Fundtech 20F 2006 Annual report

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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

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

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

For the fiscal year ended December 31, 2006

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

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

For the transition period from __________ to __________

Commission file number 0-29634

FUNDTECH LTD.

(Exact name of Registrant as specified in its charter)

STATE OF ISRAEL

(Jurisdiction of incorporation or organization)

12 Ha’hilazon Street, 5th Floor

Ramat-Gan, Israel 52522

(Address of principal executive offices)

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

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

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

None

(Title of Class)

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

None

(Title of Class)

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

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

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ No ¨

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

Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨

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

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION

Except for the historical information contained herein, the statements contained in this annual report are forward-looking statements, within the meaning of the Private Securities Litigation Report Act of 1995 with respect to our business, financial condition and results of operations. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, all the risks discussed or identified in this annual report and our other public filings, such as general economic and market conditions, changes in regulations and taxes and changes in competition and pricing environments.

We desire to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and we are including this cautionary statement in connection with this safe harbor legislation. This document and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance. We urge you to consider that statements which use the terms “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate,” and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Except as required by applicable law, including the securities laws of the United States, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections. In addition to these important factors and matters discussed elsewhere herein and in the documents incorporated by reference herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements, include the achievement of the anticipated levels of profitability, growth, cost, the timely development and acceptance of new products, the impact of competitive pricing, the impact of general business and global economic conditions and other important factors described from time to time in the reports filed by us with the Securities and Exchange Commission.

As used in this annual report, the terms “we,” “us,” “our,” the “Company” and “Fundtech” mean Fundtech Ltd. and its subsidiaries, unless otherwise indicated. All reference to dollars or “$” are to United States Dollars and all references to “NIS” are to New Israeli Shekels and all references to “Ordinary Shares” are to our Ordinary Shares, NIS 0.01 par value per share.

TABLE OF CONTENTS

PART I

ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.	1
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE.	1
ITEM 3.	KEY INFORMATION.	1
ITEM 4.	INFORMATION ON THE COMPANY.	11
ITEM 4A.	UNRESOLVED STAFF COMMENTS	23

ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS.	24
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.	41
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.	53
ITEM 8.	FINANCIAL INFORMATION.	55
ITEM 9.	THE OFFER AND LISTING.	56
ITEM 10.	ADDITIONAL INFORMATION.	59
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	73
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.	73

PART II

ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.	73
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.	73
ITEM 15T.	CONTROLS AND PROCEDURES.	73
ITEM 16.	[RESERVED]	74
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT.	74
ITEM 16B.	CODE OF ETHICS.	74
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES.	74
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.	76
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.	76

PART III

ITEM 17.	FINANCIAL STATEMENTS.	76
ITEM 18.	FINANCIAL STATEMENTS.	76
ITEM 19.	EXHIBITS.	76

PART I

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable

ITEM 3.

KEY INFORMATION

A.	Selected Financial Data.

The following selected consolidated financial data for each of the year in the three year period which ended December 31, 2006 are derived from our audited Consolidated Financial Statements set forth elsewhere in this report, which have been prepared in accordance with and utilizing accounting principles generally accepted in the United States (“US GAAP”). The selected consolidated financial data for each of the years in the two year period which ended December 31, 2003 are derived from other audited consolidated financial statements not appearing in this report. All of the financial data set forth below are in thousands (except per share amounts). You should read the following selected consolidated financial data in conjunction with “Operating and Financial Review and Prospects” and the Consolidated Financial Statements and Notes thereto appearing elsewhere herein. Historical results are not necessarily indicative of any results to be expected in any future period.

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

Israeli Securities Law allows Israeli companies, such as ours, whose securities are listed on both the Tel Aviv Stock Exchange and on certain stock exchanges in the United States (including The NASDAQ Global Market) to report exclusively under the United States Securities and Exchange Commission rules and utilizing US GAAP. All financial statements included in this report and all financial information released in Israel are presented solely under US GAAP.

B.	Capitalization and Indebtedness.

Not applicable.

C.	Reasons for the Offer and Use of Proceeds.

Not applicable.

D.	Risk Factors.

You should carefully consider the risks described below and in the documents we have incorporated by reference into this prospectus before making an investment decision. The risks described below and in the documents we have incorporated by reference into this prospectus are not the only ones facing our company. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. The trading price of our Ordinary Shares could decline due to any of these risks, and you may lose all or part of your investment.

Risk Relating to Our Business

We are and expect to continue to be dependent upon a limited number of customers for a significant portion of our future revenues.

We believe that the market for our payments, cash management and securities software products and services consists of a relatively small number of customers who have very large potential accounts as well as a great number of customers comprising smaller accounts. These large accounts may from time to time comprise a significant percentage of our revenues in a specific fiscal period. Our failure to attract and retain these large accounts may have a material adverse effect on our business, financial condition and results of operations.

We have entered into a contract with a large customer for the sale of one of our payments products and one for sale of our securities product. Sales to this customer represented 12%, 14%, and 14% or our revenues for 2006, 2005 and 2004 respectively. We have also entered into a contract with another large customer for the sale of our securities product. Sales to this customer represented 12%, 10%, and 2% or our revenues for 2006, 2005 and 2004 respectively. The cessation of projects of this size, which have an indefinite term, could have a material adverse effect on our business, financial condition and results of operations and could also negatively impact the market acceptance of this product. We expect that a significant portion of our future revenues will continue to be derived from a relatively small number of customers. We cannot assure you that other customers will purchase our products and services in the future. See Item 5, “Operating Results and Financial Review and Prospects - Major Customers.”

Our business is affected by conditions in the financial services industry.

Our customers are highly concentrated in the financial services industry. Our business is therefore susceptible to a downturn in that industry. For example, a decrease in spending for software and related services within this industry could result in a decrease in demand for our products. Financial institutions around the world continue to consolidate which decreases the overall potential market for our products and services. These factors, as well as other changes occurring in the financial services industry, could have a material adverse effect on our business, financial condition and results of operations.

Our sales cycle is variable and sometimes long and involves significant resources on our part, but may never result in actual sales.

Our sales cycle from our initial contact with a potential customer to the signing of a license agreement has historically been lengthy and is variable. We generally must educate our potential customers about the use and benefit of our products and services, which can require the investment of significant time and resources. In addition, the purchasing decisions of our customers are subject to the uncertainties and delays of the budgeting, approval and competitive evaluation processes that typically accompany significant capital expenditures. If our sales cycle lengthens, our quarterly operating results may become less predictable and may fluctuate more widely than in the past. A number of potential clients decide which products to buy through a request for proposal process. In those situations, we run the risk of investing significant resources in a proposal that does not result in revenue, because either a competitor obtains the desired contract from the customer or the customer decides not to proceed with the project or the customer decides to internally develop the product. Due to the relatively large size of some orders, a lost or delayed sale could have a material adverse effect on our quarterly revenue and operating results.

We may experience significant fluctuations in our quarterly results, which makes it difficult for investors to make reliable period-to-period comparisons and may contribute to volatility in the market price for our Ordinary Shares.

Our quarterly revenues, margins and results of operations have fluctuated significantly in the past as a result of various factors, many of which are outside our control. These factors include:

the size, timing and shipment of orders for our products and services;

our customers’ budget cycles;

the timing of the release of new product upgrades;

any lengthening of our sales cycle;

changes in the proportion of service and license revenues;

price and product competition;

enhancements or introductions by us and our competitors;

the mix of product sales;

software “bugs” or other product quality problems;

product pricing;

our effectiveness in providing customer support;

delays in implementation;

impact of unrest or political instability in the places we do business, such as in Israel;

consolidation of our customers; and

currency fluctuations.

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

A substantial portion of our expenses, including most product development and selling and marketing expenses, must be incurred in advance of when revenue is generated. If our projected revenue does not meet our expectations, we are likely to experience a shortfall in our operating profit relative to our expectations. As a result, we believe that period-to-period comparisons of our historical results of operations are not necessarily meaningful and that you should not rely on them as an indication for future performance. It is also possible that our quarterly results of operations may be below the expectations of public market analysts and investors. If this happens, the price of our Ordinary Shares will likely decrease.

Decisions by customers to develop their own payments and cash management solutions or greater market acceptance of our competitors’ products could result in reduced revenues.

The market for payments and cash management solutions is continuing to develop and competition is intense. We compete for the business of global or national and regional financial services organizations that seek to support complex and sophisticated products. Some of the larger financial institutions have developed products that are similar in function to our global payments and cash management products, in lieu of purchasing our products which they have then marketed to other banks or implemented in banks that they have acquired. Thus we might be competing with both software vendors within our industry and the in-house IT departments of certain of our clients.

We believe there are several principal competitive factors in the industry in which we operate, including:

product performance;

technical features;

compatibility with existing operating systems;

reliability;

security;

relational database power;

price;

customer service and support; and

ease of use.

Our competitors may be in a better position to devote significant funds and resources to the development, promotion and sale of their products, thus enabling them to respond more quickly to new or emerging technologies and changes in customer requirements. Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase their ability to successfully market their products. We also expect that competition will increase as a result of consolidation within the industry. As we develop new products, we may begin to compete with companies with which we have not previously competed. Our competitors include, but are not limited to, BankServ, Logica PLC, Digital Insights, Inc., S1 Corporation, Fidelity Information Services, Banklink, TietoEnator, Sunguard, Fiserv, Dovetail, GIFTS Software, Smartstream Technologies, Clear2Pay and Transaction Systems Architects, Inc.

We may be unable to differentiate our products from the products of our competitors or successfully develop and introduce new products that are less costly than, or superior to, those of our competitors. In addition, existing and new competitors may establish relationships with our existing and potential customers. This could have a material adverse effect on our ability to compete.

In addition to our current competitors, we expect substantial competition from both established and emerging companies. A number of our existing and potential competitors have, or are likely to have, more extensive engineering, development, marketing, distribution, financial, technological and personnel resources than us. This increased competition may result in our loss of market share and pricing pressure which may have a material adverse effect on our business, financial condition and results of operations. We cannot assure you that competition with both competitors within our industry and with the in-house IT departments of certain of our clients or prospective clients will not result in price reductions for our products and services, fewer customer orders, deferred payment terms, reduced revenues or loss of market share, any of which could materially adversely affect our business, financial condition and results of operations. See Item 4B, “Information on the Company — Business Overview — Competition.”

We may be unable to expand our support organizations which may hinder our ability to grow and meet customer demands and rapid expansion of these resources could increase our cost and reduce our operating profit.

Prior to 2003 in order to reduce costs, we substantially reduced the number of employees in both our research and development and administrative departments. We may need to increase our technical and customer support staff to support new customers and the expanding needs of existing customers. With the addition of our Cashtech business, we are increasingly looking to India to source these requirements. Since our products are complex we expect that the training process will take a significant period of time before these personnel can support our customers. Qualified individuals are in demand throughout the software industry globally and there is significant competition for qualified personnel. Competition for qualified people may lead to increased labor and personnel costs. If we do not succeed in retaining our personnel or in attracting new employees, our business could suffer significantly. If we are unable to attract, train and retain qualified personnel, we may not be able to achieve our objectives and our business could be harmed.

Marketing and distributing our products outside of the United States may require increased expenses and greater exposure to risks that we may not be able to successfully address.

We market and sell our products and services throughout the world. We received 45.5% of our total revenues in 2004, 46.4% of our total revenues in 2005 and 48.1% of our revenues in 2006 from sales to customers located outside of the United States. The expansion of our existing operations and entry into additional international markets will require significant management attention and financial resources. We are subject to a number of risks customary for international operations, including:

economic or political changes in international markets;

greater difficulty in accounts receivable collection and longer collection periods;

difficulties and costs of staffing and managing foreign operations;

the uncertainty of protection for intellectual property rights in some countries;

multiple and possibly overlapping tax structures; and

currency and exchange rate fluctuations.

If we are unable to accurately predict and respond to market developments or demands, our business will be adversely affected.

The market for financial institutions payments and cash management solutions continues to develop and evolve. This makes it difficult to predict demand for our products. We cannot guarantee that the market for our products will grow or that our products will become widely accepted. If the market for our products does not develop in the time frames and with the demand that we have projected, our future revenues and profitability will be adversely affected. In addition, changes in technologies, industry standards, the regulatory environment, customer requirements and new product introductions by existing or future competitors could render our existing products obsolete and unmarketable, or require us to develop new products. A significant increase in the number of customers and/or a significant increase in our development of new product offerings would require us to expend significant amounts of money, time and other resources to meet demand. These expenditures could strain our personnel and financial resources.

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

The combination of sales to major clients containing a significant services component to implement software globally, increases in sales where significant modifications are required to meet customer specific demands (“Solution Sales”) and increasing selection of our ASP hosted solution in lieu of our licensed solution, particularly with respect to our CASHplus software, may result in lower overall margins and a change in the way our share value is viewed by the marketplace. Although we continue to believe that a solutions and hosting based revenue model has numerous advantages, particularly in recurring revenue and visibility into our future earnings, the marketplace may view our share price as a solutions based business in a different way than it views a license based business. This may lead to volatility in our share price.

The market price of our Ordinary Shares may be volatile.

The stock market in general, and particularly over the past six years, has experienced price and volume fluctuations. The market prices of securities of technology companies still suffer from the declines experienced in the year 2000, and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. For additional information, see the table in Item 9, “The Offer and Listing — Market Price Information.” These market fluctuations could adversely affect the market price of our Ordinary Shares. The market price of the Ordinary Shares may fluctuate substantially due to a variety of factors, including:

any actual or anticipated fluctuations in our financial condition and operating results;

public announcements concerning us or our competitors, or the financial services industry;

our inability to meet any guidance or forward looking information, if provided;

the introduction or market acceptance of new service offerings by us or our competitors;

changes in security analysts’ financial estimates;

changes in accounting principles;

sales of our Ordinary Shares by existing shareholders;

the loss of any of our key personnel; and

changes in the political conditions in Israel.

In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert our management’s attention and resources, which could cause serious harm to our business.

Future sales of our Ordinary Shares in the public market or issuances of additional securities could cause the market price for our Ordinary Shares to fall.

As of June 15, 2007, we had 16,021,425 Ordinary Shares outstanding, and, in addition, we have reserved up to 199,590 Ordinary Shares for issuance under our share option and restricted share plans. If a large number of our Ordinary Shares are sold, the price of our Ordinary Shares would likely decrease or if we continue to issue shares, convertible securities, warrants restricted shares and/or options the price of our Ordinary Shares may decrease.

We may continue to issue restricted shares or stock options and the issuance of these securities could be dilutive to our shareholders. Future acquisitions involving the issuance of shares as part of the purchase price could result in dilution. Certain warrants or options, when issued, may require us to reflect appropriate charges in our financial statements at that time. See also “Any future acquisitions of companies or technologies may distract our management and disrupt our business.” below.

Undetected defects may increase our costs and impair the market acceptance of our products and technology.

Our software products are complex and may contain undetected defects, particularly when first introduced or when new versions or enhancements are released. Testing of our products is particularly challenging because it is difficult to simulate the wide variety of customer environments into which our products are deployed. Despite testing conducted by us and our customers, some defects have been discovered after their commercial shipment. Our products are frequently more critical to our customers’ operations compared to other software solutions used by such customers, and as a result, our customers may have a greater sensitivity to product defects relating to our products.

The finding of defects in current or future products and versions after the start of commercial shipment may result in:

a delay or failure of our products to achieve market acceptance;

adverse customer reaction;

negative publicity and damage to our reputation;

diversion of resources; and

increased service and maintenance costs.

Defects could also subject us to legal claims. Although our license agreements contain limitation of liability provisions, these provisions may not be sufficient to protect us against these legal claims. The sale and support of our products, as well as our professional services, may also expose us to product liability claims.

Any future acquisitions of companies or technologies may distract our management and disrupt our business.

We have in the past acquired certain assets of Sterling Commerce and CheckFree Holdings Corporation, as well as all of the stock of Biveroni Batschelet Partners AG, Switzerland, Datasphere SA, Switzerland and Cashtech Solutions India Private Limited, Radius Partners, Inc. and Prang GmbH, Germany, and may in the future acquire or make investments in complementary businesses, technologies, services or products, if appropriate opportunities arise. We may also engage in discussions and negotiations with companies about our acquiring or investing in those companies’ businesses, products, services or technologies. We cannot make assurances that we will be able to identify future suitable acquisition or investment candidates, or if we do identify suitable candidates, that we will be able to make the acquisitions or investments on commercially acceptable terms or at all or that we will have sufficient available resources for such acquisitions or investments. If we acquire or invest in another company, we could have difficulty assimilating that company’s personnel, operations, customers, technology or products and service offerings into our own. The key personnel of the acquired company may decide not to work for us. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. We may incur indebtedness or issue equity securities to pay for any future acquisitions.

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

We have spent considerable time, effort and money developing our next generation software. Over the period 2004-2006, Global PAYplus™ has been installed at 15 banks and CASHplus® which is currently installed at or operating on behalf of 70 banks. This limited history of operations for our newest solutions and their delivery modes, makes it difficult to predict future results of operations.

We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively.

Our success and ability to compete are substantially dependent upon our internally developed technology. Other than our trademarks, our intellectual property consists primarily of proprietary or confidential information that is not subject to patent or similar protections. In general, we have relied on a combination of technical leadership, trade secret, copyright and trademark law and nondisclosure agreements to protect our proprietary know-how. Unauthorized third parties may attempt to copy or obtain and use the technology protected by those rights. Any infringement of our intellectual property could have a material adverse effect on our business, financial condition and results of operations. Policing unauthorized use of our products is difficult and costly, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States.

We have placed, and in the future may place, our software source code in escrow. The software source code may, under specified circumstances, be made available to our customers. In certain limited instances, we have also provided our software source code directly to customers. This may increase the likelihood of misappropriation or other misuse of our software.

Substantial litigation over intellectual property rights exists in the software industry. We expect that software products may be increasingly subject to third-party infringement claims as the functionality of products in different industry segments overlaps.

We believe that many industry participants have filed or intend to file patent and trademark applications covering aspects of their technology. We cannot be certain that they will not make a claim of infringement against us based on our products and technology. Any claims, with or without merit, could:

be expensive and time-consuming to defend;

cause product shipment and installation delays;

affect the decision by prospective customers to enter into agreements with us;

divert management’s attention and resources; or

require us to enter into royalty or licensing agreements to obtain the right to use a necessary product or component.

If we are required to enter into royalty or licensing agreements, such agreements may not be available on acceptable terms, if at all. Therefore, a successful claim of product infringement against us and our failure or inability to license the infringed or similar technology at all or to license the infringed or similar technology for reasonable commercial terms, could have a material adverse effect on our business, financial condition and results of operations.

We utilize software from third parties. If we cannot continue using that software on commercially reasonable terms, we would have to spend additional capital to redesign our existing software.

We utilize off-the-shelf third-party software products to optimize the performance of our products. Our business would be disrupted if functional versions of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required to spend additional capital to either redesign our software to function with alternate third-party software or develop these components ourselves. If this third-party software were either no longer available to us or no longer offered to us on commercially reasonable terms, we might be forced re-engineer our current or future product offerings and the commercial release of our products could be delayed, which could materially adversely affect our business, financial condition and results of operations.

Government regulatory policy for the financial services industry affects our business.

Our current and prospective customers, which include state and federally chartered banks and savings and loan associations, operate in markets that are subject to extensive and complex regulation. While we are not ourselves directly subject to this regulation, our products and services must be designed to work within the regulatory constraints under which our customers operate. The inability of our products and services to work properly within the regulatory framework may have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Location in Israel

It may be difficult to effect service of process and enforce judgments against directors, officers and experts in Israel.

We are organized under the laws of the State of Israel. Many of our executive officers and directors named in this annual report are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States against us or any of those persons. It may also be difficult to enforce civil liabilities under United States federal securities laws in actions initiated in Israel.

Political, economic and military conditions in Israel and the Middle East as a whole, could negatively impact our business.

Political, economic and military conditions in Israel have a direct influence on us because one of our significant research and development facilities and one of our executive offices is located there. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations. We cannot assure you that ongoing hostilities related to Israel will not have a material adverse effect on our business or on our share price. Several Arab countries still restrict business with Israeli companies and these restrictions may have an adverse impact on our operating results, financial condition or the expansion of our business. We could be adversely affected by restrictive laws or policies directed towards Israel and Israeli businesses. The future of peace efforts between Israel and its Arab neighbors is uncertain. Since October 2000, there has been a significant deterioration in Israel’s relationship with the Palestinian Authority, including a series of armed clashes between Israel, the armed forces of the Palestinian Authority, and terrorist organizations, and acts of terror have been committed inside Israel. In July and August 2006, significant fighting took place between Israel and Hezbollah in Lebanon, resulting in rockets being fired from Lebanon up to 50 miles into Israel. There can be no assurance that the recent relative calm will continue. Also, the war in Iraq led by coalition forces and the short and long term consequences of such war may negatively impact our business. The local situation has been exacerbated by the recent election of representatives of the Hamas movement to a majority of seats in delegates in the Palestinian Legislative Council, and by civil unrest between Hamas and Fatah, particularly in Gaza. All indications are that there is no short term relief in sight for these problems.

Generally, all male adult citizens and permanent residents of Israel under the age of 54 are, unless exempt, obligated to perform up to 36 days of military reserve duty annually. Additionally, all Israeli residents of this age are subject to being called to active duty at any time under emergency circumstances. Some of our officers and employees are currently obligated to perform annual reserve duty. Although we have operated effectively under these requirements since we began operations, we cannot assess the full impact of these requirements on our workforce or business if political and military conditions should change, and we cannot predict the effect on us of any expansion or reduction of these obligations.

We may be adversely affected if the rate of inflation in Israel exceeds the rate of devaluation of the new Israeli shekel against the dollar.

Most of our revenues are in dollars or are linked to the dollar, while a portion of our expenses, principally salaries and the related personnel expenses, are in new Israeli Shekels, or NIS. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar or that the timing of this devaluation lags behind inflation in Israel. This would have the effect of increasing the dollar cost of our operations. In 1999 and in 2000, while the rate of inflation was low, there was a devaluation of the dollar against the NIS, and in 2001 the rate of devaluation of the NIS against the dollar exceeded the rate of inflation. In 2002, the devaluation of the NIS against the dollar was similar to the rate of inflation. In 2003, the NIS gained in value against the dollar while the rate of inflation was negative. During 2004, the valuation of NIS against the dollar was stable. In 2005, the NIS devalued against the dollar at a greater rate than inflation. In 2006, the dollar devalued against the NIS while the inflation rate in Israel was negligible. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation of the NIS against the dollar. If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected.

The tax benefits available to us from government programs may be discontinued or reduced at any time, which would likely increase our taxes.

We have received government grants in the past and currently receive tax benefits under Israeli government programs. To maintain our eligibility for these programs and benefits, we must continue to meet specified conditions. Some of these programs restrict our ability to transfer particular technology outside of Israel. If we fail to comply with these conditions in the future, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay increased taxes. The government of Israel has reduced the benefits available under these programs recently and these programs and tax benefits may be discontinued or reduced in the future.

The government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions.

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

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

Our United States investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Although we believe that we were not a passive foreign investment company in 2006, we cannot assure you that the United States Internal Revenue Service will agree with our position. We would be a passive foreign investment company if (i) 75% or more of our gross income in a taxable year (including our pro rata share of the gross income of any company treated as a corporation for U.S. Federal income tax purposes, U.S. or foreign, in which we are considered to own directly or indirectly 25% or more of the shares by value) is passive income, or (ii) the value of our assets averaged quarterly over our the taxable year (including our pro rata share of the assets of any company treated as a corporation for U.S. Federal income tax purposes in which we are considered to own directly or indirectly 25% or more of the shares by value) that produce, or are held for the production of, passive income is at least 50%. Passive income includes interest, dividends, royalties, rents and annuities. If we are or become a passive foreign investment company, our U.S. investors could be subject to adverse tax consequences, including: being taxed at ordinary income tax rates on gain from the sale or other disposition of our Ordinary Shares (and on certain distributions on our Ordinary Shares). For additional information, see Item 10E, “Additional Information — Taxation.” - United States Federal Income Taxation.

ITEM 4.

INFORMATION ON THE COMPANY.

A.	History and Development of the Company

Both our legal and commercial name is Fundtech Ltd. We were incorporated in Israel in 1993 under the Israeli Companies Ordinance (New Version), 1983 (the “Companies Ordinance”), as a private limited company, under the name of “Fundtrust Technologies Limited”. The principal legislation under which we operate is the Israeli Companies Law, 5759-1999 as amended (the “Companies Law”), which replaced most of the provisions of the Companies Ordinance effective as of May 1, 2000.

Our registered office is located at 12 Ha’hilazon Street, 5th Floor, Ramat-Gan, Israel 52522, and our telephone number is 972-3-611-6500.

Our name was changed to “Fundtech Ltd.” in June 1994. Our primary business at that time was the automation of payments for community banks. In 1998, we acquired the assets of the cash management division of CheckFree Holdings Corporation. In 1999, we acquired the assets of the cash management division of Sterling Commerce as well as 100% of the stock of Biveroni Batschelet Partners AG, Switzerland (“BBP”), which connects banks to the Central Bank of Switzerland for the processing and settlement of payments, securities trading and settlement. In 2004, we acquired 100% of the stock of Datasphere SA, Switzerland (“Datasphere”) and Cashtech Solutions India Private Limited (“Cashtech”). In 2005, we acquired 100% of the stock of Radius Partners, Inc. (“Radius Partners”). In early 2007 we acquired 100% of the stock of Prang GMBH, Germany (“Prang”).

On March 13, 1998, we completed our initial public offering and our Ordinary Shares began trading on The NASDAQ National Market (now the NASDAQ Global Market). As part of the offering, we issued 3,450,000 Ordinary Shares in consideration of net proceeds of approximately $41,710,500.

On August 19, 2003 our Ordinary Shares began trading on the Tel-Aviv Stock Exchange in Israel, and we became a dual listed company.

Capital expenditures consisting primarily of purchases of property and equipment were $4.3 million, $5.4 million and $5.2 million during the years ended December 31, 2004, 2005 and 2006, respectively. We neither purchased nor owned any real property during this same period. We acquired all of the capital stock of Datasphere and Cashtech during 2004 for a total of $4.8 million and all of the capital stock of Radius Partners during 2005 for a total of $2.6 million. Each of these transactions carried an “earn out” provision for which we have made payments totaling $1.4 million during 2006 and for which we forecast payments of $1.2 million in 2007. We acquired all of the capital stock of Prang during 2007 for a total of approximately $5.2 millions plus an adjustment for 2006 undistributed profits which totaled $0.7 million. Under the “earn out” provisions of the acquisition agreement, we may be required to pay up to an additional approximately 4 million euros based on Prang’s performance between 2007 and 2010.

Capital expenditures for the year ending December 31, 2007 are expected to be approximately $7.8 million, of which $6.2 million will be spent in the United States and $1.6 million will be expended outside the United States, primarily by BBP. We anticipate financing these capital expenditures with our own funds.

B.	Business Overview

We are a leading provider of end-to-end financial transaction processing software solutions for financial institutions. These solutions are grouped into five broad categories: payment processing, foreign exchange settlement processing, financial messaging, cash management and securities settlement straight through processing products. The first three categories are transaction processing solutions, which enable banks to automate the payment and settlement processes and provide real-time transaction processing capabilities to financial institutions and their customers. The fourth category, cash management products, enable corporate clients to communicate with their financial institutions for the purpose of initiating payments, making inquiries and managing their activities with the financial institutions. The final category securities post-trade settlement, is a multi-asset global trade management solution that consolidates and automates a broker/dealer’s middle office operations.

We acquired our ACCESS Banking™ products in April 1998, BBP, our Swiss subsidiary, in June 1999 and our banker products in September 1999. Our major products include ACCESS Banking™, CASHplus®, PAYplus USA™, PAYplus for CLS™, Global PAYplus™, Recovery Services for disaster recovery service bureau solutions and related services. We acquired Datasphere through BBP in August 2004 and Cashtech in November 2004. BBP and Datasphere have sold their products and services to approximately 150 customers for the purpose of accessing the S.W.I.F.T. financial messaging network. Cashtech offers a suite of cash management products named CashWeb, CashIn and TransactCentral. Radius Partners is an STP (“straight through processing”) solutions provider to the securities industry. Radius offers two STP products named TRADEplus and TRADEplus Data Manager. Prang, acquired in early 2007, is a payments solution provider in Germany where it offers its Prang FTS solutions.

Industry Background

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

The following trends continue to drive demand for our products and services in this dynamic market environment: an increasing need for centralized payment and treasury functions; global adoption of real-time gross settlement; migration to Internet-based solutions; growth in electronic commerce; consolidation in the financial services industry; increased regulatory requirements imposed on banks, particularly in respect to initiatives in the European Union, a desire to accelerate top-line revenue growth in the form of additional fee income generating services, the need to lower operating costs, and to develop unique services that allow an institution to differentiate itself from its competitors.

We believe that several market trends and the current environment are favorable to our products and services. Specifically, we focus on the following trends and market conditions:

continued expansion of Internet-enabled functions such as real-time information on financial positions and transactions;

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

greater emphasis on risk mitigation in areas such as liquidity management and contingency and recovery capabilities;

a shift on the part of financial institutions to establish strategic technology partnerships with a few key vendors in order to use outsourcing, application service providers and “white-labeling” in lieu of developing and managing their own IT activities;

continued spread of globalization that will require new tools for banks to manage 24-hour trading and settlement, real-time information demands and end-to-end processing;

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

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

Products and Services

Our products and related services are designed to integrate all elements of the electronic payments cycle, including electronic funds transfer, and cash and treasury management. We believe that our products are among the most technologically advanced and cost-effective solutions in the electronic payments and banking industry. Our products facilitate all aspects of the electronic payments and banking cycle including payment initiation, electronic balance reporting, account reconciliation, real-time account balance verification and other sophisticated auditing and reporting functionality. In addition, our products offer feature-rich graphical user interfaces, enabling our customers to easily receive accurate and focused information concerning the status of electronic payment transactions and other cash management data.

Our end-to-end solutions provide for remote initiation of transactions, efficient and automated processing of these transactions and settlement of the transactions at the central bank of the country of origin. We are one of the largest providers of services linking banks to networks, such as the Federal Reserve System in the United States that has approximately 7,500 banks on their FedLine system. On a global basis, we provide banks with the capability to link to the Society for Worldwide Financial Interbank Telecommunications (“S.W.I.F.T.”) network for communicating cross-border transactions. S.W.I.F.T. has over 7,000 banks in 200 countries. In addition to providing payment services, we are also a leading provider of settlement solutions that link banks to the CLS Bank’s Continuous Linked Settlement System (“CLS”). CLS is a system set up by the largest foreign exchange banks in the world to reduce foreign exchange settlement risk.

*Payment Solutions*		*Short Description*
PAYplus USA™		A payments solution for banks operating in the United States.

Global PAYplus™		A solution for managing the global payments activities of large multi-national banks and financial institutions that conduct business in multiple countries.

Pan-European PAYplus		A comprehensive solution to meet SEPA and Target 2 compliance.

OmniPay		A payments hub that enables corporate clients to transmit a single file of mixed payments, thereby simplifying this process.

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

Global PAYplus™ Liquidity Manager		Global PAYplus Liquidity Manager provides banks with the ability to control and centralize all their liquidity management needs in one system, ensuring more efficient control and management of multi-currency, multi-bank liquidity assets across bank accounts, clearing systems, and central bank channels.

PAYplus USA™

PAYplus USA™ is a funds transfer solution used to connect a financial institution’s funds transfer room with the Federal Reserve’s FedWire system. This solution evolved from and replaces two older products, FEDplus™ and PAY$tar™. Our target market includes all banks operating in the United States that do not need a global payment solution, including U.S.-based banks, thrifts, savings and loans and international agency banks operating in the United States.

PAYplus USA™ supports payment processing, risk management and regulatory compliance for U.S. financial institutions that utilize the Federal Reserve Bank’s FedWire system for high value payments. PAYplus USA™ also offers the same functionalities for international multi-currency payments of international banks operating in the United States.

PAYplus USA™ provides financial institutions with complete funds transfer capacity at a substantially lower cost than other technologies. At the same time, it both reduces payments risk (through real-time updates of account balances by means of an on-line interface with the host computer) and improves customer service (through its comprehensive database containing relevant information about a transfer - from its creation to accounting and memo posting).

Global PAYplus™

Our Global PAYplus™ provides institutions with a real-time global view of their payments activity. This multi-tiered system addresses the needs of both local and global payment processes. At the local level, Global PAYplus™ employs a client/server funds transfer payment system that supports both the local payment processing, and risk management and regulatory compliance for the local clearing systems. At the global level, Global PAYplus™ aggregates worldwide payment activity. Global PAYplus™ is a multi-platform system supporting both UNIX and NT that employs open technology standards. The system features end-to-end security and multi-currency capabilities.

Pan-European PAYplus

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

OmniPay

OmniPay is a web-based, intelligent payments hub that processes mixed payments files using the bank’s existing payments infrastructure. By eliminating the “siloed” approach of legacy systems, OmniPay allows banks to offer clients highly automated and highly customized payments services that integrate with their enterprise resource planning (ERP) systems. Banks are able to deliver a new level of customer satisfaction and generate new service fee revenue from value-added services.

IGTplus

Our Swiss subsidiary markets IGTplus, a message broker application for financial messages. For financial institutions it comprises the interface to their central banking system. IGTplus processes payments, securities transactions or related orders and information to/from other financial institutions, clearing organizations, and central banks, among others, using straight through processing in order to provide faster, better quality service to customers and to reduce costs. The S.W.I.F.T., SIC (Swiss Interbank Clearing), SIS (Swiss Securities Clearing) and FIX (Stock Exchanges [SWX, virt-x, other] & Broker) applications of IGTplus provide communication to/from these financial services with the option of manual investigations, exception handling and queries for liquidity information. Due to the high sensitivity and performance requirements inherent in this application, IGTplus is designed for very high throughput and 24x7 fully automated operation. The target markets are large banks, service centers and financial market infrastructures. Smaller financial institutions may obtain the same functionality as they would obtain by acquiring a license by contracting for the services of the BBP Service Bureau, which operates IGT Plus on behalf of a number of such institutions.

Global PAYplus Liquidity Manager

Global PAYplus Liquidity Manager (GLM) is a management and planning tool, that ensures more efficient control and management of multi-currency liquidity assets across the bank’s accounts and Real Time Gross Settlement channels. The system provides flexible functionality which allows the bank to centralize, monitor and control the management of liquidity. GLM provides Treasury personnel with accurate, online, and timely information to facilitate better decision-making and also can provide Treasury staff with efficient payment delivery and execution based upon up-to-date information. GLM interfaces with other systems within the bank to gather liquidity information, ensuring that a complete and accurate liquidity position is continuously available.

*Cash Management Solutions*		*Short Description*
ACCESS Banking™		A solution designed to enable high end and mid-level financial institutions to deliver comprehensive cash management services to their corporate clients.

CASHplus®		An Internet-based cash management solution designed for high end and mid-level financial institutions.

webBANKER™		A fully integrated cash management solution designed primarily for the community bank market.

CashWeb		A multi-currency Internet front end for cash management systems.

CashIn		A business engine supporting all forms of cash management services utilized primarily in India.

TransactCentral		A fully integrated suite of cash management modules with a building block architecture, designed for large financial institutions requiring significant customization.

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

ACCESS Banking™

Our ACCESS Banking™ solution is a client/server product that enables banks and other financial institutions to provide cash management services to their corporate clients. ACCESS Banking™ is targeted at the mid-to-large-size financial institutions. Through ACCESS Banking™, clients can obtain balance history and intra-day reporting, manage check transactions, originate ACH (automated Clearing House) wire transfer payment transactions and initiate intra-bank account transfers. ACCESS Banking™ consists of a server located in the back-office of a bank and a remote access module located at the premises of the bank’s corporate client. Clients can interact with the bank’s ACCESS Banking™ server remotely via the web, touch-tone telephone with voice response, teletype terminal emulation or facsimile transmission.

CASHplus®

The CASHplus® product, enables corporations to perform sophisticated cash management functions across accounts at multiple branches, in multiple currencies, and in multiple countries and regulatory environments. CASHplus® is designed to reduce the cost of delivering remote banking services through universal access and simplified maintenance and distribution of remote software.

webBANKER™

web BANKER™ was designed for community banks - it is cost-effective to operate and easy to set up and use. It offers the features needed to be competitive in the marketplace such as wire transfer. ACH origination with federal and state tax payments, compatibility with FEDLine Advantage, information reporting, cash concentration and disbursement. Fundtech offers this system on an installed or ASP basis.

CashWeb

Developed by our Cashtech subsidiary, this multi-currency Internet front-end program that offers a single-window interface for all types of cash management transactions. The software can also be customized to meet both client and country specific requirements.

CashIn

Also developed by our Cashtech subsidiary, CashIn is a business engine equipped with features that support all cash management activities and products. The system handles basic clearing products like automated clearinghouse, wire clearing and other collection mechanisms. CashIn can also be customized to meet more complex client needs.

Transact Central

TransactCentral is a component-based cash management platform that is designed to be highly customized by the bank’s in-house development staff. This rules-based system is built in Java (J2EE) and can be integrated into a highly complex bank infrastructure. TransactCentral enables financial institutions to offer their corporate customers the business benefits of tracking cash balances, monitoring payments and receivables and performing liquidity management functions.

Transact Remit

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

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

*Settlement Solutions*		*Short Description*
PAYplus for CLS™		A solution designed to allow its members, being the largest international financial institutions, to fully participate in the CLS Bank system.

PAYplus for CLS™

PAYplus for CLS™ is an integrated solution that assists large foreign exchange trading banks in addressing the requirements of the CLS bank. PAYplus for CLS™ provides payments, treasury, reconciliation, interface and systems management controls that assist banks in meeting the necessary requirements. In addition, PAYplus for CLS™ provides such institutions full control and functionality for its foreign exchange trading relationships.

*Securities Solutions*		*Short Description*
TRADEplus™		TRADEplus is a multi-asset, global trade management solution that consolidates and automates a broker/dealer’s middle office operations.

TRADEplus Data Manager		TRADEplus Data Manager audits, controls and manages all of the customer, account and settlement instruction data necessary for institutional trade processing.

TRADEplus Fixed Income		TRADEplus Fixed income provides web based, straight through processing solutions that provides real-time Omgeo and FIX connectivity, as well as automated matching and intelligent routing by business area.

TRADEplus Correspondent Clearing		TRADEplus allows Correspondent Clearing firms to provide superior internet services to their clients.

TRADEplus™

TRADEplus is a multi-asset, global trade management solution that consolidates and automates a broker/dealer’s middle office operations. Its advanced exceptions management capabilities allow users to detect and resolve trade issues in real time. Its rules engine ensures more efficient control and management of transactions across asset classes, offices, central services and clients. Its services oriented architecture provides scalability, simplifies enterprise integration, allows clients to quickly enable new external client and service connections and to automate trade operations for greater efficiency and client service. TRADEplus automates the trade process from the point of execution through booking and notification of settlement, delivering significant operating efficiencies and reducing complexity and costs. With TRADEplus, all trades of all asset classes are integrated through a streamlined and highly visible trade process - providing lower costs and greater control over global operations. With a global, cross-asset process, it is easier to deploy trade process enhancements and global operating procedures - enabling automated environment for today and the flexibility to adapt to business changes that the future will bring. Automation, control and visibility not only reduce cost and risk but also make it easier to provide top-notch client service to your institutional clients.

TRADEplus Data Manager

TRADEplus Data Manager audits, controls and manages all of the customer, account and settlement instruction data necessary for institutional trade processing. Its real-time interfaces automatically access new and changed information from industry sources such as Omgeo ALERT and SWIFT. Its rules-based workflows efficiently covert inconsistent and inaccurate data into a trusted, high-quality source that can be relied upon for trade and back office process automation. In addition, TRADEplus Data Manager enriches trade messages as needed for timely and accurate settlement. With TRADEplus Data Manager, operations become more efficient, compliance requirements are properly addressed and inaccurate/inaccessible reference data issues are eliminated.

TRADEplus Fixed Income

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

TRADEplus Correspondent Clearing

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

*ASP/Outsourcing Solutions*		*Short Description*
Fundtech Connect (ASP) - for PAYplus USA		An Application Service Provider solution that provides the PAYplus solution to banks operating in the United States

Fundtech Connect (ASP) - for CASHplus		An ASP solution that provides the ACCESS solution to banks operating in the United States.

Interbank Gateway Services		An ASP solution that provides payment and settlement solutions to banks in Europe, primarily in Switzerland.

Recovery Services		Disaster recovery and contingency services for users of our products.

Fundtech Connect - PAYplus USA and CASHplus

Fundtech Connect is an ASP solution available for all of our products. This service allows banks to have our solutions reside at our data center rather than requiring the bank to purchase the necessary hardware and software to host the solution in-house.

SWIFT Services

Corporate Connect		Fundtech's service bureau is an efficient way for corporations to connect to their Banks via SWIFT.

Message Converter		A unique middleware solution allows users to convert proprietary messages into SWIFT and other standard messages.

Compliance Filter		The Compliance Filter monitors transaction flow based on the requirements of the OFAC (Office of Foreign Assets Control), Factiva, Worldcheck or other country specific standards.

Corporate Connect

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

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

IGTplus Message Converter

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

IGTplus Compliance Filter

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

Interbank Gateway Services

Interbank Gateway Services is a set of electronic payments and securities application services provided by our service bureau in Switzerland. The Interbank Gateway Services provides a secure and reliable technology infrastructure, which enables financial institutions to initiate, process and support electronic payment transactions across a wide range of settlement systems. The service bureau’s customers are currently predominantly Swiss banks, but we intend to expand this offering into other areas of the world. In addition, we intend to continue expanding the application services offered by the service bureau in an effort to continue offering our bank customers the most complete set of electronic payment and e-commerce solutions available in the market.

Interbank Gateway Services provides its services to smaller financial institutions using the IGTplus software to provide communication to/from S.W.I.F.T., SIC (Swiss Interbank Clearing), SIS (Swiss Securities Clearing) and FIX (Financial Information Exchange) protocol.

Recovery Services - Contingency Processing Centers

Recovery Services - Contingency Processing Centers were developed to respond to the need of our customers for a contingency back-up system for wire transfer operations (in accordance with government regulations). Recovery Services supports all of our U.S.-based product groups and we have centers in Jersey City, New Jersey, San Leandro, California and Norcross, Georgia.

Customers And Markets

Our scaleable products are sold to a wide array of financial institutions and large business enterprises.

The markets for our products consist of the following end-users:

U.S. Banks - This group of customers is divided into three tiers. The top tier consists of approximately 100 banks, each with more than $10 billion of assets. The second tier consists of approximately 3,500 banks, each with over $100 million in assets. The third tier consists of approximately 5,500 small banks, each with less than $100 million of assets.

Agency Banks and Branches of Foreign Banks located in the United States - These banks are located mainly in financial centers such as New York City, San Francisco, Los Angeles and Dallas.

Banks located outside of the United States - These banks are located in countries that have moved to or will move to processing payments on a real time gross settlement (RTGS) basis.

The back office processing in capital markets is complex and costly. For decades the securities industry has continually sought efficiency improvements through greater automation. This trend continues today and is accelerated by the expanding number of new investment vehicles and globalization of the markets. Fundtech sees an opportunity in the securities industry from leveraging its knowledge of back office processing at banks. Process improvements from automated transaction processing, error repair and routing are integral to Fundtech’s banking product line, and can be applied to the securities industry.

Since 2001, we have pursued a strategy of penetrating the top tier of global banks with our PAYplus for CLS™ product offering. The major foreign exchange trading banks worldwide, as well as central banks and regulators supported the creation of the CLS, a global system for providing foreign exchange, or “FX” or settlement services. CLS handles FX trades with a daily value of approximately three trillion U.S. dollars. We have been successful in obtaining a majority of the CLS contracts awarded from 2001 to the present time from banks including, inter alia, Australia and New Zealand Banking Group Ltd., Bank of America, Bank of New York, Citibank, Commerzbank, Deutsche Bank, Dresdner Bank, National Australia Bank, Banco Bilboa Vizcaya Argentaria, ABN Amro Bank and Intesa Sanpaolo SpA. We believe that this significant step forward will help us leverage our technology and offer those banks additional products in the future as evidenced by sales of Global PAYplus™ to three of the “top five” global banks.

In 2001, we entered into an agreement with a leading international financial institution whereby we agreed to license certain of our products, including PAYplus for CLS™ and Global PAYplus™, and perform various consulting and maintenance services in connection with the license of such products. During 2004, we were engaged by another major international financial institution which licensed Global PAYplus™ and retained us to perform product customizations on its behalf. During 2005, we entered into an agreement with a major securities industry entity to license and develop a series of customizations for our TRADEplus software and to host the new software in our Atlanta ASP Center. For the year ended December 31, 2006, the total revenue derived from these bank customers was approximately $20.1 million which represented approximately 24% of our 2006 revenue and the revenue derived from the securities customer was approximately $7.5 million which represented approximately 9% of our 2006 revenue. See Item 5A, “Operating and Financial Review and Prospects —Results of Operations— Major Customers.”

During the period 2003 though 2006, we made significant progress marketing our Global PAYplus software in Europe, which was reflected in agreements for software and services with Bank Cypress, Bank Austria (a member of the HVB Group), Banco Popular Espana and HSBC. In December 2006 and March 2007, we entered into agreements to license faster payments and Euroscheduler versions of Global PAYplus™ with Barclays Bank PLC and to perform services in connection with the licenses. The services are to be provided through a relationship with our alliance partner i-flex Solutions.

Also during 2004, we acquired Datasphere and Cashtech and began the process of assimilating their products and services into our offerings. We acquired Radius Partners in 2005 and have begun to market its solutions through our securities division. Likewise, we acquired Prang in early 2007. Prang has approximately 50 customers, primarily in Germany.

Please see the table that presents our consolidated revenues according to the geographical regions to which such revenues are attributable in Item 5A, “Operating and Financial Review and Prospects —Results — Significant Revenue Information.”

Sales and Marketing

We sell our products and services primarily through our direct sales force. In the past we have relied more heavily on referrals from local distributors or independent marketing representatives. In response to this and other factors, we have grown our sales force to support our direct sales efforts. We have a dedicated sales staff in the United States, United Kingdom, Switzerland, India, and Singapore.

Our marketing efforts include a variety of activities that promote our products and thought leadership including public and industry analyst relations, direct response marketing programs, telemarketing lead generation and lead nurturing, and industry trade shows and conferences. In addition, we receive inquiries about our products directly through our corporate website.

We maintain a working relationship with the Federal Reserve Bank in the United States to ensure that our products meet Federal Reserve requirements. We also maintain a working relationship with S.W.I.F.T., a utility for communication of global financial institutions payment and settlement instructions owned by the largest banks in the world. By ensuring that our solutions are S.W.I.F.T.-compliant, we are well positioned to offer payment and settlement solutions to international banks.

Software Development

We believe that our software development team provides a significant competitive advantage. The team is comprised of developers with experience in visual programming design and object-oriented software development of mission-critical applications. We also believe that this assembly of diverse technical expertise contributes to the highly integrated functionality of our products. Our ability to attract and retain highly qualified employees will be one of the principal determinants of our success in achieving technological leadership. The total software development staff consisted of 134 full-time employees on December 31, 2006. All of our payments products have been developed internally by our product development staff. Our cash management, BBP and securities products were initially developed by the personnel of the businesses we acquired (such personnel migrating to us with the acquired businesses), and have since continued to be developed by our product development staff. Some of these products are embedded, or bundled, with standardized software products developed by other companies. We believe significant investments in product development are required to remain competitive.

To ensure that our products are developed successfully, within their budgets and according to schedule, all of our products are sent through the following four distinct design and testing stages: (1) requirements descriptions are developed through consultation with prospective users to ensure that the product matches the user’s requirements; (2) an internal quality assurance team verifies the integrity of the product at each stage of development prior to beta testing; (3) beta testing data are used to evaluate the functionality of the products and their ability to perform under realistic conditions; and (4) a controlled group of users is polled regularly to identify any modifications that may be necessary. In addition, we work closely with current and potential end-users, our strategic partners and leaders in certain industry segments to identify market needs and define appropriate product requirements. Our employees also participate in numerous user focus groups to review product design. We have software development sites in Georgia, New Jersey, Massachusetts, Israel, Switzerland, India and Germany. We believe that separating development by geographic region allows for development to be in close proximity to the targeted market, while increasing our ability to attract development talent.

Customer Support

We believe that effective customer support in the software industry requires rapid, efficient and comprehensive installation of the product. Upon installation, we strive to provide superior customer support by solving problems quickly and providing customers with consistent, accurate and understandable technical information. We employ test scripts and bank production data to test our solutions and our products are shipped with back-up procedures installed. We recognize that timely solutions are essential for our mission-critical solutions in the event problems do arise. We emphasize responsiveness to our customers’ inquiries and offer telephonic support for the reporting of problems twenty-four hours a day. Customer inquiries range from production problems to user questions and hardware issues. In addition, we utilize remote access services inclusive of virtual private networks, to enhance remote customer support. Certain of our marketing representatives and contractors also provide sales, service and technical support functions for our products to end-users in specific geographic territories.

Proprietary Rights

We rely upon a combination of trademarks, contractual rights, trade secret law, copyrights, nondisclosure agreements and technical measures to establish and protect our proprietary rights in our products and technologies. We also enter into non-disclosure and confidentiality agreements with our customers, employees and marketing representatives and with certain contractors with access to sensitive information. However, we have no registered patents and these measures taken by us may not be adequate to protect our technology from third-party infringement. In addition, our competitors may also independently develop technologies that are substantially equivalent or superior to ours. See the risk factor entitled “We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively” in Item 3C above.

Competition

The industry in which we operate is highly competitive and evolving. Our competitors include, but are not limited to, BankServ, Logica PLC, Digital Insights, Inc., Politzer & Haney, S1 Corporation, Fidelity Information Services, Banklink, TietoEnator, Sunguard, Smartstream Technologies, Transaction Systems Architects Inc., Dovetail, Fiserv, GIFTS Software, and Clear2Pay. Furthermore, several large financial institutions have developed solutions internally which they have then marketed to other banks or implemented in banks that they have acquired. In order to maintain our competitive position, we must differentiate our products from the products of our competitors and successfully develop and introduce new products that meet the changing needs of our clients. See the risk factor entitled “We may not be able to compete successfully in the very competitive markets for our products” in Item 3C above.

C.	Organizational Structure

We are organized under the laws of the State of Israel. We are the parent company of our wholly-owned operating subsidiaries that are specified in the table below.

Name of Subsidiary		Country of Incorporation/Organization
Fundtech Corporation		United States
Fundtech U.K. Limited		United Kingdom
Fundtech Australia Pty Limited		Australia
Fundtech International, LLC		United States
Biveroni Batschelet Partners AG		Switzerland
Datasphere SA		Switzerland
Cashtech Solutions India Private Limited		India
Radius Partners, Inc.		United States
Fundtech Germany, GmbH		Germany
Prang GmbH		Germany

D.	Property, Plants and Equipment.

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

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

ITEM 4A.

UNRESOLVED STAFF COMMENTS

None

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH ITEM 3A “SELECTED FINANCIAL DATA” AND OUR AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. SEE “CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS.”

Overview

Fundtech is a leading provider of end-to-end financial transaction processing software solutions for financial institutions. These solutions are grouped into five broad categories: (i) payment processing and management; (ii) foreign exchange settlement processing, both of (i) and (ii) automating the payment and settlement processes and providing real-time transaction processing capabilities to financial institutions and their customers; (iii) cash management products, used by a bank’s corporate clients for initiating payments, making inquiries and managing their activities with their financial institution; (iv) financial messaging products and services that enable banks to communicate with specialized networks such as the S.W.I.F.T. network; and (v) securities settlement straight through processing products.

We derive our revenues principally from software licensing and from the provision of professional services. Professional services are derived from (i) providing maintenance services with respect to our software, (ii) installation and training services related to the software, (iii) services to enhance or customize the software for particular client needs, inclusive of requirements analysis, (iv) operating hosting service bureaus which process transactions or messages and provide cash management and access to securities settlement services to our clients or which operate client licensed applications on their behalf and (v) providing contingency and recovery services to our clients. See “Critical Accounting Policies” below for a discussion of how we account for these revenues and their associated costs.

The demand for Fundtech products and services is influenced by a number of industry-wide factors:

(i) An increased focus on finding new sources of fee-based income, which currently account for almost half of banks’ revenues. This is largely the result of the increased competitiveness of their lending activities, which has resulted in lower profit margins;

(ii) An ongoing objective to lower operating costs through automation. This has become an even greater issue as new regulations such as the U.S. Patriot Act are requiring banks to perform additional complex analyses that significantly benefit from automation;

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

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

Fundtech’s products offer financial institutions new capabilities that address these major industry factors. Our software products automate transaction procedures and also allow clients of our customers both to initiate transactions and access information over the Internet rather than by contacting the customer’s staff. The server-based architecture of our software also allows cost reductions in comparison to mainframe based applications. The software permits customers to easily change fee parameters and offer new financial products without having to reprogram the software.

PAYplus USA™ is our United States funds transfer solution used to connect a financial institution’s funds transfer room with the Federal Reserve’s FedWire system and with the S.W.I.F.T. system. PAYplus USA™ both reduces payments risk (through real-time updates of account balances by means of an on-line interface with the host computer) and improves customer service (through its comprehensive database containing relevant information about a transfer - from its creation to accounting and memo posting). Our target market for this product includes all banks operating in the United States that do not need a global payment solution. PAYplus USA™ may be licensed or utilized through an ASP outsourcing arrangement where it is operated at our data center on behalf of the customer. We currently have approximately 130 customers operating PAYplus USA™ in a live production environment.

Our Global PAYplus™ software provides institutions with real-time global support of their multi-currency payments activity. Global PAYplus™ employs a client/server funds transfer payment system that supports the local payment processing and risk management and regulatory compliance for local clearing systems as well as worldwide payment activity. Global PAYplus™ supports both UNIX and NT and employs open technology standards. The system features end-to-end security and multi-currency capabilities. Global PAYplus is being marketed to larger multinational banks. It is also being marketed to large financial institutions who wish to use it for low value, bulk payments processing.

Our CASHplus® product, which is our newest Internet-based cash management product, enables corporations to perform sophisticated cash management functions across accounts at multiple branches, in multiple currencies and in multiple countries and regulatory environments. CASHplus® is designed to reduce the cost of delivering remote banking services through universal access and simplified maintenance and distribution of remote software. CASHplus® may be licensed or utilized through our ASP outsourcing arrangement where it is operated at our data center on behalf of the customer. Banks using CASHplus can create unique versions of the software that address the specific needs of the multiple market segments they serve. This feature enables banks to reduce their operating costs by replacing numerous cash management systems with a single platform, as well as to better serve the needs of their customers.

Our Cashtech subsidiary markets its CashIn, CashWeb and TransactCentral cash management software products to financial institutions throughout Southeast Asia. Its multi-currency, Internet-enabled products are highly customizable and we are currently evaluating how best to extend the marketing of these products to new geographies.

PAYplus for CLS™ is an integrated solution that assists large foreign exchange trading banks in addressing the requirements of the CLS bank. PAYplus for CLS™ provides payments, treasury, reconciliation, interface and systems management controls that assist banks in meeting the CLS Bank’s requirements. In addition, PAYplus for CLS™ provides such institutions with full control and functionality for their foreign exchange (“FX”) trading relationships. CLS member banks are the primary customers for this software.

Our BBP subsidiary operates a service bureau in Switzerland providing Interbank Gateway Services, a set of electronic payments and securities application services. Interbank Gateway Services provide secure and reliable technology infrastructure, which enables financial institutions to initiate, process and support electronic payment transactions across a wide range of settlement solutions. The service bureau’s services include connection to the Central Bank of Switzerland for the processing and settlement of bank-to-bank e-payments, the processing and settlement of bank-to-bank Euro-denominated e-payments, electronic trading and settlement of securities transactions through online access SECOM, Switzerland’s securities trading and settlement system and connection to the S.W.I.F.T. network for the processing and settlement of international bank-to-bank e-payments. The IGTplus software utilized to provide these services is also available on a license basis

During the period 2001 to 2003, we restructured in response to market conditions which resulted in a reduction in the total sum of maintenance and services costs, research and development costs (including capitalized development costs), selling and marketing costs and general and administrative costs (together, “Certain Costs”). While Certain Costs declined during 2001 and 2002, they stabilized in 2003. Certain Costs for 2004 increased to $11.6 million, $12.2 million, $12.3 million and $15.3 million in the first, second, third and fourth quarters, respectively. Certain Costs for 2005 increased to $15.5 million, $16.0 million, $16.5 million and $16.5 million in the first, second, third and forth quarters, respectively. Certain Costs for 2006 increased to $17.8 million, $19.5 million, $19.3 million and $20.1 million in the first, second, third and fourth quarter, respectively. These increases in Certain Costs were necessitated by our improving revenues during this same period. During 2007, Certain Costs are expected to rise as we add staff, necessitated by our improving revenue as well as by the continuing increase in projects involving a significant services component.

We are currently marketing new products which have been developed since 2001, particularly Global PAY plus and CASHplus. During 2004, we continued to heavily market these products and have seen a corresponding increase in both revenues and backlogs (signed contracts for which the software has not yet been fully delivered and/or ASP contracts which are “pre-production” and not yet operational). Our development focus with respect to these products is now on upgrades to add new functionality, new interfaces to the products and performance enhancements in conjunction with out customer implementations.

While we note that although spending on technology in the financial services industry increased during the period 2004 through 2006, and is expected to continue to grow in 2007, it is difficult to predict if this trend will continue as well as the extent of the impact that it may have on our future revenues or results of operations. Notwithstanding this increase in spending, we have seen and expect to see a significant percentage of spending on maintaining and upgrading so-called “legacy systems” that are currently in place with our customers, or internally developed “in-house” solutions rather than on the acquisition of new externally developed systems such as those we market.

Acquisition of Businesses and Certain Assets

In August of 2004, BBP completed the acquisition of Datasphere SA from its shareholders. Datasphere provides software linking IBM systems to the S.W.I.F.T. alliance platform and also provides consulting services to financial institutions related to their clearing and settlement requirements. The cash consideration of $1 million was paid from our working capital.

In November 2004, we acquired all outstanding shares of India-based Cashtech Solutions India Private Limited (“Cashtech”), a leading provider of cash management software and services throughout Southeast Asia for an aggregate purchase price of approximately $3.8 million. Cashtech’s products are targeted at large banks that seek highly customized applications and prefer a component-based approach in order to integrate with their complex infrastructure. Cashtech has sales offices in Singapore and Tokyo.

The acquisition of Cashtech enhanced our cash management product line with products that are well suited for non-US markets, as well as extending our geographic coverage into the Asia Pacific market.

Under the terms of the acquisition agreement, we will pay an additional amount of up to $3.7 million in cash over the subsequent three years, contingent upon the financial performance of Cashtech. We paid additional amounts of $991,000 in 2005 and $126,000 in 2006 based on achieved performance milestones, of which $697,000 was accounted for in 2005 and $126,000 accounted for in 2006, and capitalized additional acquisitions costs of $62,000 in 2005. A further payment of $1,130,000 was made in 2006 based on Cashtech’s financial performance, which was already accounted for in 2005. We also expect to make a payment of $1,004,000 in 2007 based on Cashtech’s financial performance, which was already accounted for in 2006.

In October of 2005, we acquired all of the outstanding shares of Radius Partners, Inc. (“Radius”). The purchase price was $1.75 million of which $1.5 million was paid in cash and $250,000 was paid in the form of forgiveness of prepaid fees (“Initial Consideration”). Of the $1.5 million cash consideration $1.25 million was paid at the closing and an additional $250,000 was paid 60 days after the closing date. Additional cash consideration will be paid if and when certain conditions are met between the acquisition date and December 31, 2011, which may amount to an additional $3 million payable. During 2006, payments of $220,000 were made based on and for 2005, and we anticipate that payments will be made in 2007 in the amount of $200,000 based on and for 2006.

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

Critical Accounting Policies

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

We believe that application of the following critical accounting policies entails the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Revenues. Our revenues are generated from licensing the rights to use our software products directly to end-users, sales of professional services, including consulting, implementation and training. We also provide hosting services, contingency and recovery services, as well as maintenance and sales of hardware.

Revenue from software license agreements are recognized when all criteria outlined in Statement of Position (SOP) 97-2 “Software Revenue Recognition” (as amended) (“SOP 97-2”) are met. Therefore, revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable.

Where software arrangements involve multiple elements, revenue is allocated to each element based on vendor specific objective evidence (“VSOE”) of the relative fair values of each element in the arrangement. Our VSOE used to allocate the sales price to services and maintenance is based on the price charged when these elements are sold separately.

We usually provide a warranty period to our customers of up to three months at no extra charge. As of December 31, 2006 and 2005, the provision for warranty cost is immaterial.

Revenue from software licenses that require significant customization, integration and installation are recognized based on SOP 81-1 “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” using contract accounting on the percentage-of-completion method, based on the relationship of actual labor costs incurred, to total labor costs estimated to be incurred over the duration of the contract. In recognizing revenues based on the percentage-of-completion method, we estimate time to completion with revisions to estimates reflected in the period in which changes become known. If we do not accurately estimate the resources required or the scope of work to be performed, or do not manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, then future services margins may be significantly and negatively affected or losses on existing contracts may need to be recognized.

Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential, revenue under the arrangement is recognized using contract accounting. When services are not considered essential, the revenue allocable to the software services is recognized as the services are performed.

Revenue from maintenance is recognized over the life of the maintenance agreement.

Receivables. Our trade receivables primarily include amounts due from banks and large financial institutions. An allowance for doubtful accounts is determined for those specific amounts that we believe are not likely to be collected. We perform ongoing credit evaluations of our customers and in judging the probability of collection of receivables we continuously monitor collection and payments from our customers and maintain a provision for any specific customer collection issues that we have identified. For some customers, typically those with whom we have long-term relationships, we may grant extended payment terms. If the financial situation of any of our customers were to deteriorate, resulting in an impairment of their ability to pay the indebtedness they incur with us, an additional provision for doubtful accounts might be required.

Software Capitalization. SFAS No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on our product development process, technological feasibility is established upon completion of a detailed program design.

Our costs incurred between completion of the detailed program design for the Global PAYplus™ product and the point at which the product was ready for general release has been capitalized. As of December 31, 2001, we capitalized development costs totaling $7,876,000 in aggregate. In 2002 we started amortizing the capitalized development costs and we did not capitalize any additional development costs. The 2004, 2005 and 2006 amortization costs relating to the capitalized development costs totaled $1,575,000 for each year.

Long-Lived Assets. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

significant decrease in the market price of a long-lived asset or asset group;

significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition;

significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an adverse action or assessment by a regulator;

accumulation of costs significantly in excess of the amount originally expected for the acquisition of a long-lived asset or asset group;

current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; and

current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

We determine the recoverability of long-lived assets based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. This estimation process is highly subjective and involves significant management judgment. Determination of impairment loss from long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

Valuation of Goodwill. We assess the impairment of goodwill on an annual basis, and potentially more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

significant underperformance relative to expected historical or projected future operating results;

significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and

significant negative industry or economic trends.

When we determine that the carrying value of goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure this impairment based on a projected discounted cash flow. We did not record an impairment charge based on our reviews in 2005 and 2006. If our estimates or the related assumptions change in the future, we may be required to record impairment charge on goodwill to reduce its carrying amount to its estimated fair value.

Share Based Payments. In December 2004, the FASB issued SFAS No. 123 (revised 2004) “Share Based Payments” (“SFAS 123R”). This Statement is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, which supersedes APB Opinion No. 25, “Accounting for Stock Issued Employees” and its authoritative interpretations.

SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services; focuses primarily on accounting for transactions in which an entity obtains employee and director services in share-based payment transactions; and does not change the accounting guidance for share-based payment transactions with parties other than employees.

SFAS 123R eliminates the alternative to use APB 25's intrinsic value method of accounting that was provided in SFAS 123 as originally issued and requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The fair-value-based method in this Statement is similar to the fair-value-based method in SFAS 123 in most respects. The costs associated with the awards will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period).

The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.

The provisions of SFAS 123R apply to all awards which will vest after January 1, 2006 and to awards modified, repurchased, or cancelled after that date. When initially applying the provisions of SFAS 123R, in the first quarter of 2006, we elected to use the “modified prospective method”. Under the modified prospective method, we was required to recognize compensation cost for all awards granted after the adoption of SFAS 123R and for the unvested portion of previously granted awards that are outstanding on that date.

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

A.	Operating Results

The following table sets forth for the periods indicated the percentage of revenues represented by each of the items in our statement of operations:

	Year Ended December 31,
	2004			2005			2006
Revenues:
Software license fees		28.0	%		22.2	%		15.9	%
Maintenance and service fees		71.5			77.7			84.0
Hardware sales		0.5			0.1			0.1
Total revenues		100.0			100.0			100.0

Operating Expenses:
Software license costs		1.1			0.7			0.7
Maintenance and service costs		39.3			40.2			40.6
Hardware Costs		0.5			0.1			0.1
Research and development		19.1			18.1			19.5
Selling and marketing, net		19.1			17.8			18.4
General and administrative		12.4			12.8			13.7
Amortization of capitalized software development costs		2.7			2.1			1.8
Amortization of other acquired intangible assets		1.7			1.6			1.5
Provision for doubtful accounts		0.5			0.7			0.5


Total operating expenses		96.2			94.1			96.8
Operating income (loss)		3.8			5.9			3.2

Financial income, net		1.2			1.5			2.3
Income before income taxes		5.0			7.4			5.5
Income taxes		0.8			1.6			1.1
Net income		4.2	%		5.8	%		4.4	%

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

Significant Revenue, Segment and Earnings Information

The following table presents our consolidated revenues (in thousands) according to the geographical regions to which such revenues are attributable:

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

Segment Information:

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

Segment Information (in thousands):

While cash management revenues continued to grow from 2004 to 2006, operating income has been adversely impacted by the costs associated with the launch of the new CASHplus product. Payments revenues and operating income are primarily related to strong sales and installations of PAYplus USA and Global PAYplus leading to both increased license fees and services revenues. BBP revenue and operating income have steadily increased due to the implementation of IGTplus. License and services fee trends are discussed more fully in the year to year comparisons below.

Major Customers

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

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

Revenues.

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

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

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

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

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

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

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

The increase in fees primarily related to (i) increases in maintenance fees payable for newly installed banks of $2.3 million; (ii) increases in the fees related to customizations and product installations, particularly with respect to three major clients, that totaled $8.9 million; and (ii) and increases in hosting fees totaling $2.9 million.

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

Software License Costs. Software license costs consist primarily of royalty payments and other costs related to product media, duplication, manuals, shipping and third party embedded software costs. A comparison between our 2005 and 2006 software license costs is as follows:

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

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

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

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

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

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

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

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

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

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

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

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

Software Development. Software development expenses are related to the development of new products, enhancement of existing products and testing of products. A comparison between our 2005 and 2006 software development expenses is as follows:

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

We did not capitalize any software development costs in 2006 or 2005 since the time period during which costs could have been capitalized from the point of technological feasibility until the time of general product release was very short. These costs were expensed as incurred as the amounts that could have been capitalized were not material to our financial position. The increase in costs is primarily due to the addition in staff in the United States and Israel to handle change orders for our major clients, and to enhance our Global PAYplus product, staff added in the United States to handle enhancements to our cash management software and projects as well as Cashtech staff added to accommodate their revenue growth. The implementation of FASB 123R in 2006 accounted for $152,000.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Revenues.

					Variance
	2004		2005		Increase		%
Total Revenues	$	58,537,000	$	74,466,000	$	15,929,000		27.2	%

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

Software License Fees. Software license fees consist of revenues derived from software license agreements we enter into with our customers. A comparison between our 2004 and 2005 software license fees is as follows:

					Variance
	2004		2005		Increase		%
Software License Fees	$	16,395,000	$	16,523,000	$	128,000		0.8	%

Our revenue growth was primarily related to project work for our three major clients. In addition, we have noted a shift in sales of our CASHplus product that indicates a trend away for licensing and toward hosting services. For this reason, the growth in software license fees was not proportional to the growth in revenues. See also Maintenance and Services Fees immediately below.

Maintenance and Services Fees. Maintenance and services fees include revenues derived from maintenance contracts, customizations and product installation, training, hosting, and consulting fees. We generally receive a contract for maintenance and services at the time a contract for software license is entered into. A comparison between our 2004 and 2005 maintenance and services fees is as follows:

					Variance
	2004		2005		Increase		%
Maintenance and Services Fees	$	41,827,000	$	57,849,000	$	16,022,000		38.3	%

The increase in fees primarily relates to (i) increases in maintenance fees payable for newly installed banks of $3.2 million; (ii) increases in the fees related to customizations and product installations, particularly with respect to three major clients, which totaled $10.4 million; and (iii) increases in hosting fees totaling $2.5 million.

Hardware Sales. Hardware sales consist of the reselling of third-party hardware in connection with the licensing and installation of our software. A comparison between our 2004 and 2005 hardware sales is as follows:

					Variance
	2004		2005		Decrease			%
Hardware Sales	$	315,000	$	94,000		($221,000	)		(70	%)

We continue to de-emphasize sales of hardware to our customers. Much of the hardware upon which our products run can be obtained directly from the manufacturer rendering the margins on this brokering activity unattractive. The decrease in hardware sales was attributable to a decrease in the number of transactions in which our customers also purchased hardware through us.

					Variance
	2004		2005		Decrease			%
Software License Costs	$	626,000	$	522,000		($104,000	)		(16.6	%)

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

Amortization of Capitalized Software Development Costs. A comparison between our 2004 and 2005 amortization of capitalized software development costs is as follows:

					Variance
	2004		2005		Decrease			%
Amortization of Capitalized Software Development Costs	$	1,576,000	$	1,575,000		($1,000	)		(0.1	%)

This reflects the amortized capitalized software development costs in connection with our Global PAYplus product. The variance was not significant.

Amortization of Other Acquired Intangible Assets. A comparison between our 2004 and 2005 amortization of other acquired intangible assets is as follows:

					Variance
	2004		2005		Increase		%
Amortization of Other Acquired Intangible Assets	$	966,000	$	1,154,000	$	188,000		19.5	%

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

Maintenance and Services Costs. Maintenance and services costs consist primarily of personnel and related expenses, voice and data expenses and other costs related to the provision of maintenance, hosting and professional services. A comparison between our 2004 and 2005 services costs is as follows:

					Variance
	2004		2005		Increase		%
Maintenance and Services Costs	$	23,001,000	$	29,947,000	$	6,946,000		30.2	%

Maintenance costs increased by $478,000, directly related to the impact of additional staffing required to handle a $3.2 million increase in maintenance revenues. Services costs increased by $6.1 million, primarily related to the number personnel assigned to Global PAYplus and securities projects. Hosting costs were flat, as (i) costs had been incurred in previously years which related to current year revenues and (ii) we achieved economies of scale relevant to the number of hosted customers. Others services costs increased by $411,000 for reimbursable expenses billed to the client.

Hardware Costs. Hardware costs consist primarily of our cost of computer hardware resold to our customers. A comparison between our 2004 and 2005 hardware costs is as follows:

					Variance
	2004		2005		Decrease			%
Hardware Costs	$	266,000	$	80,000		($186,000	)		(69.9	%)

The reduction in costs is commensurate with the decrease in hardware sales previously noted.

Software Development. Software development expenses are related to the development of new products, enhancement of existing products and testing of products. A comparison between our 2004 and 2005 software development expenses is as follows:

					Variance
	2004		2005		Increase		%
Software Development	$	11,171,000	$	13,480,000	$	2,309,000		20.7	%

We did not capitalize any software development costs in 2005 or 2004 since the time period during which costs could have been capitalized from the point of technological feasibility until the time of general product release was very short and consequently these costs were expensed as incurred as the amounts that could have been capitalized were not material to our financial position. The increase in costs was primarily due to the addition in staff in the United States and Israel to handle change orders for our major clients, staff added in the United States to handle enhancements to our securities software and projects as well as Cashtech staff added to accommodate their revenue growth.

Selling and Marketing. A comparison between our 2004 and 2005 selling and marketing expenses is as follows:

					Variance
	2004		2005		Increase		%
Selling and Marketing	$	11,193,000	$	13,182,000	$	1,939,000		17.8	%

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

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

					Variance
	2004		2005		Increase		%
Provision for Doubtful Accounts	$	269,000	$	552,000	$	283,000		105.2	%

The increase in the provision for doubtful accounts reflects greater customer specific provisions in 2005 coupled with the settlement of previously accrued matters resulting in the accounts no longer being deemed doubtful of collection

General and Administrative. A comparison between our 2004 and 2005 general and administrative expenses is as follows:

					Variance
	2004		2005		Increase		%
General and Administrative	$	7,254,000	$	9,557,000	$	2,303,000		31.7	%

This increase is due to increased staff costs in the U.S., Israel, India, and Switzerland.

Financial Income, Net. A comparison between our 2004 and 2005 financial income, net is as follows:

					Variance
	2004		2005		Increase		%
Financial Income, net	$	727,000	$	1,085,000	$	358,000		49.2	%

The increase of the net financial income is primarily due to an increase in our cash of $3.0 million and the increasing interest that was earned on our cash, cash equivalents and marketable securities.

Income Taxes. A comparison between our 2004 and 2005 income taxes is as follows:

					Variance
	2004		2005		Increase		%
Income Taxes	$	475,000	$	1,166,000	$	691,000		145.5	%

Increasing profits in India coupled with continued profitability of our Swiss subsidiary resulted in an increased tax liability.

B.	Liquidity and Capital Resources.

We have financed our operations primarily through the sale of equity securities in the amount of approximately $139.7 million including net proceeds from our 1998 initial public offering in the amount of approximately $29.0 million, proceeds from our follow-on 1999 public offering in the amount of approximately $92.3 million and grants from the Government of Israel, Office of the Chief Scientist to fund new product development. In addition, we raised $1,490,000 from the exercise of employee options in 2006. As of December 31, 2006, working capital was $54.8 million, which included cash and cash equivalents, short term deposits and marketable securities of $47.2 million. Working capital has not increased from December 31, 2005 primarily due to cash utilized in acquisitions.

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

Cash flows from investing activities. Net cash used in investing activities amounted to $6.2 million for the year ended December 31, 2006 as compared to $3.3 million for the year ended December 31, 2005. During the year ended December 31, 2006, we invested $1.4 million to pay additional amounts as per the terms of the acquisition agreements with Radius Partners and Cashtech. Purchases of property and equipment decreased $0.2 million to $5.2 million for the year ended December 31, 2006 from $5.4 million for the year ended December 31, 2005. We believe our capital expenditure program is sufficient to maintain our current level and quality of operations. We review our capital expenditures program periodically and modify it as required to meet current needs. For 2007, our anticipated capital expenditures are $7.8 million - See Item 4A.

Cash flows from financing activities. Net cash used in financing activities was $1.8 million for the year ended December 31, 2006 as compared to net cash provided by financing activities of $1.4 million for the year ended December 31, 2005. The decrease was primarily due to the purchase of Ordinary Shares in the amount of $3.3 million as noted below, offset in part by proceeds from the exercise of stock options.

On February 21, 2002, the Company’s Board of Directors authorized the purchase of up to one million of our Ordinary Shares from time to time on the open market. By December 31, 2003, the Company had purchased a total of 21,500 shares. No shares were purchased during 2004 and 2005. On June 4, 2006, the Company’s Board of Directors authorized the Company to utilize up to $20 million to purchase Ordinary Shares from time to time on the open market. By June 13, 2007, the Company had purchased a total of 320,883 shares at a cost of $3.3 million.

We believe that cash and cash equivalents and marketable securities will provide adequate financial resources to finance our current and planned future operations for at least the next 12 months. However, in the event that we make one or more acquisitions for consideration consisting of all or a substantial part of our available cash, we might be required to seek external debt or equity financing for such acquisition or acquisitions or to fund subsequent operations.

Effective Corporate Tax Rate

Our development facility in Israel has been granted “Approved Enterprise” status under Israel’s Law for the Encouragement of Capital Investments. We have derived, and expect to continue to derive, a portion of our income from Approved Enterprise investments. The Company has elected the alternative benefits program, which provides for a waiver of grants in return for tax exemptions. Pursuant thereto, the income of the Company derived from the Approved Enterprise program is tax-exempt for two years commencing with the year it first earns taxable income relating to each expansion program, and subject to Israeli corporate taxes at the reduced rate of 10% to 25%, for an additional eight years.

We completed our investment in accordance with its initial approval enterprise program on November 27, 1997. Income derived from this program was tax exempt for two years commencing in 1998 and will be subject to the reduced tax rates for eight years ending in 2005 (subject to an adjustment based upon the foreign investors’ ownership in us). In 1998, we received approval for our first expansion program. In 2000, we received approval for our second expansion program and in July 2004 we received approval for our third expansion program. Income derived from the expansion programs will be tax-exempt for a period of two years and will be subject to a reduced tax rate, as mentioned above, for an additional period of eight years. The period of benefits for these programs has not yet commenced since no income has been derived from the programs. The period of tax benefits detailed above is subject to limits of 12 years from the year of commencement of production, or 14 years from the date of granting the approval, whichever is earlier. See “Note 14b - Income Taxes” for additional information.

At December 31, 2006, we had net operating loss (“NOL”) carryforwards of approximately $44.0 million and $32.6 million in the United States and in Israel, respectively. The U.S. NOL carryforwards begin to expire in 2010 through 2025 and the Israeli NOL carryforwards have no expiration. See Note 12 to the Consolidated Financial Statements.

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

During 2006, $16.7 million in current expense charges was made related to the development of our software with no capitalized costs. During 2005 and 2004, $11.2 million and $13.5 million, respectively, in current expense charges were made with no capitalized costs for our software. There were no Office of the Chief Scientist grants in 2004, 2005 or 2006.

D.	Trend Information.

Our trends are disclosed above in the Overview of this Item 5, “Operating and Financial Review and Prospects”.

E.	Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

F.	Tabular Disclosure of Contractual Obligations

The following table of our material contractual obligations as of December 31, 2006, summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated:

			Payments Due by Period (in thousands)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating leases	$	10,041	$	2,878	$	4,280	$	1,424	$	1,459

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

A.	Directors and Senior Management.

The following table lists the names and ages of the current directors and executive officers:

NAME	AGE	POSITION
Gideon Argov	50	Chairman of the Board of Directors
Reuven Ben Menachem	46	Chief Executive Officer, Director
Tsvi Gal	47	Director
Yaffa Krindel	52	Director
Stanley Stern	50	Director
Gil Weiser	65	Director
Ben-Zion Zilberfarb	57	Director
Joseph J. Aulenti	61	Executive Vice President, General Counsel and Secretary
Yoram Bibring	49	Executive Vice President, Chief Financial Officer
Joseph P. Mazzetti	66	Executive Vice President, Corporate Development
Michael Sgroe	51	President & Chief Operating Officer

Gideon Argov was elected Chairman of the Board of Directors in July 2003. Mr. Argov is currently serving as the President and Chief Executive Officer of Entegris, Inc., a materials integrity management leader in high technology. From 2001 to November 2004, he was the Managing Director, Operations of Parthenon Capital, a private equity partnership based in Boston, Massachusetts. Prior to joining Parthenon Capital, between 1991 and 2000, Mr. Argov served as Chairman, CEO and President of Kollmorgen Corporation, a global leader in industrial automation specializing in electronic motion control and servo systems, located in Waltham, Massachusetts. Presently, he serves on the boards of Entegris, Inc., Interline Brands, Inc. and X-Rite Inc. Mr. Argov has earned an M.B.A. from Stanford University, as well as a B.A. in Economics from Harvard University.

Reuven Ben Menachem, a co-founder of Fundtech, has served as the Chief Executive Officer and as a director of the Company since its inception in April 1993. He served as Chairman of the Board of Directors of the Company from August 1998 to July 2003. Before founding the Company, Mr. Ben Menachem was employed at Logica Data Architects, a funds transfer software provider located in Waltham, Massachusetts from 1986 until 1992, most recently as a Technical Director and a Product Manager. From January 1984 until June 1986, Mr. Ben Menachem served as Director of Banking Systems at Manof Communications Systems, a middleware software provider located in Tel Aviv, Israel. Prior to joining Manof, Mr. Ben Menachem served as a senior programmer/analyst in the Israeli Air Force.

Yaffa Krindel has served as a director since February 2004. She is currently serving as a partner in the Herzlia, Israel office of STAR Ventures, a private venture capital partnership headquartered in Munich, Germany. Ms. Krindel joined Star in 1997 as the managing partner of STAR Ventures in Israel. Before joining STAR Ventures, between 1992 and 1996, Ms. Krindel served as CFO and VP Finance of Lannet Data Communications Ltd., then a publicly traded company on NASDAQ (now part of Avaya Inc. - NYSE: AV), a leader in data communication systems for the enterprise market, then located in Tel Aviv. From 1993 to 1997 she served as CFO and director of BreezeCOM Ltd. (now part of Alvarion Ltd. - NASDAQ: ALVR), a premier provider of solutions based on Point-to-Multipoint (PMP) Broadband Wireless Access headquartered in Tel Aviv. Prior to joining Lannet, Ms. Krindel held several executive positions in companies and banks in Israel. Ms. Krindel currently serves on the board of Syneron Medical, a publicly traded company (ELOS) and on the boards of the following private companies: Siano Mobile Silicon Inc., OrSense Ltd., Trivnet Inc., Negevtech Ltd. and Broadlight Incorporated. Ms. Krindel has earned an M.B.A. from Tel Aviv University and a B.A. in Economics and Japanese Studies from the Hebrew University in Jerusalem.

Stanley Stern has served as a director of Fundtech since July 2003. Since 2004, Mr. Stern has served as Head of Investment Banking of Oppenheimer & Co. Inc. in New York, New York. Prior to joining Oppenheimer & Co. Inc., Mr. Stern served as the Head of Investment Banking of C.E. Unterberg, Towbin in New York, New York from 2002 to 2004. Prior to joining C.E. Unterberg, Towbin, from 2000 to 2003, Mr. Stern served as Managing Director of the U.S.A. and a member of the Board of Directors and Investment Committee for STI Ventures, a global venture capital firm. From 1981 to 2000, he was a partner with Oppenheimer & Co., Inc. and CIBC/Oppenheimer in a number of roles including Head of Technology Investment Banking. He serves as Chairman of the board of Tucows, Inc. Mr. Stern has earned degrees from Harvard University Graduate School of Business and City University of New York.

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

Currently Serving External Directors under the Companies Law

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

Ben-Zion Zilberfarb has served as an external director since his election to the Board of Directors in January 2002. Dr. Zilberfarb has served as a Professor of Economics since 1988 and head of the A. Meir Center for Banking since the fall of 2000, at Bar-Ilan University located in Ramat-Gan, Israel. He is Edmond de Rothschild Professor of Global Asset Management at Netanya Academic College, Israel. Dr. Zilberfarb also served as the Director General of the Ministry of Finance from March 1998 until July 1999 and as Chairman of the Board of Euro-Trade Bank from March 2000 until April 2001. Dr. Zilberfarb has served on various government committees since 1982, including most recently, as a member of the committee to privatize El Al Airlines, and as a member of the U.S. Israel Bi-national Science Foundation. From January 1989 until February 1998, Dr. Zilberfarb served as the Chairman of the Investment Committee of Bank Leumi Provident Funds, a mutual fund located in Tel Aviv, Israel and as a consultant to several other financial institutions and several government and regulatory authorities including the Israel Securities Authority and the Bank of Israel. Dr. Zilberfarb served as Chairman of the Board of Directors of Karnit Insurance Co. from 1998 until 2002. Recently, he had been on the Board of Directors of Partner Communications and chairman of the investment committee of Clal Gemel (provident funds and study funds of Clal Insurance Company). Presently he is on the Board of Israel Discount Bank, Brimag Digital Age, and Deleq Co. Dr. Zilberfarb has earned a Ph.D. in Economics from the University of Pennsylvania and both an M.A. and a B.A. in Economics from Bar-Ilan University.

Senior Management

Joseph Aulenti was appointed General Counsel and Secretary of Fundtech on October 1, 2002 and named Executive Vice President in February, 2007. Mr. Aulenti previously served as Associate General Counsel since joining Fundtech in August 2001. Prior to joining Fundtech, Mr. Aulenti was engaged in private practice representing IT companies from October 2000 until August 2001. From May 1995 until October 2000, Mr. Aulenti served as Senior Vice President and Chief Legal Officer of Century Technology Group, Inc., a privately held technology solutions provider located in Falls Church, Virginia. From 1991 to 1995, Mr. Aulenti served as Senior Vice President - Group Counsel of Fiserv, Inc., a leading provider of banking technology solutions located in Milwaukee, Wisconsin. Mr. Aulenti was Senior Vice President and General Counsel of Citicorp Information Resources, Inc., a leading financial IT solutions provider located in Stamford, Connecticut from January 1986 until it was acquired by Fiserv in June 1991. Mr. Aulenti graduated from the Catholic University of America with a B.A., holds a M.Sc. from the University of Bridgeport and a J.D. from Fordham University.

Yoram Bibring has served as Executive Vice President and Chief Financial Officer since joining Fundtech in September 2001. Prior to joining Fundtech, Mr. Bibring served from April 1999 until May 2001 as Chief Financial Officer of ViryaNet, a provider of software solutions to the workforce management market, located in Southborough, Massachusetts. From November 1998 until April 1999, Mr. Bibring served as a Financial Consultant for ViryaNet and others. Prior to joining ViryaNet, Mr. Bibring served from February 1998 until November 1998 as Chief Financial Officer of Americash, Inc., a leading operator of e-cash platforms located in New York, New York, which was sold to American Express. Prior to joining Americash, from January 1990 until January 1998, Mr. Bibring was employed by Geotek Communications, a wireless communications service provider located in Montvale, New Jersey, where he served initially as Chief Financial Officer and then as the President of its International Division. Mr. Bibring’s financial career also includes several years in public accounting in Israel and the United States. He holds a B.A. in Accounting and Economics from Tel-Aviv University and is a certified public accountant in both Israel and the United States.

Joseph P. Mazzetti joined Fundtech in November 1994 and is currently serving as Executive Vice President Corporate Development. Prior to joining Fundtech, Mr. Mazzetti was employed from 1992 to 1994 as an Executive Vice President at PRT Corp., a software consulting company located in New York City. From 1984 to 1992, Mr. Mazzetti was employed at Logica Data Architects, a global consulting and systems integration firm located in Waltham, Massachusetts, where he held the position of Executive Vice President of the Financial Products Group with responsibility for the funds transfer, message switching and asset/liability product lines. Mr. Mazzetti has more than 30 years of experience in IT in the public and private sectors with concentration in the banking and financial institutions market. Mr. Mazzetti holds a M.Sc. in Industrial Engineering from Stevens Institute of Technology and a B.S. in Physics from Georgetown University.

Michael Sgroe has served as President and Chief Operating Officer of Fundtech since April 2004. Prior to that time Mr. Sgroe held positions as Chief Operating Officer, President of U.S. Products & Operations and Senior Vice President and General Manager of the U.S. Payments Division since joining Fundtech in May 2000. Before joining Fundtech, Mr. Sgroe was employed for over 16 years at Chase Manhattan Bank, where he served as Vice President with responsibility for developing and deploying high-performance solutions for the bank’s Payments and Cash Management businesses. During this period, Mr. Sgroe also served as Chief Information Officer and Vice President of Technology and Operations for the e-Procurement solutions provider Metiom, an e-commerce start-up with an equity ownership position held by Chase Manhattan Bank. Mr. Sgroe began his career in 1979 at Morgan Guaranty Trust, where he held assignments both in New York and in London. Mr. Sgroe holds a B.A. in Anthropology from the City University of New York.

B.	Compensation.

We have entered into an employment agreement with Reuven Ben Menachem, which provides for annual review of his compensation by the Compensation Committee and Board of Directors. Mr. Ben Menachem’s compensation as a director of the Company is also subject to shareholder approval. Mr. Ben Menachem’s agreement also provides for a notification period in the event the agreement is terminated without cause and a severance payment in the event the agreement is terminated subsequent to a change of control.

The aggregate remuneration we paid for the year ended December 31, 2006 to our directors and executive officers as a group was $2,574,290 in salaries and bonuses, inclusive of the retainer payments to directors as described below. In addition, certain officers are provided a car allowance that totaled $54,177 for 2006. There were no amounts set aside or accrued to provide for pension, retirement or similar benefits to our directors and executive officers.

In December of 2005, the shareholders approved payment of an annual retainer of $25,000 to non-employee directors for future annual periods, beginning January 1, 2006, payable on a quarterly basis of $6,250 per quarter, provided that any such quarterly payment for any non-employee director shall be contingent upon such director participating in 75% or more of the Board of Directors and committees meetings (in which such non-employee director is a member) held during such quarter. In addition, shareholders approved that the Chairman of the Board of Directors shall be entitled to an additional annual payment of $25,000, payable on a quarterly basis of $6,250 per quarter, and the Chairman of the Audit Committee of the Board of Directors (provided that such Chairman is not an external director under the Companies Law) shall be entitled to an additional annual payment of $5,000 payable on a quarterly basis of $1,250 per quarter, provided that any such quarterly payment(s) for any non-employee director shall be contingent upon such director participating in 75% or more of the Board of Directors and committees meetings (in which such non-employee director is a member) held during such quarter.

All directors are reimbursed for their reasonable expenses for each Board of Directors meeting attended. For our external directors, such reimbursement is made in accordance with the applicable provisions of the Companies Law. For additional information, please see the discussion set forth under “External Directors,” in subsection C of this Item 6.

Directors Compensation

The sole compensation paid directors for attending meetings of the Board of Directors or committee meetings of the Board of Directors is the retainer described above. We also reimburse directors for their reasonable travel expenses. Subject to shareholder approval for each of the proposed grants, directors also receive options to purchase Ordinary Shares or restricted share grants as noted below.

Option or Restricted Share Grants in Last Fiscal Year

During 2006, no options to purchase Ordinary Shares in aggregate were granted to our executive officers. Grants of restricted stock totaling 99,500 were made to our directors and executive officers under the terms of the 2005 International Share Option and Restricted Share Incentive Plan and the 2005 Israeli Share Option and Restricted Share Incentive Plan (the “2005 Plans”). Director shares vest quarterly over a one-year period, and executive management shares vest semi-annually over a three-year term. The share price on the grant date for the director shares was $11.85 per share. The share price on the grant date for the executive management shares was $11.85 per share.

C.	Board Practices.

The following table sets forth certain information concerning our current directors and executive officers:

Name	Current Office(s) Held	Commencement of Office	Termination/Renewal Date of Office
Gideon Argov (2)(5)	Chairman	July 22, 2003	2006 Annual Meeting
Reuven Ben Menachem	Chief Executive Officer, Director	October 28, 2002	2006 Annual Meeting
Stanley Stern (2)(3)	Director	July 22, 2003	2006 Annual Meeting
Yaffa Krindel (2)(4)	Director	February 12, 2004	2006 Annual Meeting
Gil Weiser (2)(4)(5)	Director	October 28, 2002	2006 Annual Meeting
Tsvi Gal (1)(2)(3)(5)(6)	Director	December 14, 2006	2009 Annual Meeting
Ben-Zion Zilberfarb (1)(2)(3)(4)(7)	Director	January 31, 2002	2007 Annual Meeting
Joseph Aulenti	Executive Vice President, General Counsel and Secretary	October 1, 2002	Not Applicable
Yoram Bibring	Executive Vice President, Chief Financial Officer	September 6, 2001	Not Applicable
Joseph P. Mazzetti	Executive Vice President, Corporate Development	June 1, 2001	Not Applicable
Michael Sgroe	President & Chief Operating Officer	June 1, 2001	Not Applicable

(1) External Director under the Companies Law.

(2) NASDAQ Independent Director.

(3) Member of the Audit Committee.

(4) Member of the Compensation Committee.

(5) Member of the Nominating Committee.

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

(7) Mr. Zilberfarb was elected for a second three year term as an external director on December 21, 2004.

Our Articles of Association (the “Articles of Association”), provide that, unless otherwise resolved by a resolution of the General Meeting, our Board of Directors shall consist of not less than five and not more than seven directors. Officers serve at the discretion of the Board of Directors.

Prior to every annual meeting, the Board of Directors selects a panel of between five and seven persons to be proposed to the shareholders of Fundtech for election as directors. Such individuals, if elected, serve as directors until the next annual meeting. The above does not apply to the nomination of “external” directors under the Companies Law, as explained below. Except for such nominees, no panel of candidates for a directorship may be proposed at an annual meeting unless shareholders holding at least 10% of our issued and outstanding shares who are entitled to attend and vote at a meeting deliver to Fundtech a proper notice in writing, stating that such shareholders intend to propose candidates for such directorships instead of the nominees proposed by the Board of Directors. The directors, other than the “external” directors under the Companies Law, are elected by a resolution at every annual meeting, for a term of office which shall end upon the convening of the first annual shareholder meeting held after the date of their election.

The Articles of Association provide that a director may appoint, by written notice to Fundtech, any individual to serve as an alternate director, subject to the provisions of the Companies Law. Any of our residing directors can-not serve an as alternate director for any of the other directors. Any alternate director shall have all of the rights and obligations of the appointing director except the power to appoint an alternate for himself or herself. Unless the period or scope of any such appointment is limited by the appointing director, such appointment is effective for all purposes and for a period of time concurrent with the term of the appointing director.

We have no service contracts in place with any of our directors in their capacity as such that provide for benefits upon termination of their services as directors.

External Directors

Under the Companies Law, companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel (i.e., public companies) are required to appoint two independent or “external” directors to their Board of Directors. A person may not be appointed as an external director if the person or the person’s relative, partner, employer or any entity under such person’s control, has, as of the date of the person’s election as an external director, or had, during the two years preceding such election, any affiliation with the company, any person or entity controlling the company or any entity controlled by the company or by this controlling entity. The term “affiliation” includes:

·	an employment relationship;

·	business or professional relationship maintained on a regular basis;

·	control; and/or

·	service as an office holder.

A person may not serve as an external director if the person’s other duties or responsibilities create, or may create, a conflict of interest with the person’s responsibilities as an external director or may adversely impact such person’s ability to serve as an external director.

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

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

Until the lapse of two years from termination of service as director, a company may not engage an external director to serve as an office holder and cannot employ or receive services from that person, either directly or indirectly, including through a corporation controlled by that person.

The majority of the shareholders in a general meeting must elect the external directors. Such majority must either include at least one-third (1/3) of the shares of non-controlling shareholders voting on the matter, or the total shares of non-controlling shareholders voting against the election may not represent more than one percent (1%) of the voting rights in the company.

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

Independent Directors

The Ordinary Shares are listed for quotation on The NASDAQ and are subject to the rules of The NASDAQ Global Market applicable to quoted companies. Under The NASDAQ rules, we are required to appoint a sufficient number of independent directors for them to constitute a majority. The independence standard under the NASDAQ rules excludes any person (i) who is an officer or employee of the Company or its subsidiaries, or (ii) that the board of directors believes has a relationship that would interfere with such individual’s independent judgment as a director. Additional circumstances that preclude an individual from serving as an Independent Director are set forth in the NASDAQ rules, including, with certain limited exceptions, receipt by a director or his/her immediate family of consulting compensation in excess of $60,000 per annum. Gideon Argov, Yaffa Krindel, Tsvi Gal, Stanley Stern, Gil Weiser and Ben-Zion Zilberfarb qualify as independent directors and meet the independence standard of the NASDAQ rules.

Audit Committee

Pursuant to the Companies Law, the Board of Directors of a public company must appoint an Audit Committee. The Audit Committee must be comprised of at least three directors, including all of the external directors elected as such in accordance with the requirements of the Companies Law. The Audit Committee may not include the chairman of the Board of Directors, any director we employ or any director who provides significant services to us on a regular basis or a controlling shareholder or his relative. The roles of our audit committee under the Companies Law include identifying irregularities in the management of the company’s business and approving related party transactions as required by law.

Under the NASDAQ rules, we are required to form an audit committee consisting of at least three independent directors. In addition, NASDAQ requires that the members of the audit committee (a) not have any relationship to the company that may interfere with the exercise of their independence, and (b) must be financially literate.

Under the NASDAQ rules and the Sarbanes-Oxley Act, the audit committee (i) has the sole authority and responsibility to select, evaluate, and, where appropriate, replace the company’s independent auditors, (ii) is directly responsible for the appointment, compensation and oversight of the work of the independent auditors for the purpose of preparing its audit report or related work, and (iii) is responsible for establishing procedures for (A) the receipt, retention and treatment of complaints received by the company regarding accounting, internal accounting controls or auditing matters, and (B) the confidential, anonymous submission by employees of the company of concerns regarding questionable accounting or auditing matters. The audit committee is required to consult with management but may not delegate these responsibilities.

In addition to such functions as the audit committee may have under the Companies Law or under the NASDAQ rules, the primary purpose of our audit committee is to assist the board of directors in fulfilling its responsibility to oversee management’s conduct of the financial reporting process, the systems of internal accounting and financial controls and the annual independent audit of the company’s financial statements. The audit committee reviews with management and our outside auditors the audited financial statements included in our Annual Report on Form 20-F and our interim quarterly financial results.

The audit committee must observe the independence of our external auditors and has the authority and responsibility to nominate for shareholder approval, evaluate and, where appropriate, recommend the replacement of our external auditors. In addition, the Audit Committee is responsible for pre-approving all services provided to us by our external auditors.

In discharging its oversight role, our audit committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities and personnel of our company and the power to retain outside counsel, auditors or other experts for this purpose. The audit Committee has a separate budget to fund its retention of such outside assistance. The audit committee has also adopted a charter in accordance with the rules of the NASDAQ National Market.

The members of the Audit Committee for the fiscal year ended December 31, 2006 were Stanley Stern, Chairman, George Lieberman, Ben-Zion Zilberfarb and Yaffa Krindel. Ms. Krindel qualifies as a financial expert under the Sarbanes-Oxley Act of 2002. For 2007, the Audit Committee will consist of Stanley Stern, Chairman, Tsvi Gal and Ben-Zion Zilberfarb. Dr. Zilberfarb has been designated as the financial expert under the Sarbanes-Oxley Act of 2002.

Compensation Committee

The members of the Compensation Committee for the fiscal year ended December 31, 2006 were George Lieberman, Chairman, Gideon Argov and Gil Weiser. No member of the Compensation Committee is an officer or employee of the Company and each is an independent director. The responsibilities of the Compensation Committee include administering our stock plans and approving the compensation of our executive officers. For 2007, the Compensation Committee will consist of Yaffa Krindel, Chairman, Gil Weiser and Ben-Zion Zilberfarb.

Nominating Committee

In accordance with NASDAQ rules, a Nominating Committee was established in 2004. Its members during 2006 were Gil Weiser, Chairman, Gideon Argov and George Lieberman. The Nominating Committee is responsible for making recommendations with respect to (i) the nomination by the Board of Directors of qualified candidates to serve as our Directors, (ii) Board committee assignments and (iii) chair appointments. The Nominating Committee has adopted a charter, as well as policies and procedures governing its activities. The committee has also adopted and published policies and procedures governing communications from shareholder or other interested parties to the board of directors. For 2007, the Nominating Committee will consist of Gil Weiser, Chairman, Gideon Argov and Tsvi Gal.

Duties Under the Companies Law

The Companies Law codifies the fiduciary duties that an “office holder,” including directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act with the same level of skill with which a reasonable office holder in the same position would act under the same circumstances. This includes a duty to use reasonable means to obtain information on the advisability of a given action brought for such office holder’s approval or performed by him by virtue of his position, and all other significant information pertaining to such action. The duty of loyalty requires an office holder to act in good faith and for the company’s benefit, and includes avoiding any conflict of interest between the office holder’s position in the company and any other position held by him or his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others and revealing to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder. Under the Companies Law, all arrangements as to compensation of office holders who are not directors require approval of the Board of Directors, in certain cases with the prior approval of the Audit Committee, and, with respect to indemnification and insurance of these office holders, also require Audit Committee approval. Arrangements regarding the compensation of directors, regardless of whether to be paid in such director’s position as a director or employee of the Company, require the approval of the Audit Committee, Board of Directors and shareholders.

Internal Auditor

Under the Companies Law, the Board of Directors of a public company must appoint an internal auditor proposed by the audit committee. The duty of the internal auditor is to examine, inter alia, whether the company’s conduct complies with applicable law and orderly business procedure. The internal auditor may participate in all audit committee meetings and has the right to demand that the chairman of the audit committee convene a meeting. Under the Companies Law, the internal auditor may not be an interested party, an office holder or a relative of any of the foregoing, nor may the internal auditor be the company’s independent accountant or its representative. The Companies Law defines the term “interested party” to include a person who holds 5% or more of the company’s outstanding share capital or voting rights, a person who has the right to appoint one or more directors or the general manager, or any person who serves as a director or as the general manager. We have appointed BKR Yarel, Haguel & Co., as the internal auditor.

The NASDAQ Global Market

Our Ordinary Shares are listed for quotation on The NASDAQ Global Market and we are subject to the rules of The NASDAQ Global Market applicable to listed companies. Under the NASDAQ rules companies quoted on NASDAQ are required to have a majority of independent directors. NASDAQ rules further require the appointment of a Compensation Committee which is comprised solely of independent directors and which is responsible for setting and approving salaries for the directors and for the executive officers of the company and a Nominating Committee which is comprised solely of independent directors and which is responsible for the selection of directors and for communications with shareholders on the subject of shareholder nominations. Gideon Argov, Yaffa Krindel, Tsvi Gal, Stanley Stern, Gil Weiser and Ben-Zion Zilberfarb and qualify as independent directors under the current NASDAQ National Market requirements.

Disclosure Committee

A Disclosure Committee consisting solely of company employees was established in 2004 under the auspices of the Audit Committee to assist the Chief Executive Officer and Chief Financial Officer with monitoring developments within the Company and with the preparation of annual and quarterly reports. The committee is chaired by the General Counsel and has members from the finance, operations and marketing departments as well as from our BBP and Cashtech subsidiaries. Meetings are held not less than quarterly. The committee has also adopted and published policies and procedures governing its activities. The Charter of the Committee was approved by the Audit Committee. No directors serve on the committee.

D.	Employees.

The following table summarizes the main category of activity and geographic location of our employees as of December 31, 2006:

	Software Development	Operations	Sales and Marketing	Administration	Total Employees
United States	72	96	36	21	225
Israel	29	49	2	4	84
Switzerland	17	22	8	9	56
United Kingdom	0	5	5	0	10
Australia	0	2	0	0	2
India	16	244	10	23	293
					670

We consider ourselves to have good relations with our employees and have never experienced a labor dispute, strike or work stoppage. Our employees are not represented by a labor union.

None of our employees is a party to a collective bargaining agreement with us. However, we are subject to certain provisions of collective bargaining agreements among the Government of Israel, the Histadrut (General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the Industrialists’ Association) that are applicable to our Israeli employees by virtue of expansion orders of the Israeli Ministry of Labor and Welfare. In addition, Israeli labor laws are applicable to all of our employees in Israel. Those provisions and laws principally concern the length of the workday, minimum daily wages for workers, procedures for dismissing employees, determination of severance pay and other conditions of employment. Under these provisions, the wages of most of our employees are automatically adjusted based on changes in the Israeli consumer price index. The amount and frequency of these adjustments are modified occasionally.

As a general practice, which became legally required in May 2006, we contribute funds on behalf of most of our full-time employees in Israel to an individual insurance policy known as “Managers’ Insurance.” This policy provides a combination of savings plan, insurance and severance pay benefits to the insured employee, provides for payments to the employee upon retirement or death and secures severance pay, if any, to which the employee is legally entitled upon termination of employment. The remaining part of this obligation is presented on our balance sheet as a provision for severance pay. See Note 2(l) to the Consolidated Financial Statements.

Our Cashtech subsidiary, as required by Indian regulations, provides a severance payment to any employee who resigns after working for five years with Cashtech. This obligation, whose valuations are carried out by an independent actuary, is reflected on the Cashtech balance sheet.

We have to comply with various labor and immigration laws throughout the world, including laws and regulations in Israel, the United Kingdom, Switzerland, Australia, Singapore, India and Germany. Compliance with these laws has not been a material burden for us. If the number of our employees increases over time, our compliance with these regulations could become more burdensome.

E.	Share Ownership.

Security Ownership of Directors and Senior Management and Certain Key Employees

As of June 15, 2007, the aggregate number of our Ordinary Shares beneficially owned by our directors, senior managers and certain key employees was as follows:

Owner:		No. of Ordinary Shares:
Gideon Argov		Beneficially owns less than one percent.
Reuven BenMenachem		416,457 (2.6%)
Tsvi Gal		Beneficially owns less than one percent.
Stanley Stern		Beneficially owns less than one percent.
Gil Weiser		Beneficially owns less than one percent.
Ben-Zion Zilberfarb		Beneficially owns less than one percent.
Yaffa Krindel		Beneficially owns less than one percent.
Joseph J. Aulenti		Beneficially owns less than one percent.
Yoram Bibring		Beneficially owns less than one percent.
Joseph P. Mazzetti		Beneficially owns less than one percent.
Michael Sgroe		244,885 (1.5%)

Beneficial ownership by a person, as of a particular date, assumes the exercise of all options and warrants held by such person that are currently exercisable or are exercisable within 60 days of such date and all restricted shares that will be released from any vesting schedule within 60 days of such date. No director is affiliated with a Major Shareholder.

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

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

Equity Compensation Plans

Fundtech had established two plans for granting share options to our employees and one plan for granting share options to our directors: the Fundtech Limited 1997 Israeli Share Option Plan for the Employees of Fundtech Ltd. (the “1997 Plan”); the Fundtech Ltd. 1999 Employee Option Plan (the “1999 Option Plan”); and the Fundtech Ltd. Directors’ Option Plan (the “Directors’ Option Plan,” and together with the 1997 Plan and the 1999 Option Plan, the “Company Option Plans”). The 1997 Plan has expired. On December 21, 2005, the shareholders approved the adoption of two new equity plans, the 2005 International Share Option and Restricted Share Incentive Plan and the 2005 Israeli Share Option and Restricted Share Incentive Plan (the “2005 Plans”), which are discussed below.

Pursuant to the Company option plans, a total of 3,592,815 options and restricted shares were allocated for grant to employees and directors of Fundtech and its subsidiaries, and an equal number of Ordinary Shares have been reserved for issuance upon the exercise of such options. As of December 31, 2006, 2,408,351 of these options were outstanding, 951,176 of these options had been exercised, and 185,141 options remain available to be granted.

1999 Stock Option Plan

The 1999 Option Plan was adopted in September 1999. The Compensation Committee or the Board of Directors determines the vesting period and expiration period for options granted under the 1999 Option Plan at the time of the grant. The options generally vest over a period of four years from the date of grant. As of December 20, 2005, 3,155,815 Ordinary Shares were reserved and allocated to the 1999 Option Plan. Of the 3,155,815 options available for grant under the 1999 Option Plan, as of December 20, 2005, 2,131,521 options were outstanding and 232,306 options had been exercised. By authorization of the shareholders granted on December 21, 2005, 391,988 options were transferred to the 2005 Share Option and Restricted Share Incentive Plans and no options remain available.

Directors’ Option Plan

The Directors’ Option Plan was adopted in May 1998. The Compensation Committee or the Board of Directors determines the vesting period and expiration period for options granted under the Directors’ Option Plan at the time of the grant. The options granted under the Directors’ Option Plan generally vest over a period between one and two years and expire five years from the date of grant. By authorization of the shareholders granted on December 21, 2005, 130,000 options were transferred to the 2005 Share Option and Restricted Share Incentive Plans and no options remain available.

Offer To Exchange/Tender Offer

In June 2002 we commenced a voluntary stock option exchange program for our employees. Under the program participating employees were given the opportunity to have unexercised stock options previously granted to them cancelled, and to receive replacement options at a future date. Replacement options were granted at a ratio of one new option for each one option cancelled (provided that the grantees were still employed by the Company on the date of the new grant), at an exercise price equal to the fair market value of our Ordinary Shares on the date of the re-grant.

Pursuant to the terms of the offer, 1,025,700 options were cancelled on July 16, 2002. We granted the 969,311 replacement options on January 17, 2003.

2005 Share Option and Restricted Share Incentive Plans

On December 21, 2005, the shareholders of the Company approved the adoption of the 2005 International Share Option and Restricted Share Incentive Plan and the 2005 Israeli Share Option and Restricted Share Incentive Plan (collectively, the “2005 Plans”). The 2005 Plans did not increase the maximum number of the Company's Ordinary Shares that may be issued under the Company's option plans. Rather, the Company transferred the aggregate number of un-granted Ordinary Shares as of the date on which the 2005 Plans are adopted, then reserved for issuance under the Company’s 1999 Employee Stock Option Plan and the Director’s Option Plan (the “Previous Plans”) to the 2005 Plans. Any options that remain available for grants under the Previous Plans are now available for subsequent grants of awards under the 2005 Plans. In addition, if any outstanding award under the Previous Plans should, for any reason, expire, be canceled or be forfeited without having been exercised in full, the shares subject to the unexercised, canceled or terminated portion of such award shall become available for subsequent grants of awards under the 2005 Plans. The cumulative number of such shares that may be so issued under the 2005 Plans, inclusive of any award or grant under the Previous Plans, may not exceed 3,592,815 shares. Grants under the 2005 Plans vest over periods of between one and four years. As of June 15, 2007, 438,036 restricted shares had been granted under the 2005 Plans.

Administration of Our Plans

The Compensation Committee of the Board of Directors administers our plans. Under the plans, options or restricted shares to purchase our Ordinary Shares may be granted to the officers, directors, employees or consultants of the Company or of any of our subsidiaries. Under the plans, the Compensation Committee of the Board of Directors shall determine the exercise price of options. The Board of Directors also determines the vesting schedule of the options and restricted shares.

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

A.	Major Shareholders.

The following table summarizes information about the beneficial ownership of our outstanding Ordinary Shares as of June 15, 2007, for each person or group that we know owns 5% or more of our Ordinary Shares.

We determine beneficial ownership of shares under the rules of the Securities and Exchange Commission and include any Ordinary Shares over which a person exercises sole or shared voting or investment power, or of which a person has the right to acquire ownership at any time within 60 days. Applicable percentage ownership in the table set forth below is based on 16,021,425 Ordinary Shares outstanding as of June 15, 2007.

NAME OF BENEFICIAL OWNER	NUMBER OF SHARES BENEFICIALLY OWNED		PERCENTAGE BENEFICIALLY OWNED

Clal Industries and Investments Ltd.(1)		5,350,761		33.4	%
Cannell Capital LLC(2)		2,800,000		17.5	%
All directors and executive officers as a group (11 persons)		1,125,306		7.0	%

Clal Industries and Investments Ltd., or “Clal”, is an Israeli corporation and is controlled by IDB Development Corporation Ltd., or “IDBD”, which, in turn, is controlled by IDB Holding Corporation, or “IDBH”, all of which companies are considered part of the IDB group.

Based upon publicly available information, as at March 1, 2006, IDBH is controlled by a group comprised of: (i) Ganden Investments I.D.B. Ltd., or “Ganden”, a private Israeli company controlled by Nochi Dankner (who is the chairman of IDBH, IDBD and Clal) and his sister Shelly Bergman, which holds 31.02% of the equity of and voting power in IDBH; (ii) Manor Investments - IDB Ltd., or “Manor”, a private Israeli company controlled by Ruth Manor (whose husband, Isaac Manor, and their son, Dori Manor, are directors of IDBH, IDBD and Clal), which holds 10.34% of the equity of and voting power in IDBH; and (iii) Avraham Livnat Investments (2002) Ltd., or “Livnat”, a private Israeli company controlled by Avraham Livnat (one of whose sons, Zvi Livnat, is a director and executive vice president of IDBH, deputy chairman of IDBD and a director and co-chief executive officer of Clal, and another son, Shay Livnat, is a director of IDBD and Clal), which holds 10.34% of the equity of and voting power in IDBH. Ganden, Manor and Livnat, owning in the aggregate approximately 51.70% of the equity of and voting power in IDBH, entered into a Shareholders Agreement relating, among other things, to their joint control of IDBH, the term of which is until May 19, 2023. In addition, (a) Ganden Holdings Ltd., the parent company of Ganden, holds 11.35% of the equity of and voting power in IDBH; (b) Ganden holds a further 6.71% of the equity of and voting power in IDBH; (c) Manor Holdings B.A. Ltd., the parent company of Manor, holds 0.03% of the equity of and voting power in IDBH; (d) Avraham Livnat Ltd., the parent company of Livnat, holds 0.04% of the equity of and voting power in IDBH; and (e) Ms. Bergman owns, through a private company which is wholly owned by her, approximately 7.23% of the equity and voting power of IDBH.

Based on the foregoing, IDBH (by reason of its control of IDBD), Ganden, Manor and Livnat (by reason of their control of IDBH), Mr. Dankner, Ms. Bergman, Ms. Manor and Mr. A. Livnat (by reason of their control, respectively, of Ganden, Manor and Livnat) may be deemed to share the power to vote and dispose: (i) with IDBD (by reason of its control of Clal), and Clal, of the Fundtech shares held by Clal; and (ii) with IDBD, of the Fundtech shares held by IDBD.

As of June 15, 2007 beneficial ownership consisted of 2,800,000 Ordinary Shares held by investment advisory clients who have granted Cannell Capital LLC, for which J. Carlo Cannell is the Managing Member, with discretionary authority to buy, sell and vote shares. Shares are held by The Anegada Master Fund Limited (656,922 Ordinary Shares); The Cuttyhunk Fund Limited (500,000 Ordinary Shares); Tonga Partners, L.P. (1,023,695 Ordinary Shares); TE Cannell Portfolio, LLC (619,383 Ordinary Shares). The address of Cannell Capital LLC is 150 California Street, Fifth Floor, San Francisco, CA 94111. Cannell Capital LLC formerly held 18.2% of our Ordinary Shares. Based on information set forth on a Schedule 13G/A filed February 15, 2007 by Cannell Capital LLC.

16,021,425 of our Ordinary Shares (of which 14,051,880 are in CEDE account) constituting 88% of our Ordinary Shares are held by record holders located in the United States. 30 record holders are located in the United States. We have determined that in excess of 60% of our Ordinary Shares are beneficially owned by non-United States persons.

During the period between December 14, 2004 and May 23, 2005 Clal Industries and Investments Ltd. has purchased 34,890 Ordinary Shares. However, its percentage ownership decreased from 36.3% to its present 33.5%. No additional shares have been purchased. Cannell Capital LLC first reported purchasing Ordinary Shares in 2002. Cannell’s ownership was reported at 2,527,826 (17.4%) on December 31, 2003, declined to 2,280,800 (15.1%) as of June 14 2006 and increased to 2,800,000 (17.5%) by February 15, 2007.

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

Insurance

We have obtained directors and officers liability insurance for the benefit of our office holders and intend to continue to maintain such coverage and pay all premiums thereunder to the fullest extent permitted by the Companies Law. Under the Companies Law, an Israeli company may not exempt an office holder from liability for a breach of his duty of loyalty, but may exempt in advance an office holder from his liability to the company, in whole or in part, for a breach of his duty of care.

Our Articles of Association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders for acts which he or she performed in his or her capacity as an office holder in relation to:

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

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

·	a financial liability imposed upon him/her in favor of another person.

Indemnification

We previously undertook to undertake to indemnify in advance our directors and office holders for the breach of his or her duty of care to the fullest extent permitted by the Companies Law, and have entered into indemnification agreements with our directors.

Under Section 260(B) of the Companies Law, a company is entitled to undertake in advance to indemnify an office holder for the breach of his or her duty of care, provided that the articles of association of the company permit such indemnification in advance and further provided that such indemnification shall be limited to the type of events that, in the discretion of the Board of Directors of the company, may be anticipated at such time of undertaking and that such undertaking shall be limited to an amount which the Board of Directors deems reasonable in light of the applicable circumstances. These are specifically limited in their scope by Section 263 of the Companies Law, which provides that a company may not indemnify an office holder nor enter into an insurance contract which would provide coverage for any liability incurred as a result of the following: (a) a breach by the office holder of his fiduciary duty unless he acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; (b) a breach by the office holder of his duty of care if such breach was done intentionally or recklessly; (c) any act or omission done with the intent to derive an unlawful personal benefit; or (d) any fine levied against such office holder. In addition, under Section 259 of the Companies Law a company may exempt an office holder from his duty of care to the company, in whole or in part and subject to the limitations of Section 263 of the Companies Law described above, provided that such actions are authorized by the company’s articles of association.

Fees and Reimbursement of Expenses for Members of the Board of Directors.

Our members of the Board of Directors are entitled to compensation and reimbursement of expenses for their services to the Company. See Item 6B above.

B.	Interests of Experts and Counsel.

Not applicable.

ITEM 8.

FINANCIAL INFORMATION.

A.	Consolidated Financial Statements and Other Financial Information.

The following Consolidated Financial Statements of Fundtech Ltd. and its subsidiaries for the years ended December 31, 2004, 2005 and 2006, together with the report of the independent auditors thereon, are presented under Item 18 of this report:

Report of Independent Auditors

Consolidated Balance Sheets

Consolidated Statements of Operations

Statements of Changes in Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Legal Proceedings

We are not a party to any litigation or legal proceeding of a material nature, either in Israel or abroad, and are not aware of any other pending or threatened litigation that we believe may have a material adverse effect on us or our business.

Dividend Distribution Policy

We have never declared or paid dividends to our shareholders. We intend to retain all future earnings for use in the development of our business and do not anticipate paying cash dividends in the foreseeable future. If we declare cash dividends, they could be taxable to the recipient. Because we have received benefits under the Law for the Encouragement of Capital Investments, 1959, as amended (the “Investment Law”), payment of cash dividends during the exemption period granted under the Investment Law will subject that portion of our income derived from the Approved Enterprise status granted to us under the Investment Law to Israeli taxes to which the income would not otherwise be subject. We intend to reinvest the amount of the tax-exempt income derived from our “Approved Enterprises” status permanently and not to distribute such income as dividends.

Under the Israeli Companies Law, dividends may be paid by an Israeli company only out of its profits, as defined in such law. Under the Companies Law, a company’s Board of Directors has the general authority to distribute dividends to the shareholders out of profits referred to above, and a company may determine in its Articles of Association that dividends may be approved: (i) by the general meeting, following a recommendation of the Board of Directors (the shareholders may reduce, but not increase, the dividends recommended by the Board of Directors), (ii) by the Board of Directors, after the shareholders have approved the maximum amount of dividends which may be distributed and (iii) in any other manner detailed in a company’s Articles of Association, provided that the company’s Board of Directors shall determine that such distribution complies with the provisions of the Companies Law. In the event we pay dividends, it is anticipated that any dividends paid to non-residents of Israel would be paid in NIS.

B.	Significant Changes.

None

ITEM 9.

THE OFFER AND LISTING.

Market Price Information

Our Ordinary Shares are quoted on The NASDAQ Global Market under the symbol “FNDT”. The following table sets forth, for the periods indicated, the high and low closing sales prices for the Ordinary Shares:

	HIGH	LOW
2002	5.24	3.28
2003	8.58	3.30
2004	9.90	6.26
2005	11.23	8.09
2006	12.94	8.72

2004
Fourth Quarter	8.76	6.44

2005
First Quarter	10.97	8.09
Second Quarter	10.59	9.90
Third Quarter	11.08	9.45
Fourth Quarter	11.23	9.61

2006
First Quarter	12.11	10.11
Second Quarter	12.94	9.14
Third Quarter	10.31	8.72
Fourth Quarter	12.60	10.03

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

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

Since August 19, 2003, our Ordinary Shares have also been listed on the Tel Aviv Stock Exchange under the symbol “FNDT”. The following table sets forth, for the periods indicated, the high and low closing sales prices in NIS of our Ordinary Shares on the Tel Aviv Stock Exchange.

	HIGH	LOW
2003	NIS 38.90	NIS 28.69
2004	46.38	28.39

2004
Fourth Quarter	38.27	28.71

2005
First Quarter	NIS47.66	NIS36.1
Second Quarter	46.47	43.00
Third Quarter	50.77	43.91
Fourth Quarter	50.37	45.36

2006
First Quarter	NIS 58.36	NIS 46.87
Second Quarter	58.88	44.62
Third Quarter Fourth Quarter	47.89 52.33	39.21 42.60

Most recent six months
December 2006	NIS 52.33	NIS 46.33
Jan 2007	55.99	45.41
February 2007	59.09	53.78
March 2007	58.79	56.41
April 2007	62.79	59.50
May 2007	63.33	59.42

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

ITEM 10.

ADDITIONAL INFORMATION.

A.	Share Capital.

Not Applicable.

B.	Memorandum and Articles of Association.

Company’s objectives

The Company’s objectives, as set forth in our Articles of Association, are to carry on any business and do any act which is not prohibited by law. We may also make contributions of reasonable sums to worthy purposes even if such contributions are not made on the basis of business considerations.

Directors

Any director is entitled to vote in a meeting of our Board of Directors, except that a director who has a personal interest in an “extraordinary transaction” (as defined below), which is considered at a meeting of our Board of Directors, may not be present at this meeting or vote on this matter. An “extraordinary transaction” is defined in the Companies Law as a transaction that is either (i) not in the ordinary course of business; (ii) not on market terms; or (iii) that is likely to have a material impact on the Company’s profitability, assets or liabilities.

A quorum at a meeting of our Board of Directors shall be constituted by the presence in person, by alternate or by telephone or similar communication equipment, of a majority of the directors then in office who are lawfully entitled to participate and vote at the meeting.

If within one-half hour (or within such longer time not to exceed one (1) hour, as the Chairman of the meeting, at his discretion, may decide) from the time appointed for the convening of the board meeting, a quorum is not present, the board meeting shall stand adjourned to the same day in the next week at the same time and place (unless such day shall fall on a public holiday either in Israel or the United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday). If, at such adjourned board meeting, a quorum is not present within half an hour from the time appointed for holding the meeting, the directors present, in person, by alternate or by telephone or similar communication equipment who are lawfully entitled to participate and vote at such meeting, shall be a quorum.

Our business is managed by the Board of Directors, which may exercise all such company powers and perform on our behalf all such acts as are not, by the Companies Law or by our Articles of Association, required to be exercised or performed through a general meeting of our shareholders. Our Articles of Association provide that the Board of Directors may from time to time, at its discretion, cause us to borrow or secure the payment of any sum or sums of money for the Company’s purposes, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking of the whole or any part of our property, both present and future, including its uncalled or called but unpaid capital for the time being.

There is no age limit as to the ability of individuals to serve as members of our Board of Directors.

A director is not required to hold our shares as a condition to his nomination or election as a director.

Rights Attached to our Shares

All dividends shall be declared by our Board of Directors and paid in proportion to the amount paid up on account of the nominal value of the Ordinary Shares in respect of which the dividend is being paid. As regards to Ordinary Shares not fully paid throughout the period in respect of which the dividend is paid, dividends in respect thereto shall be apportioned and paid pro rata according to amounts deemed under our Articles of Association to be paid up on account of the nominal value of such shares during any portion or portions of the period in respect of which the dividend is paid.

Under our Articles of Association, every shareholder who is present, in person, by proxy, or by written ballot or is deemed under the Companies Law to be present at a general meeting of the shareholders, shall be entitled to one vote for each Ordinary Share of which he or she is the holder.

The distribution of dividends is under the discretion of our Board of Directors, which is under no obligation to distribute dividends to our shareholders out of the Company’s profits.

Upon liquidation, all available surplus, after payments of all debts, shall be distributed to our shareholders on a pro-rata basis.

Changes of Rights Attached to our Shares

Changes to the rights attached to our Ordinary Shares require the approval of shareholders present, in person, by proxy, or by written ballot, or deemed under the Companies Law to be present, holding greater than fifty percent (50%) of the total voting power attached to the Ordinary Shares whose holders were present, in person, by proxy, or by written ballot, or deemed under the Companies Law to be present, at such general meeting, and voted thereon. If, at any time, the share capital of the Company is divided into different classes of shares, the right attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may be varied only upon consent of a separate general meeting of the holders of the shares of that class and the provisions of our Articles of Association relating to general meetings shall apply to every such separate general meeting. The enlargement of an authorized class of shares, or the issuance of additional shares thereof out of the authorized and unissued share capital, shall not be deemed to vary, modify or abrogate the rights attached to previously issued shares of such class or of any other class of shares.

General Meetings

We are required to hold an annual general shareholders meeting once in every calendar year within a period of not more than fifteen (15) months after the last preceding annual general shareholders meeting. All general shareholders meetings other than the annual general shareholders meeting are deemed to be special shareholders meetings. Our Board of Directors may call for a general meeting whenever it sees fit, and, under the Companies Law, is required to call a general meeting upon a demand in writing by (i) a shareholder or shareholders holding at least 5% of the outstanding shares and 1% of the voting rights in the company or (ii) a shareholder or shareholders holding at least 5% of the voting rights in the company. Subject to applicable law and regulations, prior notice of at least 35 days of any general shareholders meeting, specifying the place, date and hour of the meeting, shall be given to the shareholders of the Company. No business shall be transacted at any general shareholders meeting unless a quorum is present when the meeting proceeds to business. For all purposes, the quorum shall not be less than two (2) shareholders present in person, or by proxy, or deemed by the Companies Law to be present at such meeting, holding, in the aggregate, at least, thirty-three and one-third percent (33 1/3%) of the voting rights in our issued share capital. If, within half an hour from the time appointed for the meeting, a quorum is not present (or within such longer time not exceeding one hour as the Chairman of the meeting may decide), the meeting, if convened upon the requisition of the shareholders, shall be dissolved; in any other case, it shall stand adjourned to the same day in the next week at the same place and time (unless such day shall fall on a public holiday either in Israel or the United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday), or any other day, hour and/or place as the directors shall notify the shareholders. If a quorum is not present at the second meeting within half an hour from the time appointed for the meeting, any two shareholders present personally or by proxy or any other valid instrument, shall constitute a quorum, and shall be entitled to deliberate and to resolve in respect of the matters for which the meeting was convened.

Ownership of Our Shares

Our Articles of Association and the laws of the State of Israel do not restrict in anyway the ownership or voting of our shares by non-residents of Israel.

Change of Control

Our Articles of Association do not contain specific provisions intended to delay, defer or prevent a change of control.

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

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

C.	Material Contracts.

We have no material contracts that have been entered into outside the ordinary course of business in the past two years.

D.	Exchange Controls.

Until May 1998, Israel imposed restrictions on transactions in foreign currency. These restrictions affected our operations in various ways, and also affected the right of non-residents of Israel to convert into foreign currency amounts they received in Israeli currency, such as the proceeds of a judgment enforced in Israel. Despite these restrictions, foreign investors who purchased shares with foreign currency were able to repatriate in foreign currency both dividends (after deduction of withholding tax) and the proceeds from the sale of the shares. In 1998, the Israeli currency control regulations were liberalized significantly, as a result of which Israeli residents generally may freely deal in foreign currency and non-residents of Israel generally may freely purchase and sell Israeli currency and assets. There are currently no Israeli currency control restrictions on remittances of dividends on the Ordinary Shares or the proceeds from the sale of the shares; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.

Neither our Memorandum of Association nor our Articles of Association nor the laws of the State of Israel restrict in any way the ownership or voting of Ordinary Shares by non-residents of Israel.

E.	Taxation.

United States Federal Income Tax Considerations

Subject to the limitations described herein, the following discussion summarizes the material United States federal income tax consequences to a U.S. Holder of the purchase, ownership and disposition of our Ordinary Shares. A “U.S. Holder” means a holder of our Ordinary Shares that is:

·	an citizen or resident of the United States;

·	a corporation (or other entity taxable as a corporation) created or organized in the United States or under the laws of the United States or any political subdivision thereof;

·	an estate, the income of which is subject to United States federal income tax regardless of its source; or

a trust, (i) if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all of its substantial decisions, or (ii) that has in effect a valid election under applicable U.S. Treasury Regulations to be treated as a U.S. person.

This discussion considers only U.S. Holders that will own their Ordinary Shares as capital assets (generally, for investment) and does not purport to be a comprehensive description of all of the tax considerations that may be relevant to each person’s decision to purchase Ordinary Shares. Certain aspects of U.S. Federal income taxation relevant to a holder of Ordinary Shares that is not a U.S. Holder (a “non-U.S. Holder”). are also discussed below.

If a partnership (or any other entity treated as a partnership for U.S. Federal income tax purposes) holds Ordinary Shares, the tax treatment of the partnership as a partner in such partnership will generally depend on the activities of the partnership. Such a partner or partnership should consult its advisor as to its tax consequences. This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current and proposed Treasury Regulations promulgated thereunder, and administrative and judicial decisions as of the date hereof, all of which are subject to change, possibly on a retroactive basis. This discussion does not address all aspects of United States federal income taxation that may be relevant to any particular U.S. Holder in light of such holder’s individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax or United States federal income tax consequences to shareholders that are subject to special treatment, including U.S. Holders that:

·	are broker-dealers or insurance companies;

·	are regulated investment companies or real estate investment trusts;

·	have elected mark-to-market accounting;

·	are tax-exempt organizations or retirement plans;

·	are financial institutions or “financial services entities”;

·	hold Ordinary Shares as part of a straddle, “hedge” or “conversion transaction” with other investments;

·	acquired their Ordinary Shares upon the exercise of employee stock options or otherwise as compensation;

·	are grantor trusts;

·	are certain former citizen or long-term residents of the U.S.;

·	own directly, indirectly or by attribution at least 10% of our voting power; or

·	have a functional currency that is not the U.S. dollar.

In addition, this discussion does not address any aspect of state, local or non-United States tax laws or the possible application of United States federal gift or estate taxes.

Each holder of Ordinary Shares is advised to consult such person’s own tax advisor with respect to the specific tax consequences to such person of purchasing, owning or disposing of our Ordinary Shares, including the applicability and effect of federal, state, local and foreign income tax and other tax laws in such person’s particular circumstances.

Taxation of Distributions Paid On Ordinary Shares. A U.S. Holder will be required to include in gross income as ordinary dividend income the amount of any distribution paid on Ordinary Shares, including any non-U.S. taxes withheld from the amount paid, on the date the distribution is received to the extent the distribution is paid out of our current or accumulated earnings and profits as determined for United States federal income tax purposes. Distributions in excess of such earnings and profits will be applied against and will reduce the U.S. Holder’s basis in our Ordinary Shares and, to the extent in excess of such basis, will be treated as gain from the sale or exchange of our Ordinary Shares. The dividend portion of such distributions generally will not qualify for the dividends received deduction available to corporations.

Distributions of current or accumulated earnings and profits paid in foreign currency to a U.S. Holder (including any non-U.S. taxes withheld therefrom) generally will be includible in the income of a U.S. Holder in a U.S. dollar amount calculated by reference to the exchange rate on the day the distribution is received. A U.S. Holder that receives a foreign currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.

The maximum U.S. federal income tax rate on certain qualified dividends paid to non-corporate U.S. Holders for taxable years beginning on or before December 31, 2010 is currently 15% and subject to U.S. ordinary tax rates thereafter. This reduced rate generally will not apply, however, to dividends paid by us if we are treated as a passive foreign investment company in the year the dividends are paid or in the prior year, or if certain holding period or other requirements are not met. See the discussion below under the heading “Passive Foreign Investment Company Status.” U.S. Holders are urged to consult their own tax advisors regarding the U.S. federal income tax rate that will be applicable to their receipt of any dividends paid with respect to Ordinary Shares.

U.S. Holders will have the option of claiming the amount of any non-U.S. income taxes withheld on a dividend distribution either as a deduction from gross income or as a dollar-for-dollar credit against their United States federal income tax liability. Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of the non-U.S. income taxes withheld, but such amount may be claimed as a credit against the individual’s United States federal income tax liability. The amount of foreign income taxes that may be claimed as a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each shareholder. These limitations include, among others, rules that limit foreign tax credits allowable with respect to specific classes of income to the United States federal income taxes otherwise payable with respect to each such class of income. The total amount of allowable foreign tax credits in any year cannot exceed the U.S. Holder’s regular U.S. tax liability for the year attributable to foreign source taxable income. A U.S. Holder will be denied a foreign tax credit with respect to non-U.S. income tax withheld from a dividend received on the Ordinary Shares if such U.S. Holder has not held the Ordinary Shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date with respect to such dividend, or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the Ordinary Shares are not counted toward meeting the required 16 day holding period. Distributions of current or accumulated earnings and profits generally will be foreign source income for United States foreign tax credit purposes; however, special rules will apply if we are a “United States-owned foreign corporation.” In that case, distributions of current or accumulated earnings and profits will be treated as U.S.-source and foreign-source income in proportion to our earnings and profits in the year of the distribution allocable to U.S. and foreign sources. We will be treated as a “United States-owned foreign corporation” as long as stock representing 50% or more of the voting power or value of our shares is owned, directly or indirectly, by United States persons. Israeli withholding taxes allocable to the portion of our distributions treated as from U.S. sources under these rules may not be creditable against a U.S. Holder’s U.S. federal income tax liability on such portion.

Taxation of the Disposition of Ordinary Shares. Upon the sale, exchange or other disposition of our Ordinary Shares, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’s basis in such Ordinary Shares, which is usually the cost of such shares, and the amount realized on the disposition. A U.S. Holder that uses the cash method of accounting calculates the U.S. dollar value of the proceeds received on the sale as of the date that the sale settles, while a U.S. Holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the “trade date,” unless such U.S. Holder has elected to use the settlement date to determine its proceeds of sale. Capital gain from the sale, exchange or other disposition of Ordinary Shares held more than one year is long-term capital gain, and is eligible for a reduced rate of taxation for individuals. Individual U.S. Holders currently are subject to a maximum rate of 15% on long-term capital gains for taxable years beginning on or before December 31, 2010 and generally subject to a maximum capital gain rate of 20% thereafter. Gains recognized by a U.S. Holder on a sale, exchange or other disposition of Ordinary Shares generally will be treated as United States source income for United States foreign tax credit purposes. A loss recognized by a U.S. Holder on the sale, exchange or other disposition of Ordinary Shares is generally allocated to U.S. source income. Under the income tax treaty between the United States and Israel (the “Tax Treaty”), gain derived from the sale, exchange or other disposition of Ordinary Shares by a holder who qualifies as a resident of the United States and is entitled to claim the benefits under the Tax Treaty, and who sells the Ordinary Shares within Israel, may be treated as foreign-source income for U.S. foreign tax credit purposes. The deductibility of a capital loss recognized on the sale, exchange or other disposition of Ordinary Shares is subject to limitations. A U.S. Holder that receives foreign currency upon disposition of Ordinary Shares and converts the foreign currency into U.S. dollars subsequent to the settlement date or trade date (whichever date the taxpayer was required to use to calculate the value of the proceeds of sale) will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally be U.S. source ordinary income or loss.

Anti-Deferral Regimes. Notwithstanding the above rules regarding distributions and dispositions, special rules may apply to some U.S. Holders (or to the direct or indirect beneficial owners of some non-U.S. Holders) if one or more anti-deferral regimes discussed below are applicable. The rules regarding each of these regimes, as well as their interaction with each other, are complex, and holders should consult their tax advisers with respect to any impact these regimes may have on the tax consequences of their purchase, ownership or disposition of our shares.

Controlled Foreign Corporation Status. If more than 50% of the voting power of all classes of our stock or the total value of the stock of our company is owned, directly or indirectly, by U.S. Holders, each of whom own after applying rules of attribution 10% or more of the total combined voting power of all classes of our stock, we would be treated as a “controlled foreign corporation” or “CFC” under Subpart F of the Code. This classification would bring into effect many complex rules including the required inclusion in income by such 10% U.S. Holders of their pro rata share of our “Subpart F income” (as defined by the Code) and our earnings invested in “U.S. property” (as defined by Section 956 of the Code). In addition, under Section 1248 of the Code if we are considered a CFC at any time during the five-year period ending with the sale or exchange of our Ordinary Shares by such 10% U.S. Holders, gain from such sale or exchange of our Ordinary Shares generally is treated as ordinary dividend income to the extent of our earnings and profits attributable to the stock sold or exchanged. We do not believe that we are a CFC, but if we were to become a CFC, we would not be a passive foreign investment company, as discussed below, with regard to any such 10% U.S. Holder. Because of the complexity of Subpart F, and because we may never be a CFC, a more detailed review of these rules is beyond of the scope of this discussion.

Passive Foreign Investment Company Status. We would be a passive foreign investment company, or PFIC, if (i) 75% or more of our gross income in a taxable year (including our pro rata share of the gross income of any company treated as a corporation for U.S. Federal income tax purposes, U.S. or foreign, in which we are considered to own directly or indirectly 25% or more of the shares by value) is passive income, or (ii) the value of our assets averaged quarterly over the taxable year (including our pro rata share of the assets of any company treated as a corporation for U.S. Federal income tax purposes in which we are considered to own directly or indirectly 25% or more of the shares by value) that produce, or are held for the production of, passive income is at least 50%. As discussed below, we believe that we were not a PFIC for 2006.

If we were a PFIC, each U.S. Holder would (unless it made one of the elections discussed below on a timely basis) be taxable on gain recognized from the disposition of Ordinary Shares (including gain deemed recognized if the Ordinary Shares are pledged as security for a loan) and upon receipt of certain distributions with respect to Ordinary Shares as if such income had been recognized ratably over the U.S. Holder’s holding period for the Ordinary Shares. The U.S. Holder’s income for the current taxable year would include (as ordinary income) amounts allocated to the current year and to any period prior to the first day of the first taxable year for which we were a PFIC. Tax would also be computed at the highest ordinary income tax rate in effect for each other period to which income is allocated, and an interest charge on the tax as so computed would also apply. Additionally, if we were a PFIC, U.S. Holders who acquire our Ordinary Shares from decedents (other than certain nonresident aliens) dying before 2010 would be denied the normally-available step-up in basis for such shares to fair market value at the date of death and, instead, would have a tax basis in such shares equal to the decedent’s basis, if lower.

As an alternative to the tax treatment described above, a U.S. Holder could elect to treat us as a “qualified electing fund” (a “QEF”), in which case the U.S. Holder would be taxed currently on its pro rata share of our ordinary earnings and net capital gain (subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge). Special rules apply if a U.S. Holder makes a QEF election after the first year in its holding period in which we are a PFIC. We have agreed to supply U.S. Holders with the information needed to report income and gain under a QEF election if we are a PFIC. As another alternative to the tax treatment described above, a U.S. Holder could elect to mark our Ordinary Shares to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of our Ordinary Shares and the shareholder’s adjusted basis in the Ordinary Shares. Losses would be allowed only to the extent of net mark-to-market gain previously included in income by the U.S. Holder.

Based on our income, assets, market capitalization and discussions with our advisors, we believe that we were not a passive foreign investment company for our tax year ended December 31, 2006. However, there can be no assurance that the United States Internal Revenue Service (“IRS”) will not challenge this conclusion. The tests for determining PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, and our market capitalization which are relevant to this determination. Accordingly, there can be no assurance that we will not become a PFIC in 2007 or in subsequent years. U.S. Holders who hold Ordinary Shares during a period when we are a PFIC (whether we were determined to be a PFIC in 2006, 2005 or any earlier year) will be subject to the foregoing rules, even if we cease to be a PFIC, subject to certain exceptions for U.S. Holders who made a QEF election or the mark-to-market election.

Although a U.S. Holder normally is not permitted to make a retroactive QEF election for a foreign corporation, a retroactive QEF election may be made for a taxable year of the U.S. Holder (the “retroactive election year”) if the U.S. Holder (i) reasonably believed that, as of the date the QEF election was due, the foreign corporation was not a PFIC for its taxable year that ended during the retroactive election year and (ii) filed and complied with a protective statement with respect to the foreign corporation, applicable to the retroactive election year, in which the U.S. Holder described the basis for its reasonable belief and extended the period of limitation on the assessment of taxes determined under Sections 1291 through 1298 of the Code with respect to the foreign corporation (PFIC related taxes) for all taxable years of the shareholder to which the protective statement applies. U.S. Holders should consult their tax advisors regarding the advisability of filing a protective statement.

U.S. Holders are urged to consult their tax advisors about the PFIC rules, including eligibility for and the manner and advisability of making, the QEF election (or a protective QEF election) or the mark-to market election.

Tax Consequences for Non-U.S. Holders of Ordinary Shares

Except as described in “Information Reporting and Back-up Withholding” below, a non-U.S. Holder of Ordinary Shares will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, Ordinary Shares, unless:

such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States and, in the case of a resident of a country which has a treaty with the United States, such item is attributable to a permanent establishment or, in the case of an individual, a fixed place of business, in the United States; or

·	the non-U.S. Holder is an individual who holds the Ordinary Shares as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition and certain other requirements are met.

Information Reporting and Back-up Withholding

U.S. Holders (other than exempt recipients such as corporations) generally are subject to information reporting requirements with respect to dividends paid in the United States on, and proceeds from the disposition of, Ordinary Shares. Under the Code, a U.S. Holder may be subject, under certain circumstances, to backup withholding at a rate of up to 28% with respect to such dividends or disposition proceeds unless the U.S. Holder provides proof of an applicable exemption or correct taxpayer identification number and otherwise complies with applicable requirements of the backup withholding rules.

A U.S. Holder of Ordinary Shares who does not provide a correct taxpayer identification number may be subject to penalties imposed by the IRS. Amounts withheld under the backup withholding rules are not an additional tax and may be refunded or credited against the Holder’s federal income tax liability, provided the required information is furnished to the IRS.

Non-U.S. Holders generally are not subject to information reporting or back-up withholding with respect to dividends paid on, or the proceeds from the disposition of, Ordinary Shares, provided that such non-U.S. Holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption.

Israeli Income Tax Considerations

The following is a summary of the current tax structure applicable to companies in Israel, with special reference to its effect on us. The following also contains a discussion of certain Israeli Government programs benefiting us. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.

General Corporate Tax Structure

Israeli companies are currently subject to corporate tax at the rate of 31%. Until December 31, 2003, the regular tax rate applicable to income of companies was 36%. In June 2004 and in July 2005, the “Knesset” (Israeli parliament) passed amendments to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004 and (No. 147), 2005 respectively, which determined, among other things, that the corporate tax rate is to be gradually reduced to the following tax rates: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and 2010 and thereafter - 25%.

Law for the Encouragement of Industry (Taxes), 1969

We believe that we currently qualify as an industrial company within the definition of the Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, which provides several tax benefits for industrial companies. An industrial company is defined as a company resident in Israel, at least 90% of the income of which in a given tax year exclusive of income from specified government loans, capital gains, interest and dividends, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial production activity.

Under the Industry Encouragement Law, industrial companies are entitled to a number of corporate tax benefits, including:

deduction of purchase of know-how and patents and/or right to use a patent over an eight-year period;

the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies and an industrial holding company;

accelerated depreciation rates on equipment and buildings; and

Expenses related to a public offering on the Tel Aviv stock exchange and as of 1.1.2003 on recognized stock markets outside of Israel, are deductible in equal amounts over three years.

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

Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.

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

Law for the Encouragement of Capital Investments, 1959

Tax benefits prior the 2005 amendment

The Law for the Encouragement of Capital Investments, 1959, (the “Investments Law”), provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Commerce of the State of Israel, be designated as an approved enterprise. The Investment Center bases its decision as to whether or not to approve an application, among other things, on the criteria set forth in the Investments Law and regulations, the then prevailing policy of the Investment Center, and the specific objectives and financial criteria of the applicant. Each certificate of approval for an approved enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, e.g., the equipment to be purchased and utilized pursuant to the program.

The Investments Law provides that an approved enterprise is eligible for tax benefits on taxable income derived from its approved enterprise programs. The tax benefits under the Investments Law also apply to income generated by a company from the grant of a usage right with respect to know-how developed by the approved enterprise, income generated from royalties, and income derived from a service which is auxiliary to such usage right or royalties, provided that such income is generated within the approved enterprise’s ordinary course of business. If a company has more than one approval or only a portion of its capital investments are approved, its effective tax rate is the result of a weighted average of the applicable rates. The tax benefits under the Investments Law are not, generally, available with respect to income derived from products manufactured outside of Israel. In addition, the tax benefits available to an approved enterprise are contingent upon the fulfillment of conditions stipulated in the Investments Law and regulations and the criteria set forth in the specific certificate of approval, as described above. In the event that a company does not meet these conditions, we would be required to refund the amount of tax benefits, plus a consumer price index linkage adjustment and interest.

The Investments Law also provides that an approved enterprise is entitled to accelerated depreciation on its property and equipment that are included in an approved enterprise program in the first five years of using the equipment.

Taxable income of a company derived from an approved enterprise is subject to corporate tax at the maximum rate of 25%, rather than the regular corporate tax rate, for the benefit period.

A company may elect to receive an alternative route of benefits. Under the alternative route of benefits, a company’s undistributed income derived from the approved enterprise will be exempt from corporate tax for a period of between two and ten years from the first year the company derives taxable income under the program, depending on the geographic location of the approved enterprise within Israel, and such company will be eligible for a reduced tax rate for the remainder of the benefits period. This period is ordinarily seven years commencing with the year in which the approved enterprise first generates taxable income, and is limited to 12 years from commencement of production or 14 years from the date of approval, whichever is earlier.

A company that has elected the alternative route of benefits, that subsequently pays a dividend out of income derived from the approved enterprise during the tax exemption period will be subject to corporate tax in respect of the amount distributed, including any taxes thereon, at the rate which would have been applicable had it not elected the alternative route of benefits, generally 10%-25%, depending on the percentage of the company’s ordinary shares held by foreign shareholders. The dividend recipient is subject to withholding tax at the rate of 15% applicable to dividends from approved enterprises, if the dividend is distributed during the tax exemption period or within twelve years thereafter. The company must withhold this tax at source.

Subject to applicable provisions concerning income under the alternative route of benefits, dividends paid by a company are considered to be attributable to income received from the entire company and the company’s effective tax rate is the result of a weighted average of the various applicable tax rates, excluding any tax-exempt income. Under the Investments Law, a company that has elected the alternative route of benefits is not obliged to distribute retained profits, and may generally decide from which year’s profits to declare dividends. We currently intend to reinvest any income derived from our approved enterprise program and not to distribute such income as a dividend.

Foreign Investors’ Company (“FIC”)

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

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

An additional period of reduced corporate tax liability at rates ranging between 10% and 25%, depending on the level of foreign (i.e., non-Israeli) ownership of our shares. Those tax rates and the related levels of foreign investment are as set forth in the following table:

Rate of Reduced Tax	Reduced Tax Period	Tax Exemption Period	Percent of Foreign Ownership
25	5 years	10 years	0-25%
25	8 years	10 years	25-48.99%
20	8 years	10 years	49-73.99%
15	8 years	10 years	74-89.99%
10	8 years	10 years	90-100%

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

Tax benefits under the 2005 Amendment

A recent amendment to the Law, which has been officially published effective as of April 1, 2005 (the “Amendment”) has changed certain provisions of the Law. The Amendment includes revisions to the criteria for investments qualified to receive tax benefits as an Approved Enterprise. The Amendment also, applies to new investment programs and investment programs commencing after 2004, and does not apply to investment programs approved prior to December 31, 2004. However, a company that was granted benefits according to section 51 of the Investment Law would not be allowed to commence production for a period of 3 years from the date of approval.

Our company will continue to enjoy its current tax benefits in accordance with the provisions of the Investment Law prior to its revision, but if our company is granted any new benefits in the future they will be subject to the provisions of the amended Investment Law. Therefore, the following discussion is a summary of the Investment Law prior to its amendment as well as the relevant changes contained in the new legislation.

The Amendment simplifies the approval process: according the Amendment, only Approved Enterprises receiving cash grants require the approval of the Investment Center. The Investment Center will be entitled, to approve such programs only until December 30, 2007.

The Amendment does not apply to benefits included in any certificate of approval that was granted before the Amendment came into effect, which will remain subject to the provisions of the Investment Law as they were on the date of such approval.

Tax benefits are available under the Amendment to production facilities (or other eligible facilities), which are generally required, among others, to derive more than 25% of their business income from export (referred to as a “Benefited Enterprise”). In order to receive the tax benefits, the Amendment states that the company must make an investment in the Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the Law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to the Benefited Enterprise (the “Year of Election”). Where the company requests to have the tax benefits apply to an expansion of existing facilities, then only the expansion will be considered a Benefited Enterprise and the company’s effective tax rate will be the result of a weighted combination of the applicable rates. In this case, the minimum investment required in order to qualify as a Benefited Enterprise is required to exceed a certain percentage or a minimum amount of the company’s production assets before the expansion.

The duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from the Commencement Year, or 12 years from the first day of the Year of Election. Please note that the year’s limitations also apply to the exemption period. The tax benefits granted to a Benefited Enterprise are determined, as applicable to its geographic location within Israel, according to one of the following new tax routes, which may be applicable to us:

Similar to the currently available alternative route, exemption from corporate tax on undistributed income for a period of two to ten years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in each year. Benefits may be granted for a term of seven to ten years, depending on the level of foreign investment in the company. If the company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption period, such income will be subject to corporate tax at the applicable rate (10%-25%) in respect of the gross amount of the dividend that we may distribute. The company is required to withhold tax at the source at a rate of 15% from any dividends distributed from income derived from the Benefited Enterprise; and

A special tax route, which enables companies owning facilities in certain geographical locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited Enterprise. The benefits period is ten years. Upon payment of dividends, the company is required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents.

Generally, a company that is Abundant in Foreign Investment (as defined in the Investments Law) is entitled to an extension of the benefits period by an additional five years, depending on the rate of its income that is derived in foreign currency.

The Amendment changes the definition of “foreign investment” in the Investments Law so that the definition now requires a minimal investment of NIS 5.0 million by foreign investors. Furthermore, such definition now also includes the purchase of shares of a company from another shareholder; provided that the company’s outstanding and paid-up share capital exceeds NIS 5.0 million. Such changes to the aforementioned definition will take effect retroactively from 2003.

The Amendment will apply to approved enterprise programs in which the year of election under the Investments Law is 2004 or later, unless such programs received approval from the Investment Center on or prior to December 31, 2004, in which case the Amendment provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval.

As a result of the amendment, tax-exempt income generated under the provisions of the new law, will subject the Company to taxes upon distribution or liquidation and the Company may be required to record deferred tax liability with respect to such tax-exempt income.

We have three approved enterprises. We elected to participate in the alternative benefits program. Since March 1998, following our initial public offering in the United States, we have been a “foreign investors’ company,” as defined by the Investment Law and we are therefore entitled to a ten year period of benefits (instead of a seven-year period), for enterprises approved after March 1998. The period of benefits of our approved enterprises will expire during the period 2004 through 2014, and is conditioned upon maintaining our approved enterprise status. There can be no assurance that the current benefit program will continue to be available or that we will continue to qualify for such benefits.

A company that has elected to participate in the alternative benefits program and that subsequently pays a dividend out of the income derived from the approved enterprise during the tax exemption period will be subject to corporate tax in respect of the amount distributed (including withholding tax thereon) at the rate that would have been applicable had the company not elected the alternative benefits program (generally 10% - 25%). The dividend recipient is taxed at the reduced withholding tax rate of 15%, applicable to dividends from the approved enterprises if the dividend is distributed within 12 years after the benefits period or other rate provided under a treaty. The withholding tax rate will be 25% after such period. In the case of a company with a foreign investment level (as defined by the Investment Law) of 25% or more, the 12-year limitation on reduced withholding tax on dividends does not apply. Tax should be withheld by the company at source, regardless of whether the dividend is converted into foreign currency.

Our approved enterprise program and the tax benefits thereunder may not continue in the future at their current levels or at any level. The termination or reduction of these tax benefits would likely increase our taxes. The amount, if any, by which our taxes would increase will depend upon the rate of the tax increase, the amount of any tax benefit reduction, and the amount of any taxable income that we may earn in the future.

Taxation under Inflationary Conditions

The Income Tax (Inflationary Adjustments) Law, 1985 (the “Inflationary Adjustments Law”), was designed to neutralize the erosion of capital investments in business and to prevent tax benefits resulting from deduction of inflationary expenses. This law applies a supplementary set of inflationary adjustments to the normal taxable profits computed under regular historical cost principles.

The Inflationary Adjustments Law introduced a special tax adjustment for the preservation of equity based on changes in the Israeli CPI, whereby certain corporate assets are classified broadly into fixed (inflation-resistant) assets and non-fixed assets. Where a corporation’s equity exceeds the depreciated cost of fixed assets, a tax deduction that takes into account the effect of the annual rate of inflation on such excess is allowed (up to a ceiling of 70% of taxable income for companies in any single year, with the unused portion carried forward on a linked basis, without limit). If the depreciated cost of fixed assets exceeds shareholders’ equity, then such excess, multiplied by the annual inflation rate, is added to taxable income.

Under the Inflationary Adjustments Law, results for tax purposes are measured in real terms, in accordance with changes in the Israeli CPI. We are taxed under this law. The discrepancy between the change in (1) the Israeli CPI and (2) the exchange rate of Israeli currency in relation to the dollar, may in future periods cause significant differences between taxable income and the income measured in dollars as reflected by our financial statements (which are measured in dollars). In addition, subject to certain limitations, depreciation of fixed assets and losses carried forward are adjusted for inflation on the basis of changes in the Israeli CPI.

Withholding and Capital Gains Taxes Applicable to Non-Israeli Shareholders

The State of Israel imposes income tax on nonresidents of Israel on income accrued or derived from sources in Israel or received in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. We are required to withhold income tax at the rate of 25%, or 15% for dividends of income generated by an approved enterprise, on all distributions of dividends other than bonus shares (stock dividends), unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. Under the income tax treaty between the United States and Israel, the maximum tax on dividends paid to a holder of Ordinary Shares who is a U.S. resident (as defined in the treaty) is 25%.

Capital Gains Taxes on Sales of our Ordinary Shares

Israeli law generally imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets located in Israel, including shares in Israeli companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate, between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.

Generally, until the 2006 tax year, capital gains tax was imposed on Israeli resident individuals at a rate of 15% on real gains derived on or after January 1, 2003, from the sale of shares in, among others, Israeli companies publicly traded on the NASDAQ Exchange or on a recognized stock exchange or regulated market in a country that has a treaty for the prevention of double taxation with Israel. This tax rate was contingent upon the shareholder not claiming a deduction for financing expenses in connection with such shares (in which case the gain was generally be taxed at a rate of 25%), and did not apply to: (i) the sale of shares to a relative (as defined in the Israeli Income Tax Ordinance); (ii) the sale of shares by dealers in securities; (iii) the sale of shares by shareholders that report in accordance with the Inflationary Adjustments Law (that were taxed at corporate tax rates for corporations and at marginal tax rates for individuals); or (iv) the sale of shares by shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement).

As of January 1, 2006, the tax rate applicable to capital gains derived from the sale of shares, whether listed on a stock market or not, is 20%, retroactive from January 1, 2003, for Israeli individuals, unless such shareholder claims a deduction for financing expenses in connection with such shares, in which case the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a “material shareholder” at any time during the 12-month period preceding such sale, i.e., such shareholder holds directly or indirectly, including with others, at least 10% of any means of control in the company, the tax rate shall be 25%. Israeli companies are subject to the Corporate Tax rate on capital gains derived from the sale of shares, unless such companies were not subject to the Adjustments Law (or certain regulations) at the time of publication of the aforementioned amendment to the Tax Ordinance that came into effect on January 1, 2006, in which case the applicable tax rate is 25%. However, the foregoing tax rates do not apply to: (i) dealers in securities; and (ii) shareholders who acquired their shares prior to an initial public offering (that may be subject to a different tax arrangement).

The tax basis of publicly shares acquired prior to January 1, 2003 will be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.

Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange or regulated market outside of Israel, provided however that such capital gains are not derived from a permanent establishment in Israel, such shareholders are not subject to the Adjustments Law, and such shareholders did not acquire their shares prior to an initial public offering. However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

In some instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.

Pursuant to the Convention Between the government of the United States of America and the government of Israel with Respect to Taxes on Income, as amended (the “U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to such person by the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli capital gains tax. Such exemption will not apply if (i) such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition, subject to certain conditions, or (ii) the capital gains from such sale, exchange or disposition can be allocated to a permanent establishment in Israel. In such case, the sale, exchange or disposition of ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local taxes.

Israel presently has no estate or gift tax.

F.	Dividends and Paying Agents.

Not Applicable.

G.	Statement by Experts.

Not Applicable.

H.	Documents on Display.

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers and fulfill the obligation with respect to such requirements by filing reports with the Securities and Exchange Commission. You may read and copy any document we file with the Securities and Exchange Commission without charge at the Securities and Exchange Commission’s public reference room at 100 F Street, NE., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Branch of the Securities and Exchange Commission at such address, at prescribed rates. Additionally, copies of this material may be obtained from the Securities and Exchange Commission’s website at http://www.sec.gov. Please call the Securities and Exchange Commission at l-800-SEC-0330 for further information on the public reference room.

As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not be required under the Exchange Act to file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. A copy of each report submitted in accordance with applicable U.S. law is available for public review at our principal executive offices.

I.	Subsidiary Information.

Not Applicable.

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We do not utilize financial instruments for trading purposes and hold no derivative financial instruments that could expose us to significant market risk.

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

Not Applicable.

PART II

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

None.

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.

Not Applicable.

ITEM 15T.

CONTROLS AND PROCEDURES.

(a) Disclosure Controls and Procedures.

Our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, are responsible for establishing and maintaining our disclosure controls and procedures. These controls and procedures were designed to ensure that information relating to us and our subsidiaries required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We evaluated these disclosure controls and procedures under the supervision of our CEO and CFO as of December 31, 2006. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective in timely alerting them to information required to be disclosed in our periodic reports to the SEC.

(b) Management’s annual report on internal control over financial reporting

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

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

There were no changes in the Company’s internal control over financial reporting that occurred during the year ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 16.

[RESERVED]

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

Our Board of Directors has determined that the Company has at least one audit committee financial expert, Ben-Zion Zilberfarb, serving on our Audit Committee. Dr. Zilberfarb is also an independent director.

ITEM 16B.

CODE OF ETHICS

The Company has adopted a written code of ethics that applies to all Company employees, including the Company’s principal executive officer, principal financial officer and principal accounting officer. Our Code of Ethics was filed as an exhibit to our Form 20-F, for the year ended December 31, 2003.

Our Code of Ethics is also posted on our website at http://www.fundtech.com or you may request a copy, at no cost, by writing to or telephoning us as follows:

12 Ha’hilazon Street, 5th Floor

Ramat-Gan, Israel

Tel#. 011-972-3-611-6500

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

In the annual meeting held on December 21, 2006, our shareholders re-appointed Brightman Almagor & Co., a member of Deloitte Touche Tohmatsu to serve as our independent auditors for the 2006 fiscal year.

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

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

[a] Amount represents tax fees for a subsidiary of Fundtech Ltd. Tax fees for Fundtech Ltd. are included in audit fees under a fixed fee arrangement.

AUDIT FEES

Audit fees are the aggregate fees associated with the annual audit and reviews of the Company’s quarterly interim financial results submitted on Form 6-K, and consultations on various accounting issues.

AUDIT-RELATED FEES

Audit-related services principally include due diligence examinations as well as assistance with the requirements of the Sarbanes-Oxley Act of 2002 and related SEC regulations that are not reasonably related to the performance of the audit or review of our financial statements and are not reported under Audit Fees.

TAX FEES

Tax fees are the aggregate fees associated with professional services rendered for tax compliance, tax advice on actual or contemplated transactions and tax planning such assistance with tax audits and tax advice.

ALL OTHER FEES

In fiscal 2006, Other Fees paid were immaterial.

AUDIT COMMITTEE’S PRE-APPROVAL POLICIES AND PROCEDURES

Our audit committee is responsible for the oversight of our independent auditor’s work. The audit committee’s policy is to pre-approve all audit and non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services, as described above. The audit committee sets forth the basis for its pre-approval in detail, listing the particular services or categories of services which are pre-approved, and approving a specific budget for such services. Additional services may be pre-approved by the audit committee on an individual basis. Once services have been pre-approved, our independent auditors and our management team report to the audit committee on a periodic basis regarding the extent of services actually provided in accordance with the applicable pre-approval, and regarding the fees for services performed. In fiscal 2006, the Company’s Audit Committee approved all of the services provided by our independent auditor.

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not Applicable.

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Issuer Purchases of Equity Securities

Period

(a) Total Number of Shares (Or Units) Purchased

(b) Average Price Paid per Share (or Units)

(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(3)

May 2006

24,881

4.019(2

)

Not Applicable

June 2006

76,215

10.09(1

)

76,215

5,930,099.70

August 2006

111,594

9.70(1

)

111,594

4,848,499.80

September 2006

4,130

9.78(1

)

4,130

4,808,108.40

November 2006

107,444

11.88(1

)

107,444

3,531,673.68

December 2006

15,000

5.00(2

)

Not Applicable

(1)	Represents ordinary share repurchases.

(2)	Represents purchases of shares through vested stock option exercises.

(3)	We have the right to petition the Tel Aviv District Court for approval to purchase an additional $13.3 million in shares, but as of this date have not

taken such action.

PART III

ITEM 17.

FINANCIAL STATEMENTS.

Not Applicable.

ITEM 18.

FINANCIAL STATEMENTS.

The Financial Statements required by this item are found at the end of this Annual Report, beginning on page F-1.

ITEM 19.

EXHIBITS.

The exhibits filed with or incorporated into this annual report are listed on the index of exhibits below.

EXHIBIT NUMBER		DESCRIPTION OF EXHIBIT
1.1		Amended Memorandum of Association of Registrant(1)

1.2		Amended and Restated Articles of Association of Registrant(1)

EXHIBIT NUMBER		DESCRIPTION OF EXHIBIT
2.1		Form of Ordinary Share Certificate(1)

2.2		Form of Registration Rights(1)

4.1		Fundtech Ltd. December 1997 Israeli Share Option Plan (English summary)(1)

4.2		Fundtech Ltd. 1999 Employee Option Plan(3)

4.3		Fundtech Ltd. Directors Option Plan(4)

4.4		Employment Agreement between Reuven Ben Menachem and Fundtech Corporation, dated November 25, 1997(2)

4.5		Lease Agreement for Cashtech’s facility in Bombay, India(8)

4.6		Lease Agreement relating to Fundtech’s Facility in Ramat-Gan, Israel (English summary)(2)

4.7		Lease Agreement relating to Fundtech’s Facility in Norcross, Georgia(2)

4.8		Lease Agreement relating to Fundtech’s Facility in Jersey City, New Jersey(5)

4.9		Lease Agreement relating to Fundtech’s Facility in Burlington, Massachusetts(5)

4.10		Fundtech Ltd. 2005 International Share Option and Restricted Share Incentive Plan(7)

4.11		Fundtech Ltd. 2005 Israeli Share Option and Restricted Share Incentive Plan(7)

8		Subsidiaries of Registrant*

11		Code of Ethics(6)

12.1		Certification of the Chief Executive Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002*

12.2		Certification of the Chief Financial Officer of the Company in accordance with Section 302 of the Sarbanes-Oxley Act of 2002*

13.1		Certification of the Chief Executive Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002*

13.2		Certification of the Chief Financial Officer of the Company in accordance with Section 906 of the Sarbanes-Oxley Act of 2002*

15.1		Consent of Brightman Almagor & Co.*

(1) Previously filed as an exhibit to the Registrant’s Registration Statement on Form F-1, as amended, dated March 13, 1998, and incorporated herein by reference.

(2) Previously filed as an exhibit to the Registrant’s Report on Form 10-K, dated March 30, 1999, and incorporated herein by reference.

(3) Previously filed as an annex to the Registrant’s Proxy Statement, dated August 23, 1999.

(4) Previously filed as Exhibit to the Registrant’s Registration Statement on Form S-8, as amended (Commission Registration No. 333-9380), and incorporated herein by reference.

(5) Previously filed as an exhibit to the Registrant’s Report on Form 20-F, dated June 11, 2003, and incorporated herein by reference.

(6) Previously filed as an exhibit to the Registrant’s Report on Form 20-F, dated June 29, 2004, and incorporated herein by reference.

(7) Previously filed as an annex to the Registrant’s Proxy Statement, filed on November 30, 2005.

(8) Previously filed as an exhibit to the Registrant’s Report on Form 20-F, dated May 27, 2005, and incorporated herein by reference.

* Filed herewith.

FUNDTECH LTD.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006

FUNDTECH LTD.

CONSOLIDATED FINANCIAL STATEMENTS

INDEX

	Page

A. Report of Independent Registered Public Accounting Firm		1

Consolidated Financial Statements:

B. Balance Sheets

as of December 31, 2006 and 2005		2

C. Statements of Operations

for the years ended December 31, 2006, 2005 and 2004		3

D. Statements of Shareholders' Equity

for the years ended December 31, 2006, 2005 and 2004		4 - 5

E. Statements of Cash Flows

for the years ended December 31, 2006, 2005 and 2004		6 - 7

F. Notes to Consolidated Financial Statements		8 - 33

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

Fundtech Ltd.

We have audited the accompanying consolidated balance sheets of Fundtech Ltd. ("the Company") and its subsidiaries as of December 31, 2006 and 2005 and the related statements of operations, changes in shareholders' equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2006 and 2005 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

Brightman Almagor & Co.

Certified Public Accountants

A member firm of Deloitte Touche Tohmatsu

Tel Aviv, Israel

March 12, 2007

FUNDTECH LTD.

CONSOLIDATED BALANCE SHEET

(In thousands)

	December 31,
	2006			2005

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	28,616		$	30,807
Short term investments					216
Marketable securities (Note 4)		18,551			18,576
Trade receivables (net of allowance for doubtful accounts of $ 1,078 and $ 1,664 at December 31, 2006 and 2005, respectively) (Note 5)		25,058			17,262
Other accounts receivable and prepaid expenses		2,608			2,601
Total current assets		74,833			69,462

Severance pay fund		1,221			871
Long-term deposits		639			734
Prepaid expenses		1,821			1,321
Property and equipment, net (Note 6)		11,944			10,281
Goodwill		18,979			17,655
Intangible assets, net (Note 7a)		2,232			3,508
Capitalized software development, net (Note 7b)		394			1,969

Total assets	$	112,063			105,801

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Trade payables	$	2,444		$	2,021
Deferred revenues		7,567			7,686
Accrued restructuring expenses		185			336
Employees and payroll accruals		4,483			3,225
Other accounts payable and accrued expenses (Note 8)		5,360			6,285
Total current liabilities		20,039			19,553

Accrued severance pay		1,399			981
Accrued restructuring expenses		62			100
Other long term liabilities		777			157
Total liabilities		22,277			20,791

SHAREHOLDERS' EQUITY (Note 10)
Share capital		46			44
Additional paid-in capital		146,611			142,636
Accumulated other comprehensive income (loss)		(196	)		(414	)
Accumulated deficit		(53,417	)		(57,168	)
		93,044			85,098

Treasury shares at cost, 320,883 shares as of December 31, 2006		(3,258	)		(88	)
Total shareholders' equity		89,786			85,010

Total liabilities and shareholders’ equity	$	112,063		$	105,801

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

FUNDTECH LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

	Year ended December 31,
	2006			2005			2004

Revenues (Note 2j)

Software license fees	$	13,576		$	16,523		$	16,395
Software hosting		13,403			10,501			8,034
Maintenance		22,513			20,248			17,072
Services fees		36,017			27,100			16,721
Hardware sales		-			94			315

Total revenues		85,509			74,466			58,537

Operating Expenses

Software license costs		604			522			626
Amortization of capitalized software development costs		1,576			1,575			1,576
Amortization of other acquired intangible assets		1,275			1,154			966
Maintenance and services costs		34,726			29,947			23,001
Hardware costs		-			80			266
Research and development		16,710			13,480			11,171
Selling and marketing		15,754			13,734			11,462
General and administrative		12,133			9,557			7,254

Total operating expenses		82,778			70,049			56,322

Operating income		2,731			4,417			2,215
Financial income, net (Note 14)		1,984			1,085			727
Income before taxes on income		4,715			5,502			2,942

Taxes on income (Note 12f)		(964	)		(1,166	)		(475	)

Net income	$	3,751		$	4,336		$	2,467

Basic earnings per share (Note 11)	$	0.25		$	0.29		$	0.17

Diluted earnings per share (Note 11)	$	0.24		$	0.27		$	0.16

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

FUNDTECH LTD.

CONSOLIDATED STATEMENTS OF

SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In thousands)

(except share data)

										Accumulated
					Additional					other						Total			Total
	Ordinary shares				paid-in		Treasury			comprehensive			Accumulated			comprehensive			shareholders'
	Shares		Amount		capital		shares			income (loss)			deficit			income			equity

Balance as of January 1, 2004		14,527,871	$	43	$	140,730		(88	)	$	(180	)	$	(63,971	)				$	76,534
Exercise of stock options		128,071		-		544		-			-			-			-			544
Foreign currency translation adjustments		-		-		-		-			260			-		$	260			260
Net income		-		-		-		-			-			2,467			2,467			2,467

Total comprehensive income																$	2,727
Balance as of December 31, 2004		14,655,942		43		141,274		(88	)		80			(61,504	)					79,805
Exercise of stock options		316,522		1		1,362		-			-			-						1,363
Common stock issued for restricted stock grant		153,331		-		-		-			-			-						-
Foreign currency translation adjustments		-		-		-		-			(494	)		-			(494	)		(494	)
Net income		-		-		-		-			-			4,336			4,336			4,336

Total comprehensive income																$	3,842
Balance as of December 31, 2005		15,125,795	$	44	$	142,636	$	(88	)	$	(414	)	$	(57,168	)				$	85,010

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

FUNDTECH LTD.

CONSOLIDATED STATEMENTS OF

SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(In thousands)

(except share data)

										Accumulated
					Additional					other						Total		Total
	Ordinary shares				paid-in		Treasury			comprehensive			Accumulated			comprehensive		shareholders'
	Shares		Amount		capital		shares			income (loss)			deficit			Income		equity

Balance as of December 31, 2005		15,125,795	$	44	$	142,636		(88	)	$	(414	)	$	(57,168	)			$	85,010

Exercise of stock options		289,745		1		1,488													1,489
Common stock issued for restricted stock grant		240,205		1															1
Stock based compensation						2,487													2,487
Foreign currency translation adjustments											218					$	218		218
Purchase of Treasury shares								(3,170	)										(3,170	)
Net income														3,751			3,751		3,751

Total comprehensive income																$	3,969
Balance as of December 31, 2006		15,655,745	$	46	$	146,611	$	(3,258	)	$	(196	)	$	(53,417	)			$	89,786

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

FUNDTECH LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year ended December 31,
	2006			2005			2004

Cash flows provided by operating activities:

Net income	$	3,751		$	4,336		$	2,467
Adjustments to reconcile net income to net cash
provided by operating activities (Appendix A):		1,578			5,972			5,182

Net cash provided by operating activities		5,329			10,308			7,649

Cash flows used for investing activities:

Investments in held-to-maturity marketable securities		(34,294	)		(16,440	)		(25,855	)
Proceeds from sale of held-to-maturity marketable securities		34,352			20,490			26,486
Acquisition of subsidiaries, net of cash acquired (Appendix B)		(1,350	)		(1,973	)		(4,311	)
Increase in long-term lease deposits		314			(20	)		(86	)
Purchase of property and equipment		(5,177	)		(5,390	)		(4,318	)
Proceeds from sale of property and equipment		3			27			24

Net cash used for investing activities		(6,152	)		(3,306	)		(8,060	)

Cash flows provided by financing activities:

Proceeds from exercise of stock options, net		1,490			1,363			544
Purchase of Treasury shares, at cost		(3,170	)		-			-
Repayment of long-term debt		(82	)		-			(82	)

Net cash provided by financing activities		(1,762	)		1,363			462

Effect of exchange rate on cash and cash equivalents		394			(918	)		409

Increase (decrease) in cash and cash equivalents		(2,191	)		7,447			460
Cash and cash equivalents at the beginning of the year		30,807			23,360			22,900

Cash and cash equivalents at the end of the year	$	28,616		$	30,807		$	23,360

Supplemental disclosure of cash flows activities:

Cash paid during the year for:
Interest	$	12		$	16		$	24
Income taxes	$	807		$	1,108		$	566

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

FUNDTECH LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year ended December 31,
	2006			2005			2004

Appendix A - Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization	$	6,450		$	5,836		$	5,333
Decrease (increase) in trade receivables , net		(7,658	)		868			(2,863	)
Increase in other accounts receivable
and prepaid expenses		(387	)		(1,193	)		(725	)
Increase in trade payables		407			178			717
Increase in deferred revenues, employees and
payroll accruals and other accounts payable and accrued expenses		2,906			508			3,150
Decrease in accrued restructuring expenses		(189	)		(290	)		(605	)
Accrued severance pay, net		68			35			9
Accrued interest on marketable securities		(33	)		34			172
Other		14			(4	)		(6	)

	$	1,578		$	5,972		$	5,182

Appendix B - Acquisition of subsidiaries, net of cash acquired: (see Note 3)

Working capital deficiency, excluding cash and cash equivalents	$	-		$	(351	)	$	(1,394	)
Long term deposits		-			6			103
Property and equipment		-			38			174
Developed technology		-			878			873
Goodwill		1,350			1,402			4,555

	$	1,350		$	1,973		$	4,311

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

NOTE 1 - GENERAL OVERVIEW

Fundtech Ltd., an Israeli corporation, and its subsidiaries (“the Company”), is a leading provider of software solutions and services to financial institutions that facilitate payments, settlement and cash management by enabling banks and their customers to electronically manage cash, process payments and transfer funds. The Company's client-server and Internet based systems automate the process of transferring funds among corporations, banks and clearance systems and enable businesses to manage global cash positions efficiently and in real-time.

The Company sells and supports its products worldwide.

The Company operates in three business segments: Cash Management, Payments, and its Swiss subsidiary, Biveroni Batschelet Partners AG including its subsidiary Datasphere S.A (Collectively “BBP”).

The Company’s cash management solutions enable small, mid and large-tier financial institutions to deliver a complete set of cash management services through the Internet and other delivery channels. The Company’s payment solutions automate all aspects of the funds transfer, including foreign exchange, compliance, settlement and customer notification process, enabling straight-through-processing (STP) of transactions. BBP develops implements, maintains and operates systems for the automated processing and transport of data in the finance industry, primarily over the SWIFT Network. BBP also provides interbank gateway services. Its products include system solutions for interbank applications, as well as integration modules for host connections.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

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

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.

Financial statements in U.S. dollars

The majority of the revenues of Fundtech Ltd. and certain of its subsidiaries is generated in U.S. dollars ("dollar" or "dollars"). In addition, substantial portions of the Company’s costs are incurred in dollars. The Company believes that the dollar is the primary currency of the economic environment in which the Company operates. Thus, the functional and reporting currency of the Company is the dollar.

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The financial statements of foreign subsidiaries, whose functional currency is not the dollar, have been translated into dollars. Assets and liabilities have been translated using the exchange rates in effect at the balance sheet date. Statement of Operations amounts have been translated using the average exchange rate for the period. The resulting translation adjustments are reported in accumulated other comprehensive income (loss) in shareholders' equity.

Principles of consolidation

The consolidated financial statements include the accounts of Fundtech Ltd. and its subsidiaries, all of which are wholly-owned. Intercompany balances and transactions have been eliminated in consolidation.

Cash equivalents

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

Marketable securities

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

Management determines the appropriate classification of its investments in marketable debt and equity securities at the time of purchase and reevaluates such determinations at each balance sheet date. Held-to-maturity securities include debt securities for which the Company has the intent and ability to hold to maturity. Debt securities for which the Company does not have the intent or ability to hold to maturity would be classified as available-for-sale. The Company does not hold any equity securities classified as trading securities or available-for-sale.

As of December 31, 2006 and 2005 all marketable securities are designated as held-to-maturity and, accordingly, are stated at amortized cost. Interest income including the amortization of premium and discount are included in the consolidated statement of operations.

Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the shorter of the lease period or the estimated useful lives of the assets, as follows:

		years
Office furniture and equipment		6-17
Computers and software		3-5
Motor vehicles		6
Leasehold improvements		Over the term of the lease

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company periodically assesses the recoverability of the carrying amount of property and equipment based on expected undiscounted cash flows. If an asset’s carrying amount is determined to be not recoverable, the Company recognizes an impairment loss based upon the difference between the carrying amount and the fair value of such assets, in accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets” ("SFAS No. 144").

Software development costs

The Company capitalizes software development costs in accordance with SFAS No. 86 "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"). Capitalization of software development costs begins upon the establishment of technological feasibility, and continues up to the time the software is available for general release to customers. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by management with respect to certain external factors including, but not limited to, anticipated future gross product revenue, estimated economic life and changes in software and hardware technology.

Capitalized software development cost is amortized on a product-by-product basis and begins when the product is available for general release to customers. Annual amortization is the greater of the amount computed using the ratio of current gross revenue for a product to the total of current and anticipated product revenue or the straight-line basis over the remaining economic useful life of the software, which is not more than five years.

Acquisition-related intangible assets

The Company accounts for its business combinations in accordance with SFAS No. 141 “Business Combinations” (“SFAS 141”) and the related acquired intangible assets and goodwill in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 141 specifies the accounting for business combinations and the criteria for recognizing and reporting intangible assets apart from goodwill.

Acquisition-related intangible assets result from the Company's acquisitions of businesses accounted for under the purchase method and consist of the values of identifiable intangible assets including developed software products, distribution rights and trade names, as well as goodwill. Goodwill is the amount by which the acquisition cost exceeds the fair values of identifiable acquired net assets on the date of purchase. SFAS 142 requires that goodwill not be amortized but instead be tested for impairment in accordance with the provisions of SFAS 142 at least annually and more frequently upon the occurrence of certain events. Acquisition-related intangible assets are reported at cost, net of accumulated amortization. Identifiable intangible assets other than goodwill are amortized on a straight-line basis over their estimated useful lives of three to five years for developed software products and distribution rights, and seven years for trade-names.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Income taxes

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

Revenue recognition

The Company generates revenues from licensing the rights to use its software products directly to end-users, sales of professional services, including consulting, implementation and training. The Company also provides hosting services, contingency and recovery services, as well as maintenance and sales of hardware.

Revenue from software license agreements are recognized when all criteria outlined in Statement of Position 97-2 "Software Revenue Recognition" (as amended) (“SOP 97-2”) are met. Therefore, revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable.

Where software arrangements involve multiple elements, revenue is allocated to each element based on vendor specific objective evidence ("VSOE") of the relative fair values of each element in the arrangement. The Company's VSOE used to allocate the sales price to services and maintenance is based on the price charged when these elements are sold separately.

The Company generally does not grant right-of-return to its customers. The Company generally provides a warranty period for three months. The provision for warranty as of December 31, 2005 is immaterial.

Revenue from software licenses that require significant customization, integration and installation are recognized based on SOP 81-1 "Accounting for Performance of Construction Type and Certain Production Type Contracts", using contract accounting on the percentage of completion method, based on the relationship of actual labor costs incurred, to total labor costs estimated to be incurred over the duration of the contract. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Revenue from maintenance is recognized over the life of the maintenance agreement.

Severance pay

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

The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the conditions pursuant to Israeli severance pay law or labor agreements. The value of the deposited funds is based on the cash surrender value of these policies, including profits which were immaterial for all periods presented.

Severance expenses for the years ended December 31, 2006, 2005 and 2004, amounted to approximately $ 418, $ 283 and $ 216, respectively.

Concentration of credit risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term bank deposits, marketable securities, trade receivables and long-term trade receivables. The Company's cash, cash equivalents and marketable securities are maintained with high-quality institutions, and the composition and maturities of investments are regularly monitored by management. Generally, these securities and deposits are traded in a highly liquid market, may be redeemed upon demand and bear minimal risk.

The Company’s marketable securities include corporate bonds and notes, Euro dollar bonds and asset-backed securities.

The trade receivables of the Company include banks and large financial institutions. The Company generally does not require collateral; however, in certain circumstances, the Company may require letters of credit, other collateral or additional guarantees. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection. The Company performs ongoing credit evaluations of its customers (see Note 5).

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company has no off-balance sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

Basic and diluted earnings per share

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

In 2006, 2005 and 2004, certain outstanding stock options have been excluded from the calculation of the diluted earnings per ordinary share because of the anti-dilutive effect. The total weighted average number of shares related to the outstanding options excluded from the calculations of diluted earnings per share were 7,000, 54,000 and 557,175 for the years ended December 31, 2006, 2005 and 2004, respectively (see Note 11).

Stock-based compensation

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

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

	2006		2005		2004

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

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Stock-based compensation ( Cont.)

	*2006 ()**		2005			2004

Risk-free interest rate		-		3.86	%		3.24	%
Expected life of options		-		5 year			4 year
Expected volatility		-		55.9	%		66.5	%
Expected dividend yield		-		None			None

(*) No options were granted during 2006.

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

	2005			2004
G. Pro forma net income:

Net income for the year, as reported	$	4,336		$	2,467
Add - stock-based compensation determined under APB-25
Deduct - stock-based compensation determined under SFAS 123		(1,833	)		(1,610	)
Pro forma net income	$	2,503		$	857
H.

I. Pro forma basic earnings per share	$	0.17		$	0.06

Basic earnings per share as reported	$	0.29		$	0.17

Pro forma diluted earnings per share	$	0.16		$	0.06

Diluted earnings per share as reported	$	0.27		$	0.16

Fair value of financial instruments

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

· The carrying amounts of cash and cash equivalents, short-term bank deposits, trade receivables and trade payables approximate their fair value due to the short-term maturity of such instruments.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

· The fair value of marketable securities is based on quoted market prices (see Note 4).

Reclassification

Certain amounts from prior years have been reclassified in order to conform to the 2005 financial statements presentation.

Recent Accounting Pronouncements

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

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

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

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Recent Accounting Pronouncements ( Cont.)

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

NOTE 3 - ACQUISITIONS

In October 2005, the Company acquired all outstanding shares of Radius Partners, Inc. (“Radius”), a leading provider of straight through processing (STP) solutions to the global securities industry, located in Pembroke, Massachusetts, for an aggregate purchase price of approximately $2,544. This includes $2,242 paid in cash directly to the shareholders, $250 of liability to Fundtech that was converted to be part of the acquisition consideration and $52 of acquisition costs.

Radius provides software solutions and services that facilitate the matching and settlement of institutional trades. Radius’ business automation solutions provide financial institutions with the ability to improve operational efficiency, strengthen client relationships, securely increase transaction volumes and bring new products and services to market - quickly and profitably. By acquiring Radius, Fundtech adds domain knowledge and management depth in the securities processing arena.

Under the terms of the acquisition agreement, Fundtech will pay additional amounts of up to $3,500 in cash over six years following the acquisition, contingent upon the financial performance of Radius. Fundtech paid an additional amount of $220 in 2006 based on achieved financial performance milestones of which $100 were already accounted for in 2005. Further payments of $200 will be made in 2007 based on Radius 2006 financial performances, which were already accounted for in 2006.

This acquisition was accounted for in accordance with SFAS No. 141 and SFAS No. 142, and the financial results of Radius have been included in the Company's financial statements beginning on the acquisition date.

NOTE 3 - ACQUISITIONS (cont.)

The purchase price has been allocated on the basis of the estimated fair value of the assets purchased and the liabilities assumed. The excess of the purchase price over the fair value of the net tangible assets acquired has been attributed to other know-how and goodwill. The purchase price attributed to know-how is being amortized over its estimated useful life, which is 5 years. In accordance with SFAS No. 141 and SFAS No. 142, the purchase price attributed to goodwill is not amortized, but rather is subject to periodic impairment tests.

The allocation of fair value is as follows:

Working capital	$	576
Long term deposits		6
Property and equipment		38
Know-how		878
Goodwill		1,466
	$	2,964

In November 2004, the Company acquired all outstanding shares of India-based Cashtech Solutions India Private Limited (“Cashtech”) a leading provider of cash management software and services throughout Asia for an aggregate purchase price of $3,759 (including acquisition cost of $187). Cashtech’s products are targeted to large banks that seek highly customized applications and prefer a component-based approach in order to integrate with their complex infrastructure. Cashtech has sales offices in Singapore and Tokyo.

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

This acquisition was accounted for in accordance with SFAS No. 141 and SFAS No. 142, and the financial results of Cashtech have been included in the Company's financial statements beginning on the acquisition date.

The purchase price has been allocated on the basis of the estimated fair value of the assets purchased and the liabilities assumed. The excess of the purchase price over the fair value of the net tangible assets acquired has been attributed to know-how and goodwill. The purchase price attributed to know-how is being amortized over its estimated useful lives, which is 5 years. In accordance with SFAS No. 141 and SFAS No. 142, the purchase price attributed to goodwill is not amortized, but rather is subject to periodic impairment test.

NOTE 3 - ACQUISITIONS (cont.)

The allocation of fair value is as follows:

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

In October 2004, the Company acquired through BBP all outstanding shares of Datasphere S.A. (“Datasphere”), a Swiss provider of interbank clearing and securities settlement systems in Europe based in Geneva for an aggregate purchase price of $973. This includes $200 paid in cash directly to the shareholders, $746 that was transferred to fund the working capital of Datasphere and $27 of acquisition costs. The acquisition will allow the Company to expand its product line to support mainframe-systems as well as expand its geographic reach to southern Europe.

This acquisition was accounted for in accordance with SFAS No.141 and SFAS No. 142, and the financial results of Datasphere have been included in the Company's financial statements beginning on the acquisition date.

The purchase price has been allocated on the basis of the estimated fair value of the assets purchased and the liabilities assumed. The excess of the purchase price over the fair value of the

net tangible assets acquired has been attributed to goodwill. In accordance with SFAS No. 141 and SFAS No. 142, the purchase price attributed to goodwill is not amortized, but rather is subject to periodic impairment test.

The allocation of fair value is as follows:

Working capital deficiency	$	(517	)
Long Term Deposits		8
Property and equipment		21
Goodwill		1,461
	$	973

NOTE 4 - MARKETABLE SECURITIES

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

	$	18,551	$	18,576

Fair value	$	18,420	$	18,514

NOTE 5 - TRADE RECEIVABLES

	December 31,
	2006		2005

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

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

NOTE 6 - PROPERTY AND EQUIPMENT, NET

	December 31,
	2006		2005
Cost:
Office furniture and equipment	$	2,644	$	2,572
Computers and software		27,877		23,235
Motor vehicles		292		193
Leasehold improvements		3,007		2,792
		33,820		28,792

Accumulated depreciation		21,876		18,511
Net book value	$	11,944	$	10,281

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

	December 31,
	2006			20 5
a. Intangible assets
Cost:
Developed technology and know-how	$	5,992		$	5,992
Customer base		3,461			3,461
Other intangible assets		58			58
		9,511			9,511
Accumulated amortization		(7,279	)		(6,003	)
Net book value	$	2,232		$	3,508


b. Capitalized software development
Cost	$	7,876		$	7,876
Accumulated amortization		(7,482	)		(5,907	)
Net book value	$	394		$	1,969

NOTE 8 - OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

	December 31,
	2006		2005

Accrued expenses	$	4,475	$	5,524
Government authorities		877		761
Other		8		-
	$	5,360	$	6,285

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Lease commitments

The Company leases its facilities and vehicles under various operating lease agreements, which expire on various dates, the latest of which is in 2014. The minimum lease commitments under non-cancelable operating leases are as follows:

Year ended December 31,

2007		2,878
2008		2,492
2009		1,788
2010		894
2011-2014		1,989
	$	10,041

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

Guarantees:

The Company has obtained a bank guarantee of $45 in connection with the Company's facilities operating lease agreement in Israel.

The Company has obtained a bank guarantee of $410 for BBP as required by Swiss Law.

NOTE 10 - SHAREHOLDERS’ EQUITY

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

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

Treasury shares:

On February 21, 2002, the Company’s Board of Directors authorized the Company to purchase up to one million ordinary shares of the Company from time to time on the open market. As of December 31, 2006, the Company had purchased a total of 320,883 shares.

NOTE 10 - SHAREHOLDERS’ EQUITY (Cont.)

Stock -based compensation:

On December 21, 2005, the shareholders of the Company approved two new equity plans, the 2005 Israeli Share Option and Restricted Share Plan and 2005 International Share Option and Restricted Share Plan (the “2005 Plans”). No new shares were allocated to the 2005 Plans. These plans replaced the Company's 1998 Director’s Stock Option Plan and the 1999 Employee Stock Option Plan (the “Old Plans”), and all shares available for grant under the Old Plans, inclusive of shares which are returned to the share pool due to terminations or expirations, are transferred to the 2005 Plans. A total of 3,592,815 shares is reserved for grants to employees and directors of the Company under the Old Plans and the 2005 Plans.

Pursuant to the Plans, as of December 31, 2006, an aggregate of 185,141 shares of the Company are still available for future grants.

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

Each option granted under the Plans to employees expires not later than ten years from the date of the grant, except for grants to persons holding 10% or more of the Company’s stock, which expire in five years. Each option granted under the Plans to directors expires no later than five years from the date of grant. The options and restricted shares vest primarily over four years. Any options or restricted shares that are canceled or forfeited before expiration become available for future grants. Options or restricted shares granted to directors are vested over a one year period from their date of grant. The exercise price of the options granted under the plans may not be less than the nominal value of the shares into which such options are exercised.

NOTE 10 - SHAREHOLDERS’ EQUITY (Cont.)

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

	Year ended December 31,
	2006					2005					2004
				Weighted					Weighted					Weighted
				average		Number			average		Number			Average
	Number			exercise		of			exercise		Of			Exercise
	of options			Price		options			price		options			Price

Outstanding at January 1		2,410,490		$	6.43		2,196,225		$	5.65		2,114,087		$	5.56
Granted		-					569,500			8.75		270,350			8.20
Exercised		(289,745	)		5.13		(316,522	)		4.30		(128,071	)		4.11
Forfeited/cancelled		(11,025	)		9.74		(38,713	)		13.96		(60,141	)		16.91

Outstanding at December 31		2,109,720		$	6.59		2,410,490		$	6.43		2,196,225		$	5.65

Exercisable options at
December 31	$	1,555,172		$	5.93	$	1,403,054		$	5.28	$	1,275,563		$	4.76

The options outstanding as of December 31, 2006, have been separated into ranges of exercise price, as follows:

	Options		Weighted				Options
	Outstanding		Average		Weighted		Exercisable		Weighted
Ranges of	as of		Remaining		Average		as of		Average
Exercise	December 31,		Contractual		Exercise		December 31,		Exercise
Price	2006		Life (years)		Price		2006		Price

$ 3.55-5.00		722,925		5.7		4.01		652,797		4.01
$ 5.79-8.53		1,016,458		6.9		7.22		747,766		7.24
$ 8.70-10.52		363,337		8.3		9.84		147,609		9.76
$ 13.25-13.25		7,000		2.8		13.25		7,000		13.25
		2,109,720		6.7		6.59		1,555,172		6.15

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

Dividends

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

NOTE 11 - EARNINGS PER SHARE

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

	Year ended December 31,
	2006		2005		2004
Numerator:
Net income	$	3,751	$	4,336	$	2,467

Numerator for basic earnings per share -
income available to Ordinary
shareholders	$	3,751	$	4,336	$	2,467

Numerator for diluted net earnings per
share - income available to Ordinary
shareholders after assumed exercises	$	3,751	$	4,336	$	2,467

Denominator:	Number of shares
Denominator for basic net earnings per
share - weighted - average shares		14,879,241		14,862,054		14,590,310

Effect of dilutive securities:
Employee stock options		971,552		932,389		679,853

Denominator for diluted net earnings
per share		15,850,793		15,794,443		15,270,163

NOTE 12 - INCOME TAXES

Measurement of taxable income under the Israeli Income Tax Law (Inflationary Adjustments), 1985

The Company is assessed for tax purposes on an unconsolidated basis. Fundtech Ltd. is assessed under the provisions of the Income Tax Law (Inflationary Adjustments), 1985, pursuant to which the results for the tax purposes are measured in Israeli currency in real terms in accordance with changes in the Israeli Consumer Price Index (“CPI”). Each of the subsidiaries is subject to the tax rules prevailing in the country of incorporation.

Israeli Taxation

Corporate tax structure:

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

NOTE 12 - INCOME TAXES (Cont.)

Israeli Taxation (Cont.)

Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959:

The Company has been granted in November 1995 the status of an "Approved Enterprise", under the Israeli Law for the Encouragement of Capital Investments, 1959 (the "Investment Law") and the Company has elected the alternative benefits program, waiver of grants in return for tax exemptions. Pursuant thereto, the income of the Company derived from the "Approved Enterprise" program is tax-exempt for two years commencing with the year it first earns taxable income relating to each expansion program, and subject to corporate taxes at the reduced rate of 10% to 25%, for an additional eight years. The Company completed its investment according to certain of its first program on November 27, 1997. Income derived from this program was tax exempt for two years commencing in 1998 and will be subject to the reduced tax rates for eight years ending in 2007 (subject to an adjustment based upon the foreign investors' ownership of the Company). In 1998, the Company received approval for its first expansion program. In 2000, the Company received approval for its second expansion program. In 2005, under the Amendment to the Investment Law (see below for additional information), the company received approval for its third expansion program. Income derived from the expansion programs will be tax-exempt for a period of two years and will be subject to a reduced tax rate as mentioned above for an additional period of eight years. The period of benefits for these programs has not yet commenced since no income was derived. The period of tax benefits detailed above is subject to limits of 12 years from the year of commencement of production, or 14 years from the date of granting the approval, whichever is earlier.

The tax-exempt profits that will be earned by the Company's "Approved Enterprise" can be distributed to shareholders, without imposing tax liability on the Company only upon the complete liquidation of the Company. As of December 31, 2006, retained earnings included approximately $ 4,395 in tax exempt income earned by the Company's "Approved Enterprise". The Company has decided to permanently reinvest its tax exempt income. Accordingly, no deferred income taxes have been provided on income attributable to the Company's "Approved Enterprise".

If such tax-exempt income is distributed in a manner other upon the complete liquidation of the Company, it would be taxed at the reduced corporate tax rate applicable to such profits (between 20%-25%) and an income tax liability of up to approximately $1,099 would be incurred as December 31, 2006.

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

NOTE 12 - INCOME TAXES (Cont.)

Israeli Taxation (Cont.)

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

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

The Investment Law also grants entitlement to claim accelerated depreciation on equipment used by the "Approved Enterprise" during five tax years.

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

Income not eligible for “Approval Enterprise” benefits mentioned above is taxed at the Regular Tax Rate.

Net operating losses carryforwards

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

As of December 31, 2006, Fundtech Corporation had U.S. federal net operating loss carryforward of approximately $44,023 that can be carried forward and offset against taxable income for 10-15 years and begin to expire in 2010 through 2025. Utilization of U.S. net operating losses may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

NOTE 12 - INCOME TAXES (Cont.)

Deferred income taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company and its subsidiaries assets are as follows.

	December 31,
	2006			2005
Deferred tax assets:
U.S. net operating loss carryforwards	$	17,609		$	20,127
Israel net operating loss carryforwards		3,257			2,331
Other reserve and allowances		4,035			4,327
Total deferred tax assets		24,901			26,785
Valuation allowance		(22,866	)		(24,935	)
	$	2,035		$	1,850

Deferred tax liabilities:
Fixed assets and Intangible assets		(2,035	)		(1,850	)
	$	-		$	-

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

Tax assessments

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

NOTE 12 - INCOME TAXES (Cont.)

Composition of income tax expenses (Cont.)

	Year ended December 31,
	2006			2005			2004
Income (loss) before taxes on income:

Domestic	$	(7,305	)	$	(2,309	)	$	(2,490	)
Foreign		12,020			7,811			5,432
	$	4,715		$	5,502		$	2,942

Income tax provision (benefit) :

Current:
Domestic	$	106	$	33	$	119
Foreign		858		1,133		356
		964		1,166		475
Deferred:
Domestic		-		-		-
Foreign		-		-		-
		-		-		-
	$	964	$	1,166	$	475

NOTE 12 - INCOME TAXES (Cont.)

Theoretical taxes

The following is a reconciliation of the theoretical taxes on income assuming that all income is taxed at the ordinary rate applicable to Israeli companies and the actual taxes on income:

	Year ended December 31,
	2006			2005			2004

Income before taxes on income	$	4,715		$	5,502		$	2,942

Theoretical tax on the above amount	$	2,312		$	1,871		$	1,030

Tax benefit arising from "Approved Enterprise"		1,534			554			968

Decrease in valuation allowance		(2,069	)		(2,420	)		(1,184	)
Stock based compensation - nondeductible expenses		(772	)		-			-
Adjustments arising from differences in the basis of measurement for tax purposes and for financial reporting purposes		(44	)		905			(236	)

Other, net		3			256			(103	)

	$	964		$	1,166		$	475

NOTE 13 - OPERATING SEGMENT AND GEOGRAPHICAL INFORMATION

The Company evaluates its business activities in accordance with the provisions of SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information".

The Company has three operating business segments: Cash Management, Payments and BBP.

The Company’s cash management solutions enable small, mid and large-tier financial institutions to deliver a complete set of cash management services through the Internet and other delivery channels. The Company’s payments solutions automate all aspects of the funds transfer, including foreign exchange settlement and customer notification process, enabling straight-through-processing (STP) of payments. BBP develops, implements, maintains and operates systems for the automatic processing and transport of data in the finance industry. BBP also provides interbank gateway services. Its products include system solutions for interbank applications, as well as integration modules for host connections. The Company's chief operating decision makers evaluate performance of each segment based on income (loss) from operations before restructuring expenses, interest expenses and income taxes.

The Company does not identify or allocate its assets by operating segments as part of the assessment of segment performance.

The following table sets forth the Company’s revenue and operating income (loss) from all reportable segments:

	Year ended December 31,
	2006		2005			2004
Cash Management:
Revenues	$	21,660	$	16,454		$	13,416
Operating income (loss)	$	178	$	(503	)	$	201

Payments:
Revenues	$	54,705	$	44,898		$	33,870
Operating income	$	13,363	$	11,753		$	8,229

BBP:
Revenues	$	13,870	$	13,112		$	11,251
Operating income	$	634	$	1,061		$	600

NOTE 13 - OPERATING SEGMENT AND GEOGRAPHICAL INFORMATION, (Cont)

Following is a reconciliation of the operating loss of the reportable segments to the data included in the consolidated financial statements:

	Year ended
	December 31,
	2006		2005		2004

Total operating income of the reportable segments:	$	14,175	$	12,311	$	9,030

Amounts not allocated to segments:
Stock based compensation		2,487		-		-
General and administrative expenses		6,798		6,186		5,574
Marketing expenses		2,159		1,708		1,241
Consolidated operating income	$	2,731	$	4,417	$	2,215

Geographic information:

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

	Year ended December 31,
	2006				2005				2004
			Long -				Long -				Long -
	Total		lived		Total		lived		Total		lived
	revenues		Assets		revenues		assets		revenues		assets

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

Major customers data as a percentage of total revenue:

	Year ended December 31,
	2006			2005			2004

Customer A		12	%		10	%		14	%
Customer B		12	%		14	%		2	%

NOTE 14 - FINANCIAL INCOME, NET

	Year ended December 31,
	2006		2005		2004
Financial expenses:
Interest and other	$	37	$	39	$	18
Foreign currency translation differences, net		188		190		128
		225		229		146
Financial income:
Interest and other		2,043		1,122		795
Foreign currency translation differences, net		166		192		78
		2,209		1,314		873

	$	1,984	$	1,085	$	727

NOTE 15 - SUBSEQUENT EVENTS

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

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

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

SCHEDULE

FUNDTECH LTD.

VALUATION AND QUALIFYING ACCOUNTS

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

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


	FUNDTECH LTD.

	By:	/s/ Reuven Ben Menachem
		Reuven Ben Menachem Chief Executive Officer

Date: June 29, 2007

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Fundtech Inactive 20-F2006 FY Annual report (foreign)

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