	2014
2007		40,000	$	3.18		20,000	2011
Total		92,250				72,250

In March 2007, the Company granted 40,000 options to a consultant. On the grant date, 10,000 options were fully vested and the remaining options will vest over a period of 1.5 years, commencing on the grant date, 10,000 options every six months.

The Company had accounted for its options to consultants under the fair value method of SFAS No. 123 and EITF 96-18. The fair value for these options was estimated using the Black-Scholes option-pricing model, with the following assumptions: risk free interest rate was 3.9%, dividend yield 0%, volatility factors of the expected market price of the Company's Ordinary shares was  0.33 and contractual life of  3.8 years.

Stock-based compensation expense in respect of options granted to non employees amounted to $ 39, $ 7 and $ 28 for the years ended December 31, 2007, 2006 and 2005, respectively.

e. As of December 31, 2007, there was $ 1,250 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock option plans. That cost is expected to be recognized over a weighted-average period of 1.49 years.

F - 26

NOTE 9:- TAXES ON INCOME

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

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

According to the provisions of the law, the Company has elected the "alternative benefits" track - the waiver of grants in return for a tax exemption and, accordingly, the Company's income is tax-exempt for a period of two years commencing with the year it first earns taxable income relating to each expansion program, and subject to corporate taxes at the reduced rate of 10% to 25%, for an additional period of five years to eight years (based on the percentage of foreign ownership in each taxable year).

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

The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the above law, regulations published thereunder and the letters of approval for the specific investments in "Approved Enterprises". In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest.

As of December 31, 2007, management believes that the Company is meeting all of the aforementioned conditions.

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

The tax-exempt income attributable to the "Approved Enterprises" can be distributed to shareholders, without subjecting the Company to taxes only upon the complete liquidation of the Company. If this retained tax-exempt income is distributed in a manner other than on the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the alternative tax benefits (currently between 10% to 25% for an "Approved Enterprise"). As of December 31, 2007, the accumulated deficit of the Company does not include tax-exempt income earned by the Company's "Approved enterprise".

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

F - 27

NOTE 9:- TAXES ON INCOME (Cont.)

An amendment to the law, which has been officially published effective as of April 1, 2005 ("the Amendment") has changed the provisions of the law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as an "Approved Enterprise", such as provisions generally requiring that at least 25% of the "Approved Enterprise's" income will be derived from export. Additionally, as explained below, the Amendment enacted major changes in the manner in which tax benefits are awarded under the law so that companies no longer require Investment Center approval in order to qualify for tax benefits. However, the law provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the Company's existing "Approved Enterprises" will generally not be subject to provision of the Amendment. As of December 31, 2007, there is no income attributed to the Amendment.

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

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

c. Net operating losses carryforward:

As of December 31, 2007, the Company had a U.S. net operating loss carryforward for income tax purposes of approximately $ 9,000. The net operating loss carryforward expires within 12 to 20 years.

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

The Israeli Company has net operating losses carryforward for income tax purposes, as of December 31, 2007, of approximately $ 22,000 which can be carried forward and offset against taxable income with no expiration date.

d. Theoretical tax:

In 2007, the main reconciling item between the statutory tax rate of the Company and the effective tax rate is the tax benefit from the reduction in valuation allowance in respect of deferred tax assets resulting from the expected utilization of the net operating losses carryforward in respect of the sale of its traditional market business.

In 2006 and 2005, the main reconciling items between the statutory tax rate of the Company and the effective tax rate are the non-recognition of tax benefits from accumulated net operating losses carries forward among the various subsidies worldwide due to the uncertainty of the realization of such tax benefits.

F - 28

NOTE 9:- TAXES ON INCOME (Cont.)

e. Deferred income taxes:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:

	December 31,
	2007			2006
Deferred tax assets:
Operating loss carryforward	$	10,579		$	9,723
Reserves and allowances		1,902			2,061
Total deferred tax asset before valuation allowance		12,481			11,784
Valuation allowance		(7,077	)		(11,784	)
Net deferred tax asset	$	5,404		$	-

The Company has provided valuation allowances in respect of deferred tax assets resulting from tax loss carryforward and temporary differences. Management currently believes that since the Company has a history of losses it is more likely than not that the deferred tax regarding the loss carryforward will not be realized in the foreseeable future, except for the loss carryforward that will be realized against the Company's capital gain from the sale of its traditional market business on January 1, 2008 (see Note 1b). During fiscal 2007, the Company reduced the valuation allowance by $ 5,300 mainly due to the expected utilization of the net operating losses carryforward in respect of the sale of its traditional market business.

f.          Loss from continuing operations before taxes is comprised as follows:

	Year ended December 31,
	2007			2006			2005
Domestic (Israel)	$	(9,722	)	$	(7,784	)	$	(8,421	)
Foreign		(2,374	)		(5,167	)		(8,059	)
	$	(12,096	)	$	(12,951	)	$	(16,480	)

g. Changes in tax rates in Israel:

The regular corporate tax rate in Israel in 2007 was 29%. The corporate tax rate is to be gradually reduced as follows: in 2008 - 27%, in 2009 - 26% and in 2010 and onward - 25%.

F - 29

NOTE 9:- TAXES ON INCOME (Cont.)

h. Taxes on income from continuing operations are comprised as follows:

	Year ended December 31,
	2007			2006			2005
Deferred tax income	$	5,404		$	-		$	-
Tax benefit from continuing operations		3,300			3,246			4,055
Current income tax expenses		(32	)		(129	)		-
		8,672			3,117			4,055
Domestic		4,910			1,850			1,640
Foreign		3,762			1,267			2,415
	$	8,672		$	3,117		$	4,055

Due to the presentation of discontinued operations, the Company recorded tax benefit related to current losses from continuing operations against tax expenses related to current profits from discontinued operations for the years 2007, 2006 and 2005 in accordance with SFAS No. 109 (see Note 1b for discontinued operations).

NOTE 10:- GEOGRAPHIC INFORMATION

a. Summary information about geographical areas:

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

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

	Year ended December 31,
	2007		2006		2005
Revenues from sales to unaffiliated customers:
North America	$	5,419	$	4,028	$	725
Europe and other		7,923		4,478		4,508
	$	13,342	$	8,506	$	5,233

F - 30

NOTE 10:- GEOGRAPHIC INFORMATION (Cont.)

	December 31,
	2007		2006		2005
Long-lived assets:
Israel	$	3,786	$	4,035	$	3,361
North America		400		420		1,346
United Kingdom		12		20		20
Germany		8		4		-
	$	4,206	$	4,479	$	4,727

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

	Year ended December 31,
	2007			2006			2005
Customer A		26	%		4	%		-
Customer B		15	%		-			-
Customer C		7	%		24	%		83	%
Customer D		2	%		19	%		-
Customer E		2	%		14	%		-

NOTE 11:- SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF INCOME

a. Financial income (expenses), net:

	Year ended December 31,
	2007			2006			2005
Financial expenses:
Bank charges	$	(76	)	$	(93	)	$	(96	)
Foreign currency translation adjustments		-			-			(113	)
		(76	)		(93	)		(209	)
Financial income:
Foreign currency translation adjustments		29			103			-
Interest on marketable securities		1,595			1,362			1,039
		1,624			1,465			1,039
	$	1,548		$	1,372		$	830

F - 31

NOTE 11:- SUPPLEMENTARY DATA ON SELECTED STATEMENTS OF INCOME (Cont.)

b. Provision for doubtful accounts:

The change in the provision for doubtful accounts for the years ended December 31, 2007, 2006 and 2005, is as follows:

	Year ended December 31,
	2007			2006			2005
Balance at the beginning of the year	$	8		$	76		$	-
Doubtful accounts provision		(7	)		(63	)		76
Bad-debts written-off		(1	)		(5	)		-
Balance at the end of the year	$	-		$	8		$	76

NOTE 12:- SUBSEQUENT EVENTS

In February 2008, the Company's board of directors authorized the use of up to $ 10 million of the Company's available cash to repurchase its Ordinary shares. In March 2008, the Company obtained the approval of the Tel Aviv District Court in Israel under the Companies Law for such purchase. Purchases shall be made from time to time at the discretion of the Company's management. No time limit was set for the repurchase program and the program may be suspended from time to time or discontinued.

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

F - 32

Item 19: EXHIBITS 

Exhibit Number           Description of Document

1.1   Memorandum of Association of the Company (incorporated by reference to Exhibit 3.1 from the Company’s Registration Statement filed on Form F-1 (file no. 333-10882)).

1.2   Articles of Association of the Company (incorporated by reference to Exhibit 3.2 from the Company’s Registration Statement filed on Form F-1 (file no. 333-10882)).

1.3   Amendments to the Company’s Articles of Association, dated August 24, 2003 (incorporated by reference to Exhibit 1.3 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2003).

1.4   Amendments to the Company’s Articles of Association, dated August 25, 2004 (incorporated by reference to Exhibit 1.3 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2004).

4.2 1996 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.2 from the Company’s Registration Statement filed on Form F-1 (file no. 333-10882)).

4.3 1999 Share Option and Incentive Plan (incorporated by reference to Exhibit 10.3 from the Company’s Registration Statement filed on Form F-1 (file no. 333-10882)).

4.4 Restated Employment Agreement of Gideon Hollander with Jacada Ltd. dated as of October 1, 2001 (incorporated by reference to Exhibit 4.5 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2001

4.5 Technology and Product License Agreement between the Company and Cortlandt Reade Technical Corporation dated May 25, 2000 (incorporated by reference to the Company’s Annual Report on Form 20-F for the year ended December 31, 2000).

4.6 Amendment to 1999 Share Option and Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-8 (file no. 333-73650)).

4.7 2003 Share Option Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (file no. 333-111303)).

8 List of Jacada’s Subsidiaries.

11 Code of Ethics of the Company (incorporated by reference to Exhibit 11 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2003).

12.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a).

12.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a).

13.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

14.1 Consent of Kost, Forer, Gabbay and Kasierer, a member of Ernst & Young Global.

68

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and it has duly caused and authorized the undersigned to sign this Annual Report on its behalf on June 17, 2008.

JACADA LTD.
/s/Tzvia Broida
By:	Tzvia Broida Chief Financial Officer

EXHIBIT INDEX

Exhibit Number               Description of Document

1.1   Memorandum of Association of the Company (incorporated by reference to Exhibit 3.1 from the Company’s Registration Statement filed on Form F-1 (file no. 333-10882)).

1.2   Articles of Association of the Company (incorporated by reference to Exhibit 3.2 from the Company’s Registration Statement filed on Form F-1 (file no. 333-10882)).

1.3   Amendments to the Company’s Articles of Association, dated August 24, 2003 (incorporated by reference to Exhibit 1.3 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2003)

1.4   Amendments to the Company’s Articles of Association, dated August 25, 2004 (incorporated by reference to Exhibit 1.3 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2004).

4.2 1996 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.2 from the Company’s Registration Statement filed on Form F-1 (file no. 333-10882)).

4.3 1999 Share Option and Incentive Plan (incorporated by reference to Exhibit 10.3 from the Company’s Registration Statement filed on Form F-1 (file no. 333-10882)).

4.4 Restated Employment Agreement of Gideon Hollander with Jacada Ltd. dated as of October 1, 2001 (incorporated by reference to Exhibit 4.5 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2001).

4.5 Technology and Product License Agreement between the Company and Cortlandt Reade Technical Corporation dated May 25, 2000 (incorporated by reference to the Company’s Annual Report on Form 20-F for the year ended December 31, 2000).

4.6 Amendment to 1999 Share Option and Incentive Plan (incorporated by reference to Exhibit 10.2 the Company’s Registration Statement on Form S-8 (file no. 333-73650)).

4.7 2003 Share Option Plan (incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 (file no. 333-111303)

8 List of Jacada’s Subsidiaries.

11 Code of Ethics of the Company (incorporated by reference to Exhibit 11 to the Company’s Annual Report on Form 20-F for the year ended December 31, 2003).

12.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)

12.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)

13.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

14.1 Consent of Kost, Forer, Gabbay and Kasierer, a member of Ernst & Young Global.