UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
20-F




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




OR





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





For the fiscal year
ended December
31, 2008




OR




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





OR





 ̈  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)


____________________________________________________________________________




Joseph
Aulenti, General Counsel, Fundtech Corporation


30
Montgomery Street, Suite 501


Jersey
City, New Jersey 07302


Fax:
(201) 946-1313


(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)


_____________________________________________________________________________




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:
16,401,442 Ordinary Shares, NIS 0.01 par value per share





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




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 x




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days: Yes x   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 xNon-accelerated filer  ̈




Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:




U.S.
GAAP: x




International
Financial Reporting Standards as issued by the International Accounting
Standards
Board:                    ̈




Other:
             ̈




If
"Other" has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow:




Item 17
  ̈  
Item 18  ̈




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








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
      IITEM
      1.
                IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.
                1ITEM
      2.
                OFFER
      STATISTICS AND EXPECTED TIMETABLE.
                1ITEM
      3.
                KEY
      INFORMATION.
                1ITEM
      4.
                INFORMATION
      ON THE COMPANY.
                11ITEM
      4A.
                UNRESOLVED
      STAFF COMMENTS.
                24ITEM
      5.
                OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS.
                24ITEM
      6.
                DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES.
                41ITEM
      7.
                MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
                54ITEM
      8.
                FINANCIAL
      INFORMATION.
                56ITEM
      9.
                THE
      OFFER AND LISTING.
                57ITEM
      10.
                ADDITIONAL
      INFORMATION.
                59ITEM
      11.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
                69ITEM
      12.
                DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES.
                69PART
      IIITEM
      13.
                DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES.
                70ITEM
      14.
                MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS.
                70ITEM
      15.
                CONTROLS
      AND PROCEDURES.
                70ITEM
      16.
                [RESERVED]
                70ITEM
      16A.
                AUDIT
      COMMITTEE FINANCIAL EXPERT.
                70ITEM
      16B.
                CODE
      OF ETHICS.
                71ITEM
      16C.
                PRINCIPAL
      ACCOUNTANT FEES AND SERVICES.
                71ITEM
      16D.
                EXEMPTIONS
      FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
                72ITEM
      16E.
                PURCHASES
      OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
    PURCHASERS.
                72ITEM
      16F.
                CHANGE
      IN REGISTRANT'S CERTIFYING ACCOUNTANT.
                73ITEM
      16G.
                CORPORATE
      GOVERNANCE.
                73PART
      IIIITEM
      17.
                FINANCIAL
      STATEMENTS.
                73ITEM
      18.
                FINANCIAL
      STATEMENTS.
                73ITEM
      19.
                EXHIBITS.
                73





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




Selected
Financial Data.




The
following selected consolidated financial data for each of the years in the
three-year period which ended December 31, 2008 and at December 31, 2007 and
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 financial data for each of the years in the two-year period
ended December 31, 2005 and at December 31, 2005 and 2004 are derived from other
audited consolidated financial statements not appearing in this report which
have also been prepared in accordance with U.S. GAAP. 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.




2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006
                                    
                                    
                                    2005
                                    
                                    
                                    2004FINANCIAL
      DATA:Total
      revenues
                                    
                                    $
                                    121,037
                                    
                                    
                                    $
                                    104,634
                                    
                                    
                                    $
                                    85,509
                                    
                                    
                                    $
                                    74,466
                                    
                                    
                                    $
                                    58,537Operating
      income
                                    
                                    
                                    2,984
                                    
                                    
                                    
                                    6,117
                                    
                                    
                                    
                                    2,731
                                    
                                    
                                    
                                    4,417
                                    
                                    
                                    
                                    2,215Net
      income
                                    
                                    
                                    1,240
                                    
                                    
                                    
                                    7,107
                                    
                                    
                                    
                                    3,751
                                    
                                    
                                    
                                    4,336
                                    
                                    
                                    
                                    2,467Basic
      earnings per share
                                    
                                    $
                                    0.08
                                    
                                    
                                    $
                                    0.46
                                    
                                    
                                    $
                                    0.25
                                    
                                    
                                    $
                                    0.29
                                    
                                    
                                    $
                                    0.17Diluted
      earnings per share
                                    
                                    $
                                    0.08
                                    
                                    
                                    $
                                    0.43
                                    
                                    
                                    $
                                    0.24
                                    
                                    
                                    $
                                    0.27
                                    
                                    
                                    $
                                    0.16Cash,
      cash equivalents, short-term short term marketable investments and
      securities
                                    
                                    $
                                    40,620
                                    
                                    
                                    $
                                    42,001
                                    
                                    
                                    $
                                    47,167
                                    
                                    
                                    $
                                    49,599
                                    
                                    
                                    $
                                    36,430Long-term
      marketable securities
                                    
                                    
                                    2,204
                                    
                                    
                                    
                                    12,847
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    9,591Working
      capital
                                    
                                    
                                    48,108
                                    
                                    
                                    
                                    45,815
                                    
                                    
                                    
                                    54,794
                                    
                                    
                                    
                                    49,909
                                    
                                    
                                    
                                    37,917Total
      assets
                                    
                                    
                                    138,772
                                    
                                    
                                    
                                    128,272
                                    
                                    
                                    
                                    112,063
                                    
                                    
                                    
                                    105,801
                                    
                                    
                                    
                                    98,881Shareholders’
      equity
                                    
                                    
                                    106,937
                                    
                                    
                                    
                                    102,132
                                    
                                    
                                    
                                    89,786
                                    
                                    
                                    
                                    85,010
                                    
                                    
                                    
                                    79,805




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.


1


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 annual report before making an investment
decision. The risks described below and in the documents we have incorporated by
reference into this annual report 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




Our
business is affected by adverse conditions in the financial services industry
and the global economy in general.




Our
customers are highly concentrated in the financial services industry, which has
been directly affected by an industry-specific crisis, as well as by the general
downturn in overall economic conditions.  Our business has been
impacted by the current instability in that industry. The sub-prime financing
problem has resulted in a global recession which has had an impact on the
ability of our clients and potential clients to purchase our products and
services. We cannot be sure that there will not be a further adverse impact on
our business related to this recession. For example, a decrease in spending for
software and related services within this industry which is related to the
recession has resulted, and could further result, in a decrease in demand for
our products. We should also note that financial institutions around the world
continue to consolidate which somewhat 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.




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. 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 three large customers for the sale of one of our
payments products. Sales to these customers represented 22.1%, 27.3%, and 26.4%
of our revenues for 2008, 2007 and 2006, 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. At the
present time, these major customers are some of the large global banks which
have been most impacted by the global recession. We expect that a significant
portion of our anticipated future revenues will be impacted by the financial
problems of these larger customers. See Item 5, “Operating Results and Financial
Review and Prospects - Major Customers”.


2


Our
sales cycle is variable and sometimes long and involves the expenditure of
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 have
observed that sales cycles are lengthening in this economic downturn at larger
banks as they approach any significant expenditure with greater
caution.  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 cycles lengthen appreciably, 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.




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 our 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, FX settlement 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.  In some instances, customers may seek to
develop part of the solution such as interfaces in an attempt to retain staff
and/or control costs.  This could result in successfully bid projects
being smaller in scope.




Our
competitors currently include, but are not limited to, BankServ, Logica PLC,
Digital Insights, Inc., S1 Corporation, Fidelity Information Services, Banklink,
TietoEnator, Sunguard, Smartstream Technologies, ACI Worldwide Inc., Dovetail,
Fiserv, GIFTS Software, Bottomline, Technologies, Nucleus Software, Goldleaf
Financial Solutions, EFunds, OB10, Harbor
Payments, Clear2Pay and Sterci.




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 intensify as a result of consolidation
within the industry and the global economic downturn. As we develop new
products, we may begin to compete with companies with which we have not
previously competed.


3


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.




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 4,
“Information on the Company — Business Overview — Competition.”




We
may be unable to expand our development or support organizations which may
hinder our ability to grow and meet customer demands; on the other hand, rapid
expansion of these resources could increase our cost and reduce our operating
profit.




We
increasingly have the need to increase our technical and customer support staff
to support both 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 and other
newly hired 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 qualified employees, our business could suffer
significantly.




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 48.1% of
our total revenues in 2006, 56.0% of our total revenues in 2007 and 59.3% of our
total revenues in 2008 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;


·
            currency
      and exchange rate fluctuations;


·
            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; and


·
            multiple
      and possibly overlapping tax
structures.




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.


4


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 commercial shipment of our products. 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
discovery 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 BBP AG, Switzerland, Datasphere SA,
Switzerland, Cashtech Solutions India Private Limited, Radius Partners, Inc.,
Prang GmbH, Germany, Accountis Limited, Synergy Financial Services Limited and
the ACH assets of Troy Group, Inc. and 100% of the stock of Intersoftware (UK)
Limited (by our subsidiary Accountis Limited) 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 provide
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
may be unable to adequately protect our proprietary rights in our internally
developed technology, which may limit our ability to compete
effectively.




We have
spent considerable time, effort and money developing our next generation
software. Over the period 2005-2008, Global PAYplusTM has been installed at15 banks, PAYplus USA at
150 banks and CASHplus® has been installed at or operating on behalf of 70banks. We may be unable
to adequately protect our proprietary rights, which may limit our ability to
compete effectively.


5


Our
success and ability to compete are substantially dependent upon our internally
developed technology. Our intellectual property consists primarily of
proprietary or confidential information that is not subject to patent
protection. We have relied on a combination of technical leadership, trade
secret, copyright and trademark law and nondisclosure agreements to protect our
proprietary know-how. We have no patents or patent applications pending for our
products and services.  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 to 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.


6


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.  Given the
intense regulatory scrutiny to which the financial services industry has been
subject and will likely continue to be subject in light of the ongoing crisis in
financial markets, this may be a continuous challenge for us in the design of
our products and services.  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.




Investment
Risks




The
market price of our Ordinary Shares may be volatile.




The stock
market in general, including its technology market sector in particular, has
experienced price and volume fluctuations which have become increasingly
volatile, and which have resulted in a substantial decrease in market
capitalization, during the current economic downturn. For additional
information, see the table in Item 9, “The Offer and Listing — Market Price
Information.” These market fluctuations and general downturn have been adversely
affecting, and could continue to 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:




·
            the
      general state of the securities markets (with particular emphasis on the
      technology and Israeli sectors thereof);·
            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, which we
      provide from time to time;·
            the
      introduction or market acceptance of new service offerings by us or our
      competitors;·
            changes
      in security analysts’ financial estimates;·
            changes
      in accounting principles;·
            tender
      offers for our shares initiated due to Israeli law
      requirements;·
            sales
      of our Ordinary Shares by existing shareholders;·
            the
      loss of any of our key personnel; and·
            changes
      in 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.




Our
stock ownership is highly concentrated, and, as a result, certain
shareholders may influence our affairs significantly.




Clal
Industries and Investments Ltd, or Clal, owns approximately 56.3% of
our Ordinary Shares, or 57.1% when taken together with Ordinary Shares
owned by Clal’s affiliate IDB Development Corporation, Ltd. As a
result, Clal has the voting power to significantly influence our policies,
business and affairs, and also has the ability to influence the outcome of any
corporate transaction or other matter, including mergers, consolidations and the
sale of all or substantially all of our assets. This concentration in control
may have the effect of delaying, deterring or preventing a change of control
that otherwise could result in a premium in the price of our Ordinary
Shares.  This also reduces the amount of stock in the public float,
which may impact share trading values.





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


7


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, has reduced
overall margins and may result in a change in the way our shares are valued 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
value in light of our solutions-based business in a different way than it views
such value when considering our license-based business. This may lead to
volatility in our share price.




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:




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


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


·
            currency
      fluctuations;


·
            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 of products and services 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; and


·
            consolidation
      of our customers.




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 as occurred
in the latter part of 2008, we are likely to experience a shortfall in our
operating profit relative to our expectations. In addition, our results may be
impacted by fluctuations in the values of currencies in which certain of our
fees are paid such as British Pounds and Euros against the United States Dollar,
our reporting currency.  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 of 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.





Risks
Related to Our Location in Israel





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


8


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. Since the establishment of the State of
Israel in 1948, a number of armed conflicts have taken place between Israel and
its Arab neighbors. A state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. Any major hostilities
involving Israel, acts of terrorism 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 such
as those exhibited in the recent Gaza incursion 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. Any on-going or future violence between Israel and the
Palestinians, armed conflicts, terrorist activities, tension along the
Israeli-Lebanese or the Israeli-Syrian borders, or political instability in the
region would likely disrupt international trading activities in Israel and may
materially and negatively affect our and our major contract manufacturer’s
business conditions and could harm our results of operations. Certain countries,
as well as certain companies and organizations, continue to participate in a
boycott of Israeli firms and others doing business with Israel and Israeli
companies. Thus, there have been sales opportunities that we could not pursue
and there may be such opportunities in the future from which we will be
precluded. We are also precluded from marketing our products to certain of these
countries due to U.S. and Israeli regulatory restrictions. In addition,
such boycott, restrictive laws, policies or practices may change over time and
we cannot predict which countries, as well as whether certain companies and
organizations, will be subject thereto. The boycott, restrictive laws, policies
or practices directed towards Israel or Israeli businesses could, individually
or in the aggregate, have a material adverse affect on our business in the
future.




Some of
our officers and employees are currently obligated to perform annual reserve
duty, depending on their age and position in the Israeli army. Additionally,
they may be called to active reserve duty at any time under emergency
circumstances for extended periods of time. Our operations could be disrupted by
the absence for a significant period of one or more of our executive officers or
key employees due to military service, and any significant disruption in our
operations could harm our business. We believe that we have operated effectively
given these requirements since we began operations. Nevertheless, the full
impact on our workforce or business if some of our executive officers and
employees will be called upon to perform military service, especially in times
of national emergency, is difficult to predict. 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.





It
may be difficult to effect service of process and enforce judgments against our
directors and officers 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. Israeli courts may refuse to
hear a claim based on a violation of U.S. securities laws because Israel is not
the most appropriate forum to bring such a claim. In addition, even if an
Israeli court agrees to hear a claim, it may determine that Israeli law and not
U.S. law is applicable to the claim. If U.S. law is found to be applicable, the
content of applicable U.S. law must be proved as a fact, which can be a
time-consuming and costly process. Certain matters of procedure will also be
governed by Israeli law. There is little binding case law in Israel addressing
these matters.




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 United States Dollars, Euros or British Pounds Sterling ,
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 2008, the dollar devalued against the NIS by
approximately 1.1% while the consumer price index has increased at the rate of
3.8%. 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.


9


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”) under the Encouragement of Industrial Research and Development, 1984, or
the Research and Development Law, and the regulations promulgated thereunder.
The terms of these grants prohibit us from manufacturing more than 10% of the
products developed using these grants outside of Israel without special
approvals. There is no assurance that we will receive such OCS approval. 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 Research and Development Law also allows for the approval of grants
in cases in which the applicant declares that part of the manufacturing will be
performed outside of Israel or by non-Israeli residents and the OCS is convinced
that doing so is essential for the execution of the program. This declaration
will be a significant factor in the determination of the OCS whether to approve
a program and the amount and other terms of benefits to be granted. For example,
the increased royalty rate and repayment amount will be required in such
cases.




The
Research and Development Law also provides that know-how developed under an
approved research and development program may not be transferred to third
parties in Israel without the approval of the OCS. Such approval is not required
for the sale or export of any products resulting from such research or
development. The Research and Development Law further provides that the know-how
developed under an approved research and development program may not be
transferred to any third parties outside Israel, except in certain circumstances
and subject to prior OCS approval. Even if we receive approval to a transfer the
technology outside of Israel, a percentage of the consideration paid for such
transfer equal to the ratio of the aggregate amount of OCS grants received by us
to the aggregate amount of all cash investments made in such technology,
including the OCS grants.




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 and
we may be subject to criminal charges. In addition, under the Research and
Development Law, any non-Israeli who becomes a direct holder of 5% or more of
our share capital is required to notify the OCS and to undertake to observe the
law governing the grant programs of the OCS, the principal restrictions of which
are the transferability limits described in the above paragraphs.




The
tax benefits to which we are currently entitled from our approved enterprise
program require us to satisfy specified conditions. If we fail to satisfy these
conditions, we may be required to pay increased taxes and would likely be denied
these benefits in the future.


10


The
Investment Center of the Ministry of Industry, Trade and Labor has granted
“approved enterprise” status to investment programs at our facility in Ramat
Gan. When we begin to generate taxable income from these approved enterprise
programs, the portion of our income derived from these programs will be exempt
from tax for a period of two years and will be subject to a reduced tax for an
additional five to eight years thereafter, depending on the percentage of our
share capital held by non-Israelis. The benefits available to an approved
enterprise program are dependent upon the fulfillment of conditions stipulated
under applicable law and in the certificate of approval. If we fail to comply
with these conditions, in whole or in part, or fail to get approval in whole or
in part, we may be required to pay additional taxes for the period in which we
benefited from the tax exemption or reduced tax rates and would likely be denied
these benefits in the future. The amount by which our taxes would increase will
depend on the difference between the then applicable tax rate for non-approved
enterprises and the rate of tax, if any, that we would otherwise pay as an
approved enterprise, and the amount of any taxable income that we may earn in
the future.




Provisions
of Israeli law may delay, prevent or impede an acquisition of us, which could
prevent a change of control.




Israeli
corporate law regulates mergers and tender offers, requires tender offers for
acquisitions of shares above specified thresholds and regulates other matters
that may be relevant to these types of transactions. Furthermore, Israeli tax
considerations may make potential transactions unappealing to us or to some of
our shareholders. These provisions could delay, prevent or impede an acquisition
of us. See Item 10, “Additional Information-Mergers and Acquisitions” in this
annual report, for additional discussion about some anti-takeover effects of
Israeli law.





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, or PFIC, in
2008, we cannot assure you that the United States Internal Revenue Service will
agree with our position. We would be a 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, 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 PFIC, our U.S. investors could suffer adverse
tax consequences, including being taxed at ordinary income tax rates and subject
to an interest charge on gain from the sale or other disposition of our Ordinary
Shares and on certain “excess distributions” with respect to Ordinary Shares .
For additional information regarding our PFIC status, see Item 10E, “Additional
Information — Taxation. - United States Federal Income Taxation Considerations”
- Passive Foreign Investment Company Status.




ITEM
4.  INFORMATION ON THE COMPANY.




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
February 1, 2000.


11


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 (ACCESS
BankingTM). In 1999, we acquired the assets of the cash management division of
Sterling Commerce (Banker product line); as well as 100% of the stock of BBP AG,
Switzerland, which connects banks to the Central Bank of Switzerland and the
SWIFT network for the processing and settlement of payments and securities. In
2004, we acquired 100% of the stock of Datasphere SA, Switzerland
(“Datasphere”), which also offers financial messaging products; and Cashtech
Solutions India Private Limited which offers a line of cash management and
financial supply chain products. In 2005, we acquired 100% of the stock of
Radius Partners, Inc. (“Radius Partners”), which offers securities settlement
products. In early 2007 we acquired 100% of the stock of Prang GmbH, Germany
(“Prang”), which provides payments software for the German, Central European and
Asian markets. In January 2008 we acquired the ACH (Automated Clearing House)
transaction processing, initiation and collection software business of Troy
Group, Inc in an asset purchase. In February 2008 we acquired 100% of the stock
of Accountis Limited, which offers electronic bill presentment
software.  During 2008, we renamed Prang GmbH as Fundtech GmbH and
Fundtech India Solutions India Private Limited as Fundtech India Ltd. and will
use those names throughout the balance of this report.  In October
2008, we acquired 100% of the stock of Synergy Financial Services Limited which
offers payments software and services to banks in the United
Kingdom.  In April 2009 our subsidiary, Accountis Limited, acquired
100% of the stock of Intersoftware (UK) Limited which offers payments software
to UK based corporate and banking clients.




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.





Cash
use in the purchase of property and equipment decreased by $0.1 million to $6.6
million for the year ended December 31, 2008 from $6.7 million for the year
ended December 31, 2007. During 2007 we invested $7.5 million to fund the
acquisition of Fundtech GmbH as well as to pay additional amounts as per the
terms of the acquisition agreements with Radius Partners and Fundtech India.
Purchases of property and equipment increased by $1.5 million to $6.7 million
for the year ended December 31, 2007 from $5.2 million for the year ended
December 31, 2006. 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 2009, our anticipated capital expenditures are $8.0
million.





Business
Overview




We are a
leading provider of end-to-end financial transaction processing software
solutions for financial institutions. These solutions are grouped into four
broad categories: payment processing, bbp, electronic invoice presentment and
payments and cash management products. The first three categories are
transaction processing solutions, which enable banks to automate the payment and
settlement (inclusive of foreign exchange settlements) processes and provide
real-time transaction processing capabilities and electronic presentment
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.


12


We
acquired our ACCESS BankingTM products in April 1998, BBP, our Swiss subsidiary,
in June 1999 and our banker products in September 1999. Our major products
include ACCESS BankingTM, CASHplus®, PAYplus USATM, PAYplus for CLSTM, Global
PAYplusTM, Recovery Services for disaster recovery service bureau solutions and
related services. We acquired Datasphere through BBP in August 2004 and Fundtech
India in November 2004. BBP and Datasphere have sold their products and services
to approximately 150 customers for the purpose of accessing the SWIFT financial
messaging network. Fundtech India 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. Fundtech
GmbH, acquired in early 2007, is a payments solution provider in Germany where
it offers its PAYplus FTS solutions. The newly acquired ACH business’ products
deliver real-time ACH transaction processing as well as automated exception
handling. Accountis offers Electronic Invoice Presentment and Payments services
to financial institutions and corporations in Europe.  Synergy and
Intersoftware offer payments solutions to UK based clients.




Industry
Background




Until the
onset of the global recession during 2008, global commerce had continued to
increase, with new banking technologies being adopted. This resulted in dramatic
increases in both the number of transactions consummated through electronic
payment systems and the need for timely delivery of financial information While
the number of transactions generated by larger financial institutions has been
impacted by the global recession, there is a countervailing trend of smaller or
regional banks seeking to increase their transaction handling capabilities to
service clients seeking to move business from the larger banks.  These
smaller and regional financial institutions continue to seek more efficient
methods of offering payment, settlement and cash management
services.




The
following trends had driven demand for our products and services prior to the
onset of the current global recession and are likely to once again favorably
impact such demand once the recession passes: 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; a
growing move away from in-house development toward packaged applications;
increasing interest in financial supply chain solutions; and the need to develop
unique services that allow an institution to differentiate itself from its
competitors. At present, the impact of the recession has overshadowed any prior
trends.




We
believe that the current dynamic market environment and several additional
market trends are favorable to our products and services. The following
additional trends continue to drive demand for our products and
services:




·
            adoption
      of real-time gross settlement by central banks around the
      world;


·
            growth
      in globalization and electronic commerce resulting in continued migration
      to Internet-enabled financial services such as 24-hour trading and
      settlement, as well as real-time information on financial positions and
      transactions;


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


·
            the
      need among financial institutions to lower operating costs, which is
      driving the need among banks for centralized payment and treasury
      functions;


·
            increased
      regulatory requirements imposed on banks, including, but not limited to,
      those in the areas of interdiction, anti-money laundering, and in the
      European Union, the conversion to a Single European Payments Area
      (“SEPA”);


·
            a
      desire among financial institutions to unlock un-tapped value in their
      transaction banking franchises and accelerate top-line revenue growth in
      the form of additional fee income-generating services, which is increasing
      the interest in financial supply chain solutions such as electronic
      invoice presentment and payment
(“EIPP”);


13


·
            a
      continued shift away from in-house development toward packaged
      applications as well as an increased use of outsourcing, application
      service providers and “white-labeling” in lieu of developing and managing
      their own IT activities;


·
            a
      shift on the part of financial institutions to establish strategic
      technology partnerships with a few key vendors in order to lower the cost
      and risk of integrating new applications with existing infrastructure;
      and


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




Products
and Services




Our
products and related services are designed to integrate all elements of the
electronic payment cycle, and we believe that they are among the most
technologically advanced and cost-effective solutions in the financial services
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 that are easy learn and use, and
enable our customers to maximize their efficiency.




We are
one of the largest providers of products and services that link banks to
domestic and international payment networks. In the United States our products
connect banks to the Federal Reserve System’s FedLine, which has approximately
7,500 banks connected. On a global basis, we provide banks with the capability
to link to the SWIFT network for communicating cross-border transactions. SWIFT
has over 7,000 banks in over 200 countries connected to its global network.
Fundtech is also a leading provider in global settlements through the CLS Bank’s
Continuous Linked Settlement System (“CLS”), which was established by the
largest foreign exchange banks in the world to reduce foreign exchange
settlement risk.





Payment
      Solutions
              
              Short
      DescriptionPAYplus
      USATM
              
              A
      payments solution for banks operating in the United
  States.Global
      PAYplusTM
              
              A
      solution for managing the global payments activities of large
      multi-national banks and financial institutions that conduct business in
      multiple countries.Pan-European
      PAYplusTM
              
              A
      comprehensive solution to meet the Single European Payments Area (SEPA)
      and the European Central Bank’s Target 2 initiative
      compliance.OmniPay®
              
              A
      payments hub that enables corporate clients to transmit a single file of
      mixed payments, thereby simplifying this process.IGTplusTM
              
              A
      payments and settlement solution which provides message broker services
      between financial institutions and SWIFT, SIC, SIS and SWX in
      Switzerland.Global
      PAYplusTM Liquidity Manager
              
              A
      system that provides centralized control of a bank’s liquidity management
      needs, ensuring more efficient management of multi-currency, multi-bank
      liquidity assets across bank accounts, clearing systems, and central bank
      channels.PAYplus
      FTS
              
              PAYplus
      FTS is a SWIFTReady
      application for Payments Processing, Message Management and related
      services. It can handle multi-entity / multi-branch environments, is rich
      in functionality and flexible in interfacing. PAYplus FTS is available on
      IBM PowerSystems (iSeries) and has a non-graphical user
      interface.


14





ACHplu$®
              
              A
      high volume system that automates the processing of ACH payments and
      provides a bank with tools to streamline this
operation.OriginetTM
              
              An
      Internet-based software application that corporations use to make and
      collect ACH payments.ProcessMaster
              
              A
      low-volume system that automates the processing of ACH payments and
      provides a bank with tools to streamline this
operation.BACSTEL-IPTM
              
              An
      Internet based software application that corporations use to make and
      collect ACH payments over the UK BACS system, which is an automated direct
      debit and credit processing facility.Electronic
      Invoice Presentment and Payment Solutions (“EIPP”)
              
              Software
      that enables the accounts receivable department of the selling
      organization to send an electronic invoice to the accounts payable
      department of the buying organization.ClaritySuiteTM
              
              a
      modular web based financial solution designed to exchange high value
      information between a financial institution and its partners. It is
      designed to interface interactively with all the major SWIFT Interface
      Systems such as SWIFTAlliance, IBM MERVA, Logica Fastwire and Sungard MINT
      and offers solutions in a number of key operational areas such as
      Payments, Cash Management, Documentary Credits and Foreign
      Exchange.AzTech
              
              Software
      which enables BACS-IP payments for UK
  institutions.




PAYplus
USATM




PAYplus
USATM is a funds transfer solution used to connect a financial institution’s wire
transfer room with the Federal Reserve’s FedWire system. This solution evolved
from and replaces two older products, FEDplusTM and PAY$tarTM. 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
USATM 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 USATM also offers the same
functionalities for international multi-currency payments of international banks
operating in the United States.




PAYplus
USATM 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).


15


Global
PAYplusTM




Our
Global PAYplusTM 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 PAYplusTM 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 PAYplusTM aggregates worldwide payment
activity. Global PAYplusTM is a multi-platform system supporting both UNIX and
Microsoft operating systems that employ open technology standards. The system
features end-to-end security and multi-currency capabilities.




Pan-European
PAYplus




Pan-European
PAYplus is a 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 (SEPA). 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 our 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
SWIFT, SIC (Swiss Interbank Clearing), SIS (Swiss Securities Clearing) and FIX
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 IGTplus
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
a bank’s accounts and Real Time Gross Settlement channels. The system provides
flexible functionality which allows a 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 a bank to
gather liquidity information, ensuring that a complete and accurate liquidity
position is continuously available.


16


ACHplu$®




ACHplus®
is a server-based, enterprise class software application designed to streamline
processing for all levels of ACH processors. The system is built on a scalable
platform that can handle increasing transaction volumes as needed. The system
includes many advanced features such as continuous processing, process
automation, advanced reporting, and risk management. Its web interface allows
originators, bank internal staff, and ACH operators to upload files to the
system for processing, search the warehouse and retrieve and view
reports.





Originet




OrigiNET
is an Internet-based software application, derivative of ACHplu$®, which allows
corporations and banks to make or collect payments electronically using ACH. The
software structures payment data into a standard file format that can be
accepted by any financial institution, third-party processor, or ACH operator.
Common applications of OrigiNET include payroll, expense reimbursements,
pensions, annuities, dividends, commissions, and benefit payments.




ProcessMaster




ProcessMaster
is a Windows®-based software application that enables small to medium size
processors to streamline their ACH operations, enabling them to reduce
operational costs by providing increased transaction capacity through
automation. The system includes features that ensure National Automated Clearing
House Association (NACHA) compliance, improve risk management, automate
processing, scheduling and billing, and address other critical issues involved
in ACH processing. This central, automated processing system effectively manages
the origination and receipt of ACH transactions and enables ACH processors to
automate tasks, minimize risk and increase productivity.




BACSTEL-IP




Accountis
BACSactive-IP provides organizations with a modern, well designed, reliable and
secure electronic funds transfer solution. BACSactive-IP was designed by experts
in the field of Internet payments to take advantage of features of the BACS
system and all it has to offer, such as the highest levels of security and
easy-to-use reporting facilities.




Accountis
EIPP Services




Accountis
Enterprise AP enables corporations to automate payables process from the
creation of purchase orders and receipt of invoices, to handling disputes and
submitting payments online by integrating with existing ERP or accounting
systems. It can work as a stand-alone solution or in conjunction with Accountis
Enterprise AR and additional modules to provide a complete end-to-end solution.
Accountis Enterprise AP is designed for organizations that deal with large
volumes of inbound transactions and wish to receive them electronically. It
supports multiple currencies and languages and is fully VAT compliant across
European member states. The system integrates easily with existing ERP or
finance systems to save resources by automating the receivables process, from
capturing purchase orders and issuing invoices to controlling debtors and
collecting payments online. It can also work as a stand-alone solution. By
consolidating invoice data quickly and simply, Accountis Enterprise AR presents
one-view of all receivables transactions for the benefit of both internal users
and buyers alike.




ClaritySuiteTM





Synergy’s
ClaritySuiteTM is a modular web based financial solution designed to exchange
high value information between a financial institution and its partners.
It is designed to interface interactively with all the major SWIFT
Interface Systems such as SWIFTAlliance, IBM MERVA, Logica Fastwire and Sungard
MINT and offers solutions in a number of key operational areas such as Payments,
Cash Management, Documentary Credits and Foreign Exchange.


17


AzTech





Intersoftware’s
AzTech is a PC based application which automates the creation and management of
BACS-IP wire transfers for UK based institutions.





Cash
      Management Solutions
              
              Short
      DescriptionACCESS
      BankingTM
              
              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.webBANKERTM
              
              A
      fully integrated cash management solution designed primarily for the
      community bank market.Global
      CASHplus®
              
              A
      multi-currency, multi-country cash management solution to automate the
      handling of corporate payments and receivables, liquidly, financial supply
      chain and remittance.




ACCESS
BankingTM




Our
ACCESS BankingTM solution is a client/server product that enables banks and other
financial institutions to provide cash management services to their corporate
clients. ACCESS BankingTM is targeted at the mid-to-large-size financial
institutions. Through ACCESS BankingTM, clients can obtain balance history and
intra-day reporting, manage check transactions, originate wire transfer payment
transactions and initiate intra-bank account transfers. ACCESS BankingTM 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 BankingTM 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.




webBANKERTM




web
BANKERTM 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.




Global CASHplus®Developed by
our Fundtech India subsidiary, this multi-currency, multi-national cash
management platform provides a range of functions to manage corporate payments
and receivables, automate the routing of payments, mange electronic and paper
based receivables, invoice reconciliation, liquidity pools,
sweeps,  and corporate transfer pricing, e-invoicing and receivables
financing, and remittances.





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


18


PAYplus
for CLSTM




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





ASP/Outsourcing
      Solutions
              
              Short
      DescriptionFundtech
      Connect (ASP)
                –
      for PAYplus USA
              
              An
      Application Service Provider (ASP) solution that provides the PAYplus
      solution to banks operating in the United States.Fundtech
      Connect (ASP)
                –
      for CASHplus
              
              An
      ASP solution that provides the CASHplus solution to banks operating in the
      United States.Interbank
      Gateway Services
              
              ASP
      solutions that provide payment and settlement solutions to banks in
      Europe, primarily in Switzerland and England through the SWIFT
      network.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 based upon our PAYplus USA and Cash
Management 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 (straight through processing) 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).


19


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 compliance 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.  Similar services
are provided to UK based institutions through the newly acquired Synergy
business.




Interbank
Gateway Services provides its services to smaller financial institutions using
the IGTplus software to provide communication to/from SWIFT, 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 $8 billion of
      assets. The second tier consists of banks with assets between $8.0 billion
      and $500 million. The third tier consists of banks with under $500 million
      in assets.  Currently there are approximately 7,500 banks and
      credit unions in the USA.





·
            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.


20


·
            Corporations
      – With the addition of Accountis AR and Accountis AP and Troy’s OrigiNET,
      Fundtech has a line of payments related products that are being sold
      directly to corporate entities. While we intend to continue to support the
      sale of these products directly to end users, we will also expand the
      distribution of the products through Fundtech’s traditional client base of
      financial institutions.




In 2004
we acquired Datasphere and Fundtech India 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 Fundtech GmbH in early 2007. Fundtech GmbH has
approximately 50 customers, primarily in Germany. We also acquired the ACH
business of Troy Group in early 2008 which brought several new ACH products to
our portfolio along with approximately 18 customer relationships. Accountis
Limited acquired in February 2008, has over 770 clients using its BACS payments
and electronic invoicing and presentment products and
services.  Synergy Financial Services Limited, acquired in October
2008, has about 70 clients using its software and SWIFT connections
services.




For a
presentation of our consolidated revenues according to the geographical regions
to which such revenues are attributable, please see the relevant table in Item
5A, “Operating and Financial Review and Prospects —Operating Results —
Significant Revenue, Segment and Earnings Information.”




Sales
and Marketing




We sell
our products and services primarily through our direct sales force, located in
the United States, United Kingdom, Switzerland, India and Singapore. We use the
services of distributors in the Republic of Korea, Greece and the
Balkans.  Our Accountis, Synergy and Intersoftware subsidiaries have
arrangements with a number of financial services providers and two major UK
banks to remarket their products and services.




Our
marketing efforts include a variety of activities that promote our products
including public relations 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 SWIFT, 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 SWIFT-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 467 full-time employees on December 31,
2008. All of our payments products have been developed internally by our product
development staff. Our cash management, BBP, ACH, EIPP and UK payments solutions
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.


21


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, California,
Israel, Switzerland, India, Wales, England 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
in our internally developed technology, which may limit our ability to compete
effectively” in Item 3D 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.,
S1 Corporation, Fidelity Information Services, Banklink, TietoEnator, Sunguard,
Smartstream Technologies, ACI Worldwide Inc., Dovetail, Fiserv, GIFTS Software,
Bottomline Technologies, Nucleus Software, Goldleaf Financial Solutions, EFunds,
OB10, Harbor
Payments, Clear2Pay and Sterci. 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.




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.


22





Name
      of Subsidiary
                      
                      Country
      of Incorporation/OrganizationFundtech
      Corporation
                      
                      United
      StatesFundtech
      U.K. Limited
                      
                      United
      KingdomFundtech
      Australia Pty Limited
                      
                      AustraliaFundtech
      International, LLC
                      
                      United
      StatesBiveroni
      Batschelet Partners AG
                      
                      SwitzerlandDatasphere
      SA
                      
                      SwitzerlandFundtech
      India Ltd.
                      
                      IndiaRadius
      Partners Inc.
                      
                      United
      StatesFundtech
      Germany GmbH
                      
                      GermanyFundtech
      GmbH
                      
                      GermanyAccountis
      Limited
                      
                      United
      KingdomSynergy
      Financial Services Limited
                      
                      United
      KingdomIntersoftware
      (UK) Limited
                      
                      United
      KingdomCashTec
      Asia Pte Ltd.
                      
                      SingaporeCashTec
      Solutions India Pvt Ltd.
                      
                      India




Property,
Plants and Equipment.





We lease
the premises at each of our locations, with the exception of a facility owned by
Synergy Financial Services Limited, which constitutes an approximately 2,500
square foot building in a science park at Edison Village, Highfields Science
Park, University Boulevard, NG7 2RF, Nottingham England which is used to
house its software development and administrative personnel. As of December
31, 2008, we leased office space as specified in the table below. The aggregate
annual lease payments for our facilities during 2008 were approximately
$3,615,000.





Location
              
              Approximate
                Aggregate
      Square FeetRamat-Gan,
      Israel
              
              25,000Burlington,
      Massachusetts
              
              9,800Pembroke,
      Massachusetts
              
              2,800Jersey
      City, New Jersey
              
              25,800Flower
      Mound, Texas
              
              400San
      Leandro, California
              
              6,700Norcross,
      Georgia
              
              26,000Baden,
      Switzerland
              
              10,500London,
      United Kingdom
              
              4,700Pune,
      India
              
              36,900Frankfurt,
      Germany
              
              3,660Costa
      Mesa, California
              
              2,330Bangor,
      Wales
              
              2,400Manchester,
      England
              
              1,500


23


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,” WHICH
PRECEDES THE TABLE OF CONTENTS OF THIS ANNUAL REPORT.




Overview




Fundtech
is a leading provider of end-to-end financial transaction processing software
solutions for financial institutions. These solutions are grouped into four
segments: (i) payment processing and management (including foreign exchange
settlement processing), which automate the payment and settlement processes and
provide real-time transaction processing capabilities to financial institutions
and their customers; (ii) bbp, which provides financial messaging products and
services that enable banks to communicate with the SWIFT network; (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) electronic invoice presentment and payment, which consists of financial
supply chain products that expand traditional transaction banking into
electronic invoice presentment and trade services.




We derive
our revenues principally from software licensing and from the provision of
professional services. Professional services consist of (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 our
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 bank lending activities, which has resulted in
lower profit margins;


24


(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)           Changes
in the regulatory requirements that mandate changes in the IT systems of
banks;




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




(v)           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
USATM 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 SWIFT network. PAYplus USATM 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 USATM 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 180 customers operating PAYplus USATM in a live production
environment in both in-house and ASP solution form.




Our
Global PAYplusTM software provides institutions with real-time global support of
their multi-currency payment activity. Global PAYplusTM 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 PAYplusTM supports both UNIX and Microsoft 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 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
Fundtech India subsidiary markets its Global CASHplusTM cash management software
products to financial institutions throughout Southeast Asia. Its
multi-currency, Internet-enabled products are highly customizable and we have
expanded the marketing of these products to Europe.




PAYplus
for CLSTM is an integrated solution that assists large foreign exchange trading
banks in addressing the requirements of the CLS Bank. PAYplus for CLSTM provides
payments, treasury, reconciliation, interface and systems management controls
that assist banks in meeting the CLS Bank’s requirements. In addition, PAYplus
for CLSTM 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.


25


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 SWIFT 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.




Our
newest ACH solutions include ACHplu$® which is a server-based, enterprise class
software application built on a scalable platform that can handle increasing
transaction volumes as needed. ACHplu$®  includes continuous
processing, process automation, advanced reporting, and risk management.
OrigiNET is an Internet-based software application, derivative of ACHplu$®,
which allows corporations and banks to make or collect payments electronically
through the Automated Clearing House (ACH). ProcessMaster is a Windows® based
software application that enables small to medium size processors to streamline
their ACH operations, enabling them to reduce operational costs by providing
increased transaction capacity through automation.




Accountis
Limited markets BACSactive-IP which provides organizations with a reliable and
secure electronic funds transfer solution utilizing the UK’s BACS system.
Accountis Enterprise EIPP solutions enable corporations to automate their
payables and receivables processes from the creation of purchase orders and
receipt of invoices in electronic form, to handling disputes and submitting
payments online. The system integrates with existing ERP or accounting systems
to eliminate errors, reduce costs and improve relationships with suppliers. The
solution supports multiple currencies and languages and is fully VAT compliant
across European member states.




Synergy
Financial Systems Ltd. provides a range of SWIFT support services, which include
Full Hosting, SNL Connectivity, SWIFTCare for Alliance support and a portfolio
of its own developed web-based SWIFT messaging software applications that are
deployed across the globe.  Synergy is an accredited SWIFT Service
Partner, which means that it can provide SWIFT trained and certified specialists
to help with the maintainenance of SWIFT interface systems for high
availability, including assistance with system upgrades, training and new
installations.  Synergy offers fully outsourced SWIFT solutions as
well as connectivity hosted solutions via its SWIFT Service Bureau.





Intersoftware
(UK) Limited provides its AzTech BACS-IP transaction processing products to
approximately 7,600 financial and corporate clients in the
UK.   Intersoftware’s clients will now have the ability to obtain
additional products and services through Accountis.





During
the period 2005 through 2007, spending on technology in the financial services
industry increased; such trend continued during the first half of
2008.  During the second half of 2008, we began to see the impact of
the global recession, as there was a decline in revenue attributable to new
license fees from global and US based clients.  Other revenues from
maintenance and services for previously installed systems were affected to a
lesser degree.  It is difficult to predict whether these trends will
continue, as well as the extent of the impact that they may have on our future
revenues or results of operations.




Acquisitions
of Businesses and Certain Assets




In
October of 2004, our BBP AG subsidiary completed the acquisition of Datasphere
SA from its shareholders. Datasphere provides software linking IBM systems to
the SWIFT 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.


26


In
November 2004, we acquired all outstanding shares of India-based Fundtech India
Solutions India Private Limited (“Fundtech India”), a leading provider of cash
management software and services throughout Southeast Asia for an aggregate
purchase price of approximately $3.8 million. Fundtech India’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. Fundtech India has sales offices in Singapore and
Tokyo.




The
acquisition of Fundtech India 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 paid additional amounts of $991,000 in
2005, $1.1 million in 2006 and $1.0 million in 2007 based on achieved
performance milestones. No payments were made in 2008.




In
October of 2005, we acquired all of the outstanding shares of Radius Partners,
Inc. (“Radius”) for an aggregate purchase price of approximately $2.5 million.
Additional cash consideration was or will be paid if and when certain conditions
are met between the acquisition date and December 31, 2011, which could have
amounted to an additional $3.5 million paid or payable. During 2006, payments of
$220,000 were made based on and for 2005, and payments were made in 2007 in the
amount of $200,000 based on and for 2006. We made payment of an additional
$200,000 in 2008 based on and for 2007. We do not anticipate further future
payments at this time.




In
February of 2007, we acquired all of the outstanding shares of Fundtech GmbH.
The purchase price was €4.8 ($6.3) million which was paid in cash. Additional
cash consideration in an amount of up to €4 million will be paid if and when
certain conditions related to the performance of Fundtech GmbH are met between
the acquisition date and December 31, 2010. In 2008, we made payment of €2.3
($3.4) million based upon Fundtech GmbH’s financial performance, which was
accrued and accounted for in 2007. The parties have amended the original
acquisition agreement with respect to the payment of additional consideration,
pursuant to which €597,000 was paid in January 2009 and an additional amount of
€597,000 will be paid again in January 2010. No further earn-out obligations
will exist after these two payments.




In
January 2008, we acquired the ACH business of Troy Group, Inc. The purchase
price was approximately $1.1 million in cash. Also in February 2008 we acquired
all of the outstanding shares of Accountis Limited which provides solutions for
our financial supply chain suite of services. The initial purchase price was
£3.9 ($7.7) million. 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 £2 million.




In
October, 2008, we acquired all of the outstanding shares of Synergy Financial
Services Limited.  The purchase price was £2.52 ($4.7) million in
cash, including £300,000 payable contingent on delivery of certain reports.
Additional consideration will be paid in cash if and when certain conditions are
met between the acquisition date and February 28, 2012, which may amount to an
additional £1.17 million.





In April
2009, we acquired all of the outstanding shares of Intersoftware (UK) Limited
for a purchase price of £2.7 million in cash.  There are no contingent
amounts payable.





Critical
Accounting Policies




The
operating and financial condition review contained herein 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 ongoing basis. We base our
estimates on our historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.


27




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




Revenues.Our revenues are generated
from licensing the rights to use our software products directly to end-users and
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 collectability 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.  In software arrangements in which we
have fair value of all undelivered elements but not of a delivered element, we
use the residual method to record revenue.  Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee is allocated to the delivered element and is recognized
as revenue.  In software arrangements in which we do not have VSOE of
fair value of all undelivered elements, revenue is deferred until fair value is
determined or all elements for which we do not have VSOE of fair value have been
delivered.




We
generally do not grant rights-of-return to our customers. We usually provide a
warranty period to our customers of up to three months at no extra charge. As of
December 31, 2008 and 2007, 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.




As we
provide hosting services to our customers without any contractual right to take
possession of the software licenses, we recognize revenue from hosting over the
hosting contract period following the consensus reached in EITF Issue 00-03
“Application of AICPA Statement of Position 97-2 to Arrangement That Includes
the Right to Use Software Stored on Another Entity’s Hardware”. Revenues from
set up fees are also recognized over the related hosting contract in accordance
with SAB Topic 13.




28


Revenues
from customer maintenance and support contracts are deferred and recognized
ratably over the term of the agreements.  Revenues for maintenance and
support that are bundled with license fees are deferred based on the VSOE of
fair value of the bundled maintenance and support and recognized over the term
of the agreement.  VSOE of fair value is based on the renewal rate for
continued maintenance and support arrangements.




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 may not be collected. We generally do not
require collateral; however, in certain circumstances, we may require letters of
credit, other collateral or additional guarantees. 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 was to deteriorate, resulting in an impairment of its
ability to pay the indebtedness it incurs with us, an additional provision for
doubtful accounts might be required.




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.




29


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 2006 and 2007.  In 2008 we
recorded an impairment charge of $1.66 million.





Share Based Payments.
The Company accounts for stock-based compensation in accordance with SFAS No.
123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires
companies to estimate the fair value of equity-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the
requisite service periods in the Company's consolidated income
statements.





The
Company recognizes compensation expenses for the value of its awards granted
based on the straight line method over the requisite service period of each of
the awards, net of estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Estimated forfeitures are
based on actual historical pre-vesting forfeitures.





The
Company selected the Black-Scholes option pricing model as the most appropriate
fair value method for its stock-options awards and values restricted stock based
on the market value of the underlying shares at the date of grant. The
option-pricing model requires a number of assumptions, of which the most
significant are the expected stock price volatility and the expected option
term. Expected volatility was calculated based upon actual historical stock
price movements. The expected term of options granted is based upon historical
experience and represents the period of time that options granted are expected
to be outstanding. The risk-free interest rate is based on the yield from U.S.
treasury bonds with an equivalent term. The Company has historically not paid
dividends and has no foreseeable plans to pay dividends.




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 31,2006
                            
                            
                            2007
                            
                            
                            2008Revenues:Software
      license fees
                            
                            
                            15.9
                            %
                            
                            
                            18.9
                            %
                            
                            
                            13.6
                            %Service
      Fees
                            
                            
                            42.0
                            
                            
                            
                            40.0
                            
                            
                            
                            41.4Hosting
                            
                            
                            15.7
                            
                            
                            
                            14.7
                            
                            
                            
                            16.4Maintenance
                            
                            
                            26.3
                            
                            
                            
                            26.3
                            
                            
                            
                            28.5Hardware
      sales
                            
                            
                            0.1
                            
                            
                            
                            0.1
                            
                            
                            
                            0.1Total
      revenues
                            
                            
                            100.0
                            
                            
                            
                            100.0
                            
                            
                            
                            100.0Operating
      Expenses:Software
      license costs
                            
                            
                            0.7
                            
                            
                            
                            0.6
                            
                            
                            
                            0.2Maintenance
      and service costs
                            
                            
                            40.6
                            
                            
                            
                            43.4
                            
                            
                            
                            44.4Hardware
      Costs
                            
                            
                            0.1
                            
                            
                            
                            -
                            
                            
                            
                            -Research
      and development
                            
                            
                            19.5
                            
                            
                            
                            18.5
                            
                            
                            
                            18.1Selling
      and marketing, net
                            
                            
                            18.4
                            
                            
                            
                            17.0
                            
                            
                            
                            16.7General
      and administrative
                            
                            
                            13.7
                            
                            
                            
                            13.0
                            
                            
                            
                            14.1Amortization
      of capitalized software development costs.
                            
                            
                            1.8
                            
                            
                            
                            0.4
                            
                            
                            
                            -Impairment
      of goodwill and other intangible assets
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1.7Amortization
      of other acquired intangible assets
                            
                            
                            1.5
                            
                            
                            
                            1.3
                            
                            
                            
                            1.8Provision
      for doubtful accounts
                            
                            
                            0.5
                            
                            
                            
                            (0.1
                            )
                            
                            
                            0.5Total
      operating expenses
                            
                            
                            96.8
                            
                            
                            
                            94.1
                            
                            
                            
                            97.5Operating
      income
                            
                            
                            3.2
                            
                            
                            
                            5.9
                            
                            
                            
                            2.5Loss
      on Investments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            (0.6
                            )Financial
      income, net
                            
                            
                            2.3
                            
                            
                            
                            2.1
                            
                            
                            
                            -Income
      before income taxes
                            
                            
                            5.5
                            
                            
                            
                            8.0
                            
                            
                            
                            1.9Income
      taxes
                            
                            
                            1.1
                            
                            
                            
                            1.2
                            
                            
                            
                            0.9Net
      income
                            
                            
                            4.4
                            %
                            
                            
                            6.8
                            %
                            
                            
                            1.0
                            %


30





We again
note in particular the impact on net income of the application of SFAS No. 123R,
which resulted in charges of $2.5 million in 2006, $2.6 million in 2007 and $3.0
million in 2008.




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:


2006
                                
                                
                                2007
                                
                                
                                2008Total
                                
                                
                                Total
                                
                                
                                TotalRevenues
                                
                                
                                Percentage
                                
                                
                                Revenues
                                
                                
                                Percentage
                                
                                
                                Revenues
                                
                                
                                PercentageIsrael
                                
                                $
                                2,006
                                
                                
                                
                                2.4
                                %
                                
                                $
                                1,331
                                
                                
                                
                                1.3
                                %
                                
                                $
                                1,108
                                
                                
                                
                                0.9
                                %U.S.A.
                                
                                
                                44,399
                                
                                
                                
                                51.9
                                
                                
                                
                                46,028
                                
                                
                                
                                44.0
                                
                                
                                
                                49,228
                                
                                
                                
                                40.7Switzerland
                                
                                
                                11,471
                                
                                
                                
                                13.4
                                
                                
                                
                                12,711
                                
                                
                                
                                12.1
                                
                                
                                
                                15,155
                                
                                
                                
                                12.5India
                                
                                
                                1,105
                                
                                
                                
                                1.3
                                
                                
                                
                                2,302
                                
                                
                                
                                2.2
                                
                                
                                
                                2,350
                                
                                
                                
                                1.9United
      Kingdom
                                
                                
                                14,469
                                
                                
                                
                                17.0
                                
                                
                                
                                19,966
                                
                                
                                
                                19.1
                                
                                
                                
                                17,758
                                
                                
                                
                                14.7Germany
                                
                                
                                547
                                
                                
                                
                                0.6
                                
                                
                                
                                2,611
                                
                                
                                
                                2.5
                                
                                
                                
                                3,990
                                
                                
                                
                                3.3Australia
                                
                                
                                546
                                
                                
                                
                                0.6
                                
                                
                                
                                2,839
                                
                                
                                
                                2.7
                                
                                
                                
                                5,938
                                
                                
                                
                                4.9Austria
                                
                                
                                244
                                
                                
                                
                                0.3
                                
                                
                                
                                61
                                
                                
                                
                                0.1
                                
                                
                                
                                3,615
                                
                                
                                
                                3.0Hong
      Kong
                                
                                
                                65
                                
                                
                                
                                0.1
                                
                                
                                
                                629
                                
                                
                                
                                0.6
                                
                                
                                
                                1,999
                                
                                
                                
                                1.7Other
                                
                                
                                10,657
                                
                                
                                
                                12.4
                                
                                
                                
                                16,156
                                
                                
                                
                                15.4
                                
                                
                                
                                19,896
                                
                                
                                
                                16.4$
                                85,509
                                
                                
                                
                                100.0
                                %
                                
                                $
                                104,634
                                
                                
                                
                                100.0
                                %
                                
                                $
                                121,037
                                
                                
                                
                                100
                                %


The
following table presents (in thousands) our consolidated revenues and resultant
operating income (loss) for each of our three operating segments:




2006
                  
                  
                  2007
                  
                  
                  2008Cash
      management revenue
                  
                  $
                  20,492
                  
                  
                  $
                  24,460
                  
                  
                  $
                  27,914Operating
      income (loss)
                  
                  
                  178
                  
                  
                  
                  1,057
                  
                  
                  
                  821Payments
      revenue
                  
                  
                  51,608
                  
                  
                  
                  65,460
                  
                  
                  
                  75,001Operating
      income
                  
                  
                  13,363
                  
                  
                  
                  17,672
                  
                  
                  
                  17,206BBP
      revenue
                  
                  
                  13,409
                  
                  
                  
                  14,714
                  
                  
                  
                  18,122Operating
      income
                  
                  
                  634
                  
                  
                  
                  1,108
                  
                  
                  
                  1,071





While
cash management revenues continued to grow during 2006, 2007 and 2008, the
related operating income results have been adversely impacted by the costs
associated with the launch of the new CASHplus product and related modules. The
growth in 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 as well as the acquisition of our
German subsidiary, Fundtech GmbH. 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.




31




Major
Customers




We
derived approximately 22.1% and 27.3% of our annual revenues, or approximately
$26.7 million and $28.6 million, from the license, consulting and maintenance
service fees earned in connection with agreements with three leading
international financial institutions in 2008 and 2007, respectively. At the
present time, these major customers are some of the large global banks which
have been most impacted by the global recession.  Notwithstanding that
many of these institutions have received government assistance, we cannot
forecast when they will return to normal procurement patterns.




Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007




Revenues.




Variance2007
                    
                    2008
                    
                    Increase
                    
                    %Total
      Revenues
                    
                    $
                    104,634,000
                    
                    121,037,000
                    
                    
                    16,403,000
                    
                    15.7%





The
increase in revenues was primarily attributable to (a) an increase of $4.4
million due to acquisition of new businesses, (b) $1.7 million increase in cash
management products-related revenue, (c) a $7.3 million increase in revenue from
our payments business, mainly attributable to our Global PAYplus solution (d)
higher revenue from BBP of $3.0 million.





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
2007 and 2008 software license fees is as follows:




Variance2007
                    
                    
                    2008
                    
                    
                    Decrease
                    
                    %Software
      License Fees
                    
                    $
                    19,741,000
                    
                    
                    $
                    16,488,000
                    
                    
                    $
                    3,253,000
                    
                    
                    
                    16.5%




The
decrease in license fees was due to (a) $1 million decrease in United States
cash management licenses, (b) $3 million decrease due to termination of a major
securities project, (c) $0.4 million decrease in license fees from our payments
segment, (d) $0.6 million decrease in BBP licenses, (e) partially offset by a
$1.7 million increase due to the acquisition of a new business.




Maintenance, Hosting and Services
Fees. Maintenance, hosting 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 2007 and 2008 maintenance and services fees is as
follows:




Variance2007
                  
                  
                  2008
                  
                  
                  Increase
                  
                  %Maintenance,
      Hosting and Services Fees
                  
                  $
                  84,893,000
                  
                  
                  $
                  104,549,000
                  
                  
                  $
                  19,656,000
                  
                  
                  
                  23.15%




Our
service fees increased by $8.2 million, due to a $7.3 million increase in
customers implementing our Global PAYplus solution or existing customers seeking
additional services and a $1.2 million increase in our cash management services
from new and existing customers, partially offset by a $0.3 million decrease in
BBP services revenue.




32


Our
hosting fees increased by $4.5 million, consisting of an increase in our BBP
segment hosting fees of $3.6 million and a $1.2 million increase in our US cash
management, offset by $0.3 million decrease in payments.




Our
maintenance fees increased by $6.9 million, which consisted of increases in
maintenance fees of $4.4 million in our payments segment, $1.8 million in our
cash management segment and $0.7 million in our BBP segment.




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 2007 and 2008 software license
costs is as follows:




Variance2007
                  
                  
                  2008
                  
                  
                  Decrease
                  
                  %Software
      License Costs
                  
                  $
                  590,000
                  
                  
                  $
                  291,000
                  
                  
                  $
                  299,000
                  
                  
                  
                  50.7%





This
large decrease relates solely to the presence of fewer embedded third party
software component sales and lower sales of free standing third party modules,
each of which is consistent with the decline in our license
revenues.




Amortization of Capitalized Software
Development Costs. A comparison between our 2007 and 2008 amortization of
capitalized software development costs is as follows:




Variance2007
                  
                  
                  2008
                  
                  
                  Decrease
                  
                  %Amortization
      of Capitalized
                    Software
      Development Costs
                  
                  $
                  394,000
                  
                  
                  $
                  0.00
                  
                  
                  $
                  394,000
                  
                  
                  
                  100%




The
elimination of  our amortization of capitalized software development
costs in 2008 reflects the completion of the amortization of capitalized
software development costs in connection with our Global PAYplus product. We
began amortizing this product in the second quarter of 2002 over a five year
period. The software was fully amortized by the end of March 2007.




Amortization of Other Acquired
Intangible Assets. A comparison between our 2007 and 2008 amortization of
other acquired intangible assets is as follows:




Variance2007
                  
                  
                  2008
                  
                  
                  Increase
                  
                  %Amortization
      of Other Acquired Intangible Assets
                  
                  $
                  1,387,000
                  
                  
                  $
                  2,167,000
                  
                  
                  $
                  780,000
                  
                  
                  
                  56.2%




The
increase in amortization resulted from the partial year amortization of the
newly acquired Accountis, Synergy and Troy assets, which caused an increase in
amortization of $1.1 million, which was partially offset by a decrease in
amortization of $0.3 million due to the completion of amortization of several
intangible assets during 2007 and 2008.





Maintenance, Hosting and Services
Costs. Maintenance, hosting 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 2007 and 2008 services costs is as follows:




33





Variance2007
                  
                  
                  2008
                  
                  
                  Increase
                  
                  %Maintenance,
      Hosting and
                    Services
      Costs
                  
                  $
                  45,578,000
                  
                  
                  $
                  53,730,000
                  
                  
                  $
                  8,152,000
                  
                  
                  
                  17.9%




Maintenance
costs increased by $0.6 million due to an increase in headcount in our support
organization.  Service costs increased by $3.6 million mainly due to
an increase in personnel allocated to our cash management and payments
projects.  Hosting costs increased by $3.0 million, consistent with
the increased number of hosting customers.  Other services costs,
which are reimbursable expenses that were billed back to customers, increased by
$1.0 million.




Impairment of Goodwill and related
intangible assets. A comparison between our 2007 and 2008 impairment of
goodwill is as follows:




Variance2007
                  
                  
                  2008
                  
                  
                  Increase
                  
                  %Impairment
      of Goodwill and related intangible Assets
                  
                  $
                  0.00
                  
                  
                  $
                  2,018,000
                  
                  
                  $
                  2,018,000
                  
                  
                  
                  100%





During
2008 we realized an impairment of goodwill related to our Radius subsidiary for
a total amount of $1.66 million and an additional impairment to Radius' related
intangible assets for a total amortized cost of $358,000.





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 2007 and 2008 software development expenses is as follows:




Variance2007
                  
                  
                  2008
                  
                  
                  Increase
                  
                  %Software
      Development
                  
                  $
                  19,348,000
                  
                  
                  $
                  21,849,000
                  
                  
                  $
                  2,501,000
                  
                  
                  
                  12.9%




We did
not capitalize any software development costs in 2008 or 2007 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
software development expenses from 2007 to 2008 derived from an increase in our
personnel/workforce and related hiring costs, which were attributable mainly to
(i) Fundtech India's efforts to enhance our US cash management product and (ii)
the additional personnel that we added as a result of the acquisition of
Accountis, Synergy and Troy.




Selling and Marketing. A
comparison between our 2007 and 2008 selling and marketing expenses is as
follows:




Variance2007
                  
                  
                  2008
                  
                  
                  Increase
                  
                  %Selling
      and Marketing
                  
                  $
                  17,801,00
                  
                  
                  $
                  20,130,000
                  
                  
                  $
                  2,329,000
                  
                  
                  
                  13.1%




The
increase in selling and marketing expenses was primarily due to (i) additional
selling and marketing personnel who joined us as a result of our acquisition of
Accountis, Synergy and Troy, and (ii) increases in travel, marketing materials
and promotion costs.




34


Provision for Doubtful
Accounts. Management’s assessment for uncertainties of outstanding
accounts receivable collectability is reflected in our provision for doubtful
accounts. A comparison between our 2007 and 2008 provision for doubtful accounts
is as follows:





Variance2007
                  
                  
                  2008
                  
                  
                  Increase
                  
                  %Provision
      for Doubtful Accounts
                  
                  $
                  (134,000
                  )
                  
                  $
                  753,000
                  
                  
                  $
                  887,000
                  
                  
                  
                  662%




The large
increase in doubtful accounts related to our taking a more conservative approach
in reserving for doubtful trade receivables due to the current uncertainty in
the market condition of the financial services industry.




General and Administrative. A
comparison between our 2007 and 2008 general and administrative expenses is as
follows:




Variance2007
                  
                  
                  2008
                  
                  
                  Increase
                  
                  %General
      and Administrative
                  
                  $
                  13,553,000
                  
                  
                  $
                  17,115,000
                  
                  
                  $
                  3,562,000
                  
                  
                  
                  26.3%




The
increase relates to higher headcount and related expenses.  In
addition, the increase reflects an increase in professional fees, travel and
administrative costs due to our acquisition of additional subsidiaries in
2008.




Financial Income, Net. A
comparison between our 2007 and 2008 financial income, net is as
follows:




Variance2007
                  
                  
                  2008
                  
                  
                  Decrease
                  
                  %Financial
      Income, net
                  
                  $
                  2,197,000
                  
                  
                  $
                  48,000
                  
                  
                  $
                  2,149,000
                  
                  
                  
                  97.8%




The
decrease in net financial income resulted primarily from foreign currency
fluctuations.  The decrease also reflects a lower average interest
rate on the financial instruments that we held in 2008 compared to 2007 due to
(i) maturity of long term marketable securities and (ii) generally lower short
term rates.




Income Taxes. A comparison
between our 2007 and 2008 income tax expense is as follows:




Variance2007
                  
                  
                  2008
                  
                  
                  Decrease
                  
                  %Income
      Taxes
                  
                  $
                  1,207,000
                  
                  
                  $
                  1,100,000
                  
                  
                  $
                  107,000
                  
                  
                  
                  8.9%




The
decrease with respect to income tax expense in 2008 derives in part from an
immaterial decrease of $49,000 in current income tax expense.  An
increase in deferred tax in Israel in 2008 created tax income of $940,000, which
was offset in part by an increase in deferred tax expense of $784,000 from
foreign operations (mainly from the US).





Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006




Revenues.




35




Variance2006
                    
                    
                    2007
                    
                    
                    Increase
                    
                    %Total
      Revenues
                    
                    $
                    85,509,000
                    
                    
                    $
                    104,634,000
                    
                    
                    $
                    19,125,000
                    
                    
                    
                    22.4%





The
increase in revenues in 2007 was primarily attributable to (i) higher United
States revenues from our cash management products, which were partially offset
by a decline in Fundtech India revenues from cash management products, netting
an increase of $3.6 million, (ii) higher revenues from our payments segment,
which increased by $13.9 million, consisting of CLS initiatives that raised
revenue by $3.4 million, Global PAYplus increases of $5.4 million and partial
year revenues from Fundtech GmbH (acquired in February 2007) of $4.1 million and
(iii) higher revenue from our BBP segment, which increased by $1.6 million,
partially due to exchange rate changes.





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
2006 and 2007 software license fees is as follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Increase
                  
                  %Software
      License Fees
                  
                  $
                  13,576,000
                  
                  
                  $
                  19,741,000
                  
                  
                  $
                  6,165,000
                  
                  
                  
                  45.4%




The
increase in license fees was primarily attributable to increases in (i) United
States cash management license fees of $2.3 million, offset in part by a decline
of $1.2 million in Fundtech India cash management license fees, (ii) BBP license
fees of $0.5 million and (iii) payment license fees of $4.6 million, which
included a Fundtech GmbH license fees increase of $1.7 million. See also Maintenance, Hosting and Services
Fees immediately below.





Maintenance, Hosting and Services
Fees. Maintenance, hosting 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 a software license is entered into. A
comparison between our 2006 and 2007 maintenance, hosting and services fees is
as follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Increase
                  
                  %Maintenance,
      Hosting and Services Fees
                  
                  $
                  71,933,000
                  
                  
                  $
                  84,893,000
                  
                  
                  $
                  12,960,000
                  
                  
                  
                  18.0%




Our
service fees increased by $5.9 million, primarily due to an increase in
customers implementing our Global Payplus solution or existing customers seeking
additional services, as well an increase of $1.1 million in our cash management
services from new and existing customers.




Our
hosting fees increased by $2 million, consisting of a BBP segment increase of $1
million, an increase of $0.5 million in our US payments operations and an
increase of $0.5 million in our US cash management operations.




Our
maintenance fees increased by $5.1 million, comprised of an increase of $4
million in our payments segment, $0.8 million in our cash management segment and
$0.3 million in our BBP segment.




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 2006 and 2007 software license
costs is as follows:




36




Variance2006
                    
                    
                    2007
                    
                    
                    Decrease
                    
                    %Software
      License Costs
                    
                    $
                    604,000
                    
                    
                    $
                    590,000
                    
                    
                    $
                    14,000
                    
                    
                    
                    2.3%




This
decrease related solely to the presence of fewer embedded third party software
component sales and lower sales of free standing third party
modules.




Amortization of Capitalized Software
Development Costs. A comparison between our 2006 and 2007 amortization of
capitalized software development costs is as follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Decrease
                  
                  %Amortization
      of Capitalized
                    Software
      Development Costs
                  
                  $
                  1,575,000
                  
                  
                  $
                  394,000
                  
                  
                  $
                  1,181,000
                  
                  
                  
                  75.0%




This
decrease reflects the completion of the amortization of the capitalized software
development costs in connection with our Global PAYplus product. We began
amortizing this product in the second quarter of 2002 over a five year period.
The software was fully amortized by the end of March 2007.




Amortization of Other Acquired
Intangible Assets. A comparison between our 2006 and 2007 amortization of
other acquired intangible assets is as follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Increase
                  
                  %Amortization
      of Other Acquired Intangible Assets
                  
                  $
                  1,275,000
                  
                  
                  $
                  1,387,000
                  
                  
                  $
                  112,000
                  
                  
                  
                  8.8%





The
increase in amortization resulted from the partial year amortization of the
newly acquired Fundtech GmbH assets which was partially offset by the decrease
in amortization of BBP assets due to the completion of their amortization during
2007.




Maintenance, Hosting and Services
Costs. Maintenance, hosting 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 2006 and 2007 maintenance, hosting and services costs is
as follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Increase
                  
                  %Maintenance,
      Hosting and
                    Services
      Costs
                  
                  $
                  34,726,000
                  
                  
                  $
                  45,578,000
                  
                  
                  $
                  10,852,000
                  
                  
                  
                  31.3%




Maintenance
costs increased by $2.0 million, which related directly to an increase in
headcount in our support organizations. Services costs increased by
$6.5 million, primarily related to the increased number of our personnel
assigned to large bank cash management projects in the United States and
payments projects offshore. The offshore services personnel costs were also
impacted by fluctuations in home country currencies against the United States
dollar. Hosting costs increased by $1.4 million, commensurate with the increased
number of hosted customers. Others services costs, which are reimbursable
expenses that are billed back to customers, increased by $894,000.




37




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 2006 and 2007 software development expenses is as follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Increase
                  
                  %Software
      Development
                  
                  $
                  16,710,000
                  
                  
                  $
                  19,348,000
                  
                  
                  $
                  2,638,000
                  
                  
                  
                  15.8%




We did
not capitalize any software development costs in 2007 or 2006 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
software development expenses consisted primarily of (i) an increase of $1.4
million in costs for additional hiring to provide enhancements for our Global
PAYplus product, and (ii) an increase of $1.2 million due to the retention of
additional consultants to create enhancements to our United States cash
management product.




Selling and Marketing. A
comparison between our 2006 and 2007 selling and marketing expenses is as
follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Increase
                  
                  %Selling
      and Marketing
                  
                  $
                  15,324,000
                  
                  
                  $
                  17,801,000
                  
                  
                  $
                  2,477,000
                  
                  
                  
                  16.2%




The
increase in selling and marketing expenses was primarily due to (i) our
acquisition of Fundtech GmbH and (ii) increases in travel, promotional, and
convention costs.




Provision for Doubtful
Accounts. Management’s assessment for uncertainties relating to the
collectability of outstanding accounts receivable is reflected in our provision
for doubtful accounts. A comparison between our 2006 and 2007 provision for
doubtful accounts is as follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Decrease
                  
                  %Provision
      for Doubtful Accounts
                  
                  $
                  430,000
                  
                  
                  $
                  (134,000
                  )
                  
                  $
                  564,000
                  
                  
                  
                  131%





The
significant decrease in the provision for doubtful accounts in 2007 reflected an
increased confidence in collectability of customer accounts in 2007 and an
increased emphasis on collections. We determine write off provisions on a case
by case basis.




General and Administrative. A
comparison between our 2006 and 2007 general and administrative expenses is as
follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Increase
                  
                  %General
      and Administrative
                  
                  $
                  12,133,000
                  
                  
                  $
                  13,553,000
                  
                  
                  $
                  1,420,000
                  
                  
                  
                  11.7%




The
increase was primarily due to (i) the acquisition of Fundtech GmbH, (ii)
increased hiring in the U.S and (iii) higher bonuses.




38




Financial
Income, Net. A comparison between our 2006 and 2007 financial income, net
is as follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Increase
                  
                  %Financial
      Income, net
                  
                  $
                  1,984,000
                  
                  
                  $
                  2,197,000
                  
                  
                  $
                  213,000
                  
                  
                  
                  10.7%




The
increase in net financial income was primarily due to an increase in the average
cash and cash equivalent invested balances, as well as a higher average interest
rate on the financial instruments that we held in 2007 compared to
2006.




Income Taxes. A comparison
between our 2006 and 2007 income taxes is as follows:




Variance2006
                  
                  
                  2007
                  
                  
                  Increase
                  
                  %Income
      Taxes
                  
                  $
                  964,000
                  
                  
                  $
                  1,207,000
                  
                  
                  $
                  243,000
                  
                  
                  
                  25.2%




We
experienced a tax increase in Israel, the United Kingdom and Switzerland that
totaled $0.2 million in 2007 and a tax increase related to Fundtech GmbH that
totaled $0.4 million. These increases were offset in part by a decrease in tax
liability of $0.3 million in the United States, $0.1 million in
India.





B.           Liquidity and Capital
Resources.





We have
financed our operations primarily through the sale of equity securities in an
aggregate amount of approximately $139.7 million, including net proceeds from
our 1998 initial public offering in an amount of approximately $29 million,
proceeds from our follow-on 1999 public offering in an 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 $1.4 million
from the exercise of employee options in 2008. As of December 31, 2008, working
capital was $47.8 million, which included cash and cash equivalents, short term
investments and marketable securities of $40.3 million.




Cash flows from operating
activities.Net cash provided by operating activities amounted to $13.8
million for the year ended December 31, 2008 as compared to net cash provided by
operating activities of $17.3 million for the year ended December 31, 2007 and
$5.3 million for the year ended December 31, 2006. This decrease of $3.5 million
from 2007 to 2008 reflects a decrease in our net income of $5.9 million, an
increase in trade receivables, net, other account receivables and prepaid
expenses of $11.3 million, offset by impairments of marketable securities,
goodwill and other intangible assets of $2.7 million, an increase in
depreciation and amortization, stock option compensation and accrued interest on
marketable securities of $2.2 million and an increase in trade payables,
deferred revenue, other payable and accrued expenses of $12.3 million, in the
aggregate, compared to 2007. The increase of $12 million from 2006 to 2007
reflects an increase in net income of $3.4 million, a decrease in account
receivables of $11.5 million, offset by a decrease in trade payables, deferred
revenue, other payable and accrued expenses of $2.9 million.





Cash flows from investing
activities.Net cash used in investing activities amounted to $14.8
million for the year ended December 31, 2008 as compared to $17.5 million for
the year ended December 31, 2007 and $6.2 million for the year ended December
31, 2006.   During 2008, cash was used to fund the acquisitions
of Synergy, Accountis and Troy as well as to pay additional amounts as per the
terms of the acquisition agreements with Radius Partners and Fundtech GmbH in
the aggregate amount of $17.2 million. Cash used in the purchase of property and
equipment decreased by $0.1 million to $6.6 million for the year ended December
31, 2008 from $6.7 million for the year ended December 31, 2007. During 2007 we
invested $7.5 million to fund the acquisition of Fundtech GmbH as well as to pay
additional amounts as per the terms of the acquisition agreements with Radius
Partners and Fundtech India. Purchases of property and equipment increased by
$1.5 million to $6.7 million for the year ended December 31, 2007 from $5.2
million for the year ended December 31, 2006. 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 2009, our anticipated capital expenditures
are $8 million - See Item 4, "Information on the Company", in the subsection
titled "History and Development of the Company.”





39


Cash flows from financing
activities.Net cash provided by financing activities was $0.8 million
for the year ended December 31, 2008 as compared to $2.3 million for the year
ended December 31, 2007 and as compared to net cash used in financing activities
of $1.8 million in the year ended December 31, 2006. The decrease in cash
provided by financing activities from 2007 to 2008 was primarily due to a
decrease in cash proceeds from exercise of stock options of $0.9 million and the
use, in 2008, of $0.7 million of cash for the repurchase of treasury stock. The
increase in cash provided by financing activities from 2006 to 2007 was
primarily due to an increase in proceeds from exercise of stock options in 2007,
whereas we did not use cash for the purchase of Ordinary Shares as we had in
2006, as noted below.





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.
As of December 31, 2006, the Company had purchased a total of 299,383 shares. No
shares were purchased during 2007. On November 11, 2008, the Company’s Board of
Directors authorized the purchase of up to $10 million of our Ordinary Shares
from time to time on the open market. As of December 31, 2008, the Company had
purchased a total of 82,239 shares.




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 our initial approved enterprise
program on November 27, 1997. In 1998, we received approval for our first
expansion program. In 2000, we received approval for our second expansion
program and in 2005 we received approval for our third expansion program and in
2007 we submitted a request for an approval for our forth 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 12 - Income Taxes” to our Consolidated Financial
Statements included herein for additional information.




At
December 31, 2008, we had net operating loss (“NOL”) carry forwards of
approximately $43.1 million and $21.8 million in the United States and in
Israel, respectively. The U.S. NOL carry forwards begin to expire in 2010
through 2025 and the Israeli NOL carry forwards have no expiration. See Note 12
to the Consolidated Financial Statements.




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




During
2008, we expended $21.8 million in current expense charges related to the
development of our software with no capitalized costs. During 2007 and 2006,
$19.3 million and $16.7 million, respectively, in current expense charges were
expended by us for our software, with no capitalized costs. There were no grants
by the Office of the Chief Scientist to us in 2006, 2007 or 2008.




40


D.           Trend
Information.




Our
trends are disclosed above in the “Overview” subsection of this Item 5,
“Operating and Financial Review and Prospects”.  Additional,
industry-wide trend information that may have an impact on our revenues, income
from continuing operations and profitability is described above under “Industry
Background” in the “Business Overview” subsection of Item 4, “Information on the
Company” and in the “Risk Factors” subsection of Item 3, “Key
Information.”




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, 2008,
summarizes the aggregate effect that these obligations are expected to have on
our cash flows in the periods indicated:




Payments Due by PeriodContractual Obligations
                      
                      Total
                      
                      
                      Less than
                        1 year
                      
                      
                      1-3
                        years
                      
                      
                      3-5
                        years
                      
                      
                      More than
                        5 yearsOperating
      Lease Obligations
                      
                      $
                      8,809,000
                      
                      
                      $
                      2,896,000
                      
                      
                      $
                      4,289,000
                      
                      
                      $
                      1,624,000
                      
                      
                      $
                      -





ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.




Directors
and Senior Management.




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




NAME
                AGE
                POSITIONAvi
      Fischer
                52
                Chairman
      of the Board of DirectorsGideon
      Argov
                52
                Vice-Chairman
      of the Board of DirectorsReuven
      Ben Menachem
                48
                Chief
      Executive Officer, DirectorRobert
      Cobuzzi
                68
                DirectorGerald
      Dogon
                69
                DirectorYaffa
      Krindel
                54
                DirectorStanley
      Stern
                52
                DirectorGil
      Weiser
                67
                DirectorPeter
      Radcliffe
                59
                DirectorMichael
      Sgroe
                53
                President
      & Chief Operating OfficerJoseph
      J. Aulenti
                63
                Executive
      Vice President, General Counsel and SecretaryYoram
      Bibring
                51
                Executive
      Vice President, Chief Financial OfficerJoseph
      P. Mazzetti
                68
                Executive
      Vice President, Corporate
Development





41


Avi Fischer was elected to
serve as Chairman of the Board of Directors of Fundtech on February 17,
2009.  Since June 2003, Mr. Fischer has served as Co-Chief Executive
Officer of Clal Industries and Investments (CII), a conglomerate that divides
its investments into three distinct segments: core industrial holdings, venture
capital, and biotechnology.  He also serves as the Deputy Chairman of
IDB Group in the Bio-Tech sector.  IDB Group is one of Israel’s
largest holding companies.  Prior to and for a period of time after
joining CII, from January 1999 to December 2004, Mr. Fischer was a managing
partner of Fischer Behar Chen Well Orion & Co., one of Israel’s leading law
firms. Mr. Fischer is a co-founder of the Ganden Group, a leading holding
concern with interests in real estate, tourism and aviation.  Mr.
Fischer currently serves on the boards of numerous Israeli companies, including:
Ganden Holdings Ltd., Ganden Tourism and Aviation, private companies and on the
boards of the following publicly traded companies: Clal Biotech Ltd. (TASE:
CBI), , Makhteshim Agan Industries Ltd. (TASE: MAIN), Koor Industries Ltd.
(TASE: KOR), American Israeli Paper Mills Ltd.(TASE & AMEX: AIPM) Elron Ltd.
(TASE & NASDAQ: ELRN) and GVT Brazil (BOVESPA: GVTT3). In addition, Mr.
Fischer also serves as the Co-Chairman of “Matan – Your Way to Give”, Israel’s
largest Philanthropists organization.  He is a Lieutenant Colonel
(reserves) in the armored corps of I.D.F. Mr. Fischer has earned an L.L.B. from
the Tel-Aviv University and was a faculty member at the Tel-Aviv University Law
School in 1983.





Gideon Argov was elected
Vice-Chairman of the Board of Directors on February 17, 2009.  Prior
to such time, Mr. Argov served as Chairman of our Board of Directors, commencing
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 General Partner of
Tamarix Ventures, a new Cleantech venture capital fund located in Herzliya,
Israel. From 1997 she served as a Managing Partner and an Investment Partner in
the Herzliya office of STAR Ventures, a private venture capital partnership
headquartered in Munich, Germany. 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 leading provider of
innovative wireless broadband network solutions. 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 boards of
Syneron Medical (ELOS) and Voltaire (VOLT), publicly traded companies and on the
boards of the following private companies: Siano Mobile Silicon Inc., and
OrSense Ltd. 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.




42




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 Solutions 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 Herzliya. 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.





Peter Radcliffe was elected to
serve as a director of Fundtech on December 20, 2008. Mr. Radcliffe is currently
Chairman of Accountis Limited, a UK private company specializing in Electronic
Invoice Presentment and Payment, acquired by Fundtech in February 2008. Mr.
Radcliffe serves on the boards of several companies, Monitise, the provider of
mobile banking on cell phones and Finance Wales the main Venture Capital
provider of Wales. Mr. Radcliffe was the Global Head of ATM Channel Management,
NCR, 1999 to 2004. From 1993 to 1997 he worked for First Data Corporation,
initially as Director of Operations and Business Development Europe, before
promotion to MD Asia Pacific based in Hong Kong. Between 1990 and 1993 he was
Director of Banking and Money Transmission at the just demutualised bank Abbey
National (now part of Santander). Mr. Radcliffe is a Fellow of the Chartered
Institute of Bankers.





Currently
Serving External Directors under the Companies Law




Robert Cobuzzi was elected to
serve as a director of Fundtech on December 20, 2007. Since 2006, Mr. Cobuzzi
has served as a member of the Board of Directors of Economic Development
Industrial Corporation. Prior to joining the Board of Directors of Economic
Development Industrial Corporation, from 2002 until 2006, Mr. Cobuzzi served as
the Chief Financial Officer of Akamai Technologies Inc., a multi-million dollar
global provider of software services for accelerating and improving the delivery
of content and business processes over the Internet, located in Cambridge,
Massachusetts. From 2000 to 2002, Mr. Cobuzzi served as the Executive Vice
President and Chief Financial Officer of Network Plus Corporation, located in
Massachusetts, a network-based communications provider offering broadband data
telecommunications and data hosting services to small and medium-sized
businesses from New Hampshire to Florida. Prior to 2002, he served as Senior
Vice President, and Chief Financial Officer of Kollmorgen Corporation, a global
leader in high-performance electronic equipment, systems software from 1991 to
2000. Mr. Cobuzzi also served on the Board of Directors of Kollmorgen
Corporation. He has earned degrees from Northeastern University and Bentley
College of Massachusetts.




Gerald Dogon was elected to
serve as a director of Fundtech as of December 20, 2007. Mr. Dogon served as the
Executive Vice President, Chief Financial Officer and a member of the Board of
Directors of DSP Communications Inc. DSP is a leading developer of chip sets and
products for cellular, personal communication services (PCS), and wireless local
loop (WLL) markets, headquartered in Cupertino, California from 1994 to 1999.
DSP was acquired by Intel Corp. in 2000. Prior to joining DSP, Mr. Dogon served
as the Director of Finance of Nilit Ltd., a privately held company manufacturing
Nylon, Polyamide fibers from 1992 to 1994. From 1991 until 1992, he served as
the Vice President of Finance and Director of Mul T Lock Ltd., Yavne, Israel,
manufacturers of high security products. Prior to joining Mul T Lock Ltd., Mr.
Dogon served as Manager of the International Division of Israel General Bank
Ltd., a commercial bank in Tel-Aviv, Israel from 1989 to 1991. Mr. Dogon served
as a member of the Board of Directors and Chairman of the Audit Committee of
Contahal Ltd. and Nogatech Inc in addition to serving as a member of the
Investment and Nomination Committees of Scailex Corporation from 1993 to 2006.
He currently is a member of the Boards of Directors of Rosetta Genomics Ltd. and
serves as the Chairman of the Audit Committee and a member of the Compensation
and Nomination Committees of Rosetta Genomics Ltd. from 2007 to present. Mr.
Dogon earned degrees from Columbia University and University of Cape
Town.




43


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 Ltd., 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.




44




Arrangements
for the Election of Directors




Avi Fischer, who was elected by our
Board of Directors to the position of Chairman of the Board in February 2009, is
a director and Co-Chief Executive Officer of CII, the beneficial owner of
8,797,398 of our Ordinary Shares (constituting approximately 53.6% beneficial
ownership of our outstanding share capital).  In addition, Peter
Radcliffe, who serves on our Board, also serves as Chairman of Accountis
Limited, a company that we acquired in February 2008 and that is our wholly
owned subsidiary.  Other than as described immediately above, there
are no arrangements or understandings pursuant to which any of our directors or
members of senior management were elected as such.  There are
furthermore no family relationships among any such directors or members of our
senior management.





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, 2008 to our
directors and executive officers as a group was $2,382,895 in salaries and
bonuses, inclusive of the retainer payments to directors as described below. In
addition, certain officers are provided a car allowance, the aggregate cost of
which (for all such officers combined) totaled $88,167 for 2008. 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 2007, our shareholders approved payment of an annual retainer of
$25,000 to non-employee directors for future annual periods, beginning January
1, 2008, 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
committee 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 (as described below in subsection C of
this Item 6)) shall be entitled to an additional annual payment of $10,000
payable on a quarterly basis of $2,500 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 committee
meetings (in which such non-employee director is a member) held during such
quarter, and the Chairmen of the Compensation and Nominating Committees shall be
entitled to an additional annual payment of $5,000 payable on a quarterly basis
of $1,650 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. This authorization
remains in effect during 2009, but the directors have voluntarily agreed to
reduce their cash compensation by 27% to 30%. The shareholders also approved the
grant of either 4,500 restricted shares of 13,500 stock options to Mr. Argov and
of 2,250 restricted shares or 6,750 stock options to each other non-employee
director.




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.




45




Directors
Compensation




The sole
compensation paid to 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
2008, options to purchase 186,500 Ordinary Shares and 82,584 shares of
restricted stock were granted to our directors and executive
officers.  The exercise price of these options was $7.81 per share for
both directors and officers, with vesting over a one to three year
period.  All options and restricted shares were granted pursuant to
our 2005 Plans (as defined below).  Options granted under the 2005
Plans expire 10 years from the date of grant.




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 OfficeAvi
      Fischer
                        
                        Chairman
                        
                        February
      17, 2009
                        
                        2009
      Annual MeetingGideon
      Argov (2)(5)
                        
                        Vice
      Chairman
                        
                        February
      17, 2009
                        
                        2009
      Annual MeetingReuven
      Ben Menachem
                        
                        Chief
      Executive Officer, Director
                        
                        October
      28, 2002
                        
                        2009
      Annual MeetingStanley
      Stern (2)(3)
                        
                        Director
                        
                        July
      22, 2003
                        
                        2009
      Annual MeetingYaffa
      Krindel (2)(4)
                        
                        Director
                        
                        February
      12, 2004
                        
                        2009
      Annual MeetingGil
      Weiser (2)(4)(5)
                        
                        Director
                        
                        October
      28, 2002
                        
                        2009
      Annual MeetingRobert
      Cobuzzi (1)(2)(3)(4)(6)
                        
                        Director
                        
                        December
      20, 2007
                        
                        2010
      Annual MeetingGerald
      Dogon (1)(2)(3)(5)(7)
                        
                        Director
                        
                        December
      20, 2007
                        
                        2010
      Annual MeetingPeter
      Radcliffe
                        
                        Director
                        
                        December
      20, 2008
                        
                        2009
      Annual MeetingJoseph
      Aulenti
                        
                        Executive
      Vice President, General Counsel and Secretary
                        
                        October
      1, 2002
                        
                        Not
      ApplicableYoram
      Bibring
                        
                        Executive
      Vice President, Chief Financial Officer
                        
                        September
      6, 2001
                        
                        Not
      ApplicableJoseph
      P. Mazzetti
                        
                        Executive
      Vice President, Corporate Development
                        
                        June
      1, 2001
                        
                        Not
      ApplicableMichael
      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.
Cobuzzi was elected for a three year term as an external director on December
20, 2007.


(7) Mr.
Dogon was elected for a three year term as an external director on December 20,
2007.




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




46


Prior to
every annual meeting, the Board of Directors selects a panel of between five and
nine 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 cannot serve an
as alternate director for any of the other directors. Any alternate director has
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 rules of the
Securities and Exchange Commission (the “SEC”) that has the requisite financial
sophistication as defined by the NASDAQ Marketplace Rules and regulations (the
"NASDAQ rules") and is independent within the meaning of the independent
director standards of the NASDAQ rules and the SEC rules, then our external
directors are only required to possess requisite professional
qualifications.




47


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.




Robert
Cobuzzi and Gerald Dogon currently serve as our “external” directors within the
meaning prescribed by the Companies Law. Their current term of office ends after
our 2010 annual shareholder meeting.




Independent
Directors Under NASDAQ Rules




Our
Ordinary Shares are listed for quotation on the NASDAQ Global Market and are
subject to the NASDAQ rules applicable to listed companies. Under the NASDAQ
rules, we are required to appoint a sufficient number of independent directors
for them to constitute a majority of our Board of Directors. The independence
standard under the NASDAQ rules excludes, among other disqualifying factors, any
person (i) who is an officer or employee of the Company or its subsidiaries, or
(ii) that our 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 $120,000 per annum.





Gideon
Argov, Robert Cobuzzi, Gerald Dogon, Yaffa Krindel, Stanley Stern and Gil Weiser
qualify as independent directors and meet the independence standard of the
NASDAQ rules, thereby providing us with a majority of independent directors on
our Board of Directors.




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 our
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.




48


Under the
NASDAQ rules and the Sarbanes-Oxley Act of 2002, our Audit Committee (i) has the
sole authority and responsibility to select, evaluate, and, where appropriate,
replace our 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 our 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 our
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 NASDAQ rules.




The
members of the Audit Committee for the fiscal year ended December 31, 2008 were
Stanley Stern, Chairman, Robert Cobuzzi and Gerald Dogon, each of whom is an
independent director, as determined under the NASDAQ rules and SEC rules. Mr.
Cobuzzi qualifies as a financial expert under the Sarbanes-Oxley Act of 2002.
For 2009, the Audit Committee will consist once again of Stanley Stern,
Chairman, Robert Cobuzzi and Gerald Dogon. Mr. Cobuzzi has been designated as
the financial expert under the Sarbanes-Oxley Act of 2002.




Compensation
Committee





In
addition to our Audit Committee, our Board of Directors has furthermore created
a Compensation Committee consisting solely of independent directors, in
accordance with NASDAQ rule requirements.  The members of the
Compensation Committee for the fiscal year ended December 31, 2008 were Yaffa
Krindel, Chairman, Robert Cobuzzi and Gil Weiser. No member of the Compensation
Committee is an officer or employee of the Company and each is an independent
director, as determined under the NASDAQ rules. As required under the NASDAQ
rules, which require that this committee be responsible for setting and
approving salaries for our executive officers, the responsibilities of the
Compensation Committee include administering our stock plans and approving the
compensation of our executive officers. For 2009, the Compensation Committee
will consist once again of Yaffa Krindel, Chairman, Gil Weiser and Robert
Cobuzzi.




Nominating
Committee




In
accordance with the NASDAQ rules, which require our Board of Directors to
appoint a wholly independent nominating committee that is responsible for the
nomination of directors, our Board of Directors established our Nominating
Committee in 2004. Its members during 2008 were Gil Weiser, Chairman, Gideon
Argov and Gerald Dogon, each of whom is an independent director, as determined
under the NASDAQ rules. 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
shareholders or other interested parties to our Board of Directors. For 2009,
the Nominating Committee will consist once again of Gil Weiser, Chairman, Gideon
Argov and Gerald Dogon.




49


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. The Companies Law requires that an office holder of the company
promptly disclose any personal interest that he or she may have and all related
material information known to him or her, in connection with any existing or
proposed transaction by the company. In addition, if the transaction is an
extraordinary transaction as defined under Israeli law, the office holder must
also disclose any personal interest held by the office holder’s spouse,
siblings, parents, grandparents, descendants, spouse’s descendants and the
spouses of any of the foregoing. In addition, the office holder must also
disclose any interest held by any corporation in which the office holder is a 5%
or greater shareholder, director or general manager or in which he or she has
the right to appoint at least one director or the general manager. An
extraordinary transaction is defined as a transaction other than in the ordinary
course of business, otherwise than on market terms, or that is likely to have a
material impact on the company’s profitability, assets or liabilities. 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. In any event, the transaction must not be adverse to the company’s
interest.




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 our internal auditor.





50


Disclosure
Committee




A
Disclosure Committee consisting solely of Company employees was established in
2004 under the auspices of our 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, Fundtech GmbH and Fundtech
India subsidiaries. Meetings are held periodically as warranted. The committee
has also adopted and published policies and procedures governing its activities.
The charter of the committee was approved by our Audit Committee. No directors
serve on the committee.




Employees




The
following table summarizes the main category of activity and geographic location
of our employees as of December 31, 2008:




Software
                  Development
                
                Operations
                
                Sales and
                  Marketing
                
                Administration
                
                Total
                  EmployeesUnited
      States
                
                
                128
                
                70
                
                
                40
                
                41
                
                
                279Israel
                
                
                66
                
                101
                
                
                0
                
                12
                
                
                179Switzerland
                
                
                33
                
                19
                
                
                9
                
                10
                
                
                71United
      Kingdom
                
                
                16
                
                19
                
                
                7
                
                10
                
                
                52Australia
                
                
                3
                
                0
                
                
                0
                
                0
                
                
                3India
                
                
                215
                
                110
                
                
                8
                
                35
                
                
                368Germany
                
                
                6
                
                4
                
                
                2
                
                3
                
                
                14





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 our
Consolidated Financial Statements included herein.




Our
Fundtech India subsidiary, as required by Indian regulations, provides a
severance payment to any employee who resigns after working for five years with
Fundtech India. This obligation, the valuation of which is carried out by an
independent actuary, is reflected on the Fundtech India 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.




51




Share
Ownership of Management and Directors




Security
Ownership of Directors, Senior Management and Certain Key Employees




As of
April 15, 2009, 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:Avi
      Fischer
              
              Beneficially
      owns less than one percent (1)Gideon
      Argov
              
              Beneficially
      owns less than one percent.Reuven
      Ben Menachem
              
              461,794
      (2.8%)Robert
      Cobuzzi
              
              Beneficially
      owns less than one percent.Stanley
      Stern
              
              Beneficially
      owns less than one percent.Gil
      Weiser
              
              Beneficially
      owns less than one percent.Gerald
      Dogon
              
              Beneficially
      owns less than one percent.Yaffa
      Krindel
              
              Beneficially
      owns less than one percent.Peter
      Radcliffe
              
              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
              
              337,268
      (2.1%)Total
              
              1,153,840
      (7.0%)





(1)           Excludes
shares beneficially owned by Clal Industries and Investments Ltd. (for which Mr.
Fischer serves as Co-Chief Executive Officer), with respect to which Mr. Fischer
disclaims beneficial ownership.





Beneficial
ownership by a person, as of a particular date, is determined in accordance with
the rules of the SEC and includes Ordinary Shares that are issuable upon 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 complete a vesting schedule (and/or be released from relevant
restrictions) within 60 days of such date. Applicable percentage ownership in
the table set forth above is based on 16,425,442 Ordinary Shares outstanding as
of April 15, 2009.  No director, other than Mr. Fischer, is affiliated
with a major shareholder.  In addition, none of the shares held by our
directors or members of management possesses different voting rights than shares
held by any of our other shareholders.





As of May
15, 2009, options to purchase up to 993,859 Ordinary Shares were outstanding and
540,249 restricted shares have been granted to our directors and executive
employees under our 2005 Plans. The weighted average exercise price of such
options was $7.90 per share.  Among such options and restricted
shares, options to purchase 654,364 Ordinary Shares and 149,572 Restricted
Shares granted to our directors and executive employees are currently
exercisable or will become exercisable within 60 days of April 15,
2009.





Equity
Compensation Plans




Fundtech
had initially 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”). The
1997 Plan has expired. On December 21, 2005, our 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,” and together with the 1997 Plan, the
1999 Option Plan and the Directors' Option Plan, the “Company Option Plans”),
which are discussed below.




52




Under the
Company Option Plans, options to purchase our Ordinary Shares or restricted
shares may be granted to the officers, directors, employees or consultants of
the Company or of any of our subsidiaries.  Pursuant to the Company
Option Plans, a total of 4,892,815 options and restricted shares have been
allocated for grant to employees and directors of Fundtech and its subsidiaries;
for each option outstanding, an equivalent underlying Ordinary Share has been
reserved for issuance upon the exercise thereof. As of December 31, 2008, an
aggregate of 2,060,312 of the options and restricted shares granted under the
Company Option Plans remained outstanding, 1,598,776 of the options granted had
been exercised, and 848,722 shares or options remain available to be
granted.




1999
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. Options
granted under this plan 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
under, 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, the remaining
391,988 options available for grant under the 1999 Option Plan were transferred
to the 2005 Plans and no options remain available for grant
thereunder.   As of May 1, 2009, 1,731,562 options remain
outstanding under the 1999 Option Plan.




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, the remaining
130,000 options available for grant under the Directors' Option Plan were
transferred to the 2005 Plans and no options remain available for grant
thereunder.





2005
Plans


On
December 21, 2005, the shareholders of the Company approved the adoption of the
2005 Plans. The 2005 Plans as adopted 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 Ordinary Shares that
were available for issuance (as of the date on which the 2005 Plans were
adopted) 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. On December 20, 2007 and
December 18, 2008, our shareholders approved the allocation of an additional
300,000 shares and 1,000,000 shares, respectively, to the 2005 Plans. The
cumulative number of shares that may be issued under the 2005 Plans, inclusive
of any award or grant under the Previous Plans, may not exceed 4,892,815 shares.
Grants under the 2005 Plans vest over periods of between one and four years. As
of April 15, 2009, 893,252 restricted shares have been granted under the 2005
Plans. As of May 15, 2009, 915,752 restricted shares and 222,500 options have
been granted under the 2005 Plans.




Administration
of Our Equity Compensation Plans




The
Compensation Committee of the Board of Directors administers the Company Option
Plans. Under such plans, the Compensation Committee of the Board of Directors
has the authority to set the exercise price of options that are granted. The
Compensation Committee also determines the vesting schedule for option and
restricted share grants.Restricted share grants
and stock option grants to directors are also approved by the Audit Committee of
the Board of Directors, the Board of Directors and the
shareholders.




53




ITEM
7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.




Major
Shareholders.




The
following table summarizes information about the beneficial ownership of our
outstanding Ordinary Shares as of April 15, 2009, 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 SEC 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 16,425,442 Ordinary Shares outstanding as of April 15,
2009.




NAME OF BENEFICIAL OWNER
                    
                    NUMBER OF SHARES
                      BENEFICIALLY
                      OWNED
                    
                    PERCENTAGE
                      BENEFICIALLY
                      OWNEDClal
      Industries and Investments Ltd.(1)
                    
                    
                    8,797,398
                    
                    53.6
                    %Cannell
      Capital LLC(2)
                    
                    
                    1,429,921
                    
                    8.7
                    %All
      directors and executive officers as a group (13 persons)
                    
                    
                    1,153,840
                    
                    7.0
                    %





1.
            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 April 15, 2009, 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 37.73% of the equity and
37.76% of the 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 10.39% of the equity and 10.40% of the 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 and 10.35% of
the 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 17.53% of the equity and 17.55% voting
power in IDBH; (b) Ganden holds a further 6.71% of the equity in IDBH; (c) Manor
Holdings B.A. Ltd., the parent company of Manor, holds 3.03% of the equity of
and voting power in IDBH; (d) Avraham Livnat Ltd., the parent company of Livnat,
holds 3.09% 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 4.23% 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.




54




2.
            As
      of December 31, 2008, Anegada Master Fund Limited (“Anegada”), Tonga
      Partners, L.P. (“Tonga Partners, L.P. (“Tonga”) and Tonga Partners QP,
      L.P. (“TongaQP”, and collectively with Anegada and Tonga, the “Funds”)
      owned in the aggregate 1,429,921 of our Ordinary
      Shares,  Cannell Capital LLC acts as the investment adviser to
      Anegaa and is the general partner of and investment adviser to Tonga and
      Tonga QP.   Mr. J. Carlo Cannell is the sole managing
      member of Cannell Capital LLC.  As a result, Mr. Cannell
      possesses the sole power to vote and to direct the disposition of the
      securities held by the Funds.  Mr. Cannell is deemed to
      beneficially own 1,429,921 shares, or approximately 8.79% of the shares
      deemed issued and outstanding.




16,676,685
of our Ordinary Shares (of which 12,688,996 are in CEDE accounts), constituting
76% of our outstanding Ordinary Shares, are held by record holders located in
the United States.  48 record holders are located in the United
States. We have determined that in excess of 63% of our Ordinary Shares are
beneficially owned by non-United States persons.




During
the period between December 14, 2004 and April 7, 2008, Clal purchased 3,481,527
Ordinary Shares, increasing its percentage ownership from 36.3% to
42.3%.  2,104,720 additional shares were purchased by Clal and its
affiliate IDB during the remainder of 2008 pursuant to its tender offer, as
described immediately below.





On March
5, 2008, Clal initiated a tender offer seeking to purchase up to 2,338,686
shares of the Company at a per share price of $12.50. On April 8, 2008, Clal
announced that it had received tenders of 2,104,720 shares. Upon consummation of
the share purchases, Clal’s share holdings increased to 8,797,398 (constituting
53.6% of our outstanding share capital, or 57.9%, when taken together with
98,498 Ordinary Shares held by its affiliate IDB Development Corporation,
Ltd.).





Cannell
Capital LLC first reported purchasing Ordinary Shares in 2002. Cannell’s
ownership was reported at 2,527,826 Ordinary Shares (17.4%) on December 31,
2003, decreased to 2,280,800 (15.1%) Ordinary Shares as of June 14 2006,
increased to 2,800,000 Ordinary Shares (17.5%) as of February 15, 2007,
decreased to 2,056,597 Ordinary Shares (12.8%) as of February 15, 2008, and
decreased once again to 1,429,921 (8.7%) as of December 31, 2008.




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




Related
Party Transactions





Directors
and Officers' 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.




Our
directors and officers insurance policy is competitively bid for each year
through brokers operating in the United States and Israel.  As part of
this process, bids were solicited by our Israeli broker from major carriers,
inclusive of Clal Insurance Ltd., which is owned by Clal Industries and
Investments Ltd., our largest shareholder.  The Clal proposal was the
most economical and provided coverage equivalent to every other bidder, and we
therefore accepted it for the current, 2009 year.  This transaction,
made in the ordinary course of business and with a premium cost substantially
below one percent (1%) of our revenues, was approved by our management in
accordance with our policy for approval of related party
transactions.


55


Indemnification




Our
shareholders have approved our entering into undertakings to indemnify in
advance our directors and office holders for the breach of their duty of care to
the fullest extent permitted by the Companies Law, and entering into
indemnification agreements with our directors.




Under
Section 260 of the Companies Law, we are 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 (our Articles of Association, as amended at our 2007 annual meeting, so
permit) 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 or standard which the Board of Directors deems
reasonable in light of the applicable circumstances. This allowance for
indemnification is specifically limited in its 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 or her fiduciary duty unless he or she acted in good faith and had
a reasonable basis to believe that the act would not prejudice the interests of
the company; (b) a breach by the office holder of his or her 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 or her 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 (our Articles of Association, as amended
at our 2007 annual meeting, so authorized).




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 6 above.





Interests
of Experts and Counsel




Not
applicable.




ITEM
8 FINANCIAL INFORMATION.




Consolidated
Statements and Other Financial Information.




The
following Consolidated Financial Statements of Fundtech Ltd. and its
subsidiaries for the years ended December 31, 2006, 2007 and 2008, together with
the report of our independent auditors thereon, are presented under Item 18 of
this annual report:





Report
      of Independent Auditors
                  F-1
      – F-2Consolidated
      Balance Sheets
                  F-3Consolidated
      Statements of Operations
                  F-4Statements
      of Changes in Shareholders’ Equity
                  F-5
      – F-6Consolidated
      Statements of Cash Flows
                  F-7
      – F-8Notes
      to Consolidated Financial Statements
                  F-9
      – F-42


56


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 Israel's 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 our Articles of Association, the
authority to declare dividends is vested in our Board of Directors. In the event
we pay dividends, it is anticipated that any dividends paid to non-residents of
Israel would be paid in NIS.




Significant
Changes.




None




ITEM
9 THE OFFER AND LISTING.




Market
and Price Information.





Our
Ordinary Shares are listed 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
                    
                    
                    LOWFive
      most recent full financial years:2004
                    
                    
                    9.90
                    
                    
                    
                    6.262005
                    
                    
                    11.23
                    
                    
                    
                    8.092006
                    
                    
                    12.94
                    
                    
                    
                    8.722007
                    
                    
                    17.78
                    
                    
                    
                    11.332008
                    
                    
                    15.20
                    
                    
                    
                    6.14Quarterly
      information for two most recent years and subsequent
    quarters:2007First
      Quarter
                    
                    
                    14.13
                    
                    
                    
                    11.33Second
      Quarter
                    
                    
                    16.00
                    
                    
                    
                    14.16Third
      Quarter
                    
                    
                    17.59
                    
                    
                    
                    14.25Fourth
      Quarter
                    
                    
                    17.78
                    
                    
                    
                    13.052008First
      Quarter
                    
                    
                    13.37
                    
                    
                    
                    9.68Second
      Quarter
                    
                    
                    14.85
                    
                    
                    
                    11.51Third
      Quarter
                    
                    
                    15.20
                    
                    
                    
                    13.01Fourth
      Quarter
                    
                    
                    14.15
                    
                    
                    
                    6.142009First
      QuarterU.S.
                    
                    
                    8.86
                    
                    
                    
                    5.00TASE
                    
                    
                    3,499
                    
                    
                    
                    2,100Most
      recent six monthsDecember
      2008
                    
                    
                    9.30
                    
                    
                    
                    6.14January
      2009
                    
                    
                    7.25
                    
                    
                    
                    5.80February
      2009
                    
                    
                    6.44
                    
                    
                    
                    5.00March
      2009
                    
                    
                    8.86
                    
                    
                    
                    5.97April
      2009
                    
                    
                    9.50
                    
                    
                    
                    7.26May
      2009
                    
                    
                    9.79
                    
                    
                    
                    8.63




57




On May
15, 2009, the last closing sale price of the Ordinary Shares, as reported by the
NASDAQ Global Market, was $8.87 per share. As of May 15, 2009, we had 86
shareholders of record. We believe that the number of beneficial owners of the
Ordinary Shares is approximately 5,585.




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
                            
                            
                            LOWMost
      recent full financial years:2004
                            
                            NIS
                            46.38
                            
                            
                            NIS
                            28.392005
                            
                            
                            50.77
                            
                            
                            
                            36.12006
                            
                            
                            58.88
                            
                            
                            
                            39.21Quarterly
      information for two most recent years and subsequent
    quarters:2007First
      Quarter
                            
                            NIS
                            59.09
                            
                            
                            NIS
                            45.41Second
      Quarter
                            
                            
                            63.21
                            
                            
                            
                            59.29Third
      Quarter
                            
                            
                            70.00
                            
                            
                            
                            60.35Fourth
      Quarter
                            
                            
                            71.65
                            
                            
                            
                            37.482008First
      Quarter
                            
                            NIS
                            51.52
                            
                            
                            NIS
                            37.48Second
      Quarter
                            
                            
                            49.90
                            
                            
                            
                            38.68Third
      Quarter
                            
                            
                            53.93
                            
                            
                            
                            42.31Fourth
      Quarter
                            
                            
                            46.10
                            
                            
                            
                            23.572009First
      QuarterMost
      recent six monthsDecember
      2008
                            
                            
                            36.03
                            
                            
                            
                            24.11January
      2009
                            
                            
                            28.30
                            
                            
                            
                            23.90February
      2009
                            
                            
                            24.99
                            
                            
                            
                            21.23March
      2009
                            
                            
                            34.99
                            
                            
                            
                            26.02April
      2009
                            
                            
                            41.31
                            
                            
                            
                            34.12May
      2009
                            
                            
                            40.29
                            
                            
                            
                            35.41


58





As of May
15, 2009, the exchange rate of the NIS to the U.S. Dollar was $1= 4.14
NIS.




ITEM
10. ADDITIONAL INFORMATION




Share
Capital.




Not
Applicable.




Memorandum
and Articles of Association




Register





The
Company’s registration number at the Israeli registrar of companies is
52-004375-3.





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 such meeting or vote on such 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).




Our
business is managed by our 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 or her
nomination or election as a director.


59


Rights
Attached to our Ordinary Shares




All
dividends (if any) declared by our Board of Directors shall be declared 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 the holders of our Ordinary Shares on a pro-rata
basis.




Changes
to 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 a general shareholders
meeting whenever it sees fit, and, under the Companies Law, is required to call
a general shareholders 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. Our Articles
of Association provide that 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 nevertheless constitute a quorum, and shall
be entitled to deliberate and to resolve in respect of the matters for which the
meeting was convened.


60


Ownership
of Our Shares




Our
Articles of Association and the laws of the State of Israel do not restrict in
any way the ownership or voting of our shares by non-residents of Israel, except
for shareholders who are subjects of countries that are in a state of war with
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. The law provides for appraisal rights if any
shareholder files a request in court within three months following the
consummation of a full tender offer.





Mergers
and Acquisitions





A merger
of a company requires the approval of the holders of a majority of the voting
power represented at the annual or special general meeting in person or by proxy
or by written ballot, as shall be permitted, and voting thereon in accordance
with the provisions of the Companies Law. Upon the request of a creditor of
either party of the proposed merger, the court may delay or prevent the merger
if it concludes that there exists a reasonable concern that as a result of the
merger, the surviving company will be unable to satisfy the obligations of any
of the parties to the merger. In addition, a merger may not be completed unless
at least (i) 50 days have passed from the time that the requisite proposal for
the merger has been filed by each party with the Israeli Registrar of Companies
and (ii) 30 days have passed since the merger was approved by the shareholders
of each party.




Material
Contracts





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




Exchange
Controls





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.


61


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, except for shareholders who are subjects of
countries that are in a state of war with Israel.




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 to a U.S. Holder that
owns our Ordinary Shares as a capital asset (generally for investment). A U.S.
Holder is a holder of our Ordinary Shares that is for U.S. federal income tax
purposes:




·
            an
      individual citizen or resident of the United
  States;


·
            a
      corporation (or other entity taxable as a corporation for U.S. federal
      income tax purposes) created or organized in the United States or under
      the laws of the United States any political subdivision thereof or the
      District of Columbia;


·
            an
      estate, the income of which is subject to U.S. 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 U.S. 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 U.S. 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 United States;
      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-U.S. tax laws or the possible application of U.S. federal gift or estate
taxes.


62


Each
holder of Ordinary Shares is advised to consult such holder’s own tax advisor
with respect to the specific tax consequences to such holder 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 holder’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 our
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 U.S.
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 may 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 taxable year the
dividends are paid or in the prior taxable 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 our 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 U.S. 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 U.S. 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
U.S. 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 taxes
withheld from a dividend received on our Ordinary Shares if (1) 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 (2) 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 passive income for U.S. 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. Non-U.S. 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.


63


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 U.S. source income for U.S. foreign tax credit
purposes. 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 U.S. 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 Ordinary
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 classified as a passive foreign investment company,
or PFIC, if either (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, 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 2008.


64


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 our Ordinary
Shares are pledged as security for a loan) and upon receipt of certain “excess
distributions” with respect to our 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 taxable 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). In any taxable year in which we are
a PFIC 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 PFIC for our taxable year ended December 31, 2007.
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 2008 or in subsequent taxable 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, or any earlier taxable 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.




65




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, in the case of U.S. federal income
taxes:




·
            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


·
            in
      the case of a disposition of our Ordinary Shares, 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 Backup 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 paid on
or proceeds from the disposition of, our Ordinary Shares 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 U.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 backup 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 were subject to corporate tax in 2008 at the rate of 27% (reduced from
31% and 29%, respectively, in 2006 and 2007). Under legislation presently in
effect, the corporate tax rate is scheduled to be reduced to 26% in 2009 and to
25% for 2010 and thereafter.  Notwithstanding these rates, we are
subject to a lower rate with respect to portions of our income, as described
below, due to our participation in certain government incentive
programs.




Industrial
Company Tax Benefits




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.




66


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 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.




Approved
Enterprise Tax Benefits




We
participate in a program sponsored by the Israeli Government for the
encouragement of capital investments called the approved enterprise
program.  Under this program,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.




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.
These tax benefits 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 by law and in the specific certificate of approval, as
described above. If we do not meet these conditions, we would be required to
refund the amount of tax benefits we had received, plus a consumer price index
linkage adjustment and interest.


67





An
approved enterprise is entitled to accelerated depreciation on its property and
equipment that are included in the program in the first five years of using the
equipment.




Under the
benefits that we receive from this program, our undistributed income derived
from an approved enterprise is exempt from corporate tax for two from the first
year that we derive taxable income under the program, and we are then eligible
for a reduced tax rate for an additional 8-year 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.




If we pay
a dividend out of income derived from our approved enterprise during the tax
exemption period, we will be subject to corporate tax in respect of the amount
distributed, including any taxes thereon, at a higher rate, generally 10%-25%,
depending on the percentage of our shares held by foreign shareholders.
Shareholders who receive a dividend payment out of proceeds of an approved
enterprise are subject to withholding tax at the rate of 15%. We are required to
withhold this tax at source. We currently intend to reinvest any income derived
from our approved enterprise program and not to distribute such income as a
dividend.




We have
three approved enterprises, with benefit periods expiring between 2004 through
2014, subject to our fulfilling all conditions of these programs.





Privileged
Enterprises




The tax
benefits available to a privileged enterprise are generally similar to those
available to an approved enterprise. Income under a privileged enterprise must
arise from production facilities (or other eligible facilities), which derive
more than 25% of their business income from export. In order to receive the tax
benefits, a company must make an investment in a priveliged enterprise exceeding
a certain percentage or a minimum amount specified by law. This 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 enjoy tax benefits under the program. If a
company requests to have the tax benefits apply to an expansion of existing
facilities, only the expansion will be considered a privileged 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 privileged 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 for a privileged enterprise is subject to a limitation
of the earlier of 7 to 10 years from the year that we commence production under
the enterprise, or 12 years from the year that we elect to enjoy tax benefits
under the program. The levels of tax benefits granted to us under our privileged
enterprise are similar to those available under our approved
enterprise.  As a company with a high level of foreign investment, we
may be eligible for an extended benefit period of up to five years.





We have
three privileged enterprises in effect.




Our
approved enterprise and privileged enterprise programs and the tax benefits we
receive under these programs may not necessarily 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 would 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.




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%.


68


Non-residents
of Israel, who do not maintain a permanent establishment within Israel, are
exempt from Israeli capital gains tax on the sale of our shares.




Israel
presently has no estate or gift tax.




Dividends
and Paying Agents.




Not
Applicable.




Statement
by Experts.




Not
Applicable.




Documents
on Display.




We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), 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.




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.




We are
exposed to financial market risk associated with changes in foreign currency
exchange rates. A significant portion of our revenue is generated, and a
substantial portion of our expenses is incurred, in dollars. A portion of our
expenses, however, is denominated in NIS and Rupees and a portion of our revenue
is in British Pounds and Euros. Since our financial results are reported in
dollars, fluctuations in the rates of exchange between the dollar and non-dollar
currencies may have an effect on our results of operations.




ITEM
12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.




Not
Applicable.


69


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
15.             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 (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). These controls and procedures are designed to ensure that
information relating to us and our subsidiaries required to be disclosed in the
reports that we file under the Exchange Act 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, 2008. Based on this evaluation, our CEO
and CFO concluded that our disclosure controls and procedures were effective as
of such time.




(b) Management’s annual report on
internal control over financial reporting. Our management, under the
supervision of our Chief Executive Officer and our Chief Financial Officer, is
responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) 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 of December 31, 2008 and has concluded that
it is effective as of such time.




(c) Attestation Report of the registered
public accounting firm. The attestation report of our registered public
accounting firm on management's assessment of our internal control over
financial reporting is included in page F-1 of our audited consolidated
financial statements set forth in “Item 18. Financial Statements,” and is
incorporated herein by reference.




(d) Changes in internal control over
financial reporting. Based on the evaluation carried out in accordance
with Rules 13a-15(d) and 15d-15(d) under the Exchange Act, our management, under
the supervision of our Chief Executive Officer and our Chief Financial Officer,
concluded that there were no changes in our internal control over financial
reporting that occurred during the year ended December 31, 2008 that have
materially affected, or are reasonably likely to materially affect, our 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, Robert Cobuzzi, serving on our Audit Committee. Mr. Cobuzzi
also qualifies as an independent director, as defined under the NASDAQ
rules.


70


ITEM 16B. CODE OF ETHICS





We have
adopted a written Code of Ethics that applies to all Company employees,
including our 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 calling, us as
follows:




Fundtech
Ltd.


12
Ha’hilazon Street, 5th Floor


Ramat-Gan,
Israel


Telephone:
011-972-3-611-6500




ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND
SERVICES




In our
annual shareholders meeting held on December 18, 2008, our shareholders
re-appointed Brightman Almagor & Co., a member of Deloitte Touche Tohmatsu
to serve as our independent auditors for the 2008 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 31,2008
                          
                          
                          2007Audit
      fees
                          
                          $
                          284,182
                          
                          
                          $
                          296,003Audit
      related fees
                          
                          
                          25,820
                          
                          
                          
                          54,858Tax
      fees [a]
                          
                          
                          51,127
                          
                          
                          
                          16,952All
      other fees
                          
                          
                          5,150
                          
                          
                          
                          3,023Total
                          
                          $
                          366,279
                          
                          
                          $
                          370,836





[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 of our financial
statements included in our annual report on Form 20-F and reviews of our
quarterly interim financial results submitted on Form 6-K, and consultations on
various accounting issues.  The increase in Audit fees related
primarily to auditing of newly acquired businesses.




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 but which 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.


71


All
Other Fees




In fiscal
2008, there were no material Other Fees (for products or services rendered by
our principal accountant other than those reported under the above three
categories).




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
our 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 2007, our 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 ProgramsJanuary
      2008February
      2008March
      2008April
      2008
                                      
                                      
                                      2,104,720
                                      
                                      
                                      $
                                      12.50
                                      
                                      
                                      
                                      2,104,720
                                      
                                      
                                      $
                                      26,309,000May
      2008June
      2008July
      2008August
      2008September
      2008October
      2008November
      2008 (1)
                                      
                                      
                                      63,860
                                      
                                      
                                      $
                                      7.76
                                      
                                      
                                      
                                      63,860
                                      
                                      
                                      $
                                      9,504,446December
      2008
                                      
                                      
                                      18,379
                                      
                                      
                                      $
                                      8.27
                                      
                                      
                                      
                                      18,379
                                      
                                      
                                      $
                                      9,352,452


72





(1) On
November 11, 2008, the Company’s Board of Directors authorized the purchase of
up to $10 million of our Ordinary Shares from time to time on the open market.
As of December 31, 2008, the Company had purchased a total of 82,239
shares.





ITEM
16F. CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.





None.





ITEM
16G. CORPORATE GOVERNANCE.





None





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, and are incorporated by reference
herein.




ITEM
19 EXHIBITS.




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




EXHIBIT
                NUMBER
              
              DESCRIPTION OF EXHIBIT1.1
              
              Amended
      Memorandum of Association of Registrant(1)1.2
              
              Amended
      and Restated Articles of Association of Registrant(1)1.3
              
              Amendment
      to Amended and Restated Articles of Association of
      Registrant(2)2.1
              
              Form
      of Ordinary Share Certificate(1)4.2
              
              Fundtech
      Ltd. 1999 Employee Option Plan(4)4.3
              
              Fundtech
      Ltd. Directors Option Plan(5)4.4
              
              Employment
      Agreement between Reuven Ben Menachem and Fundtech Corporation, dated
      November 25, 1997(3)4.5
              
              Lease
      Agreement for Fundtech India’s facility in Bombay,
  India(9)4.6
              
              Lease
      Agreement relating to Fundtech’s Facility in Ramat-Gan, Israel (English
      summary)(3)4.7
              
              Lease
      Agreement relating to Fundtech’s Facility in Norcross,
      Georgia(3)4.8
              
              Lease
      Agreement relating to Fundtech’s Facility in Jersey City, New
      Jersey(6)4.9
              
              Lease
      Agreement relating to Fundtech’s Facility in Burlington,
      Massachusetts(7)4.10
              
              Fundtech
      Ltd. 2005 International Share Option and Restricted Share Incentive
      Plan(8)4.11
              
              Fundtech
      Ltd. 2005 Israeli Share Option and Restricted Share Incentive
      Plan(10)8
              
              Subsidiaries
      of Company*11
              
              Code
      of Ethics(11)12.1
              
              Certification
      of the Chief Executive Officer of the Company pursuant to Rule
      13a-14(a)/Rule 15d-14(a) under the Exchange Act*12.2
              
              Certification
      of the Chief Financial Officer of the Company pursuant to Rule
      13a-14(a)/Rule 15d-14(a) under the Exchange Act*13.1
              
              Certification
      of the Chief Executive Officer of the Company pursuant to Rule
      13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*13.2
              
              Certification
      of the Chief Financial Officer of the Company pursuant to Rule
      13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section
      1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002*15.1
              
              Consent
      of Brightman Almagor &
Co.*




73


______________


(1)
            Incorporated
      by reference to an exhibit to the Registrant’s Registration Statement on
      Form F-1, as amended, filed with the SEC on March 13,
  1998.





(2)
            Incorporated
      by reference to Proposal 7 of the Company’s Proxy Statement for its 2007
      Annual Shareholders Meeting, included as Exhibit 99.1 to the Company's
      Form 6-K that was filed with the SEC on November 14,
  2007.





(3)
            Incorporated
      by reference to Exhibits 10.12 and 10.14 (as appropriate) to the Company’s
      Annual Report on Form 10-K, filed with the SEC on March 31,
      1999.





(4)
            Incorporated
      by reference to Annex A to the Company’s Definitive Proxy Statement on
      Schedule 14A for its 1999 Annual Meeting of Shareholders, filed with the
      SEC on August 23, 1999.





(5)
            Incorporated
      by reference to Exhibit 4.6 to the Company’s Registration Statement on
      Form S-8, as amended (SEC Registration No.
  333-9380).





(6)
            Incorporated
      by reference to Exhibit 4.10 to the Company’s Annual Report on Form 20-F,
      filed with the SEC on June 12,
2003.





(7)
            Incorporated
      by reference to Exhibit 4.11 to the Company’s Annual Report on Form 20-F,
      filed with the SEC on June 12,
2003.





(8)
            Incorporated
      by reference to Annex A to the Company’s Proxy Statement for its 2005
      Annual Shareholders Meeting, included as Exhibit 99.1 to the Company's
      Form 6-K that was filed with the SEC on November 30,
      2005.





(9)
            Incorporated
      by reference to Exhibit 4.5 to the Company’s Annual Report on Form 20-F,
      filed with the SEC on May 27,
2005.





(10)
            Incorporated
      by reference to Annex B to the Company’s Proxy Statement for its 2005
      Annual Shareholders Meeting, included as Exhibit 99.1 to the Company's
      Form 6-K that was filed with the SEC on November 30,
      2005.





(11)
            Incorporated
      by reference to Exhibit 11 to the Company’s Annual Report on Form 20-F,
      filed with the SEC on June 29,
2004.





*
            Filed
      herewith.


74






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 MenachemName:
      Reuven Ben MenachemTitle:
      Chief Executive
Officer
 Date:
June 12, 2009


FUNDTECH
LTD





CONSOLIDATED FINANCIAL
STATEMENTS





DECEMBER 31,
2008





FUNDTECH
LTD.





CONSOLIDATED FINANCIAL
STATEMENTS





INDEX





PageReport
      of Independent Registered Public Accounting Firm
            
            F-1
      – F-2Consolidated
      Financial Statements:Balance
      Sheetsas
      of December 31, 2008 and 2007
            
            F-3Statements
      of Operationsfor
      the years ended December 31, 2008, 2007 and 2006
            
            F-4Statements
      of Shareholders' Equityfor
      the years ended December 31, 2008, 2007 and 2006
            
            F-5
      – F-6Statements
      of Cash Flowsfor
      the years ended December 31, 2008, 2007 and 2006
            
            F-7
      – F-8Notes
      to Consolidated Financial Statements
            
            F-9
      – F-42








REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
the Shareholders of


Fundtech
Ltd.





We have
audited the accompanying consolidated balance sheets of FundtechLtd. ("the Company") and
its subsidiaries as ofDecember 31, 2008 and
2007 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, 2008. 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.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, 2008 and 2007 and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on the criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated  June 9,2009 expressed an
unqualified opinion on the Company’s internal control over financial
reporting.





Brightman
Almagor & Co.





Certified
Public Accountants


A
member firm of Deloitte Touche Tohmatsu





Tel Aviv,
Israel


June
9,2009


F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
the Shareholders of


Fundtech
Ltd.




We have
audited the internal control over financial reporting of Fundtech Ltd. and
subsidiaries (the “Company”) as of December 31, 2008, based on criteria
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.




We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.




A
company’s internal control over financial reporting is a process designed by, or
under the supervision of, the company’s principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.




Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.




In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the
criteria established in Internal Control — Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of
the Company and its subsidiaries as ofDecember 31, 2008 and
2007 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, 2008 and our report dated June
9,2009  expressed an unqualified opinion thereon.





Brightman
Almagor & Co.


Certified
Public Accountants


A
member firm of Deloitte Touche Tohmatsu





Tel Aviv,
Israel


June
9,2009


F-2





FUNDTECH
LTD.


CONSOLIDATED
BALANCE SHEET


(In
thousands)





December
      31,2008
              
              
              2007ASSETSCURRENT
      ASSETSCash
      and cash equivalents
              
              $
              29,642
              
              
              $
              31,612Short
      term investments
              
              
              1,415
              
              
              
              1,765Marketable
      securities (Note 4)
              
              
              9,563
              
              
              
              8,624Trade
      receivables, net of allowance for doubtful accounts of $1,588and
      $ 859 at December 31, 2008 and 2007, respectively (Note 5)
              
              
              28,264
              
              
              
              22,387Other
      accounts receivable and prepaid expenses
              
              
              6,077
              
              
              
              3,600Total
      current assets
              
              
              74,961
              
              
              
              67,988Marketable
      Securities (Note 4)
              
              
              2,204
              
              
              
              12,847Severance
      pay fund
              
              
              1,394
              
              
              
              1,197Long-term
      deposits
              
              
              1,003
              
              
              
              778Prepaid
      expenses
              
              
              2,797
              
              
              
              2,434Property
      and equipment, net (Note 6)
              
              
              15,898
              
              
              
              14,070Goodwill
              
              
              34,520
              
              
              
              26,802Intangible
      assets, net (Note 7)
              
              
              5,995
              
              
              
              2,156Total
      assets
              
              $
              138,772
              
              
              $
              128,272LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESTrade
      payables
              
              $
              2,908
              
              
              $
              1,079Deferred
      revenues
              
              
              9,910
              
              
              
              6,143Accrued
      restructuring expenses
              
              
              -
              
              
              
              62Employees
      and payroll accruals
              
              
              6,807
              
              
              
              6,298Other
      accounts payable and accrued expenses (Note 8)
              
              
              7,228
              
              
              
              8,591Total
      current liabilities
              
              
              26,853
              
              
              
              22,173Accrued
      severance pay
              
              
              1,734
              
              
              
              1,518Deferred
      Taxes
              
              
              970
              
              
              
              878Other
      long term liabilities
              
              
              2,278
              
              
              
              1,571Total
      liabilities
              
              
              31,835
              
              
              
              26,140SHAREHOLDERS' EQUITY
      (Note 10)Share
      capital
              
              
              49
              
              
              
              47Additional
      paid-in capital
              
              
              155,976
              
              
              
              151,547Accumulated
      other comprehensive income
              
              
              290
              
              
              
              506Accumulated
      deficit
              
              
              (45,470
              )
              
              
              (46,710
              )110,845
              
              
              
              105,390Treasury
      shares at cost 403,122 and  320,883 shares as of
      December31,
      2008 and 2007 respectively
              
              
              (3,908
              )
              
              
              (3,258
              )Total
      shareholders' equity
              
              
              106,937
              
              
              
              102,132Total
      liabilities and shareholders’ equity
              
              $
              138,772
              
              
              $
              128,272





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


F-3


FUNDTECH
LTD.,




CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands)





Year
      ended December 31,2008
              
              
              2007
              
              
              2006RevenuesSoftware
      license
              
              $
              16,488
              
              
              $
              19,741
              
              
              $
              13,576Software
      hosting
              
              
              19,889
              
              
              
              15,384
              
              
              
              13,403Maintenance
              
              
              34,506
              
              
              
              27,570
              
              
              
              22,513Services
              
              
              50,154
              
              
              
              41,939
              
              
              
              36,017Total
      revenues
              
              
              121,037
              
              
              
              104,634
              
              
              
              85,509Operating
      ExpensesCost
      of revenueSoftware
      license costs
              
              
              291
              
              
              
              590
              
              
              
              604Maintenance,
      hosting and services costs
              
              
              53,730
              
              
              
              45,578
              
              
              
              34,726Amortization
      of capitalized software development costs
              
              
              -
              
              
              
              394
              
              
              
              1,576Amortization
      of other acquired intangible assets
              
              
              2,167
              
              
              
              1,387
              
              
              
              1,275Impairment
      of goodwill and related intangible assets
              
              
              2,018
              
              
              
              -
              
              
              
              -Research
      and development
              
              
              21,849
              
              
              
              19,348
              
              
              
              16,710Selling
      and marketing
              
              
              20,883
              
              
              
              17,667
              
              
              
              15,754General
      and administrative
              
              
              17,115
              
              
              
              13,553
              
              
              
              12,133Total
      operating expenses
              
              
              118,053
              
              
              
              98,517
              
              
              
              82,778Operating
      income
              
              
              2,984
              
              
              
              6,117
              
              
              
              2,731Impairment
      on marketable securities
              
              
              (692
              )
              
              
              -
              
              
              
              -Financial
      income, net
              
              
              48
              
              
              
              2,197
              
              
              
              1,984Income
      before income taxes
              
              
              2,340
              
              
              
              8,314
              
              
              
              4,715Income
      tax
              
              
              (1,100
              )
              
              
              (1,207
              )
              
              
              (964
              )Net
      income
              
              $
              1,240
              
              
              $
              7,107
              
              
              $
              3,751Basic
      earnings per share
              
              $
              0.08
              
              
              $
              0.46
              
              
              $
              0.25Diluted
      earnings per share
              
              $
              0.08
              
              
              $
              0.43
              
              
              $
              0.24




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




F-4




FUNDTECH
LTD.


CONSOLIDATED
STATEMENTS OF


SHAREHOLDERS’
EQUITY AND COMPREHENSIVE INCOME


(In
thousands, except share data)





Ordinary shares
                  
                  
                  
                  
                  
                  
                  
                  
                  Accumulated other
                  
                  
                  
                  
                  
                  Total
                  
                  
                  TotalNumber of
                      Shares
                  
                  
                  Amount
                  
                  
                  Additional
                      paid-in Capital
                  
                  
                  Treasury
                      shares
                  
                  
                  comprehensive
                      income (loss)
                  
                  
                  Accumulated
                      deficit
                  
                  
                  comprehensive
                      Income
                  
                  
                  shareholders'
                      equityBalance
      as of January 1, 2006
                  
                  
                  14,972,464
                  
                  
                  $
                  44
                  
                  
                  $
                  142,636
                  
                  
                  $
                  (88
                  )
                  
                  $
                  (414
                  )
                  
                  $
                  (57,168
                  )
                  
                  
                  -
                  
                  
                  $
                  85,010Exercise
      of stock options
                  
                  
                  289,745
                  
                  
                  
                  1
                  
                  
                  
                  1,488
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,489Vested  restricted
      stock -net of forfeited and cancelled
                  
                  
                  48,147
                  
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,487
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,487Foreign
      currency translation adjustments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  218
                  
                  
                  
                  -
                  
                  
                  
                  218
                  
                  
                  
                  218Purchase
      of Treasury shares
                  
                  
                  (299,383
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,170
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,170
                  )Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,751
                  
                  
                  
                  3,751
                  
                  
                  
                  3,751Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  3,969Balance
      as of December 31, 2006
                  
                  
                  15,010,973
                  
                  
                  $
                  46
                  
                  
                  $
                  146,611
                  
                  
                  $
                  (3,258
                  )
                  
                  $
                  (196
                  )
                  
                  $
                  (53,417
                  )
                  
                  
                  
                  
                  
                  $
                  89,786Exercise
      of stock options
                  
                  
                  405,010
                  
                  
                  
                  1
                  
                  
                  
                  2,340
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,341Vested
      restricted stock – net of forfeited and cancelled
                  
                  
                  145,925
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,596
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,596Cumulative
      effect of a change in accounting principle – adoption of FIN
      48
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (400
                  )
                  
                  
                  -
                  
                  
                  
                  (400
                  )Foreign
      currency translation adjustments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  702
                  
                  
                  
                  -
                  
                  
                  
                  702
                  
                  
                  
                  702Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,107
                  
                  
                  
                  7,107
                  
                  
                  
                  7,107Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  7,809Balance
      as of December 31, 2007
                  
                  
                  15,561,908
                  
                  
                  $
                  47
                  
                  
                  $
                  151,547
                  
                  
                  $
                  (3,258
                  )
                  
                  $
                  506
                  
                  
                  $
                  (46,710
                  )
                  
                  
                  
                  
                  
                  $
                  102,132




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


F-5


FUNDTECH
LTD.


CONSOLIDATED
STATEMENTS OF


SHAREHOLDERS’
EQUITY AND COMPREHENSIVE INCOME


(In
thousands, except share data)





Ordinary shares
                  
                  
                  Additional
                  
                  
                  
                  
                  
                  Accumulated other
                  
                  
                  
                  
                  
                  Total
                  
                  
                  TotalNumber of
                      Shares
                  
                  
                  Amount
                  
                  
                  paid-in
                      capital
                  
                  
                  Treasury
                      shares
                  
                  
                  comprehensive
                      income (loss)
                  
                  
                  Accumulated
                      deficit
                  
                  
                  comprehensive
                      Income
                  
                  
                  shareholders'
                      equityBalance
      as of January 1, 200815,561,908
                  
                  
                  $
                  47
                  
                  
                  $
                  151,547
                  
                  
                  $
                  (3,258
                  )
                  
                  $
                  506
                  
                  
                  $
                  (46,710
                  )
                  
                  
                  -
                  
                  
                  $
                  102,132Exercise
      of stock options
                  
                  
                  242,590
                  
                  
                  
                  2
                  
                  
                  
                  1,422
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,424Vested
      restricted stock -net of forfeitedand
      cancelled
                  
                  
                  190,931
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Stock
      based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,007
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,007Change
      in unrealized gain on cash flowhedges
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  126
                  
                  
                  
                  -
                  
                  
                  
                  126
                  
                  
                  
                  126Foreign
      currency translation adjustments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (342
                  )
                  
                  
                  -
                  
                  
                  
                  (342
                  )
                  
                  
                  (342
                  )Purchase
      of Treasury shares
                  
                  
                  (82,239
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (650
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (650
                  )Net
      income
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,240
                  
                  
                  
                  1,240
                  
                  
                  
                  1,240Total
      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  1,024Balance
      as of December 31, 2008
                  
                  
                  15,913,190
                  
                  
                  $
                  49
                  
                  
                  $
                  155,976
                  
                  
                  $
                  (3,908
                  )
                  
                  $
                  290
                  
                  
                  $
                  (45,470
                  )
                  
                  
                  
                  
                  
                  $
                  106,937





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




F-6


FUNDTECH
LTD.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)


Year
      ended December 31,2008
              
              
              2007
              
              
              2006Cash flows provided by operating
      activities:Net
      income
              
              $
              1,240
              
              
              $
              7,107
              
              
              $
              3,751Adjustments
      to reconcile net income to net cashprovided
      by operating activities (Appendix A):
              
              
              12,576
              
              
              
              10,214
              
              
              
              1,578Net
      cash provided by operating activities
              
              
              13,816
              
              
              
              17,321
              
              
              
              5,329Cash flows used for investing
      activities:Investments
      in marketable securities –short term
              
              
              (5,362
              )
              
              
              (25,841
              )
              
              
              (34,294
              )Proceeds
      from sale of  marketable securities-short term
              
              
              14,252
              
              
              
              37,090
              
              
              
              34,352Investment
      in marketable securities – long term
              
              
              -
              
              
              
              (12,969
              )
              
              
              -Acquisition
      of subsidiaries, net of cash acquired  (Appendix
    B)
              
              
              (17,197
              )
              
              
              (7,465
              )
              
              
              (1,350
              )Increase
      (decrease) in long-term deposits
              
              
              (277
              )
              
              
              (111
              )
              
              
              314Proceeds
      from (Investment in) maturity of short term deposits
              
              
              316
              
              
              
              (1,765
              )
              
              
              -Purchase
      of property and equipment
              
              
              (6,570
              )
              
              
              (6,745
              )
              
              
              (5,177
              )Proceeds
      from sale of property and equipment
              
              
              -
              
              
              
              14
              
              
              
              3Net
      cash used in investing activities
              
              
              (14,838
              )
              
              
              (17,519
              )
              
              
              (6,152
              )Cash flows provided by financing
      activities:Proceeds
      from exercise of stock options, net
              
              
              1,424
              
              
              
              2,341
              
              
              
              1,490Purchase
      of Treasury shares at cost
              
              
              (650
              )
              
              
              -
              
              
              
              (3,170
              )Decrease
      of long-term debt
              
              
              (10
              )
              
              
              (61
              )
              
              
              (82
              )Net
      cash provided by (used in) financing activities
              
              
              764
              
              
              
              2,280
              
              
              
              (1,762
              )Effect of exchange rate on cash and cash
      equivalents
              
              
              (1,712
              )
              
              
              914
              
              
              
              394Increase
      (decrease) in cash and cash equivalents
              
              
              (1,970
              )
              
              
              2,996
              
              
              
              (2,191
              )Cash
      and cash equivalents at the beginning of the year
              
              
              31,612
              
              
              
              28,616
              
              
              
              30,807Cash
      and cash equivalents at the end of the year
              
              $
              29,642
              
              
              $
              31,612
              
              
              $
              28,616Supplemental disclosure of cash flows
      activities:Cash
      paid during the year for:Interest
              
              $
              71
              
              
              $
              20
              
              
              $
              12Income
      taxes
              
              $
              1,748
              
              
              $
              1,890
              
              
              $
              807





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




F-7


FUNDTECH
LTD.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)





Year
      ended December 31,2008
              
              
              2007
              
              
              2006Appendix A-
      Adjustments to reconcile
      net income to net cash provided by operating
      activities:Depreciation
      and amortization
              
              $
              8,103
              
              
              $
              6,581
              
              
              $
              6,450Foreign
      currency change and accrued interest on marketable
    Securities
              
              
              122
              
              
              
              (170
              )
              
              
              (33
              )Impairment
      on marketable securities
              
              
              692
              
              
              
              -
              
              
              
              -Impairment
      of goodwill and other intangible assets
              
              
              2,018
              
              
              
              -
              
              
              
              -Shares-based
      and Stock option compensation
              
              
              3,007
              
              
              
              2,596
              
              
              
              2,487Change
      in assets and liabilities:Decrease
      (increase) in trade receivables , net of allowance for  doubtful
      accounts
              
              
              (6,272
              )
              
              
              3,853
              
              
              
              (7,658
              )Increase
      in other accounts receivable and prepaid expenses
              
              
              (2,019
              )
              
              
              (835
              )
              
              
              (387
              )Increase
      (decrease) in trade payables
              
              
              1,334
              
              
              
              (1,441
              )
              
              
              407Increase
      (decrease) in deferred revenues, employees and payroll accruals and other
      accounts payable and accrued expenses
              
              
              5,767
              
              
              
              (246
              )
              
              
              419Decrease
      in accrued restructuring expenses
              
              
              (62
              )
              
              
              (185
              )
              
              
              (189
              )Increase
      in accrued severance pay, net
              
              
              19
              
              
              
              143
              
              
              
              68Increase
      in deferred taxes
              
              
              (101
              )
              
              
              (120
              )
              
              
              -Other
      assets and liabilities
              
              
              (32
              )
              
              
              38
              
              
              
              14$
              12,576
              
              
              $
              10,214
              
              
              $
              1,578Appendix B-Acquisition of subsidiaries, net of cash
      Acquired: (see Note
3)Working
      capital, excluding  cash and cash equivalents
              
              $
              (1,130
              )
              
              $
              620
              
              
              $
              -Property
      and equipment
              
              
              1,074
              
              
              
              74
              
              
              
              -Long
      term liabilities
              
              
              (189
              )
              
              
              -
              
              
              
              -Other
      assets
              
              
              6,365
              
              
              
              1,313Goodwill
              
              
              11,077
              
              
              
              5,458
              
              
              
              1,350$
              17,197
              
              
              $
              7,465
              
              
              $
              1,350





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




F-8




FUNDTECH
LTD.





NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





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").





a.     Use
of estimates





The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
The Company's management believes that the estimates, judgments and assumptions
used are reasonable based upon information available at the time they are made.
Actual results could differ from those estimates.


F-9


FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)




NOTE
      2     -
              SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)




b.
                Financial
      statements in U.S.
dollars





The
majority of the revenues of Fundtech Ltd. and certain of its subsidiaries are
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 remeasured
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 remeasurement of monetary balance sheet items are reflected in
the statements of operations as financial income or expenses, as appropriate.
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 on the balance sheet date.
Statement of Operations amounts have been translated using the average exchange
rate for the period. The resulting translation adjustments are charged or
credited to other comprehensive income (loss).





c.
            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.





d.
            Cash
      equivalents





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





e.
            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.





Marketable
securities that are designated as held-to-maturity are stated at amortized cost.
Interest income including the amortization of premium and discount, are included
in the consolidated statement of operations.


F-10




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      2     -
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





e.
            Marketable
      securities (Cont.)





Investments
in auction rate securities are classified as available-for-sale and are recorded
at fair value. Changes in fair value, net of taxes, if applicable, are reflected
in other comprehensive income (loss). Unrealized losses considered to be
temporary are reflected in other comprehensive income (loss); unrealized losses
that are considered to be other-than-temporary are charged to income as an
impairment charge.


FASB
Staff Position ("FSP") No. 115-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investment" ("FSP 115-1") and SAB
Topic 5M "Other
Than Temporary Impairment Of Certain Investments In Debt And Equity Securities"
provides guidance for determining when an investment is considered impaired,
whether impairment is other-than temporary, and measurement of an impairment
loss. An investment is considered impaired if the fair value of the investment
decreased below its cost in other-than temporary manner. If, after consideration
of all available evidence to evaluate the realizable value of its investment,
impairment is determined to be other than - temporary, then an impairment loss
should be recognized equal to the difference between the investment’s cost and
its fair value.





During
2008 the Company recognized an other-than-temporary impairment in a total amount
of $ 75 related to auction rate securities and wrote-off $ 617 related to Lehman
Brothers corporate notes. See further details in Note 4.





f.
            Property
      and equipment





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


YearsOffice
      furniture and equipment
                6-17Computers
      and software
                3-5Motor
      vehicles
                6Leasehold
      improvements
                Over
      the shorter of the lease term or the
                  useful
      life of the asset





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 144"). During 2006, 2007 and
2008, no impairment losses were recorded.


F-11




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      2     -
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)




g.
            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 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 require 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.





Based on
the Company's product development process, technological feasibility is
established upon completion of a working model. Costs incurred by the Company
between completion of the working models and the point at which the products are
ready for general release has been insignificant. Therefore, all research and
development costs have been expensed.





h.
              Goodwill
      and acquisition-related intangible
assets





The
Company accounts for Goodwill and acquired intangible assets in accordance with
SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”).





The
Company records goodwill when the purchase price of net tangible and intangible
assets acquired exceeds their fair value. Under SFAS 142 goodwill is not
amortized.


SFAS 142
requires goodwill to be tested for impairment at least annually or between
annual tests in certain circumstances, and written down when impaired. Goodwill
is tested for impairment by comparing the fair value with its carrying value.
Fair value is determined using discounted cash flows and market multiples. In
2008 the Company recorded an impairment charge of $1,660 related to its Radius
investment. During 2007 and 2006, no impairment losses were
identified.





Acquisition
related intangible assets result from the Company's acquisitions of businesses.
Intangible assets subject to amortization are initially recognized based on fair
value allocated to them, and subsequently stated at amortized cost. Identifiable
intangible assets other than goodwill are amortized on a straight-line basis
over their estimated useful lives in accordance with SFAS 142. During 2008, an
amount of $ 2,168 was recorded as amortization expenses.





Identifiable
intangibles are reviewed for impairment in accordance with SFAS 144, whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the future undiscounted
cash


F-12




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      2     -
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





h.
              Goodwill
      and acquisition-related intangible assets
  (Cont.)





flow
expected to be generated by such assets. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which the
carrying amount exceeds the fair value of the assets. During 2008 the Company
recorded an amount of $358 as impairment loss related to its Radius investment.
During 2007 and 2006, no impairment losses were identified.





i.
              Income
      taxes





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Income tax expense (benefit) is generally comprised of
the taxable payable (receivable) for the period and the change in deferred
income tax assets and liabilities during the period. Valuation allowances are
recorded to reduce deferred tax assets to the amount that will more likely than
not be realized.





On
January 1, 2007, the Company adopted the provisions of FASB interpretation No 48
(Fin 48), “Accounting for Uncertainty in Income Taxes,” an interpretation of
SFAS No. 109 “Accounting for income taxes” (SFAS 109). As a result of this
adoption, the Company recognized a charge of $400 to the beginning balance of
the accumulated deficit on the accompanying consolidated balance sheet as of
December 31, 2007. The Company’s continuing practice is to recognize interest
and/or penalties related to income tax matters in income tax
expense.




j.
              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.





The
Company recognizes revenue for software products and related services in
accordance with the AICPA Statement of Position (SOP) 97-2, “Software
Revenue Recognition,” as modified by SOP 98-9, 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 collection is probable.


F-13




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      2     -
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





j.
              Revenue
      recognition (Cont.)





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. In software arrangements in
which a fair value of all undelivered elements is known but not of a delivered
element, the Company uses the residual method to record revenue. Under the
residual method, the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement fee is allocated to the delivered element
and is recognized as revenue. In software arrangements in which the Company does
not have VSOE of fair value of all undelivered elements, revenue is deferred
until fair value is determined or until all elements for which the Company does
not have VSOE of fair value have been delivered.





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, 2008 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.





As the
Company provides hosting services to its customers without any contractual right
to take possession of the software license, the Company recognizes revenue from
hosting over the hosting contract period following the consensus reached in EITF
Issue 00-03 “Application of AICPA Statement of Position 97-2 to Arrangement That
Includes the


Right to
Use Software Stored on Another Entity’s Hardware”. Revenues from set up fees are
also recognized over the related hosting contract in accordance with SAB Topic
13.





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.





Revenues
from customer maintenance and support contracts are deferred and recognized
ratably over the term of the agreements. Revenues for maintenance and support
that are


Bundled
with license fees are deferred based on the VSOE of fair value of the bundled
maintenance and support and recognized over the term of the agreement. VSOE of
fair value is based on the renewal rate for continued maintenance and support
arrangements.


F-14




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      2     -
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)




k.
              Severance
      pay





Israeli
employees are entitled to severance pay in the amount of 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, 2008, 2007 and 2006, amounted to
approximately $ 879, $ 695 and $ 418, respectively.





l.
              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 Company's investment policy limits the
amount the Company may invest in any one type of investment or issuer, thereby
reducing





credit
risk concentrations. The trade receivables of the Company include amounts owed
by 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).


F-15




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      2     -
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





m.
              Derivatives
      and hedging





The
Company accounts for derivatives and hedging based on SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 133 requires the
Company to recognize all derivatives on the balance sheet at fair value. If the
derivatives meet the definition of a hedge and are so designated, depending on
the nature of the hedge, changes in the fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings, or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value is recognized in earnings.





It is the
policy of the Company to enter into forward foreign exchange contracts to cover
specific foreign currency payments mainly salary expenses paid in Israel. As of
December 31, 2008 the Company held forward foreign exchange contracts in the
amount of $ 2,700. These contracts were for a period of up to twelve months. The
aggregate amount of unrealized gains under forward foreign exchange contracts
deferred in the hedging reserve relating to these foreign exchange contracts is
$126.





n.
              Basic
      and diluted earnings per
share





Basic
earnings per share is computed by dividing net income by the weighted average
number of ordinary shares outstanding during the applicable period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of ordinary shares outstanding during the period, plus dilutive potential
ordinary shares outstanding during the period, in accordance with SFAS No. 128,
"Earnings Per Share" ("SFAS 128").





In 2008,
2007 and 2006, certain outstanding stock options were excluded from the
calculation of the diluted earnings per ordinary share because of their
anti-dilutive effect. The total weighted average number of shares related to the
outstanding options excluded from the calculations of diluted earnings per share
was 7,000, 0 and 7,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.





o.
              Stock-based
      compensation





The
Company accounts for stock-based compensation in accordance with SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) requires
companies to estimate the fair value of equity-based payment awards on the date
of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the
requisite service periods in the Company's consolidated income
statements.





The
Company recognizes compensation expenses for the value of its awards granted
based on the straight line method over the requisite service period of each of
the awards, net of estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Estimated forfeitures are
based on actual historical pre-vesting forfeitures.


F-16




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      2     -
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





o.
                Stock-based
      compensation (Cont.)




The
following table summarizes the effects of share-based compensation resulting
from the application of SFAS 123(R):




2008
                
                
                2007
                
                
                2006Cost
      of revenue
                
                $
                575
                
                
                $
                308
                
                
                $
                219Research
      and development
                
                
                262
                
                
                
                358
                
                
                
                151Selling
      and marketing
                
                
                642
                
                
                
                514
                
                
                
                506General
      and administrative
                
                
                1,528
                
                
                
                1,416
                
                
                
                1,611Share-based
      compensation effects in income before taxes
                
                
                3,007
                
                
                
                2,596
                
                
                
                2,487Share-based
      compensation effects on basic earnings per common share
                
                $
                0.19
                
                
                $
                0.17
                
                
                $
                0.17Share-based
      compensation effects on diluted earnings per common share
                
                $
                0.19
                
                
                $
                0.16
                
                
                $
                0.16




The
Company selected the Black-Scholes option pricing model as the most appropriate
fair value method for its stock-options awards and values restricted stock based
on the market value of the underlying shares at the date of grant. The
option-pricing model requires a number of assumptions, of which the most
significant are the expected stock price volatility and the expected option
term. Expected volatility was calculated based upon actual historical stock
price movements. The expected term of options granted is based upon historical
experience and represents the period of time that options granted are expected
to be outstanding. The risk-free interest rate is based on the yield from U.S.
treasury bonds with an equivalent term. The Company has historically not paid
dividends and has no foreseeable plans to pay dividends.




The fair
value for options granted in 2006, 2007 and 2008 is estimated at the date of
grant using a Black-Scholes options pricing model with the following weighted
average assumptions:


2008
                
                
                2007(*)
                
                
                2006(*)Risk-free
      interest rate
                
                
                1.28%
                
                
                
                -
                
                
                
                -Expected
      life of options
                
                
                5.5
                
                
                
                -
                
                
                
                -Expected
      volatility
                
                
                40%
                
                
                
                -
                
                
                
                -Expected
      dividend yield
                
                None
                
                
                
                -
                
                
                
                -





(*) No
options were granted during 2006 and 2007.


F-17




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      2     -
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)




p.
              Fair value of financial
      instruments





The
carrying amounts of the financial instruments, including cash and cash
equivalents, short term deposits, marketable securities, accounts receivable,
accounts payable and accrued liabilities, approximate fair value because of
their generally short maturities.


Effective
January 1, 2008, the Company adopted SFAS 157, "Fair Value Measurements" and,
effective October 10, 2008, adopted FSP No. SFAS 157-3, "Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active", except
as it applies to the nonfinancial assets and nonfinancial liabilities subject to
FSP 157-2. SFAS 157 clarifies that fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability. As a basis for
considering such assumptions, SFAS 157 establishes a three-tier value hierarchy,
which prioritizes the inputs used in the valuation methodologies in measuring
fair value:





Level 1
-  Observable inputs that reflect quoted prices (unadjusted) for
identical assets or
liabilities in active markets.





Level 2 -
Include other inputs that are directly or indirectly observable in
the marketplace.





Level 3 -
Unobservable inputs which are supported by little or no market activity
(See Note
4).





The fair
value hierarchy also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.


F-18




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      2     -
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)




q.
              Recent
      Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“FAS 141R”). FAS 141R provides revised guidance on how acquirers
recognize and measure the consideration, identifiable assets acquired,
liabilities assumed, contingencies, non-controlling interests and goodwill
acquired in a business combination, and expands disclosure requirements
surrounding the nature and financial effects of business combinations. Key
changes include: acquired in-process research and development will no longer be
expensed on acquisition, but capitalized and assessed for impairment where
relevant and amortized over its useful life; acquisition costs will be expensed
as incurred; restructuring costs will generally be expensed in periods after the
acquisition date; the consideration in shares would be valued at closing date;
and in the event that a deferred tax valuation allowance relating to a business
acquisition, including from prior years, is subsequently reduced, the adjustment
will be recognized in the statement of income. Early adoption is not permitted.
As applicable to the Company, this statement will be effective, on a prospective
basis, as of the year beginning January 1, 2009. The Company believes that the
initial adoption of FAS 141R will not have a material impact on its consolidated
financial statements. However, if the Company consummates business combinations
after the adoption of FAS 141R, this could significantly impact the consolidated
financial statements as compared to prior acquisitions which were accounted for
under existing GAAP requirements, due to the changes described
above.





In
December 2007, the FASB issued SFAS No. 160, “Non controlling Interests in
Consolidated Financial Statements-an amendment of Accounting Research Bulletin
51” (FAS 160), which establishes accounting and reporting standards for
non-controlling interests in a subsidiary and deconsolidation of a subsidiary.
Early adoption is not permitted. As applicable to the Company, this statement
will be effective as of the year beginning January 1, 2009. The adoption of FAS
160 will not have a material impact on the Company’s consolidated financial
statements.





In
November 2008, the FASB ratified Emerging Issues Task Force Issue No. 08-7,
"Accounting for Defensive Intangible Assets". EITF 08-7 clarifies the accounting
for certain separately identifiable intangible assets which an acquirer does not
intend to actively use but intends to hold to prevent its competitors from
obtaining access to them. EITF 08-7 requires an acquirer in a business
combination to account for a defensive intangible asset as a separate unit of
accounting which should be amortized to expense over the period the asset
diminishes in value. EITF 08-7 is effective for fiscal years beginning after
December 15, 2008, with early adoption prohibited. The Company is currently
evaluating the potential impact, if any, of the adoption of EITF 08-7 on its
consolidated financial statements.


F-19




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      2     -
            SIGNIFICANT
      ACCOUNTING POLICIES (Cont.)





q.
              Recent
      Accounting Pronouncements
(Cont.)





In
April 2008 the FASB issued FASB Staff Position (FSP) SFAS 142-3,
“Determination of the Useful Life of Intangible Assets.” FSP SFAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS 142. This new staff position is intended to improve the consistency
between the useful life of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS 141(R). FSP SFAS 142-3 is effective for fiscal years beginning after
December 15, 2008, which means that it will be effective for the Company
starting January 1, 2009. The Company is in the process of evaluating this staff
position and therefore has not yet determined the impact that adoption of FSP
SFAS 142-3 will have on its financial position, results of operations or cash
flows.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities,” (“SFAS No. 161”) as an amendment to
SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities.” SFAS No. 161 requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting designation.
The fair value of derivative instruments and their gains and losses will need to
be presented in tabular format in order to present a more complete picture of
the effects of using derivative instruments. SFAS No. 161 is effective for
financial statements issued for fiscal years beginning after November 15, 2008. The
Company does not believe that the adoption of SFAS No. 161 will have a
significant impact on its consolidated financial statements.





In
February 2008, the FASB issued FSP No. FAS 157-1, "Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13", and FSP No. FAS 157-2, "Effective Date of FASB
Statement No. 157". Collectively, the Staff Positions defer the effective date
of Statement 157 to fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities except for items that are
recognized or disclosed at fair value on a recurring basis at least annually,
and amend the scope of Statement 157. The Company adopted Statement 157 and the
related FASB staff positions except for those items specifically deferred under
FSP No. FAS 157-2.


F-20




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      3     -
            ACQUISITIONS





a.
              In
      October 2008, the Company acquired through its Swiss subsidiary BBP all
      outstanding shares of Synergy Financial Systems Ltd. a provider of SWIFT
      services located in London and Nottingham, England for an aggregate
      purchase price of approximately GBP 2,538 ($ 4,737) in cash. Additional
      consideration will be paid in cash if and when certain conditions are met
      between the acquisition date and February 28, 2012, which may amount to an
      additional GBP 1,200.





This
acquisition was accounted for in accordance with SFAS No.141 and SFAS No. 142,
the financial results of the unit 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 other technology, backlog and goodwill. The purchase price
attributed to technology and backlog is being amortized over its estimated
useful life, which is 3 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
                  
                  
                  (315
                  )Property
      and equipment
                  
                  
                  1,040Long
      term liabilities
                  
                  
                  (150
                  )Technology
                  
                  
                  692Backlog
                  
                  
                  152Goodwill
                  
                  
                  3,318$
                  4,737





b.
                In
      February 2008, the Company acquired all outstanding shares of Accountis
      Limited (“Accountis”), a leading supplier of electronic invoice
      presentment and payment (EIPP) systems for an aggregate purchase price of
      approximately GBP 3,900 ($7,691) in cash plus $402 acquisition
      costs.





Under the
terms of the acquisition agreement, Fundtech will pay additional amounts of up
to GBP 2,000 in cash over three years following the acquisition, contingent upon
the financial performance of Accountis.





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


F-21




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      3     -
            ACQUISITIONS
      (Cont.)





b.
              (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 technology, backlog and goodwill. The purchase price attributed to
know-how is being amortized over its estimated useful life, which is 3 years for
backlog and 5 years for technology. 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
                  
                  $
                  (320
                  )Property
      and equipment
                  
                  
                  34Technology
                  
                  
                  4,250Know-how
                  
                  
                  402Goodwill
                  
                  
                  3,727$
                  8,093





c.
              In
      January 2008, the Company acquired the ACH Software Product unit from TROY
      Group, Inc. for an aggregate purchase price of approximately $ 1,129
      including $ 29 of acquisition
costs.





Under the
terms of the acquisition agreement, Fundtech will pay additional amounts of up
to $ 400 in cash by the end of 2008, contingent upon fulfillment of certain
conditions.





This
acquisition was accounted for in accordance with SFAS No.141 and SFAS No. 142
and the financial results of the unit 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 other technology, backlog
and goodwill. The purchase price attributed to technology and backlog 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.


F-22




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      3     -
            ACQUISITIONS
      (Cont.)




c.
                (Cont.)





The
allocation of fair value is as follows:





Working
      capital
                  
                  $
                  (227
                  )Technology
                  
                  
                  479Backlog
                  
                  
                  390Goodwill
                  
                  
                  487$
                  1,129





d.
              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 €
      4,879 ($6,339). This includes € 4,505 ($5,839) paid in cash directly to
      the shareholders and € 374 ($500) of acquisition
  costs.





Under the
terms of the acquisition agreement, Fundtech was to pay additional amounts of up
to €4,000 million in cash over four years following the acquisition, contingent
upon the financial performance of Prang. In March 2008 Fundtech paid € 2,307
($3,345) based on Prang’s 2007 financial performance, which was already
accounted for in 2007.





In March
2008, an amendment agreement was signed pursuant to which the terms of the
additional payments were changed as follows: € 597 was to be paid in January
2009 and additional € 597 will be paid in January 2010, which was already
accounted for in 2008.





This
acquisition was accounted for in accordance with SFAS No. 141 and SFAS No. 142,
and the financial results of Prang 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 other know-how and goodwill. The purchase price attributed to
know-how is being amortized over its estimated useful life, which is 4 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.


F-23




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)


NOTE
      3     -
            ACQUISITIONS
      (Cont.)




d.
              (Cont.)





The
allocation of fair value is as follows:





Working
      capital
                  
                  $
                  698Property
      and equipment
                  
                  
                  74Know-how
                  
                  
                  1,313Goodwill
                  
                  
                  9,477$
                  11,562





e.
              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 was to 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 additional amounts of $220, $200
and $200 in 2006, 2007 and 2008, respectively, based on achieved financial
performance milestones.





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.





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.


F-24




FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE
      3
              -
              ACQUISITIONS
      (Cont.)
  e.     (Cont.)
 
 The
allocation of fair value is as follows:
 
 Working
      capital
                    
                    $
                    576Long
      term deposits
                    
                    
                    6Property
      and equipment
                    
                    
                    38Know-how
                    
                    
                    878Goodwill
                    
                    
                    1,666$
                    3,164
 
 Following
the completion of a major project, and based on testing performed by the Company
in the fourth quarter of 2008, the Company concluded that impairment indicators
existed. The Company recorded a $1,660 impairment of goodwill and an additional
$358 of amortized costs related to acquired intangibles.
 
 f.
              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 costs 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 was to
      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, $1,130 and $1,004 in 2005, 2006
      and 2007 respectively, based on achieved financial performance
      milestones.
 
 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 knowhow and
goodwill. The purchase price attributed to knowhow 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 test.
  F-25
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE
      3
              -
              ACQUISITIONS
      (Cont.)
 
 f.     (Cont.)
 
 The
allocation of fair value is as follows:
 
 Working
      capital deficiency
                    
                    $
                    (459
                    )Long
      term deposits
                    
                    
                    95Property
      and equipment
                    
                    
                    153Know-how
                    
                    
                    873Goodwill
                    
                    
                    5,584$
                    6,246
 
 NOTE
      4
              -
              MARKETABLE
      SECURITIES
  December
      31,Maturity
      year
                
                
                2008
                
                
                2007Short-term
      investmentsHeld
      to maturity -Corporate
      bonds
                
                2009
                
                
                $
                4,276
                
                
                $
                3,027Corporate
      notes
                
                2009
                
                
                
                4,678
                
                
                
                1,110Euro-dollar
      bonds
                
                2009
                
                
                
                609
                
                
                
                718Corporate
      Certificates of Deposit
                
                
                
                
                
                -
                
                
                
                2,4679,563
                
                
                
                7,322Available
      for sale -Taxable
      auction securities
                
                
                
                
                
                -
                
                
                
                1,302$
                9,563
                
                
                $
                8,624Fair
      value
                
                
                
                
                $
                9,479
                
                
                $
                7,191Long
      -term InvestmentsHeld
      to maturity -Corporate
      bonds
                
                2010
                
                
                $
                1,179
                
                
                $
                3,941Corporate
      notes
                
                -
                
                
                
                -
                
                
                
                4,216Euro-dollar
      bonds
                
                -
                
                
                
                -
                
                
                
                6071,179
                
                
                
                8,764Available
      for sale -Taxable
      auction securities
                
                
                
                
                
                
                1,025
                
                
                
                4,083$
                2,204
                
                
                $
                12,847Fair
      value
                
                
                
                
                
                $
                2,263
                
                
                $
                8,605
 
 The
investments held by the Company include Auction Rate Securities (ARS). The ARS
held are securities issued by municipalities and closed end preferred funds
which had ratings of AAA and Aaa at the time of purchase.
  F-26
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE
      4
              -
              MARKETABLE
      SECURITIES (Cont.)
 
 An
unprecedented number of auctions for ARS failed and it has become increasingly
difficult for the industry to value certain ARS. These failed auctions do not
represent a default by the issuer. Upon an auction failure, coupons were reset
at the maximum reset rate. These failures to sell are primarily a liquidity
event not a credit event. Issuers continue to pay interest and dividends to all
ARS holders. Investments in auction rate securities are classified within Level
3 because they are valued using valuation techniques.
 
 During
2008, the Company successfully liquidated ARS at total amount of
$4,285.
 
 The
Company reviews various factors in determining whether it should recognize an
impairment charge for its marketable securities, including its intent and
ability to hold the investment for a period of time sufficient for any
anticipated recovery in market value, the length of time and extent to which the
fair value has been less than its cost basis, the credit ratings of the
securities, the nature of underlying collateral, as applicable and the financial
condition and near-term prospects of the issuer. Based on the Company's
consideration of these factors, the Company recognized in 2008 an
other-than-temporary impairment in a total amount of $ 75 related to ARS and a
write-off of $ 617 related to Lehman Brothers corporate notes. The Company may
recognize additional losses in the future should the market prospects of the
issuers of these securities continue to deteriorate.
 
 NOTE
      5
              -
              TRADE
      RECEIVABLES
 December
      31,2008
                    
                    
                    2007Accounts
      receivable, net of allowance for doubtful accounts
                    
                    $
                    22,785
                    
                    
                    $
                    17,614Unbilled
      receivables
                    
                    
                    5,479
                    
                    
                    
                    4,773$
                    28,264
                    
                    
                    $
                    22,387
 
 Management's
assessment for uncertainties of outstanding debt collectability resulted in
doubtful accounts expenses of $753 for 2008, income of $134 for 2007 and
expenses of $430 for 2006 in the statement of operations.
 
 NOTE
      6
              -
              PROPERTY
      AND EQUIPMENT, NET
 December
      31,2008
                    
                    
                    2007Cost:Office
      furniture and equipment
                    
                    $
                    3,425
                    
                    
                    $
                    2,828Computers
      and software
                    
                    
                    40,972
                    
                    
                    
                    33,180Motor
      vehicles
                    
                    
                    663
                    
                    
                    
                    585Leasehold
      improvements
                    
                    
                    3,985
                    
                    
                    
                    3,32349,045
                    
                    
                    
                    39,916Accumulated
      depreciation
                    
                    
                    33,147
                    
                    
                    
                    25,846Net
      book value
                    
                    $
                    15,898
                    
                    
                    $
                    14,070
  F-27
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE
      7
              -
              INTANGIBLE
      ASSETS AND CAPITALIZED SOFTWARE DEVELOPMENT COST,
  NET
 
 December
      31,Useful
      life
                    
                    
                    2008
                    
                    
                    2007Intangible
      assetsCost:Developed
      technology and know-how
                    
                    
                    5
                    
                    
                    $
                    12,732
                    
                    
                    $
                    7,303Customer
      base
                    
                    
                    -35
                    
                    
                    
                    4,397
                    
                    
                    
                    3,461Other
      intangible assets
                    
                    
                    
                    
                    
                    
                    58
                    
                    
                    
                    5817,187
                    
                    
                    
                    10,822Accumulated
      Amortization:Developed
      technology and know-how
                    
                    
                    
                    
                    
                    
                    (7,468
                    )
                    
                    
                    (5,419
                    )Customer
      base
                    
                    
                    
                    
                    
                    
                    (3,666
                    )
                    
                    
                    (3,189
                    )Other
      intangible assets
                    
                    
                    
                    
                    
                    
                    (58
                    )
                    
                    
                    (58
                    )(11,192
                    )
                    
                    
                    (8,666
                    )Net
      book value
                    
                    
                    
                    
                    
                    $
                    5,995
                    
                    
                    $
                    2,156
 
 NOTE
      8
              -
              OTHER
      ACCOUNTS PAYABLE AND ACCRUED
EXPENSES
 
 December
      31,2008
                  
                  
                  2007Accrued
      expenses
                  
                  $
                  5,672
                  
                  
                  $
                  7,379Government
      authorities
                  
                  
                  1,522
                  
                  
                  
                  1,159Other
                  
                  
                  34
                  
                  
                  
                  53$
                  7,228
                  
                  
                  $
                  8,591
 
 NOTE
      9
              -
              COMMITMENTS
      AND CONTINGENCIES
 
 a.
                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 31,2009
                    
                    $
                    2,8962010
                    
                    
                    1,7222011
                    
                    
                    1,2992012
                    
                    
                    1,2682013-2014
                    
                    
                    1,624$
                    8,809
  F-28
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE
      9
              -
              COMMITMENTS
      AND CONTINGENCIES (Cont.)
 
 a.     (Cont.)
 
 Total
facilities lease expenses for the years ended December 31, 2008, 2007 and 2006,
were approximately $3,615, $3,109 and $2,487 respectively.
 
 b.
                Guarantees:
 
 1.
                The
      Company has obtained a bank guarantee of $120 in connection with the
      Company's facilities operating lease agreement in
  Israel.
 
 2.
                The
      Company has obtained a bank guarantee of $570 for BBP as required by Swiss
      Law.
 
 3.
                The
      Company has obtained a bank guarantee of $42 for Prang in connection with
      the Company’s facilities operating lease agreement in
    Germany.
 
 NOTE 10
              -
              SHAREHOLDERS’
      EQUITY
 
 a.
                The
      ordinary shares of the Company are traded on the NASDAQ Global Market and
      on the Tel-Aviv Stock
Exchange.
 
 b.
                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.
 
 c.
                Treasury
      shares:
 
 On
 
 d.
                Stock
      -based compensation:
 
 1.
                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, were transferred to the 2005 Plans. On
      December 20, 2007, the shareholders approved the addition of 300,000
      shares for the 2005 Plans. A total of 3,892,815 shares are reserved for
      grants to employees and directors of the Company under the Old Plans and
      the 2005 Plans.
 
 2.
                Pursuant
      to the 2005 Plans, as of December 31, 2008, an aggregate of 848,722 shares
      of the Company are still available for future
  grants.
  F-29
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE 10
              -
              SHAREHOLDERS’
      EQUITY (Cont.)
 
 3.
                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, 2008 the Company had issued 873,252
      restricted shares of ordinary stock of which 385,002 are
      vested.
 
 4.
                Each
      option granted to employees and directors under the 2005 Plans 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 to directors under the Old Plans 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.
 
 e.
Summary of the Company's option activity under the Plans is as
follows:
 
 Year
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Weighted
                  
                  
                  
                  
                  
                  Weighted
                  
                  
                  
                  
                  
                  Weightedaverage
                  
                  
                  
                  
                  
                  Average
                  
                  
                  
                  
                  
                  AverageNumber
                  
                  
                  exercise
                  
                  
                  Number
                  
                  
                  Exercise
                  
                  
                  Number
                  
                  
                  Exerciseof
      options
                  
                  
                  Price
                  
                  
                  of
      options
                  
                  
                  Price
                  
                  
                  of
      options
                  
                  
                  PriceOutstanding
      at January 1
                  
                  
                  1,609,387
                  
                  
                  
                  6.74
                  
                  
                  
                  2,109,720
                  
                  
                  $
                  6.59
                  
                  
                  
                  2,410,490
                  
                  
                  $
                  6.43Granted
                  
                  
                  222,500
                  
                  
                  
                  7.81
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  (242,590
                  )
                  
                  
                  5.86
                  
                  
                  
                  (405,010
                  )
                  
                  
                  5.78
                  
                  
                  
                  (289,745
                  )
                  
                  
                  5.13Forfeited/cancelled
                  
                  
                  (17,235
                  )
                  
                  
                  9.41
                  
                  
                  
                  (95,323
                  )
                  
                  
                  7.50
                  
                  
                  
                  (11,025
                  )
                  
                  
                  9.74Outstanding
      at December 31
                  
                  
                  1,572,062
                  
                  
                  
                  7.00
                  
                  
                  
                  1,609,387
                  
                  
                  $
                  6.74
                  
                  
                  
                  2,109,720
                  
                  
                  $
                  6.59Exercisable
      options at December 31
                  
                  
                  1,316,308
                  
                  
                  
                  6.78
                  
                  
                  
                  1,407,364
                  
                  
                  $
                  6.46
                  
                  
                  
                  1,555,172
                  
                  
                  $
                  5.93
  F-30
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE 10
              -
              SHAREHOLDERS’
      EQUITY (Cont.)
 
 e.
              (Cont.)
 
 The
options outstanding as of December 31, 2008, have been separated into ranges of
exercise price, as follows:
 
 Options
                    
                    
                    Weighted
                    
                    
                    
                    
                    
                    OptionsOutstanding
                    
                    
                    Average
                    
                    
                    Weighted
                    
                    
                    Exercisable
                    
                    
                    WeightedRanges
      of
                    
                    as
      of
                    
                    
                    Remaining
                    
                    
                    Average
                    
                    
                    as
      of
                    
                    
                    AverageExercise
                    
                    December
      31,
                    
                    
                    Contractual
                    
                    
                    Exercise
                    
                    
                    December
      31,
                    
                    
                    ExercisePrice
                    
                    2008
                    
                    
                    Life
      (years)
                    
                    
                    Price
                    
                    
                    2
      0 08
                    
                    
                    Price$  3.55-4.02
                    
                    
                    415,863
                    
                    
                    
                    3.9
                    
                    
                    $
                    3.96
                    
                    
                    
                    415,878
                    
                    
                    
                    3.96$  5.79-8.53
                    
                    
                    905,897
                    
                    
                    
                    6.4
                    
                    
                    
                    7.55
                    
                    
                    
                    683,397
                    
                    
                    
                    7.47$  8.70-10.52
                    
                    
                    243,302
                    
                    
                    
                    6.3
                    
                    
                    
                    9.94
                    
                    
                    
                    210,033
                    
                    
                    
                    9.91$  13.25-13.25
                    
                    
                    7,000
                    
                    
                    
                    0.8
                    
                    
                    
                    13.25
                    
                    
                    
                    7,000
                    
                    
                    
                    13.251,572,062
                    
                    
                    
                    5.7
                    
                    
                    
                    7.00
                    
                    
                    
                    1,316,308
                    
                    
                    
                    6.78
 
 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.
 
 f.
              Dividends
 
 In the
event that cash dividends are declared in the future, such dividends will be
paid in NIS. The Company does not intend to pay cash dividends in the
foreseeable future.
 
 NOTE 11
              -
              EARNINGS
      PER SHARE
 
 The
following table sets forth the computation of historical basic and diluted net
earnings per share:
 
 Year
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Numerator:Net
      income
                  
                  $
                  1,240
                  
                  
                  $
                  7,107
                  
                  
                  $
                  3,751Numerator
      for basic earnings  per share -income
      available to OrdinaryShareholders
                  
                  $
                  1,240
                  
                  
                  $
                  7,107
                  
                  
                  $
                  3,751Numerator
      for diluted net earnings  pershare
      - income available to Ordinaryshareholders
      after assumed exercises
                  
                  $
                  1,240
                  
                  
                  $
                  7,107
                  
                  
                  $
                  3,751
  F-31
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 Number
      of sharesDenominator:Denominator
      for basic net earnings per share - weighted - average
      shares
                    
                    
                    15,769,588
                    
                    
                    
                    15,322,515
                    
                    
                    
                    14,879,241Effect
      of dilutive securities:Employee
      stock options
                    
                    
                    664,175
                    
                    
                    
                    1,270,768
                    
                    
                    
                    971,552Denominator
      for diluted net earnings per share
                    
                    
                    16,433,763
                    
                    
                    
                    16,593,283
                    
                    
                    
                    15,850,793
 
 NOTE 12
              -
              INCOME
      TAXES
 
 a.
                  Measurement
      of taxable income under the Israeli Income Tax Law (Inflationary
      Adjustments), 1985
 
 The
Company is assessed for tax purposes on an unconsolidated basis. Each of the
Company’s subsidiaries is subject to the tax rules prevailing in its country of
incorporation.
 
 b.
                Israeli
      Taxation
 
 1.
                Corporate
      tax structure:
 
 Taxable
income of Israeli companies is subject to tax at the rate of 27% in 2008
(“Regular Tax Rate”). This rate is to be gradually reduced to 25% until 2010
(26% in 2009 and 25% in 2010 and thereafter).
  F-32
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE 12
              -
              INCOME
      TAXES (Cont.)
 
 2.
                Tax
      benefits under the Israeli Law for the Encouragement of Capital
      Investments, 1959:
 
 The
Company was 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 was
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. In 2007 the Company submitted a request for an approval for its
fourth expansion program. 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,
2008, retained earnings included approximately $ 4,884 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 recorded on income attributable to the Company's "Approved
Enterprise".
  F-33
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE 12
              -
              INCOME
      TAXES (Cont.)
 
 b.
                Israeli
      Taxation (Cont.)
 
 2.
                (Cont.)
 
 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 $1,221 would be incurred as of December 31, 2008.
 On April
1, 2005, an amendment to the Investment Law came into effect (“the Amendment”)
that has significantly changed the provisions of the Investment
Law.
 
 The
Amendment limits the scope of enterprises which may be approved by the Israeli
Investment Center of the Ministry of Industry, Trade and Labor (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.
 
 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, 2008, none of Fundtech's income was generated under the provisions
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 “Approved Enterprise” benefits mentioned above is taxed at the
Regular Tax Rate.
  F-34
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE 12
              -
              INCOME
      TAXES (Cont.)
 
 c.
                Net
      operating loss carry forwards
 
 As of
December 31, 2008, the Company had approximately $21,800 of Israeli net
operating loss carry forwards and approximately $7,380 capital loss carry
forwards. The Israeli loss carry forwards have no expiration date.
 
 As of
December 31, 2008, Fundtech Corporation had a U.S. federal net operating loss
carry forward of approximately $43,100 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.
 
 d.
                Deferred
      income taxes
 
 Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
 
 Significant
components of the Company and its subsidiaries assets are as
follows:
 
 December
      31,2008
                  
                  
                  2007Deferred
      tax assets:U.S.
      net operating loss carry forward
                  
                  $
                  17,251
                  
                  
                  $
                  17,347Israel
      net operating loss carry forward
                  
                  
                  5,452
                  
                  
                  
                  6,281Other
      reserve and allowances
                  
                  
                  5,337
                  
                  
                  
                  5,129Total
      deferred tax assets
                  
                  
                  28,040
                  
                  
                  
                  28,757Valuation
      allowance
                  
                  
                  (26,502
                  )
                  
                  
                  (27,491
                  )1,538
                  
                  
                  $
                  1,266Deferred
      tax liabilities:
                  
                  
                  (1,585
                  )
                  
                  
                  (1,589
                  )$
                  (47
                  )
                  
                  $
                  (323
                  )
 
 Deferred
tax assets for carry forward losses in the US are calculated using the
applicable tax rate at the time of expected realization of the carry forward
losses.
 
 Deferred
tax assets for carry forward losses in Israel are calculated using the enacted
tax rate of 25%.
  F-35
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE 12
              -
              INCOME
      TAXES (Cont.)
 
 d.
                Deferred
      income taxes (Cont.)
 
 Deferred
income tax assets and liabilities at December 31, 2008 are included in the
accompanying consolidated balance sheets as follows:
 
 December
      31,2008
                  
                  
                  2007Short
      term deferred assets, net
                  
                  $
                  923
                  
                  
                  $
                  555Long
      Term deferred tax liability
                  
                  
                  (970
                  )
                  
                  
                  (878
                  )Net
      deferred income tax liabilities
                  
                  $
                  (47
                  )
                  
                  $
                  (323
                  )
 
 The
Company has provided valuation allowances in respect of deferred tax assets
resulting from net operating loss carry forwards in the US and for part of its
net operating loss carry forwards in Israel. Management currently believes that
it is more likely than not that those deferred tax losses will not be realized
in the foreseeable future.
 
 e.
                Tax
      assessments
 
 The
Company received final tax assessments through the tax year ended December 31,
2003. Fundtech U.K. Ltd. received final tax assessment through the tax year
ended December 31, 2006. BBP received final tax assessment through the tax year
ended December 31, 2005 Cashtech received final tax assessment through the tax
year ended March 31, 2000. Prang received final tax assessment through the tax
year 2007.
  F-36
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE 12
              -
              INCOME
      TAXES (Cont.)
 
 f.
                Composition
      of income tax expenses
 
 Year
      ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Income
      (loss) before taxes on income:Domestic
                  
                  $
                  1,397
                  
                  
                  $
                  2,241
                  
                  
                  $
                  (7,305
                  )Foreign
                  
                  
                  943
                  
                  
                  
                  6,073
                  
                  
                  
                  12,020$
                  2,340
                  
                  
                  $
                  8,314
                  
                  
                  $
                  4,715Income
      tax provision :Current:Domestic
                  
                  $
                  159
                  
                  
                  $
                  149
                  
                  
                  $
                  106Foreign
                  
                  
                  1,217
                  
                  
                  
                  1,178
                  
                  
                  
                  8581,376
                  
                  
                  
                  1,327
                  
                  
                  
                  964Deferred:Domestic
                  
                  $
                  (940
                  )
                  
                  $
                  -
                  
                  
                  $
                  -Foreign
                  
                  
                  664
                  
                  
                  
                  (120
                  )
                  
                  
                  -(276
                  )
                  
                  
                  (120
                  )
                  
                  
                  -$
                  1,100
                  
                  
                  $
                  1,207
                  
                  
                  $
                  964
  F-37
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 NOTE 12
              -
              INCOME
      TAXES (Cont.)
 
 g.
                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 31,2008
                    
                    
                    2007
                    
                    
                    2006Income
      before taxes on income
                    
                    $
                    2,340
                    
                    
                    $
                    8,314
                    
                    
                    $
                    4,715Theoretical
      tax on the above amount
                    
                    $
                    760
                    
                    
                    $
                    2,946
                    
                    
                    $
                    2,312Tax
      benefit arising from "Approved Enterprise"
                    
                    
                    (28
                    )
                    
                    
                    (90
                    )
                    
                    
                    1,534Decrease
      (Increase) in valuation allowance
                    
                    
                    989
                    
                    
                    
                    (19
                    )
                    
                    
                    (2,069
                    )Stock
      based compensation - non deductable expenses
                    
                    
                    (1,368
                    )
                    
                    
                    (1,294
                    )
                    
                    
                    (772
                    )Adjustments
      arising from differences in the basis of measurement for tax purposes and
      for financial reporting purposes
                    
                    
                    (353
                    )
                    
                    
                    (216
                    )
                    
                    
                    (44
                    )Impairment
      of goodwill
                    
                    
                    823
                    
                    
                    
                    -
                    
                    
                    
                    -Other,
      net
                    
                    
                    277
                    
                    
                    
                    (120
                    )
                    
                    
                    3$
                    1,100
                    
                    
                    $
                    1,207
                    
                    
                    $
                    964
 
 The
Company adopted the provisions of FIN 48 on January 1, 2007. As a result of
the implementation, the Company recognized a $400 increase to reserves for
uncertain tax positions. This increase was accounted for as an adjustment to the
beginning balance of the accumulated deficit on the accompanying consolidated
balance sheet as of December 31, 2007.
 
 The
following reconciliation summarizes the total gross unrecognized tax
benefits:
 2008
                  
                  
                  2007Beginning
      balance
                  
                  $
                  400
                  
                  
                  $
                  400Gross
      change tax positions of current period
                  
                  
                  -
                  
                  
                  
                  -Gross
      change for tax positions of prior year
                  
                  
                  -
                  
                  
                  
                  -Settlements
      with taxing authorities
                  
                  
                  -
                  
                  
                  
                  -Lapse
      of statute of limitations
                  
                  
                  -
                  
                  
                  
                  -Ending
      balance
                  
                  $
                  400
                  
                  
                  $
                  400
 
 NOTE 13
              -
              OPERATING
      SEGMENT AND GEOGRAPHICAL
INFORMATION
 
 a.
                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.
  F-38
  FUNDTECH
LTD.
 
 NOTES TO THE FINANCIAL
STATEMENTS
 (In
thousands)
 
 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 31,2008
                  
                  
                  2007
                  
                  
                  2006Cash Management:Revenues
                  
                  $
                  27,914
                  
                  
                  $
                  24,460
                  
                  
                  $
                  20,492Operating
      income
                  
                  $
                  821
                  
                  
                  $
                  1,057
                  
                  
                  $
                  178Payments:Revenues
                  
                  $
                  75,001
                  
                  
                  $
                  65,460
                  
                  
                  $
                  51,608Operating
      income
                  
                  $
                  17,206
                  
                  
                  $
                  17,672
                  
                  
                  $
                  13,363BBP:Revenues
                  
                  $
                  18,122
                  
                  
                  $
                  14,714
                  
                  
                  $
                  13,409Operating
      income
                  
                  $
                  1,071
                  
                  
                  $
                  1,108
                  
                  
                  $
                  634
  F-39


FUNDTECH
LTD.





NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
13     -  OPERATING SEGMENT AND GEOGRAPHICAL
INFORMATION (Cont.)





b.
                Following
      is a reconciliation of the operating loss of the reportable segments to
      the data included in the consolidated financial
  statements:


Year ended December 31,2008
                
                
                2007
                
                
                2006Total
      operating income of the reportable segments:
                
                $
                19,098
                
                
                $
                19,837
                
                
                $
                14,175Amounts
      not allocated to segments:Stock
      based compensation
                
                
                3,007
                
                
                
                2,596
                
                
                
                2,487General
      and administrative expenses
                
                
                10,582
                
                
                
                7,742
                
                
                
                6,798Marketing
      expenses
                
                
                2,525
                
                
                
                3,382
                
                
                
                2,159Consolidated
      operating income
                
                $
                2,984
                
                
                $
                6,117
                
                
                $
                2,731





c.
            Geographic information:


The total
revenues are attributed to geographic information, based on the customers'
location.





Year ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Long
      -
                  
                  
                  
                  
                  
                  Long
      -
                  
                  
                  
                  
                  
                  Long
      -Total
                  
                  
                  lived
                  
                  
                  Total
                  
                  
                  lived
                  
                  
                  Total
                  
                  
                  livedrevenues
                  
                  
                  Assets
                  
                  
                  revenues
                  
                  
                  assets
                  
                  
                  revenues
                  
                  
                  assetsIsrael
                  
                  $
                  1,108
                  
                  
                  $
                  2,304
                  
                  
                  $
                  1,331
                  
                  
                  $
                  1,782
                  
                  
                  $
                  2,006
                  
                  
                  $
                  1,140United
      States
                  
                  
                  49,228
                  
                  
                  
                  25,059
                  
                  
                  
                  46,028
                  
                  
                  
                  18,376
                  
                  
                  
                  44,399
                  
                  
                  
                  19,904Switzerland
                  
                  
                  15,155
                  
                  
                  
                  8,578
                  
                  
                  
                  12,711
                  
                  
                  
                  8,341
                  
                  
                  
                  11,471
                  
                  
                  
                  8,230India
                  
                  
                  2,350
                  
                  
                  
                  6,448
                  
                  
                  
                  2,302
                  
                  
                  
                  6,645
                  
                  
                  
                  1,105
                  
                  
                  
                  6,650United
      Kingdom
                  
                  
                  17,758
                  
                  
                  
                  12,595
                  
                  
                  
                  19,966
                  
                  
                  
                  76
                  
                  
                  
                  14,469
                  
                  
                  
                  83Germany
                  
                  
                  3,990
                  
                  
                  
                  10,383
                  
                  
                  
                  2,611
                  
                  
                  
                  7,851
                  
                  
                  
                  547
                  
                  
                  
                  -Others
                  
                  
                  31,448
                  
                  
                  
                  4
                  
                  
                  
                  19,685
                  
                  
                  
                  5
                  
                  
                  
                  11,512
                  
                  
                  
                  4$
                  121,037
                  
                  
                  $
                  65,371
                  
                  
                  $
                  104,634
                  
                  
                  $
                  43,076
                  
                  
                  $
                  85,509
                  
                  
                  $
                  36,011





d.
            Major
      customer’s data as a percentage of total
  revenue:





Year ended December 31,2008
                
                
                2007
                
                
                2006Customer
      A
                
                
                8
                %
                
                
                10
                %
                
                
                12
                %Customer
      B
                
                
                10
                %
                
                
                11
                %
                
                
                12
                %


F-40


FUNDTECH
LTD.





NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
14      -  FINANCIAL INCOME, NET





Year ended December 31,2008
                
                
                2007
                
                
                2006Financial
      expenses:Interest
      and other
                
                $
                39
                
                
                $
                28
                
                
                $
                37Foreign
      currency translation differences, net
                
                
                1,439
                
                
                
                58
                
                
                
                22$
                1,478
                
                
                $
                86
                
                
                $
                59Financial
      income:Interest
      and other
                
                $
                1,526
                
                
                $
                2,283
                
                
                $
                2,043$
                48
                
                
                $
                2,197
                
                
                $
                1,984


F-41


FUNDTECH
LTD.





NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





SCHEDULE
II





FUNDTECH
LTD.


VALUATION AND QUALIFYING
ACCOUNTS


(In
thousands)





Year ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Allowance
      for doubtful accounts at  beginning of year
                  
                  $
                  859
                  
                  
                  $
                  1,078
                  
                  
                  $
                  1,664Provision
                  
                  
                  753
                  
                  
                  
                  (134
                  )
                  
                  
                  430Translation
      adjustments
                  
                  
                  (24
                  )
                  
                  
                  (6
                  )
                  
                  
                  4Accounts
      receivable written off
                  
                  
                  -
                  
                  
                  
                  (79
                  )
                  
                  
                  (1,020
                  )Allowance
      for doubtful accounts at end of year
                  
                  $
                  1,588
                  
                  
                  $
                  859
                  
                  
                  $
                  1,078


F-42