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





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





For the fiscal year ended
December
31, 2009





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: 000-29634







FUNDTECH
LTD.


(Exact
name of Registrant as specified in its charter)










STATE
OF ISRAEL


(Jurisdiction
of incorporation or organization)





10 Hamada
Street


5th
Floor


Herzliya,
Israel 46140





(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:
15,784,380 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes   ̈    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 annual report 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 United States Securities and Exchange Commission
(the “SEC”).





As used
in this annual report, the terms “we,” “us,” “our,” the “Company” and “Fundtech”
mean Fundtech Ltd. and its subsidiaries, unless the context requires otherwise
or if 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.
                                                                      2ITEM
      2.
                                                                      OFFER
      STATISTICS AND EXPECTED TIMETABLE.
                                                                      2ITEM
      3.
                                                                      KEY
      INFORMATION.
                                                                      2ITEM
      4.
                                                                      INFORMATION
      ON THE COMPANY.
                                                                      11ITEM
      4A.
                                                                      UNRESOLVED
      STAFF COMMENTS.
                                                                      23ITEM
      5.
                                                                      OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS.
                                                                      23ITEM
      6.
                                                                      DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES.
                                                                      38ITEM
      7.
                                                                      MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.
                                                                      51ITEM
      8.
                                                                      FINANCIAL
      INFORMATION.
                                                                      54ITEM
      9.
                                                                      THE
      OFFER AND LISTING.
                                                                      55ITEM
      10.
                                                                      ADDITIONAL
      INFORMATION.
                                                                      56ITEM
      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.
                                                                      74ITEM
      18.
                                                                      FINANCIAL
      STATEMENTS.
                                                                      74ITEM
      19.
                                                                      EXHIBITS.
                                                                      74





1





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, 2009 and at December 31, 2009 and
2008 are derived from our audited Consolidated Financial Statements set forth
elsewhere in this report, which have been prepared in accordance with accounting
principles generally accepted in the United States (“US GAAP”). The selected
consolidated financial data for the years ended December 31, 2006 and December
31, 2005, respectively, and at December 31, 2007, 2006 and 2005 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.





2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006
                                    
                                    
                                    2005FINANCIAL
      DATA:Total
      revenues
                                    
                                    $
                                    117,757
                                    
                                    
                                    $
                                    121,037
                                    
                                    
                                    $
                                    104,634
                                    
                                    
                                    $
                                    85,509
                                    
                                    
                                    $
                                    74,466Operating
      income
                                    
                                    
                                    4,044
                                    
                                    
                                    
                                    2,984
                                    
                                    
                                    
                                    6,117
                                    
                                    
                                    
                                    2,731
                                    
                                    
                                    
                                    4,417Net
      income
                                    
                                    
                                    4,673
                                    
                                    
                                    
                                    1,240
                                    
                                    
                                    
                                    7,107
                                    
                                    
                                    
                                    3,751
                                    
                                    
                                    
                                    4,336Basic
      earnings per share
                                    
                                    $
                                    0.31
                                    
                                    
                                    $
                                    0.08
                                    
                                    
                                    $
                                    0.46
                                    
                                    
                                    $
                                    0.25
                                    
                                    
                                    $
                                    0.29Diluted
      earnings per share
                                    
                                    $
                                    0.30
                                    
                                    
                                    $
                                    0.08
                                    
                                    
                                    $
                                    0.43
                                    
                                    
                                    $
                                    0.24
                                    
                                    
                                    $
                                    0.27Cash,
      cash equivalents, short-term short term marketable investments and
      securities
                                    
                                    $
                                    42,151
                                    
                                    
                                    $
                                    40,620
                                    
                                    
                                    $
                                    42,001
                                    
                                    
                                    $
                                    47,167
                                    
                                    
                                    $
                                    49,599Long-term
      marketable securities
                                    
                                    
                                    774
                                    
                                    
                                    
                                    2,204
                                    
                                    
                                    
                                    12,847
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Working
      capital
                                    
                                    
                                    49,527
                                    
                                    
                                    
                                    48,319
                                    
                                    
                                    
                                    45,815
                                    
                                    
                                    
                                    54,794
                                    
                                    
                                    
                                    49,909Total
      assets
                                    
                                    
                                    140,352
                                    
                                    
                                    
                                    138,994
                                    
                                    
                                    
                                    128,272
                                    
                                    
                                    
                                    112,063
                                    
                                    
                                    
                                    105,801Shareholders’
      equity
                                    
                                    
                                    108,182
                                    
                                    
                                    
                                    106,147
                                    
                                    
                                    
                                    102,132
                                    
                                    
                                    
                                    89,786
                                    
                                    
                                    
                                    85,010





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 SEC rules and utilizing U.S. GAAP. All financial statements included in this
report and all financial information released in Israel are presented solely
under U.S. GAAP.





B.           Capitalization
and Indebtedness.





Not
applicable.





C.           Reasons
for the Offer and Use of Proceeds.





Not applicable.




2




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 both by an industry-specific crisis and by the lag in the
recovery seen in overall economic conditions. Our business has been impacted by
the global recession which has continued to have a lingering impact on the
ability of our clients and potential clients to purchase our products and
services. We cannot be sure precisely how long this impact will continue. While
there are signs that certain geographic regions are emerging from the recession,
it is yet unclear how strong the recovery will be in each region or the duration
of the recovery. 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 contracts with three large customers for the sale of one of our
payments products. Sales to these customers accounted for 20.8%, 22.1%, and
27.3% of our revenues for 2009, 2008 and 2007, 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 significantly impacted by the global recession. While there are
signs that the larger financial institutions are reentering the marketplace
again for financial transaction solutions, we cannot predict whether 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”.





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
global banks and U.S. based banks as such banks 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, particularly in an
uncertain economy. 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,
whether because a competitor obtains the desired contract from the customer, 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.




3




Greater
market acceptance of our competitors’ products or bank reliance on internally
developed products could result in reduced revenues.





While the
market for our solutions is continuing to develop, with expansion into Asia and
South America showing signs of accelerating, competition for the business of
global or national and regional financial services organizations that seek to
support complex and sophisticated products remains intense. Also, some 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. These internally developed solutions may then be
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 potential clients. In some instances,
customers may seek to develop part of a given 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, OB, Harbor Payments, Clear2Pay and
Sterci.





We
believe that 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. 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.





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.”




4




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 Fundtech India, 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 56.0% of
our total revenues in 2007, 59.3% of our total revenues in 2008 and 58.8% of our
total revenues in 2009 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.





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.




5




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 such 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 (via 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,
which would adversely impact our balance sheet or dilute our existing
shareholders (as applicable).





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 2005-2009, Global PAYplus® has been installed at 19
banks, PAYplus USATM at 141 banks and CASHplus® has been installed at or
operating on behalf of 70 banks. We may be unable to adequately protect our
proprietary rights, which may limit our ability to compete
effectively.




Our
success and ability to compete are substantially dependent upon our internally
developed technology. 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.




6




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.





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.





Risks
Related to an Investment in our Ordinary Shares





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 55.7% of our
Ordinary Shares, or 56.4%
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 would yield a premium
upon the price of our Ordinary Shares. This concentration of ownership also
reduces the amount of stock in the public float, which may impact share trading
values.





The
market price of our Ordinary Shares may be volatile.





The stock
market in general, including its technology market sector in particular, has
historically experienced price and volume fluctuations. During the most recent
downturn, there has been a substantial decrease in the market capitalization of
technology companies followed by a partial recovery. For additional information
on our stock price performance during this period, see the table in Item 9, “The
Offer and Listing — Market Price Information.” These market fluctuations and
general economic downturn had been adversely affecting, and could in the future
adversely affect, the market price of our Ordinary Shares. The market price of
our 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);




7




·
            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.





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.





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 in the
past as a result of various factors, some 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.




8




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.





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 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.




9




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 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
(if any) of the NIS in relation to the dollar or that the timing of such
devaluation will lag behind inflation in Israel. Either such trend has the
effect of increasing the dollar cost of our operations. In 2009, the NIS
devalued relative to the dollar by 0.7%, but the Israeli inflationary rate was
5.2%, thereby outpacing such devaluation, while in 2008, the NIS appreciated
against the dollar by approximately 1.1% and the consumer price index
furthermore increased at the rate of 3.8%, thereby further escalating the
increase in the dollar cost of our Israeli operations. We cannot predict any
future trends in the rate of inflation in Israel or the rate of devaluation or
appreciation of the NIS against the dollar. If the dollar cost of our operations
in Israel continues to increase, our dollar-measured results of operations will
be adversely affected.





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





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





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





From time
to time we have received royalty-bearing grants from the Office of the Chief
Scientist of the Ministry of Industry and Trade of the Government of Israel
(“OCS”) 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 portion of the total manufacturing volume that is
performed outside of Israel. A recent amendment to the Research and Development
Law permits the OCS, among other things, to approve the transfer of
manufacturing rights to outside of Israel in exchange for an import of different
manufacturing into Israel as a substitute, in lieu of the increased royalties.
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 research committee is
convinced that doing so is essential for the execution of the program. Despite
these leniencies afforded under the Research and Development Law and the recent
amendment adopted thereto, if we desire to transfer more than an insubstantial
portion of our manufacturing processes to contractors outside of Israel, we may
be required to obtain the consent of the OCS and pay higher royalties to the
OCS, which may reduce or eliminate entirely the profitability of effecting such
a transfer.





The
Research and Development Law also provides that the technology and know-how
developed under an approved research and development program may not be
transferred to third parties inside or outside of Israel without the approval of
the OCS (and, in the case of a transfer outside of Israel, absent certain
circumstances). Such approval is not required for the sale or export of any
products resulting from such research or development. Even if we receive
approval to a transfer of 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, must be paid to the
OCS.





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.




10




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.





The
Investment Center of the Ministry of Industry, Trade and Labor has granted
“Approved Enterprise” status to investment programs at our former facility in
Ramat Gan. When we begin to generate taxable income from these Approved
Enterprise programs, the portion of our income derived from such 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 that would otherwise yield a premium to our
shareholders.





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 that might otherwise yield to our shareholders a premium upon the market
price of our Ordinary Shares. 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
2009, 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 10, “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 10 Hamada Street, 5th Floor,
Herzliya, Israel, 46140, 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 (“Cashtech”) 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 (“Accountis”), which offers electronic
bill presentment software. During 2008, we renamed Prang GmbH as Fundtech GmbH
and Cashtech 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 (“Synergy”) which offers
payments software and services to banks in the United Kingdom. In April 2009 our
subsidiary, Accountis acquired 100% of the stock of Intersoftware (UK) Limited
(“Intersoftware”) 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 known as the NASDAQ Global Market).
As part of the offering, we issued and sold 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 used
in the purchase of property and equipment decreased by $3.0 million to $3.6
million for the year ended December 31, 2009 from $6.6 million for the year
ended December 31, 2008 after having 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 2009 we invested $5.8 million to fund the acquisition
of Intersoftware as well as to pay additional amounts as per the terms of the
acquisition agreements with Fundtech GMBH and Accountis. During 2008 we invested
$17.2 million to fund the acquisitions of Accountis, Synergy and Troy, as well
as to pay additional amounts as per the terms of the acquisition agreements with
Fundtech GMBH and Radius Partners. During 2007, we invested $7.5 million for the
acquisition of 100% of the stock of Fundtech GMBH and additional payments per
the acquisition terms of Radius Partners and Cashtech. 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 2010, our anticipated capital
expenditures are $5.5 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: (i) payment processing; (ii) bbp; (iii) electronic invoice
presentment and payments; and (iv) 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.





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 PAYplus®, Global CASHplusTM,
Global PAYplus-SP, 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 the
Global CASHplus suite of cash management products. Fundtech GmbH, acquired in
early 2007, is a payments solution provider in Germany where it offers its
PAYplus FTS solutions. The North American payments business delivers real-time
ACH transaction processing as well as automated exception handling through
ACHplus® and OriginetTM. 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.




12




Industry
Background





During
the past fifteen years, up to the onset of the global downturn, international
commerce had generally increased, with new banking technologies being adopted.
This was accompanied by 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 continues to be somewhat impacted by the downturn, 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. During the later part of 2009, we noted that the larger
financial institutions were once again turning their attention to the
optimization of their transaction processing systems.





Certain
trends drive demand for our products and services: 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; continuing 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. Throughout 2009, the impact of the recession has
overshadowed any prior trends. There are signs, however, that the larger
financial institutions are beginning to return to the marketplace to address
their needs in relation to these 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”);


·
            a continued shift by banks and
      financial institutions 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.




13


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. We
are 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
      PAYplus®
            
            A
      solution for managing the global payments activities of large
      multi-national banks and financial institutions that conduct business in
      multiple countries.Global
      PAYplus®-Service Platform
            
            A
      Services Oriented Architecture or “SOA” services platform providing broad
      services in payments, cash management and financial supply
      chain.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
      PAYplus® 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.





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.




14




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).





Global PAYplus®





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





Global
PAYplus®-Services Platform





Our
Global PAYplus ® Services Platform provides financial institutions the ability
to implement SOA services in payments, cash management and financial supply
chain within either a pre-configured service platform or in the form of a
payments hub integrating the institution’s legacy systems into a homogeneous
rules-based services platform. The services handle multiple payment types
globally and use the payments power of our Global PAYplus software, a globally
operational platform.





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.




15




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.





ACHplu$®





ACHplu$®
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.




16




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.





ClaritySuite





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.





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
Banking





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




17




CASHplus®





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





webBANKER





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





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.





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.




18




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).





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.




19




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.





·
            Corporations – With the addition
      of Accountis AR and Accountis AP and Troy’s OrigiNET, we have 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 our 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. 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 two new ACH products to our portfolio along with approximately 18
customer relationships. Accountis Limited, acquired in February 2008, when
consolidated with its Intersoftware subsidiary acquired in April 2009, 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 segments and
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 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.





20




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 318 full-time employees on December 31,
2009. 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.





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,
OB 10, 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.




21





Regulatory
Framework





The financial services industry in
which we operate is heavily subject to regulatory scrutiny. Increased regulatory
requirements have been 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 the Single Euro Payments Area, or SEPA. For more information,
please see the risk factor entitled “Government
regulatory policy for the financial services industry affects our
business” in Item 3.D above.





Organizational
Structure





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





Name of Subsidiary
                
                Country of Incorporation/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, 2009,
we leased office space as specified in the table below. The aggregate annual
lease payments for our facilities during 2009 were approximately
$3,896,000.


22





Location
                
                Approximate
                  Aggregate Square FeetHerzliya,
      Israel*
                
                53,615Burlington,
      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





* As of
December 31, 2009, we also leased approximately 25,000 square feet in Ramat-Gan,
Israel. Such lease has subsequently terminated.





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.


23





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 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;





(ii) 
  An ongoing objective to lower operating costs through automation,
including enhancing the performance of legacy systems to meet current business
objectives. 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.





During
the period 2005 through the first half of 2008, spending on technology in the
financial services industry increased. 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 both global and U.S-based clients. Other
revenues from maintenance and services for previously installed systems were
affected to a lesser degree. This trend continued throughout most of 2009. We
continue to see interest and activity from U.S. regional banks, and have shifted
some of our marketing emphasis to such businesses while maintaining our
relationships with our global and large bank customers. During the fourth
quarter of 2009, however, we began to see increasing activity amongst global
banks and large banks located in Europe and Asia Pacific. We have also placed
additional emphasis on our newly acquired products such as ACHplus which are
attractive within the sectors that appear to be less affected by the slowdown.
The trends toward increasing emphasis on transaction revenue and
processing/management cost optimization has had a favorable impact on our
business, but we continue to experience a slowdown in the sales cycle as banks
deal with the recession’s impact on their businesses. We continually communicate
with our sales personnel, clients and prospects to estimate the probability of
consummating new contracts during future periods. While the current economic
crisis has reduced our normal visibility in this regard, we were able to
forecast sufficient business reductions to warrant undertaking cost cutting
initiatives that somewhat reduced planned 2009 expenditures to offset the
declining revenues. It is difficult to predict whether the duration of these
trends will continue, as well as the extent of the impact that they may have on
our future revenues, results of operations or the length of the time periods for
which we can forecast potential revenues.


24





Acquisitions
of Businesses and Certain Assets





In
October of 2005, we acquired all of the outstanding shares of Radius Partners,
Inc. (“Radius”) for an aggregate initial purchase price of approximately $2.5
million. During 2006, additional 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.





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 ($830,000) was paid in January 2009 and 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 ($7.8) 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. During 2009, we paid an additional
amount of $1.1 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. No additional payments were made in 2009.





In April
2009, we acquired all of the outstanding shares of Intersoftware (UK) Limited
for a purchase price of £2.7 ($3.8) million in cash. There are no contingent
amounts payable in respect of such acquisition.





Critical
Accounting Policies





The
operating and financial condition review contained herein is based upon our
consolidated financial statements, which were prepared in accordance with U.S.
GAAP. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. 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.





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
ASC 985-605-15 “Software Revenue Recognition” 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.


25





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, 2009 and 2008, the provision for warranty cost is
immaterial.





Revenue
from software licenses that require significant customization, integration and
installation are recognized based on ASC 605-35-05 “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.  Revenues from set up fees are also recognized
over the related hosting contract term.





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;


26


·
            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.





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





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


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


·
            significant negative industry or
      economic trends.





When we determine that the carrying
value of goodwill may not be recoverable based upon the existence of one or more
of the above indicators of impairment, we measure this impairment based on the
implied fair value of the goodwill.  The implied fair value is derived from
the fair value of the whole unit to which the goodwill is related, determined
using projected discounted cash flow. We did not record an impairment charge
based on our reviews in 2007. In 2008 we recorded an impairment charge of $1.66
million. For 2009, no impairment charge was recorded.





Share Based Payments
.. The Company accounts for stock-based compensation in accordance with ASC
718.  ASC 718-10 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. ASC 718 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.


27


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 31,2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007Revenues:Software
      license fees
                                    
                                    
                                    9.8
                                    %
                                    
                                    
                                    13.6
                                    %
                                    
                                    
                                    18.9
                                    %Service
      Fees
                                    
                                    
                                    36.2
                                    
                                    
                                    
                                    41.4
                                    
                                    
                                    
                                    40.0Hosting
                                    
                                    
                                    20.4
                                    
                                    
                                    
                                    16.4
                                    
                                    
                                    
                                    14.7Maintenance
                                    
                                    
                                    33.5
                                    
                                    
                                    
                                    28.5
                                    
                                    
                                    
                                    26.3Hardware
      sales
                                    
                                    
                                    0.1
                                    
                                    
                                    
                                    0.1
                                    
                                    
                                    
                                    0.1Total
      revenues
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    100.0
                                    
                                    
                                    
                                    100.0Operating
      Expenses:Software
      license costs
                                    
                                    
                                    0.6
                                    
                                    
                                    
                                    0.2
                                    
                                    
                                    
                                    0.6Maintenance
      and service costs
                                    
                                    
                                    45.3
                                    
                                    
                                    
                                    44.4
                                    
                                    
                                    
                                    43.4Hardware
      Costs
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Research
      and development
                                    
                                    
                                    17.3
                                    
                                    
                                    
                                    18.1
                                    
                                    
                                    
                                    18.5Selling
      and marketing, net
                                    
                                    
                                    14.6
                                    
                                    
                                    
                                    16.7
                                    
                                    
                                    
                                    17.0General
      and administrative
                                    
                                    
                                    16.7
                                    
                                    
                                    
                                    14.1
                                    
                                    
                                    
                                    13.0Amortization
      of capitalized software development costs.
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    0.4Impairment
      of goodwill and other intangible assets
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1.7
                                    
                                    
                                    
                                    -Amortization
      of other acquired intangible assets
                                    
                                    
                                    1.7
                                    
                                    
                                    
                                    1.8
                                    
                                    
                                    
                                    1.3Provision
      for doubtful accounts
                                    
                                    
                                    0.3
                                    
                                    
                                    
                                    0.5
                                    
                                    
                                    
                                    (0.1
                                    )Total
      operating expenses
                                    
                                    
                                    96.5
                                    
                                    
                                    
                                    97.5
                                    
                                    
                                    
                                    94.1Operating
      income
                                    
                                    
                                    3.5
                                    
                                    
                                    
                                    2.5
                                    
                                    
                                    
                                    5.9Loss
      on Investments
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (0.6
                                    )
                                    
                                    
                                    -Financial
      income, net
                                    
                                    
                                    0.2
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2.1Income
      before income taxes
                                    
                                    
                                    3.7
                                    
                                    
                                    
                                    1.9
                                    
                                    
                                    
                                    8.0Income
      taxes
                                    
                                    
                                    (0.3
                                    )
                                    
                                    
                                    0.9
                                    
                                    
                                    
                                    1.2Net
      income
                                    
                                    
                                    4.0
                                    %
                                    
                                    
                                    1.0
                                    %
                                    
                                    
                                    6.8
                                    %





We note
in particular the impact on net income of the application of ASC 718, which
resulted in charges of $2.6 million in 2007, $3.0 million in 2008 and $2.8
million in 2009.


28


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:





2009
                        
                        
                        2008
                        
                        
                        2007Total
                        
                        
                        Total
                        
                        
                        TotalRevenues
                        
                        
                        Percentage
                        
                        
                        Revenues
                        
                        
                        Percentage
                        
                        
                        Revenues
                        
                        
                        PercentageIsrael
                        
                        $
                        461
                        
                        
                        
                        0.4
                        %
                        
                        $
                        1,108
                        
                        
                        
                        0.9
                        %
                        
                        $
                        1,331
                        
                        
                        
                        1.3
                        %U.S.A.
                        
                        
                        48,523
                        
                        
                        
                        41.2
                        
                        
                        
                        49,228
                        
                        
                        
                        40.7
                        
                        
                        
                        46,028
                        
                        
                        
                        44.0Switzerland
                        
                        
                        14,769
                        
                        
                        
                        12.5
                        
                        
                        
                        15,155
                        
                        
                        
                        12.5
                        
                        
                        
                        12,711
                        
                        
                        
                        12.1India
                        
                        
                        2,066
                        
                        
                        
                        1.8
                        
                        
                        
                        2,350
                        
                        
                        
                        1.9
                        
                        
                        
                        2,302
                        
                        
                        
                        2.2United
      Kingdom
                        
                        
                        19,304
                        
                        
                        
                        16.4
                        
                        
                        
                        17,758
                        
                        
                        
                        14.7
                        
                        
                        
                        19,966
                        
                        
                        
                        19.1Germany
                        
                        
                        4,987
                        
                        
                        
                        4.2
                        
                        
                        
                        3,990
                        
                        
                        
                        3.3
                        
                        
                        
                        2,611
                        
                        
                        
                        2.5Australia
                        
                        
                        7,026
                        
                        
                        
                        6.0
                        
                        
                        
                        5,938
                        
                        
                        
                        4.9
                        
                        
                        
                        2,839
                        
                        
                        
                        2.7Austria
                        
                        
                        3,822
                        
                        
                        
                        3.2
                        
                        
                        
                        3,615
                        
                        
                        
                        3.0
                        
                        
                        
                        61
                        
                        
                        
                        0.1Hong
      Kong
                        
                        
                        1,182
                        
                        
                        
                        1.0
                        
                        
                        
                        1,999
                        
                        
                        
                        1.7
                        
                        
                        
                        629
                        
                        
                        
                        0.6Other
                        
                        
                        15,617
                        
                        
                        
                        13.3
                        
                        
                        
                        19,896
                        
                        
                        
                        16.4
                        
                        
                        
                        16,156
                        
                        
                        
                        15.4$
                        117,757
                        
                        
                        
                        100
                        %
                        
                        $
                        121,037
                        
                        
                        
                        100
                        %
                        
                        $
                        104,634
                        
                        
                        
                        100
                        %





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





2009
                  
                  
                  2008
                  
                  
                  2007Cash
      management revenue
                  
                  $
                  26,380
                  
                  
                  $
                  27,914
                  
                  
                  $
                  24,460Operating
      income
                  
                  
                  868
                  
                  
                  
                  821
                  
                  
                  
                  1,057Payments
      revenue
                  
                  
                  69,573
                  
                  
                  
                  75,001
                  
                  
                  
                  65,460Operating
      income
                  
                  
                  15,967
                  
                  
                  
                  17,206
                  
                  
                  
                  17,672BBP
      revenue
                  
                  
                  21,804
                  
                  
                  
                  18,122
                  
                  
                  
                  14,714Operating
      income
                  
                  
                  1,210
                  
                  
                  
                  1,071
                  
                  
                  
                  1,108





While
cash management revenues continued to grow during 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. During 2009,
payments revenue decreased in the economic downturn, but operating income
decreased slightly on a percentile basis from 2008. Cash management revenues
declined in 2009 due to the impact of the economic downturn, but operating
income improved due to launch costs no longer being applicable. The growth in
payments revenues and operating income during 2007 and 2008 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.





Major
Customers





We
derived approximately 20.8% and 22.1% of our annual revenues, or approximately
$24.5 million and $26.7 million, from the license, consulting and maintenance
service fees earned in connection with agreements with three leading
international financial institutions in 2009 and 2008, 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. There are signs, however, that
the larger financial institutions are beginning to return to the marketplace to
address their needs.


29





Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008





Revenues.


Variance2008
                    
                    
                    2009
                    
                    Decrease
                    
                    
                    %Total
      Revenues
                    
                    $
                    121,037,000
                    
                    
                    
                    117,757,000
                    
                    
                    
                    3,280,000
                    
                    
                    
                    2.7
                    %





The
decrease in revenues was primarily attributable to $1.5 million decrease in cash
management products-related revenue, a $5.5 million decrease in revenue from our
payments business, mainly attributable to our Global PAYplus solution, partially
offset by a $1.1 million increase due to the acquisition of new business, and
higher revenue from BBP of $3.7 million, out of which $1.8 million was due to
the acquisition of a new business acquired in the fourth quarter of
2008.





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
2008 and 2009 software license fees is as follows:





Variance2008
                                      
                                      
                                      2009
                                      
                                      
                                      Decrease
                                      
                                      
                                      %Software
      License Fees
                                      
                                      $
                                      16,488,000
                                      
                                      
                                      $
                                      11,558,000
                                      
                                      
                                      $
                                      4,930,000
                                      
                                      
                                      
                                      29.9
                                      %





The
decrease in license fees was due to $2.1 million decrease in United States cash
management licenses, a $2.5 million decrease in license fees from our payments
segment and a $0.3 million decrease in BBP licenses.





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 we enter into a contract for a software
license.





A
comparison between our 2008 and 2009 maintenance and services fees is as
follows:





Variance2008
                                          
                                          
                                          2009
                                          
                                          
                                          Increase
                                          
                                          
                                          %Maintenance,
      Hosting and Services Fees
                                          
                                          $
                                          104,549,000
                                          
                                          
                                          $
                                          106,199,000
                                          
                                          
                                          $
                                          1,650,000
                                          
                                          
                                          
                                          1.6
                                          %





Our
service fees decreased by $7.6 million, due to a $7 million decrease in payments
mainly due to customers implementing our Global PAYplus solution or existing
customers seeking fewer additional services and a $1.2 million decrease in our
cash management services from new and existing customers, partially offset by a
$0.6 million increase in BBP services revenue.





Our
hosting fees increased by $4.2 million, consisting of an increase in our BBP
segment hosting fees of $2.9 million, out of which $1.1 million was due to the
acquisition of a new business in the fourth quarter of 2008, and a $1.0 million
increase in our cash management fees, out of which $0.6 million was due to the
acquisition of a new business in 2009, and a $0.3 million increase in
payments.





Our
maintenance fees increased by $5.0 million, which consisted of increases in
maintenance fees of $3.7 million in our payments segment and due to acquisitions
of a new business in the fourth quarter of 2008, $0.8 million in our cash
management segment and $0.5 million in our BBP segment.


30





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 2008 and 2009 software license
costs is as follows:





Variance2008
                                          
                                          
                                          2009
                                          
                                          
                                          Increase
                                          
                                          
                                          %Software
      License Costs
                                          
                                          $
                                          291,000
                                          
                                          
                                          $
                                          748,000
                                          
                                          
                                          $
                                          457,000
                                          
                                          
                                          
                                          157
                                          %





This
large increase relates solely to the presence of certain embedded third party
software component sales in conjunction with new licenses for our global
payments products.





Amortization of Other Acquired
Intangible Assets. A comparison between our 2008 and 2009 amortization of
other acquired intangible assets is as follows:





Variance2008
                                              
                                              
                                              2009
                                              
                                              
                                              Decrease
                                              
                                              
                                              %Amortization
      of Other Acquired Intangible Assets
                                              
                                              $
                                              2,167,000
                                              
                                              
                                              $
                                              2,028,000
                                              
                                              
                                              $
                                              139,000
                                              
                                              
                                              
                                              6.4
                                              %





The
decrease in amortization resulted from a decrease of $0.6 million attributable
to the completion of amortization of several intangible assets during 2008 which
was partially offset by amortization of the newly acquired Accountis, Synergy
and InterSoftware assets, which caused an increase in amortization of $0.46
million.





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 2008 and 2009 services costs is as follows:





Variance2008
                                              
                                              
                                              2009
                                              
                                              
                                              Decrease
                                              
                                              
                                              %Maintenance,
      Hosting and Services Costs
                                              
                                              $
                                              53,730,000
                                              
                                              
                                              $
                                              53,286,000
                                              
                                              
                                              $
                                              444,000
                                              
                                              
                                              
                                              0.1
                                              %





The above
result reflects an increase in depreciation expenses by $0.6 million, consistent
with increased revenues from hosting fees. This was offset by a decrease in
travel expenses of $1.0 million, which is consistent with the decrease in
services revenue.





Impairment of Goodwill and Related
Intangible Assets. A comparison between our 2008 and 2009 impairment of
goodwill is as follows:





Variance2008
                                        
                                        
                                        2009
                                        
                                        
                                        Decrease
                                        
                                        
                                        %Impairment
      of Goodwill and relatedintangible
      Assets
                                        
                                        $
                                        2,018,000
                                        
                                        
                                        $
                                        0
                                        
                                        
                                        $
                                        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’s related
intangible assets for a total amortized cost of $358,000. No impairment was
recorded for 2009.


31





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 2008 and 2009 software development expenses is as follows:





Variance2008
                                          
                                          
                                          2009
                                          
                                          
                                          Decrease
                                          
                                          
                                          %Software
      Development
                                          
                                          $
                                          21,849,000
                                          
                                          
                                          $
                                          20,422,000
                                          
                                          
                                          $
                                          1,427,000
                                          
                                          
                                          
                                          6.5
                                          %





We did
not capitalize any software development costs in 2009 or 2008 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
decrease in software development expenses from 2008 to 2009 derived mainly from
a decrease in our workforce personnel as part of cost savings measures, and the
weakness of the NIS vs. the U.S. dollar that resulted in lower salary expenses.
This was partially offset by expenses related to the additional personnel that
we added as a result of the acquisition of Accounts, Synergy and
Intersoftware.





Selling and Marketing. A
comparison between our 2008 and 2009 selling and marketing expenses is as
follows:





Variance2008
                                        
                                        
                                        2009
                                        
                                        
                                        Decrease
                                        
                                        
                                        %Selling
      and Marketing
                                        
                                        $
                                        20,130,000
                                        
                                        
                                        $
                                        17,234,000
                                        
                                        
                                        $
                                        2,896,00
                                        
                                        
                                        
                                        14.4
                                        %





The
decrease in selling and marketing expenses was primarily due to (i) a $1.6
million decrease in sales commissions due to a decrease in new sales, and (ii) a
decrease in salary expenses for sales and marketing employees outside the United
States due to the weakness of GBP and Euro currencies vs. the U.S.
Dollar.





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 2008 and 2009 provision for doubtful accounts
is as follows:





Variance2008
                                            
                                            
                                            2009
                                            
                                            
                                            Decrease
                                            
                                            
                                            %Provision
      for Doubtful Accounts
                                            
                                            $
                                            753,000
                                            
                                            
                                            $
                                            333,000
                                            
                                            
                                            $
                                            420,000
                                            
                                            
                                            
                                            55.8
                                            %





The
decrease in doubtful accounts resulted from the decrease in uncertainty in the
market condition of the financial services industry.





General and Administrative. A
comparison between our 2008 and 2009 general and administrative expenses is as
follows:





Variance2008
                                        
                                        
                                        2009
                                        
                                        
                                        Increase
                                        
                                        
                                        %General
      and Administrative
                                        
                                        $
                                        17,115,000
                                        
                                        
                                        $
                                        19,662,000
                                        
                                        
                                        $
                                        2,547,000
                                        
                                        
                                        
                                        14.9
                                        %





The
increase in general and administrative expenses was primarily due to (i) the
acquisition of Accountis, Synergy and Intersoftware during 2009 and 2008, and
(ii) increased salary expenses due to new hiring and higher
bonuses.


32





Financial Income, Net. A
comparison between our 2008 and 2009 financial income, net is as
follows:





Variance2008
                                          
                                          
                                          2009
                                          
                                          
                                          Increase
                                          
                                          
                                          %Financial
      Income, net
                                          
                                          $
                                          48,000
                                          
                                          
                                          $
                                          232,000
                                          
                                          
                                          $
                                          184,000
                                          
                                          
                                          
                                          383
                                          %





The
increase in net financial income resulted primarily from a decrease in foreign
currency fluctuations notwithstanding lower average interest income on the
financial instruments that we held in 2009 compared to 2008 due to (i) maturity
of long term marketable securities and (ii) generally lower short term
rates.





Income Taxes. A comparison
between our 2008 and 2009 income tax expense is as follows:





Variance2008
                                        
                                        
                                        2009
                                        
                                        
                                        Decrease
                                        
                                        
                                        %Income
      Taxes
                                        
                                        $
                                        1,100,000
                                        
                                        
                                        $
                                        (397,000
                                        )
                                        
                                        $
                                        1,497.000
                                        
                                        
                                        
                                        136
                                        %





The
decrease in income tax expense derived from increase in deferred tax assets
(mainly in Israel and the United States) of $1.0 million and a decrease in tax
expense of $0.5 million from operations.





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, and (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
                                          %


33





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.





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 U.S.
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 CapitalizedSoftware
      Development Costs
                                        
                                        $
                                        394,000
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        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.


34





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:





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
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      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 U.S. 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.


35





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).





Impact
of Inflation and Currency Fluctuations.




For a
discussion of the impact of inflation and foreign currency fluctuations upon our
results, and related hedging instruments that we have utilized with respect
thereto, please see the risk factor entitled “We may be
adversely affected if the rate of inflation in Israel exceeds the rate of
devaluation (if any) of the New Israeli Shekel against the dollar” in the
“Risk Factors” subsection of Item 3, “Key Information,” above and the discussion
below in Item 11, “Quantitative and Qualitative Disclosures About Market Risk –
“Effects of Government
Regulations and Location on our Business.




For a
discussion of the effects of Israeli governmental regulation and our location in
Israel on our business, see the “Risks Related to Our Location in Israel” in
Item 3.D above, the section entitled “Effective Corporate Tax Rate” in Item 5.B
below, and “Israeli Income Tax Considerations” in Item 10
below.


36





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 $0.8 million
from the exercise of employee options in 2009. As of December 31, 2009, working
capital was $49.5 million, which included cash and cash equivalents, short term
investments and marketable securities of $42 million.





Cash flows from operating
activities. Net cash provided by operating activities amounted to $17.3
million for the year ended December 31, 2009 as compared to net cash provided by
operating activities of $13.8 million for the year ended December 31, 2008 and
$17.3 million for the year ended December 31, 2007.





This
increase of $3.5 million from 2008 to 2009 reflects an increase in our net
income of $3.4 million, a decrease in trade receivables, net, other account
receivables and prepaid expenses of $12.6 million, an increase in depreciation
and amortization, stock option compensation and accrued interest on marketable
securities of $0.1 million, an increase of $0.2 million in accrued severance pay
offset by a decrease of impairments of marketable securities, goodwill and other
intangible assets of $2.7 million, a decrease in trade payables, deferred
revenue, other payable and accrued expenses of $9.0 million, in the aggregate,
and an increase in deferred taxes of $1.1 million compared to 2008. The decrease
in operating cash flow from $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
accounts 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 payables and accrued
expenses of $12.3 million, in the aggregate, compared to 2007.





Cash flows from investing
activities. Net cash used in investing activities amounted to $18.9
million for the year ended December 31, 2009 as compared to $14.8 million for
the year ended December 31, 2008 and $17.5 million for the year ended December
31, 2007. During 2009, cash was used to fund the acquisitions of InterSoftware
as well as to pay additional amounts pursuant to the terms of the acquisition
agreements with Accountis and Fundtech GmbH, respectively, in the aggregate
amount of $5.8 million. Cash used in the purchase of property and equipment
decreased by $3.0 million to $3.6 million for the year ended December 31, 2009
from $6.6 million for the year ended December 31, 2008. Net cash used to
purchase marketable securities amounted to $10.3 million for the year ended
December 31, 2009 as compared to $8.9 million net cashprovidedfromredemption of marketable securities
for the year ended December 31, 2008. During 2008 cash was used to fund the
acquisitions of Synergy, Accountis and Troy as well as to pay additional amounts
pursuant to the terms of the acquisition agreements with Radius Partners and
Fundtech GmbH, respectively, in the aggregate amount of $17.2 million. Purchases
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.
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 2010, our
anticipated capital expenditures are $5.5 million - See Item 4, “Information on
the Company”, in the subsection titled “History and Development of the
Company.”





Cash flows from financing
activities. Net cash used in financing activities was $7.8 million for
the year ended December 31, 2009 as compared to net cash provided by financing
activities of $0.8 million for the year ended December 31, 2008 and as compared
to net cash provided by financing activities of $2.3 million in the year ended
December 31, 2007. The increase to cash used in financing activities from 2008
to 2009 was primarily due to an increase in the aggregate value of Ordinary
Shares purchased by the Company from $0.7 million in the year ended December 31,
2008 to $8.5 million in the year ended December 31, 2009. The decrease in cash
provided by financing activities from 2007 to 2008 was primarily due to a
decrease in cash proceeds from the exerciseof stock options of $0.9
million and the use, in 2008, of $0.7 million of cash for the repurchase of
treasury stock.





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.
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, 2009, the Company had purchased a total of 1,286,056
shares, of which 883,056 shares were repurchased in 2009 (for a total cost of
approximately $8.5 million in 2009).


37





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.





Borrowings
and Other Indebtedness





We have
not relied upon bank or other debt financings to fund our working capital
requirements and have no amounts outstanding under borrowing facilities as of
the date of filing of the annual report.





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, 2009, we had net operating loss (“NOL”) carry forwards of
approximately $43 million and $21 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 included elsewhere herein.





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





During
2009, we expended $20.5 million in current expense charges related to the
development of our software with no capitalized costs. During 2008 and 2007,
$21.8 million and $19.3 million, respectively, in current expense charges were
incurred by us for our software, with no capitalized costs. There were no grants
by the Office of the Chief Scientist to us in 2007, 2008 or 2009.





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, profitability and liquidity 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.


38





F.
            Tabular Disclosure of
      Contractual Obligations





The
following table of our material contractual obligations as of December 31, 2009,
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
                                            
                                            $
                                            23,563,000
                                            
                                            
                                            $
                                            4,060,000
                                            
                                            
                                            $
                                            10,937,000
                                            
                                            
                                            $
                                            8,566,000
                                            
                                            
                                            $
                                            -





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
                        
                        53
                        
                        Chairman
      of the Board of DirectorsGideon
      Argov
                        
                        53
                        
                        Vice-Chairman
      of the Board of DirectorsReuven
      Ben Menachem
                        
                        49
                        
                        Chief
      Executive Officer, DirectorRobert
      Cobuzzi
                        
                        68
                        
                        DirectorGerald
      Dogon
                        
                        70
                        
                        DirectorYaffa
      Krindel
                        
                        55
                        
                        DirectorStanley
      Stern
                        
                        53
                        
                        DirectorGil
      Weiser
                        
                        68
                        
                        DirectorPeter
      Radcliffe
                        
                        60
                        
                        DirectorMichael
      Sgroe
                        
                        54
                        
                        President
      & Chief Operating OfficerJoseph
      J. Aulenti
                        
                        63
                        
                        Executive
      Vice President, General Counsel and SecretaryYoram
      Bibring
                        
                        52
                        
                        Executive
      Vice President, Chief Financial OfficerJoseph
      P. Mazzetti
                        
                        69
                        
                        Executive
      Vice President, Corporate
Development




Avi
Fischerwas 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.


39





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.





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 has more than 25 years experience in management and operation,
with executive posts at corporate, academic and financial entities. Mr. Weiser
presently serves as the CEO of Orsus Solutions since August 2006. He served as
the Vice President of Orama, an international investment banking group from 2000
to 2001. From 1976 until 1993, Mr. Weiser served as CEO 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 CEO of Hewlett Packard (Israel) located in Tel Aviv and CMS
Corporation, distributor of Hewlett Packard products and services. Mr. Weiser
has and continues to hold significant public positions. Mr. Weiser currently
serves on the boards of Clicksoftware (CKSW), a publicly traded company and is
on the board of the following private companies: Ospc and Infocall. He
previously served on the board of other high tech companies: Formula, BBP,
Optibase, Tescom, Safebit, and Regisoft and others. He also served as a director
of the Tel Aviv Stock Exchange from 2002 to 2004. Mr. Weiser has served as
Chairman of the Multinational Companies Forum, 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 Bachelor of Science from Technion,
Israel Institute of Technology in Haifa as well as a Master of Science 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.


40





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.





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.


41





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.




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 56.1% beneficial ownership of our outstanding share capital) as of
May 3, 2010. 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 our 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 that 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, 2009 to our
directors and executive officers as a group was $2,242,398in 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
$85,830
for 2009. There were no amounts set aside or accrued to provide for pension,
retirement or similar benefits to our directors and executive officers in
2009.





In
December of 2009, our shareholders approved payment of an annual retainer of
$19,000 to non-employee directors for future annual periods, beginning January
1, 2010, payable on a quarterly basis. In addition, shareholders approved that
the Vice-Chairman of the Board of Directors shall be entitled to an additional
annual payment of $3,500, payable on a quarterly basis, 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 $3,500
payable on a quarterly basis, and the Chairmen of each other Committee of the
Board of Directors (provided that such Chairmen are not external directors)
shall be entitled to an additional annual payment of $2,000 payable on a
quarterly basis. In addition, each director shall be paid a meeting fee for
attendance at each meeting of either the Board of Directors or of any Committee
thereof. The fee for in-person attendance at any such meeting shall be $1,000
per meeting, while the fee for telephonic attendance shall be $500 per meeting.
The cash fees payable to any individual non-employee directors on an annual
basis are subject to an overall limitation of $30,000. The Chairman of the Board
will not be paid any additional fees for serving in such role, but will still
qualify for fees based on attendance at meetings. The shareholders also approved
the grant of 2,250 restricted shares annually to each non-employee director for
his or her services, other than the Chairman of the Board of Directors, who has
waived such entitlement.


42





Directors Compensation





The sole
cash compensation paid to directors for attending meetings of the Board of
Directors or Committee meetings of the Board of Directors is the retainer, Vice
Chairman’s and Chairman’s fees and meeting fees described above. We also
reimburse directors for their reasonable travel and other expenses related to
attendance at meetings. 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. Subject to shareholder approval for
each of the proposed grants, directors also receive options to purchase Ordinary
Shares or restricted share grants as described above (on a prospective basis)
and below (with respect to 2009).





Option
or Restricted Share Grants in Last Fiscal Year





During
2009, options to purchase 207,500 Ordinary Shares and 18,000 shares of
restricted stock were granted to our directors and executive officers. The
exercise price of these options was $11.93 per share, with a vesting period over
one to three years. 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
                      
                      2010
      Annual MeetingGideon
      Argov (2)(5)
                      
                      Vice
      Chairman
                      
                      February
      17, 2009
                      
                      2010
      Annual MeetingReuven
      Ben Menachem
                      
                      Chief
      Executive Officer, Director
                      
                      October
      28, 2002
                      
                      2010
      Annual MeetingStanley
      Stern (2)(3)
                      
                      Director
                      
                      July
      22, 2003
                      
                      2010
      Annual MeetingYaffa
      Krindel (2)(4)
                      
                      Director
                      
                      February
      12, 2004
                      
                      2010
      Annual MeetingGil
      Weiser (2)(4)(5)
                      
                      Director
                      
                      October
      28, 2002
                      
                      2010
      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
                      
                      2010
      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.


43





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.





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 in the rules of the
SEC that has the requisite financial sophistication as defined in the NASDAQ
Listing 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.


44


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 above 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 and either (i) such majority must include at least one-third (1/3) of
the shares of non-controlling shareholders voting on the matter, or (ii) 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, Avi Fischer, 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.





Board
Committees





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.


45




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 monitor 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, 2009 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 an audit committee financial expert under the
Sarbanes-Oxley Act of 2002. For 2010 the Audit Committee will consist once again
of Stanley Stern, Chairman, Robert Cobuzzi and Gerald Dogon and Mr. Cobuzzi has
once again been designated as the audit committee 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, 2009 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 2010, 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 2009 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 2010,
the Nominating Committee will consist once again of Gil Weiser, Chairman, Gideon
Argov and Gerald Dogon.


46


Integration
Committee





During
2009, the Board of Directors established an Integration Committee consisting of
Peter Radcliffe, Chairman, Reuven Ben Menachem, Gideon Argov and Gil Weiser in
order to assist management in identifying potential synergies amongst our
various operating entities. For 2010, the Integration Committee will consist
once again of Peter Radcliffe, Chairman, Reuven Ben Menachem, Gideon Argov and
Gil Weiser.




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 Yarel+ Partners, as
our internal auditor.





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 (when
appropriate). 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.


47


Employees





The
following table summarizes the main category of activity and geographic location
of our employees as of December 31, 2009, 2008 and 2007
respectively:





As
      of December 31, 2009Software
                                    Development
                                  
                                  Operations
                                  
                                  Sales and
                                    Marketing
                                  
                                  Administration
                                  
                                  Total
                                    EmployeesUnited
      States
                                  
                                  
                                  128
                                  
                                  
                                  70
                                  
                                  
                                  40
                                  
                                  
                                  41
                                  
                                  
                                  257Israel
                                  
                                  
                                  79
                                  
                                  
                                  118
                                  
                                  
                                  3
                                  
                                  
                                  13
                                  
                                  
                                  213Switzerland
                                  
                                  
                                  33
                                  
                                  
                                  19
                                  
                                  
                                  11
                                  
                                  
                                  10
                                  
                                  
                                  73United
      Kingdom
                                  
                                  
                                  21
                                  
                                  
                                  20
                                  
                                  
                                  9
                                  
                                  
                                  16
                                  
                                  
                                  66Australia
                                  
                                  
                                  4
                                  
                                  
                                  0
                                  
                                  
                                  1
                                  
                                  
                                  0
                                  
                                  
                                  5India
                                  
                                  
                                  215
                                  
                                  
                                  110
                                  
                                  
                                  8
                                  
                                  
                                  35
                                  
                                  
                                  368Germany
                                  
                                  
                                  6
                                  
                                  
                                  4
                                  
                                  
                                  2
                                  
                                  
                                  3
                                  
                                  
                                  15





As
      of December 31, 2008Software
                                    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





As of December 31, 2007Software
                          Development
                        
                        Operations
                        
                        Sales and
                          Marketing
                        
                        Administration
                        
                        Total
                          EmployeesUnited
      States
                        
                        
                        69
                        
                        
                        143
                        
                        
                        38
                        
                        
                        25
                        
                        
                        275Israel
                        
                        
                        58
                        
                        
                        97
                        
                        
                        2
                        
                        
                        8
                        
                        
                        165Switzerland
                        
                        
                        18
                        
                        
                        29
                        
                        
                        11
                        
                        
                        11
                        
                        
                        69United
      Kingdom
                        
                        
                        0
                        
                        
                        13
                        
                        
                        5
                        
                        
                        0
                        
                        
                        18Australia
                        
                        
                        0
                        
                        
                        2
                        
                        
                        0
                        
                        
                        0
                        
                        
                        2India
                        
                        
                        117
                        
                        
                        208
                        
                        
                        13
                        
                        
                        39
                        
                        
                        377Germany
                        
                        
                        4
                        
                        
                        6
                        
                        
                        2
                        
                        
                        3
                        
                        
                        15





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.


48


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.





Share Ownership of Management and Directors





Security
Ownership of Directors, Senior Management and Certain Key Employees





As of May
3, 2010, 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
              
              419,966
      (2.7%)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
              
              289,836
      (1.8%)Total
              
              1,177,151
      (7.5%)





(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 vesting (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 15,691,369 Ordinary Shares outstanding as
of May 3, 2010. 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.


49


As of May
3, 2010, options to purchase up to 1,180,571 Ordinary Shares were outstanding
and 562,349 restricted shares have been granted to our directors and executive
employees under our 2005 Plans. The weighted average exercise price of such
options was $8.39 per share. Among such options and restricted shares, options
to purchase 687,400 Ordinary Shares and 247,425 Restricted Shares granted to our
directors and executive employees are currently exercisable or will become
exercisable within 60 days of May 3, 2010.





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.





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, 2009, an aggregate of
1,752,210 of the options and restricted shares granted under the Company Option
Plans remained outstanding, 1,710,315 of the options granted had been exercised,
and 402,578 shares (including both restricted shares and shares underlying
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 3, 2010, 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. As of May 3, 2010, no options remain outstanding under the
Directors’ Option Plan.





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 May 3, 2010, 1,099,684 restricted shares have been granted under the 2005
Plans. As of May 3, 2010, 1,099,684 restricted shares and 562,500 options have
been granted under the 2005 Plans.


50


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 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.





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 May 3, 2010, 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 Form 20-F
promulgated by the SEC and include any Ordinary Shares over which a person
possesses sole or shared voting or investment power, or the right to receive the
economic benefit of ownership, or for which a person has the right to acquire
any such beneficial ownership at any time within 60 days. Applicable percentage
ownership in the table set forth below is based on 15,691,369 Ordinary Shares
outstanding as of May 3, 2010.





NAME OF BENEFICIAL OWNER
                      
                      NUMBER OF
                        SHARES
                        BENEFICIALLY
                        OWNED
                      
                      
                      PERCENTAGE
                        BENEFICIALLY
                        OWNEDClal
      Industries and Investments Ltd.(1)
                      
                      
                      8,797,398
                      
                      
                      
                      56.1
                      %Cannell
      Capital LLC(2)
                      
                      
                      904,809
                      
                      
                      
                      5.8
                      %All
      directors and executive officers as a group (13 persons)
                      
                      
                      1,177,151
                      
                      
                      
                      7.5
                      %





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 May 3, 2010, IDBH is a public company
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
37.22% of the equity and 37.22% 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 13.27% of the equity and 13.27% 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 13.25% of the equity
and 13.25% 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 17.43% of the equity
and 17.43% voting power in IDBH; (b) Ganden holds a further 6.3% of the equity
in IDBH; (c) Manor Holdings B.A. Ltd., the parent company of Manor, holds 2.99%
of the equity of and voting power in IDBH; (d) Avraham Livnat Ltd., the parent
company of Livnat, holds 2.99% 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 4.17% of the equity and voting power of IDBH.





51




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.





2.
            As of May 3, 2010, Anegada Master
      Fund Limited (“Anegada”), The Cuttyhunk Master Portfolio (“Cuttyhunk”),
      Tonga Partners, L.P. (“Tonga Partners, L.P. (“Tonga”) and Tonga Partners
      QP, L.P. (“Tonga QP”, and Tristan Partners, L.P. (“Tristan” and
      collectively with Anegada, Cuttyhunk, Tonga and Tonga QP, the “Funds”)
      owned in the aggregate 904,809 of our Ordinary Shares, Cannell Capital LLC
      acts as the investment adviser to Anegada, the investment sub-advisor to
      Cuttyhunk, and is
      the general partner of and investment adviser to Tonga, Tonga QP and
      Tristan. 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 904,809 shares, or approximately 5.6% of the
      shares deemed issued and
outstanding.





16,944,466
of our Ordinary Shares (of which 13,067,941 are in CEDE accounts), constituting
77% 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 64% 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 and decreased
once again to 904,809 (5.7%) as of December 31, 2009.





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





Related
Party Transactions





New Israeli Lease





On August 17, 2009, we entered into a
lease agreement with respect to our new Herzliya, Israel facilities. Our
landlord with respect to such leased facilities, Gav Yam Properties Ltd., is an
Israeli limited company that is affiliated with the IDB group of companies,
which control our controlling shareholder, Clal Industries and Investments Ltd.
The term of the lease is ten (10) years, and our total current monthly and
yearly costs under the lease (including rent, maintenance and parking rent) are
approximately 368,594 NIS and 4,423,128 NIS, respectively (approximately $81,817
and $981,626, respectively, based on an exchange rate of NIS 3.71 for each U.S.
dollar as of May 3, 2010).


52


Our entry into the transaction followed
upon a careful, detailed financial analysis of competing facilities into which
we considered moving upon the expiration of our then-current Israeli lease in
Ramat Gan, Israel. We examined various alternatives for a period of three
months, and, after looking at such alternatives, we entered into preliminary
negotiations with five landlords and advanced negotiations with three landlords
prior to choosing the new Herzliya facilities. Based on such analysis, our Board
of Directors determined that the new Herzliya facilities offered the best value
(the lowest rent for comparable space, saving us approximately $170,000 per
year) relative to the other locations and also offered flexibility as to future
growth. Our Board of Directors (with the exception of Avi Fischer, who did not
participate in discussions or the relevant vote, due to his affiliation with the
IDB group of companies) approved the transaction in accordance with the
Companies Law, which allows for mere board approval for a related party
transaction that (i) is in a company’s best interests (based on the financial
analysis that we conducted) and (ii) is not an extraordinary transaction (which
our Israeli legal counsel determined to be true, given that the lease merely
replaced our existing facilities with new facilities at a less expensive cost
and did not therefore have a material effect on our profitability, properties or
liabilities).





A copy of our new Israeli lease
agreement has been filed as an exhibit to this annual report.





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 that offered by every other
bidder, and we therefore accepted it for the current, 2009-2010 coverage 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.





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).


53


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, 2007, 2008 and 2009, 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-41





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.


54


Significant
Changes.





Since the date of our consolidated financial statements included in this
annual report, there has not been a significant change in our Company other than
as described (if at all) in the notes to such financial
statements.





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:2005
                    
                    
                    11.23
                    
                    
                    
                    8.092006
                    
                    
                    12.94
                    
                    
                    
                    8.722007
                    
                    
                    17.78
                    
                    
                    
                    11.332008
                    
                    
                    15.20
                    
                    
                    
                    6.142009
                    
                    
                    14.24
                    
                    
                    
                    5.11Quarterly
      information for two most recent years and subsequent
    quarters:2008First
      Quarter
                    
                    
                    13.37
                    
                    
                    
                    9.68Second
      Quarter
                    
                    
                    14.85
                    
                    
                    
                    11.51Third
      Quarter
                    
                    
                    15.20
                    
                    
                    
                    13.01Fourth
      Quarter
                    
                    
                    14.15
                    
                    
                    
                    6.142009First
      Quarter
                    
                    
                    8.52
                    
                    
                    
                    5.11Second
      Quarter
                    
                    
                    10.12
                    
                    
                    
                    8.01Third
      Quarter
                    
                    
                    12.00
                    
                    
                    
                    8.33Fourth
      Quarter
                    
                    
                    14.24
                    
                    
                    
                    11.472010First
      Quarter
                    
                    
                    14.21
                    
                    
                    
                    12.63Most
      recent six monthsNovember
      2009
                    
                    
                    13.43
                    
                    
                    
                    11.81December
      2009
                    
                    
                    13.00
                    
                    
                    
                    11.93January
      2010
                    
                    
                    14.21
                    
                    
                    
                    12.79February
      2010
                    
                    
                    13.98
                    
                    
                    
                    12.63March
      2010
                    
                    
                    14.00
                    
                    
                    
                    12.82April
      2010
                    
                    
                    14.04
                    
                    
                    
                    13.00





On May 3,
2010, the last closing sale price of the Ordinary Shares, as reported by the
NASDAQ Global Market, was $13.80 per share. As of May 3, 2010, we had 80
shareholders of record. We believe that the number of beneficial owners of our
Ordinary Shares is approximately 1,900.


55


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:2005
                                      NIS
                                      
                                      50.77
                                      
                                      
                                      NIS
                                      
                                      
                                      36.102006
                                      
                                      
                                      58.88
                                      
                                      
                                      
                                      
                                      
                                      39.212007
                                      
                                      
                                      71.65
                                      
                                      
                                      
                                      
                                      
                                      37.482008
                                      
                                      
                                      53.93
                                      
                                      
                                      
                                      
                                      
                                      23.572009
                                      
                                      
                                      53.86
                                      
                                      
                                      
                                      
                                      
                                      21.23Quarterly
      information for two most recent years and subsequent
    quarters:2008First
      Quarter
                                      NIS
                                      
                                      51.52
                                      
                                      
                                      NIS
                                      
                                      
                                      37.48Second
      Quarter
                                      
                                      
                                      49.90
                                      
                                      
                                      
                                      
                                      
                                      38.68Third
      Quarter
                                      
                                      
                                      53.93
                                      
                                      
                                      
                                      
                                      
                                      42.31Fourth
      Quarter
                                      
                                      
                                      46.10
                                      
                                      
                                      
                                      
                                      
                                      23.572009First
      Quarter
                                      NIS
                                      
                                      34.99
                                      
                                      
                                      
                                      
                                      
                                      21.23Second
      Quarter
                                      
                                      
                                      40.05
                                      
                                      
                                      
                                      
                                      
                                      34.64Third
      Quarter
                                      
                                      
                                      45.03
                                      
                                      
                                      
                                      
                                      
                                      33.40Fourth
      Quarter
                                      
                                      
                                      53.86
                                      
                                      
                                      
                                      
                                      
                                      43.212010First
      Quarter
                                      
                                      
                                      53.00
                                      
                                      
                                      
                                      
                                      
                                      47.04Most
      recent six monthsNovember
      2009
                                      
                                      
                                      51.82
                                      
                                      
                                      
                                      
                                      
                                      45.19December
      2009
                                      
                                      
                                      49.11
                                      
                                      
                                      
                                      
                                      
                                      45.75January
      2010
                                      
                                      
                                      51.96
                                      
                                      
                                      
                                      
                                      
                                      47.04February
      2010
                                      
                                      
                                      53.22
                                      
                                      
                                      
                                      
                                      
                                      47.66March
      2010
                                      
                                      
                                      53.00
                                      
                                      
                                      
                                      
                                      
                                      48.11April
      2010
                                      
                                      
                                      52.65
                                      
                                      
                                      
                                      
                                      
                                      48.38





As
of May 3, 2010, the exchange rate of the NIS to the U.S. Dollar was $1 = 3.71
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.


56


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.





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.





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





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.





Upon
liquidation, all available surpluses, after payments of all debts, shall be
distributed to the holders of our Ordinary Shares on a pro-rata
basis.





57




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.





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.


58


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





During
the past two years, we have not been party to any contracts that have been
material to our business and that were or had been entered into outside of the
ordinary course of business.





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.





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 does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to each U.S. Holder’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.


59


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.





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.


60


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 and 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.





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. 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.





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 certain individuals trusts and estates of 15% 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”), certain gains
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 certain
limitations.





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 a 10% U.S. Holder, gain from such sale or exchange of our
Ordinary Shares will generally be 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.


61


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 2009.





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, in any taxable
year in which we are a PFIC, the U.S. Holder would be taxed currently on its pro
rata share of our ordinary earnings and net capital gain (subject to a separate
election to defer payment of taxes, which deferral is subject to an interest
charge). Special rules apply if a U.S. Holder makes a QEF election after the
first year in its holding period in which we are a PFIC. We have agreed to
supply U.S. Holders with the information needed to report income and gain under
a QEF election if we are a PFIC.





As
another alternative to the tax treatment described above, in any taxable year in
which we are a PFIC, 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 tax 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, 2009.
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 2010 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 2009, 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.





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
the mark-to market election.





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





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


62


·
            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 (currently 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 at the rate of 26% for the year 2009 and
are subject to corporate tax at the rate of 25% for the year 2010. Corporate tax
rates, which were reduced from a rate of 31% for the 2006 tax year, to a rate of
29% for the 2007 tax year, 27% for the 2008 tax year, 26% for the 2009 tax year
and 25% for the 2010 tax year, will further decrease to 24% in 2011, 23% in
2012, 22% in 2013, 21% in 2014, 20% in 2015 and 18% in 2016 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.




Tax
Benefits under the Law for the Encouragement of Industry (Taxes), 5672 -
1969




We
believe that we currently qualify as an industrial company within the definition
of the Law for the Encouragement of Industry (Taxes), 5672-1969, 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,
determined in NIS (exclusive of income from specified government loans, capital
gains, interest and dividends) is derived from an industrial enterprise owned by
it. An industrial enterprise is defined as an enterprise whose major activity in
a given tax year is industrial production activity.





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





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


63


·
            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 on which 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 or that we will continue to qualify as an industrial company or be able to
take advantage of any of the benefits described above under the Industry
Encouragement Law in the future.





Law
for the Encouragement of Capital Investments, 5719- 1959




The Law
for Encouragement of Capital Investments, 5719-1959, which is referred to below
as the Capital Investments Law, provides that a proposed capital investment in a
production facility or other eligible assets may, upon application to the
Israeli Investment Center of the Ministry of Industry and Commerce (the
“Investment Center”), be designated as an “Approved Enterprise.” Each
certificate of approval for an Approved Enterprise relates to a specific
investment program in the Approved Enterprise, delineated both by the financial
scope of the investment and by the physical characteristics of the facility or
other asset. An Approved Enterprise is entitled to certain benefits, including
Israeli government cash grants, state-guaranteed loans and tax
benefits.




The tax
benefits available under any instrument of approval relate only to taxable
profits attributable to the specific program and are contingent upon meeting the
criteria set out in the instrument of approval. If a company has more than one
approval or only a portion of its capital investments are approved, its
effective tax rate is the weighted average of the various applicable tax rates,
excluding any tax-exempt income. Subject to applicable provisions concerning
income under the alternative package of benefits, if a company with one or more
approvals distributes dividends, the dividends are deemed attributable to the
entire company.




The
Investment Law was significantly amended effective on April 1, 2005. Tax
benefits granted in accordance with the provisions of the Investment Law prior
to its revision remain in force, but any benefits granted subsequently are
subject to the provisions of the amended Investment Law. Therefore, the
following discussion is a summary of the Investment Law prior to its amendment
as well as the relevant changes contained in the new legislation. As explained
below, following the amendment of the Investment Law, companies may receive tax
benefits under the law without applying for an Approved Enterprise
status.




Tax
benefits prior to April 2005 Amendment




Before
April 1, 2005, an Approved Enterprise was entitled to receive a grant from the
government of Israel or an alternative package of tax benefits, which we refer
to as alternative benefits.




Taxable
income derived from an Approved Enterprise under the Capital Investments Law
grants program is subject to tax at the maximum rate of 25%, rather than the
regular corporate tax rate, for the benefit period. That income is eligible for
further reductions in tax rates depending on the percentage of the foreign
investment in our share capital. The tax rate is 20% if the foreign investment
is 49% or more but less than 74%, 15% if the foreign investment is 74% or more
but less than 90%, and 10% if the foreign investment is 90% or more. The lowest
level of foreign investment during the year will be used to determine the
relevant tax rate for that year. These tax benefits are granted for a limited
period not exceeding 7 years, or 10 years for a company whose foreign investment
level exceeds 25%, from the first year in which the Approved Enterprise has
taxable income, after the year in which production commenced (as determined by
the Israeli Investment Center of the Ministry of Industry and Commerce, or the
Investment Center). The period of benefits may in no event, however, exceed the
lesser of 12 years from the year in which the production commenced (as
determined by the Investment Center) or 14 years from the year of receipt of
Approved Enterprise status, whichever is earlier. The year’s limitation does not
apply to the exemption period.


64




An
Approved Enterprise may elect to forego any entitlement to the grants otherwise
available under the Capital Investments Law and, in lieu of the foregoing, may
participate in an Alternative Benefits Program. Under the Alternative Benefits
Program, a company’s undistributed income derived from an Approved Enterprise
will be exempt from company tax for a period of between 2 and 10 years from the
first year of taxable income, depending on the geographic location of the
Approved Enterprise within Israel, and the company will be eligible for a
reduced tax rate of 10%-25% for an additional five to eight years, depending on
the extent of foreign investment in the company. There can be no assurance that
the current benefit programs will continue to be available or that we will
continue to qualify for benefits under the current programs.




Dividends
paid out of income generated by an Approved Enterprise (or out of dividends
received from a company whose income is generated by an Approved Enterprise) are
generally subject to withholding tax at the rate of 15%, or at the lower rate
under an applicable tax treaty. This withholding tax is deductible at source by
the Approved Enterprise. The 15% tax rate is limited to dividends and
distributions out of income derived during the benefits period and actually paid
at any time up to twelve years thereafter. Under the Investments Law, a company
that has elected the alternative package of benefits is not obligated to
distribute retained profits, and may generally decide from which year’s profits
to declare dividends.




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




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





Under the
benefits that we receive from these programs, our undistributed income derived
from an Approved Enterprise is exempt from corporate tax for two years from the
year during which we first derive taxable income under the program, and we are
then eligible for a reduced tax rate for an additional eight-year period . Alternative benefits are
available to us until the earliest of (i) 7 years commencing with the year in
which the Approved Enterprise first generates taxable income, (ii) 12 years from
commencement of production or (iii) 14 years from the date of
approval.




Tax
benefits Subsequent to the April 2005 Amendment




On April
1, 2005, the Capital Investments Law was significantly amended. This amendment
applies to new investment programs and investment programs commencing after
2004, and does not apply to investment programs approved prior to December 31,
2004. The amendment provides that terms and benefits included in any certificate
of approval that was granted before the amendment came into effect will remain
subject to the provisions of the Capital Investments Law as they were on the
date of such approval. Furthermore, the Investment Center will continue to grant
Approved Enterprise status to qualifying investments. However, the amendment
limits the scope of enterprises that may be approved by the Investment Center by
setting criteria for the approval of a facility as an Approved Enterprise, such
as provisions generally requiring that at least 25% of the Approved Enterprise’s
income will be derived from export.




The
amendment provides that Approved Enterprise status will only be necessary for
receiving cash grants. As a result, it is no longer necessary for a company to
acquire Approved Enterprise status in order to receive the tax benefits
previously available under the Alternative Benefits Program. Rather, a company
may claim the tax benefits offered by the Capital Investments Law directly in
its tax returns, provided that its facilities meet the criteria for tax benefits
set out by the amendment. Companies are entitled to approach the Israeli Tax
Authority for a pre-ruling regarding their eligibility for benefits under the
amendment.




Tax
benefits are available under the amendment to production facilities (or other
eligible facilities), which are generally required to derive more than 25% of
their business income from export to specific markets with a population of at
least 12 million. In order to receive the tax benefits, the amendment states
that the company must make an investment that meets all the conditions set out
in the amendment for tax benefits and exceeds a minimum amount specified in the
Capital Investments Law. Such investment allows the company to receive a
Benefited Enterprise status, and may be made over a period of no more than three
years ending at the end of the year in which the company requested to have the
tax benefits apply to the Benefited Enterprise. Where the company requests to
have the tax benefits apply to an expansion of existing facilities, only the
expansion will be considered to be a Benefited Enterprise and the company’s
effective tax rate will be the weighted average of the applicable rates. In this
case, the minimum investment required in order to qualify as a Benefited
Enterprise is required to exceed a certain percentage of the value of the
company’s production assets before the expansion.


65


The
extent of the tax benefits available under the amendment to qualifying income of
a Benefited Enterprise are determined, inter alia, by the geographic location of
the Benefited Enterprise. The location will also determine the period for which
tax benefits are available.





We
currently have three Approved Enterprise Programs and three Benefited
Enterprises under the Capital Investments Law, to our belief, entitle us to
certain tax benefits. However, no assurance can be given that such investments
will be approved as in fact qualifying for such tax benefits by the Israeli tax
authorities. Additionally, no assurance can be given that we will, in the
future, be eligible to receive additional tax benefits under this
law.




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





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




Foreign
Investors’ Company (“FIC”)




A company
that has an Approved Enterprise program is eligible for further tax benefits if
it qualifies as a FIC. A FIC is a company with a level of foreign investment of
more than 25%. The level of foreign investment is measured as the percentage of
rights in the company (in terms of shares, rights to profits, voting and
appointment of directors), and of combined share and loan capital, that are
owned, directly or indirectly, by persons who are not residents of Israel. The
determination as to whether or not a company qualifies as an FIC is made on an
annual basis. A company that qualifies as a FIC and has an Approved Enterprise
program is eligible for tax benefits up to a ten-year benefit period. As
specified above, depending on the geographic location of the Approved Enterprise
within Israel, income derived from the Approved Enterprise program may be
entitled to the following:




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




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




The
twelve years limitation period for the reduced tax rate of 15% on dividends from
an Approved Enterprise does not apply to an FIC.




Capital
Gains Tax




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




As of
January 1, 2006, the Israeli Income Tax Ordinance was amended (via the Law for
Amendment of the Income Tax Ordinance (No. 147), 5765-2005) to provide that an
individual is subject to a 20% tax rate on real capital gains derived from the
sale of shares, as long as the individual has not demanded a deduction of
interest and linkage differences in connection with the purchase and holding of
the securities; and as long as the individual is not considered as a
“substantial shareholder” of the company issuing the shares, i.e., a shareholder
who holds directly or indirectly, including with others, at least 10% of any
means of control in the company. A substantial shareholder (or a shareholder who
has demanded a deduction of interest and linkage differences) will be subject to
tax at a rate of 25% on real capital gains derived from the sale of shares
issued by the company. The determination of whether the individual is a
substantial shareholder will be made on the date that the securities are sold.
In addition, the individual will be deemed to be a substantial shareholder if at
any time during the twelve months proceeding such date he or she had been a
substantial shareholder. Israeli companies are subject to the corporate tax rate
on capital gains derived from the sale of shares, unless such companies were not
subject to the Income Tax Law (Adjustment for Inflation) 1985 (the “Adjustments
Law”) (or certain regulations) at the time of publication of the aforementioned
Law for Amendment of the Income Tax Ordinance (No. 147), 5765-2005, in which
case the applicable tax rate is 25%. The foregoing tax rates, however, will not
apply to (i) dealers in securities; and (ii) shareholders who acquired their
shares prior to an initial public offering (which shares may be subject to a
different tax arrangement).




66




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




According
to the tax reform legislation, non-residents of Israel are exempt from any
capital gains tax on any gains derived from the sale of shares of Israeli
companies publicly traded on a recognized stock exchange or regulated market
outside of Israel (including from the sale of our Ordinary Shares), provided
however that (i) such capital gains are not derived through a permanent
establishment in Israel; (ii) such shareholders are not subject to the
Adjustments Law; (iii) such shareholders did not acquire their shares prior to
an initial public offering; and (iv) so long as our Ordinary Shares remain
listed for trading as described above. However, non-Israeli corporations will
not be entitled to such exemption if an Israeli resident (x) has a controlling
interest of 25% or more in such non-Israeli corporation, or (y) is the
beneficiary or is entitled to 25% or more of the revenues or profits of such
non-Israeli corporation, whether directly or indirectly.




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




Israeli
Taxation Applicable to Non-Israeli Shareholders




Non-residents
of Israel are subject to income tax on income accrued or derived from sources in
Israel. These sources of income include passive income such as dividends,
royalties and interest, as well as non-passive income from services rendered in
Israel. On distribution of dividends other than bonus shares or stock dividends,
income tax is withheld at the source at the following rates: (i) 20% for
dividends paid to an individual or foreign corporation who is not a substantial
shareholder; (ii) 25% for dividends paid to a substantial shareholder at any
time during the 12-month period preceding such distribution, unless a different
rate is provided in a treaty between Israel and the shareholder’s country of
residence; and (iii) 12.5% for dividends paid to U.S. taxpayers, if the dividend
recipient is a corporation that holds 10% or more of our voting stock during the
part of the tax year which precedes the date of payment of the dividend and
during the whole of its prior tax year. Notwithstanding the foregoing, with
regard to dividends generated by an Approved Enterprise or Benefited Enterprise,
we are required to withhold income tax at the rate of 15%, unless in each case a
different rate is provided in a treaty between Israel and a shareholder’s
country of residence. If the dividend is attributable partly to income derived
from an Approved Enterprise and partly to other sources of income, the
withholding rate will be a blended rate reflecting the relative portions of the
two types of income. The withheld tax is the final tax in Israel on dividends
paid to non-residents who do not conduct business in Israel.




Israeli
law generally imposes a capital gains tax on the sale of publicly traded
securities. Pursuant to changes made to the Israeli Income Tax Ordinance in
January 2006, capital gains on the sale of our ordinary shares will be subject
to Israeli capital gains tax, generally at a rate of 20% unless the holder holds
10% or more of our voting power during the 12 months preceding the sale, in
which case it will be subject to a 25% capital gains tax. However, as of January
1, 2003, non-residents of Israel are exempt from any capital gains tax derived
from the sale of our Ordinary Shares for so long as (i) our Ordinary Shares are
listed for trading on a stock exchange outside of Israel, (ii) the capital gains
are not accrued or derived by the non-resident shareholder’s permanent
establishment in Israel, (iii) the Ordinary Shares in relation to which the
capital gains are accrued or derived were acquired by the non-resident
shareholder after the initial listing of the ordinary shares on a stock exchange
outside of Israel, and (iv) neither the shareholder nor the particular capital
gain is otherwise subject to certain sections of the Income Tax Ordinance. These
provisions dealing with capital gains are not applicable to a person whose gains
from selling or otherwise disposing of the shares are deemed to be business
income. Notwithstanding this, non-Israeli companies may not benefit from this
exemption if Israeli residents (i) have a controlling interest of 25% or more in
the non-Israeli company or (ii) are the beneficiaries of, or are entitled to,
25% or more of the revenues or profits of the non-Israeli company, whether
directly or indirectly.


67




In
addition, under the Convention Between the Government of the United States of
America and the Government of Israel with Respect to Taxes on Income, as amended
(the “U.S.-IsraelTax Treaty”), the
sale, exchange or disposition of Ordinary Shares by a person who (i) holds the
Ordinary Shares as a capital asset; (ii)qualifies as a resident of the United
States within the meaning of the U.S.-Israel Tax Treaty ;and (iii) is entitled
to claim the benefits afforded to such resident by the U.S.-Israel Tax Treaty
(called a “Treaty U.S. Resident”) will be generally exempt from Israeli capital
gains tax. . Such exemption will not apply if(i)such TreatyU.S.Resident
is an individual and was present inIsraelfor more than 183 days during the relevant taxable year or(ii)such TreatyU.S.Resident holds, directly or indirectly, shares representing
10% or more of the voting power of a company during any part of the 12-month
period preceding such sale, exchange or disposition, subject to certain
conditions, or (iii) the capital gains from such sale, exchange or disposition
can be allocated to a permanent establishment in Israel. In such case, a sale,
exchange or disposition of Ordinary Shares would be subject to such Israeli tax,
to the extent applicable; however, under theU.S.-IsraelTax Treaty, such TreatyU.S.Resident would be permitted to claim a
credit for such taxes against theU.S.federal income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations inU.S.laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty
does not relate to U.S. state or local taxes.




A
non-resident of Israel who receives interest, dividend or royalty income derived
from or accrued in Israel, from which tax was withheld at the source, is
generally exempt from the duty to file tax returns in Israel with respect to
such income, provided such income was not derived from a business conducted in
Israel by the taxpayer, and the taxpayer has no other taxable sources of income
in Israel.




We participate in a program sponsored by the Israeli Government
for the encouragement of capital investment.





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 SEC. You may read and copy any document we file with the SEC without charge
at the SEC’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 SEC at such address, at prescribed rates. Additionally, copies of this
material may be obtained from the SEC’s website at http://www.sec.gov. Please
call the SEC 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 SEC 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.


68


ITEM 11.  QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.





Our main
foreign currency exposures are associated with exchange rate movements of the
U.S. dollar, our reporting currency as well as our primary functional currency,
against the NIS, Swiss Franc, British Pounds, Indian Rupees and the Euro. Our
diverse base of local currency costs, financings, and foreign exchange forward
contracts will partially counterbalance the impact of changing foreign currency
exchange rates on revenues, earnings, cash flows and fair values of assets and
liabilities. Nevertheless, when those anticipated transactions are realized,
actual effects of changing foreign currency exchange rates could have a material
impact on earnings and cash flows in future periods.





To
protect against some of the reductions in value and the volatility of future
cash flows caused by changes in foreign exchange rates, we utilize foreign
currency forward contracts in order to minimize part of the impact of foreign
currency fluctuations on our financial position and results of operations. In
order to mitigate our exposure to risk of fluctuations in the NIS/dollar
exchange rate with respect to our NIS denominated expenses, mainly payroll, we
entered into foreign currency forward contracts. As of December 31, 2009 the
Company had $8.1 million of open exchange rate agreements which will expire
throughout 2010. The aggregate amount of unrealized gains as of December 31,
2009 from the foreign exchange forward contracts was $61,000.





Short-term
exposures to changing foreign exchange rates are primarily due to operating cash
flows denominated in foreign currencies and transactions denominated in
non-functional currencies. Our most significant foreign currency exposures are
related to our operations in Germany, United Kingdom, Switzerland, India and
Israel. We have used foreign exchange forward contracts to partially cover known
and anticipated exposures. We estimate that an instantaneous 10% depreciation in
all the currencies of these countries from their levels against the dollar as of
December 31, 2009, with all other variables held constant, would decrease the
fair value of our net assets denominated in foreign currencies, held at December
31, 2009, by approximately $5 million.




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. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by
us in our reports filed or submitted under the Exchange Act is accumulated and
communicated to our management, including our CEO and CFO, as appropriate to
allow for timely decisions regarding required disclosure. We evaluated these
disclosure controls and procedures under the supervision of our CEO and CFO as
of December 31, 2009. 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 CEO and our CFO, 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, 2009 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 CEO and our CFO, 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
annual report on 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.


10 Hamada
Street, 5th Floor


Herzliya,
Israel 46140


Telephone:
011-972-3-611-6500





ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND
SERVICES





In our
annual shareholders meeting held on December 12, 2009, our shareholders
re-appointed Brightman Almagor Zohar & Co., a member of Deloitte Touche
Tohmatsu to serve as our independent auditors for the 2010 fiscal
year.





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





Year Ended December31,2009
                        
                        
                        2008Audit
      fees
                        
                        $
                        280,342
                        
                        
                        $
                        284,182Audit
      related fees
                        
                        
                        16,605
                        
                        
                        
                        25,820Tax
      fees [a]
                        
                        
                        45,671
                        
                        
                        
                        51,127All
      other fees
                        
                        
                        31,925
                        
                        
                        
                        5,150Total
                        
                        $
                        374,543
                        
                        
                        $
                        366,279





[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.





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, tax planning and
assistance with tax audits.


71


All
Other Fees





In fiscal
2009, 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 2009, our Audit Committee approved
all of the services provided by our independent auditor in accordance with the
foregoing policies and procedure.





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
      2009
                
                
                
                
                
                
                
                
                
                
                $
                9,352,452February
      2009
                
                
                110,380
                
                
                $
                6.04
                
                
                
                110,380
                
                
                
                8,685,939March
      2009
                
                
                128,446
                
                
                
                6.69
                
                
                
                128,446
                
                
                
                7,826,926April
      2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                7,826,926May
      2009
                
                
                195,500
                
                
                
                9.24
                
                
                
                195,500
                
                
                
                6,019,698June
      2009
                
                
                183,046
                
                
                
                9.60
                
                
                
                183,046
                
                
                
                4,262,536July
      2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,262,536August
      2009
                
                
                3,528
                
                
                
                9.98
                
                
                
                3,528
                
                
                
                4,227,332September
      2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,227,332October
      2009
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                4,227,332November
      2009
                
                
                5,291
                
                
                
                11.96
                
                
                
                5,291
                
                
                
                14,164,069December
      2009
                
                
                256,865
                
                
                
                13.08
                
                
                
                256,865
                
                
                
                10,804,517





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.
On July 23, 2009, the Company’s Board of Directors authorized the purchase of up
to an additional $10 million of our Ordinary Shares, subject to the approval of
the Tel Aviv Court. Court approval was obtained on October 12, 2009. As of
December 31, 2009, the Company had purchased a total of 1,286,178 shares, of
which 883,056 shares were repurchased in 2009 (for a total cost of approximately
$8.5 million in 2009).


72





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





None.





ITEM
16G.  CORPORATE GOVERNANCE.





None


73





PART
III





ITEM
17.  FINANCIAL STATEMENTS.





We have
elected to provide financial statements and related information pursuant to Item
18.





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 the Company(1)1.2
                
                Amended
      and Restated Articles of Association of the Company(1)1.3
                
                Amendment
      to Amended and Restated Articles of Association of Company
    (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 the Company, dated November 25,
      1997(3)4.5
                
                Lease
      Agreement for Fundtech India’s facility in Bombay,
  India(9)4.6
                
                Lease
      Agreement relating to Company’s Facility in Herzliya, Israel (English
      translation)*4.7
                
                Lease
      Agreement relating to Company’s Facility in Norcross,
      Georgia(3)4.8
                
                Lease
      Agreement relating to Company’s Facility in Jersey City, New
      Jersey(6)4.9
                
                Lease
      Agreement relating to Company’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 Zohar & Co., a member of Deloitte Touche Tohmatsu
      *








(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.




74





(3)
            Incorporated by reference to
      Exhibits 10.12 and 10.14 (as appropriate) to the Company’s Annual Report
      on Form 10-K for the year ended December 31, 1998, 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 for the year
      ended December 31, 2002, 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 for the year
      ended December 31, 2002, 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 Report on Form 6-K,
      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 for the year ended
      December 31, 2004, 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 Report on Form 6-K,
      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 for the year ended
      December 31, 2003, filed with the SEC on June 29,
    2004.





*
            Filed
      herewith.




75





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: May
28, 2010




76




FUNDTECH
LTD.





CONSOLIDATED FINANCIAL
STATEMENTS





DECEMBER 31,
2009


77


FUNDTECH
LTD.





CONSOLIDATED FINANCIAL
STATEMENTS





INDEX





PageReport
      of Independent Registered Public Accounting Firm
              
              F-1
      – F-2Consolidated
      Financial Statements:Balance Sheets as of December 31, 2008 and
      2009
              
              F-3Statements of Operations
      for the years ended
      December 31, 2009, 2008 and 2007
              
              F-4Statements of Shareholders’
      Equity for the years
      ended December 31, 2009, 2008 and 2007
              
              F-5 –
  F-6Statements of Cash Flows
      for the years ended
      December 31, 2009, 2008 and 2007
              
              F-7 –
  F-8Notes
      to Consolidated Financial Statements
              
              F-9
      – F-41




78





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, 2009 and
2008 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, 2009. Our audits also included the financial statement
schedules listed in the Index at Item 17. 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, 2009 and 2008 and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 2009, in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.





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, 2009, 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 May 27, 2010 expressed an
unqualified opinion on the Company’s internal control over financial
reporting.




/s/ Brightman Almagor Zohar &
      CoBrightman
      Almagor Zohar & Co.Certified
      Public AccountantsA
      member firm of Deloitte Touche Tohmatsu





Tel Aviv,
Israel


May 27,
2010


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, 2009, 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, 2009, 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, 2009 and
2008, 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, 2009, and financial statement schedules, and our report dated
May 27, 2010 expressed an unqualified opinion on those financial statements and
financial statement schedules.




/s/ Brightman Almagor Zohar &
      CoBrightman
      Almagor Zohar & Co.Certified
      Public AccountantsA
      member firm of Deloitte Touche Tohmatsu


Tel Aviv,
Israel


May 27,
2010


F-2





FUNDTECH
LTD.


CONSOLIDATED
BALANCE SHEET


(In
thousands)


December 31,2009
                      
                      
                      2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                      
                      $
                      20,903
                      
                      
                      $
                      29,642Short
      term investments
                      
                      
                      -
                      
                      
                      
                      1,415Marketable
      securities (Note 4)
                      
                      
                      21,248
                      
                      
                      
                      9,563Trade
      receivables, net of allowance for doubtful accounts of $1,345 and $1,588
      at December 31, 2009 and 2008, respectively (Note 5)
                      
                      
                      23,445
                      
                      
                      
                      28,264Other
      accounts receivable and prepaid expenses
                      
                      
                      8,861
                      
                      
                      
                      6,077Total
      current assets
                      
                      
                      74,457
                      
                      
                      
                      74,961Marketable
      Securities (Note 4)
                      
                      
                      774
                      
                      
                      
                      2,204Severance
      pay fund
                      
                      
                      1,508
                      
                      
                      
                      1,394Long-term
      deposits
                      
                      
                      1,769
                      
                      
                      
                      1,003Prepaid
      expenses
                      
                      
                      2,839
                      
                      
                      
                      (*)
      3,019Property
      and equipment, net (Note 6)
                      
                      
                      13,305
                      
                      
                      
                      15,898Goodwill
                      
                      
                      40,228
                      
                      
                      
                      34,520Intangible
      assets, net (Note 7)
                      
                      
                      5,472
                      
                      
                      
                      5,995Total
      assets
                      
                      $
                      140,352
                      
                      
                      $
                      138,994LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESTrade
      payables
                      
                      $
                      2,035
                      
                      
                      $
                      2,908Deferred
      revenues
                      
                      
                      9,141
                      
                      
                      
                      9,910Employees
      and payroll accruals
                      
                      
                      7,467
                      
                      
                      
                      6,596Other
      accounts payable and accrued expenses (Note 8)
                      
                      
                      6,287
                      
                      
                      
                      7,228Total
      current liabilities
                      
                      
                      24,930
                      
                      
                      
                      26,642Accrued
      severance pay and pension obligation (Note 9)
                      
                      
                      3,344
                      
                      
                      
                      (*)
      2,957Deferred
      Taxes
                      
                      
                      1,119
                      
                      
                      
                      970Other
      long term liabilities
                      
                      
                      2,777
                      
                      
                      
                      2,278Total
      liabilities
                      
                      
                      32,170
                      
                      
                      
                      32,847SHAREHOLDERS’ EQUITY
      (Note 11)Share
      capital
                      
                      
                      50
                      
                      
                      
                      49Additional
      paid-in capital
                      
                      
                      159,556
                      
                      
                      
                      155,976Accumulated
      other comprehensive income (loss)
                      
                      
                      1,829
                      
                      
                      
                      (*)
      (500)Accumulated
      deficit
                      
                      
                      (40,797
                      )
                      
                      
                      (45,470
                      )120,638
                      
                      
                      
                      110,055Treasury
      shares at cost 1,286,178 and 403,122 shares as of December 31, 2009 and
      2008, respectively
                      
                      
                      (12,456
                      )
                      
                      
                      (3,908
                      )Total
      shareholders’ equity
                      
                      
                      108,182
                      
                      
                      
                      106,147Total
      liabilities and shareholders’ equity
                      
                      $
                      140,352
                      
                      
                      $
                      138,994


(*) See
also Note 9d





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 31,2009
                    
                    
                    2008
                    
                    
                    2007RevenuesSoftware
      license
                    
                    $
                    11,558
                    
                    
                    $
                    16,488
                    
                    
                    $
                    19,741Software
      hosting
                    
                    
                    24,088
                    
                    
                    
                    19,889
                    
                    
                    
                    15,384Maintenance
                    
                    
                    39,531
                    
                    
                    
                    34,506
                    
                    
                    
                    27,570Services
                    
                    
                    42,580
                    
                    
                    
                    50,154
                    
                    
                    
                    41,939Total
      revenues
                    
                    
                    117,757
                    
                    
                    
                    121,037
                    
                    
                    
                    104,634Operating
      ExpensesCost
      of revenueSoftware
      license costs
                    
                    
                    748
                    
                    
                    
                    291
                    
                    
                    
                    590Maintenance,
      hosting and services costs
                    
                    
                    53,286
                    
                    
                    
                    53,730
                    
                    
                    
                    45,578Amortization
      of capitalized software development costs
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    394Amortization
      of other acquired intangible assets
                    
                    
                    2,028
                    
                    
                    
                    2,167
                    
                    
                    
                    1,387Impairment
      of goodwill and related intangible assets
                    
                    
                    -
                    
                    
                    
                    2,018
                    
                    
                    
                    -Research
      and development
                    
                    
                    20,422
                    
                    
                    
                    21,849
                    
                    
                    
                    19,348Selling
      and marketing
                    
                    
                    17,567
                    
                    
                    
                    20,883
                    
                    
                    
                    17,667General
      and administrative
                    
                    
                    19,662
                    
                    
                    
                    17,115
                    
                    
                    
                    13,553Total
      operating expenses
                    
                    
                    113,713
                    
                    
                    
                    118,053
                    
                    
                    
                    98,517Operating
      income
                    
                    
                    4,044
                    
                    
                    
                    2,984
                    
                    
                    
                    6,117Impairment
      on marketable securities
                    
                    
                    -
                    
                    
                    
                    (692)
                    
                    
                    
                    -Financial
      income, net (Note 15)
                    
                    
                    232
                    
                    
                    
                    48
                    
                    
                    
                    2,197Income
      before income taxes
                    
                    
                    4,276
                    
                    
                    
                    2,340
                    
                    
                    
                    8,314Income
      taxes (Note 13)
                    
                    
                    397
                    
                    
                    
                    (1,100
                    )
                    
                    
                    (1,207
                    )Net
      income
                    
                    $
                    4,673
                    
                    
                    $
                    1,240
                    
                    
                    $
                    7,107Basic
      earnings per share
                    
                    $
                    0.31
                    
                    
                    $
                    0.08
                    
                    
                    $
                    0.46Diluted
      earnings per share
                    
                    $
                    0.30
                    
                    
                    $
                    0.08
                    
                    
                    $
                    0.43





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, 2007
                
                
                15,010,973
                
                
                $
                46
                
                
                $
                146,611
                
                
                $
                (3,258
                )
                
                $
                (196)
                
                
                $
                (53,417
                )
                
                
                
                
                
                $
                89,786Initial
      application of SFAS No. 158 (Note 9d)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (790)
                
                
                
                -
                
                
                
                -
                
                
                
                (790)Exercise
      of stock options
                
                
                405,010
                
                
                
                1
                
                
                
                2,340
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,341Vested
      restricted stock -net of forfeited and cancelled
                
                
                145,925
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Stock
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                2,596
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,596Foreign
      currency translation adjustments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                702
                
                
                
                -
                
                
                
                702
                
                
                
                702Cumulative
      effect of a change in accounting principle – adoption of FIN
      48
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (400
                )
                
                
                -
                
                
                
                (400
                )Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,107
                
                
                
                7,107
                
                
                
                7,107Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                7,809Balance
      as of December 31, 2007 (*)
                
                
                15,561,908
                
                
                $
                47
                
                
                $
                151,547
                
                
                $
                (3,258
                )
                
                $
                (284)
                
                
                $
                (46,710
                )
                
                
                
                
                
                $
                101,342Exercise
      of stock options
                
                
                242,590
                
                
                
                2
                
                
                
                1,422
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,424Vested
      restricted stock – net of forfeited and cancelled
                
                
                190,931
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Stock
      based compensation
                
                
                -
                
                
                
                -
                
                
                
                3,007
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3,007Change
      in unrealized gain on cash flow hedges
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                126
                
                
                
                -
                
                
                
                126
                
                
                
                126Purchase
      of Treasury shares
                
                
                (82,239
                )
                
                
                -
                
                
                
                -
                
                
                
                (650
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (650
                )Foreign
      currency translation adjustments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (342)
                
                
                
                -
                
                
                
                (342)
                
                
                
                (342)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
                )
                
                $
                (500)
                
                
                $
                (45,470
                )
                
                
                
                
                
                $
                106,147





(*) See
also Note 9d





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, 2009 (*)15,913,190
                        
                        
                        $
                        49
                        
                        
                        $
                        155,976
                        
                        
                        $
                        (3,908
                        )
                        
                        $
                        (500
                        )
                        
                        $
                        (45,470
                        )
                        
                        
                        -
                        
                        
                        $
                        106,147Exercise
      of stock options
                        
                        
                        111,539
                        
                        
                        
                        -
                        
                        
                        
                        754
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        754Vested
      restricted stock -net of forfeited and cancelled
                        
                        
                        224,525
                        
                        
                        
                        1
                        
                        
                        
                        (1
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Stock
      based compensation
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,827
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,827Employees
      pension
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        111
                        
                        
                        
                        -
                        
                        
                        
                        111
                        
                        
                        
                        111Change
      in unrealized gain on cash flow hedges
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (65
                        )
                        
                        
                        -
                        
                        
                        
                        (65
                        )
                        
                        
                        (65
                        )Foreign
      currency translation adjustments
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,283
                        
                        
                        
                        -
                        
                        
                        
                        2,283
                        
                        
                        
                        2,283Purchase
      of Treasury shares
                        
                        
                        (883,056
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (8,548
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        (8,548
                        )Net
      income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        4,673
                        
                        
                        
                        4,673
                        
                        
                        
                        4,673Total
      comprehensive income
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        7,002Balance
      as of December 31, 2009
                        
                        
                        15,366,198
                        
                        
                        $
                        50
                        
                        
                        $
                        159,556
                        
                        
                        $
                        (12,456
                        )
                        
                        $
                        1,829
                        
                        
                        $
                        (40,797
                        )
                        
                        
                        
                        
                        
                        $
                        108,182




(*) See
also Note 9d





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 31,2009
              
              
              2008
              
              
              2007Cash flows provided by operating activities
      :Net
      income
              
              $
              4,673
              
              
              $
              1,240
              
              
              $
              7,107Adjustments
      to reconcile net income to net cashprovided
      by operating activities (Appendix A):
              
              
              12,633
              
              
              
              12,576
              
              
              
              10,214Net
      cash provided by operating activities
              
              
              17,306
              
              
              
              13,816
              
              
              
              17,321Cash flows used for investing activities
      :Investments
      in marketable securities –short term
              
              
              (26,610
              )
              
              
              (5,362
              )
              
              
              (25,841
              )Redemption of
      marketable securities-short term
              
              
              16,292
              
              
              
              14,252
              
              
              
              37,090Investment
      in marketable securities – long term
              
              
              -
              
              
              
              -
              
              
              
              (12,696
              )Acquisition
      of subsidiaries, net of cash acquired (Appendix B)
              
              
              (5,779
              )
              
              
              (17,197
              )
              
              
              (7,465
              )Decrease
      in long-term deposits
              
              
              (749
              )
              
              
              (277
              )
              
              
              (111
              )Proceeds
      from (Investment in) short term deposits
              
              
              1,538
              
              
              
              316
              
              
              
              (1,765
              )Purchase
      of property and equipment
              
              
              (3,612
              )
              
              
              (6,570
              )
              
              
              (6,745
              )Proceeds
      from sale of property and equipment
              
              
              -
              
              
              
              -
              
              
              
              14Net
      cash used in investing activities
              
              
              (18,920
              )
              
              
              (14,838
              )
              
              
              (17,519
              )Cash flows provided by financing
      activities:Proceeds
      from exercise of stock options, net
              
              
              754
              
              
              
              1,424
              
              
              
              2,341Purchase
      of Treasury shares at cost
              
              
              (8,548
              )
              
              
              (650
              )
              
              
              -Decrease
      of long-term debt
              
              
              (36
              )
              
              
              (10
              )
              
              
              (61
              )Net
      cash provided by (used in) financing activities
              
              
              (7,830)
              
              
              
              764
              
              
              
              2,280Effect of exchange rate on cash and cash
      equivalents
              
              
              705
              
              
              
              (1,712
              )
              
              
              914Increase
      (decrease) in cash and cash equivalents
              
              
              (8,739
              )
              
              
              (1,970
              )
              
              
              2,996Cash
      and cash equivalents at the beginning of the year
              
              
              29,642
              
              
              
              31,612
              
              
              
              28,616Cash
      and cash equivalents at the end of the year
              
              $
              20,903
              
              
              $
              29,642
              
              
              $
              31,612Supplemental disclosure of cash flows
      activities:Cash
      paid during the year for:Interest
              
              $
              8
              
              
              $
              71
              
              
              $
              20Income
      taxes
              
              $
              2,415
              
              
              $
              1,748
              
              
              $
              1,890





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 31,2009
              
              
              2008
              
              
              2007AppendixA-
      Adjustments to reconcile
      net income to net cash provided by operating activities
      :Depreciation
      and amortization
              
              $
              8,436
              
              
              $
              8,103
              
              
              $
              6,581Accrued
      interest on marketable securities and accretion
    amortization
              
              
              63
              
              
              
              122
              
              
              
              (170
              )Impairment
      on marketable securities
              
              
              -
              
              
              
              692
              
              
              
              -Impairment
      of goodwill and other intangible assets
              
              
              -
              
              
              
              2,018
              
              
              
              -Shares-based
      compensation
              
              
              2,827
              
              
              
              3,007
              
              
              
              2,596Change
      in assets and liabilities:Decrease
      (increase) in trade receivables, net of allowance for doubtful
      accounts
              
              
              5,251
              
              
              
              (6,272
              )
              
              
              3,853Increase
      in other accounts receivable and prepaid expenses
              
              
              (981
              )
              
              
              (2,019
              )
              
              
              (835
              )Increase
      (decrease) in trade payables
              
              
              (884
              )
              
              
              1,334
              
              
              
              (1,441
              )Increase
      (decrease) in deferred revenues, employees and payroll accruals and other
      accounts payable and accrued expenses
              
              
              (1,285
              )
              
              
              5,556
              
              
              
              (246
              )Decrease
      in accrued restructuring expenses
              
              
              -
              
              
              
              (62
              )
              
              
              (185
              )Increase
      in accrued severance pay, net
              
              
              406
              
              
              
              230
              
              
              
              143Increase
      in deferred taxes
              
              
              (1,200
              )
              
              
              (101
              )
              
              
              (120
              )Other
      assets and liabilities
              
              
              -
              
              
              
              (32
              )
              
              
              38$
              12,633
              
              
              $
              12,576
              
              
              $
              10,214Appendix B-Acquisition of subsidiaries,
      net of cash Acquired : (see Note 3)Working
      capital, excluding cash and cash equivalents
              
              $
              (167
              )
              
              $
              (1,130
              )
              
              $
              620Property
      and equipment
              
              
              -
              
              
              
              1,074
              
              
              
              74Long
      term liabilities
              
              
              -
              
              
              
              (189
              )
              
              
              -Other
      assets
              
              
              1,804
              
              
              
              6,365
              
              
              
              1,313Goodwill
              
              
              4,142
              
              
              
              11,077
              
              
              
              5,458$
              5,779
              
              
              $
              17,197
              
              
              $
              7,465





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 (collectively, 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 subsidiaries
Datasphere S.A and Synergy Financial Systems Ltd (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.





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.




F-9





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
2       
-     SIGNIFICANT ACCOUNTING POLICIES
(Cont.)





b.
            Financial statements in U.S.
      dollars (Cont.)





Accordingly,
monetary accounts maintained in currencies other than the dollar are re-measured
into dollars in accordance with ASC No. 830-10, “Foreign Currency Matters.” All
transaction gains and losses from the re measurement of monetary balance sheet
items are reflected in the statements of operations as financial income or
expenses, as appropriate. The financial statements of foreign subsidiaries,
whose functional currency is not the dollar (Swiss Franc, Euro, British Pound,
Indian Rupee), 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
ASC 320, “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 or discount, are included
in the consolidated statement of operations.





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.


F-10





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE 2    
   -     SIGNIFICANT ACCOUNTING POLICIES
(Cont.)





e.
            Marketable securities
      (Cont.)





DNE No.
115, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investment" 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 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 ASC 360-10, “Property, Plant and
Equipment.” During 2007, 2008 and 2009, no impairment losses were
recorded.





The
Company accounts for capitalized software development costs in accordance with
ASC 985-20, “Software.” 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.


F-11





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
2     -        SIGNIFICANT ACCOUNTING POLICIES
(Cont.)





g.
            Software development
      costs





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. During 2009 and 2008, no software
development costs were capitalized.





h.
            Goodwill and acquisition-related
      intangible assets





The
Company accounts for Goodwill and acquired intangible assets in accordance with
ASC 350-20, “Goodwill and Other Intangible Assets.”





The
Company records goodwill when the purchase price of a business acquired exceeds
the fair value of identifiable assets. Goodwill is not amortized.





Goodwill
is required 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 its implied fair value with its carrying
value. Fair value is determined using discounted cash flows or market multiples.
In 2008 the Company recorded an impairment charge of $1,660 related to its
Radius investment. During 2009 and 2007, 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 at fair
value, and subsequently stated at amortized cost. Identifiable intangible assets
other than goodwill are amortized on a straight-line basis over their estimated
useful lives. During 2009, an amount of $2,028 was recorded as amortization
expenses





Definite
life identifiable intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of any such 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
cashflow expected to
be generated by such asset. If any such asset is considered not recoverable, the
impairment to be recognized is measured as the amount by which the carrying
amount exceeds the fair value of the asset. During 2008 the Company recorded an
amount of $358 as impairment loss related to its Radius investment. During 2009
and 2007, 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.




F-12





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
2     -        SIGNIFICANT ACCOUNTING POLICIES
(Cont.)





i.
            Income taxes
      (Cont.)





On
January 1, 2007, the Company adopted the provisions of ASC No. 740-10, “Income
Taxes.” 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 ASC 985-605-15, “Software Revenue Recognition,” 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.





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 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, 2009 is immaterial.





Revenue
from software licenses that require significant customization, integration and
installation are recognized based on ASC 605-35-05, “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. Revenues from set up fees are also
recognized over the related hosting contract.


F-13





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
2     -        SIGNIFICANT ACCOUNTING POLICIES
(Cont.)





j.
            Revenue recognition
      (Cont.)





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.





k.
            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).





l.
            Derivatives and
      hedging





The
Company accounts for derivatives and hedging based on ASC No. 815-10,
“Derivatives and Hedging.”  ASC 815-10 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.


F-14





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
2     -        SIGNIFICANT ACCOUNTING POLICIES
(Cont.)





l.
            Derivatives and hedging
      (Cont.)





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, 2009, the Company held forward foreign exchange contracts in the
amount of $8,120. 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
$61.





m.
            Basic and diluted earnings per
      share





Basic
earnings per share are 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 ASC 260-10,
“Earnings Per Share”. In 2009, 2008 and 2007, 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 203,364, 7,000 and 0 for the years ended December
31, 2009, 2008 and 2007, respectively.





In 2009,
2008 and 2007, 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 203,364, 7,000 and 0 for the years ended December 31, 2009, 2008 and 2007,
respectively.





n.
            Stock-based
      compensation





The
Company accounts for stock-based compensation in accordance with ASC No. 718-10,
“Share-Based Payment.”  ASC 718-10 requires companies to estimate the
fair value of equity-based payment awards at the date of grant. 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, net of
estimated forfeitures. ASC 718 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-15





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
2     -        SIGNIFICANT ACCOUNTING POLICIES
(Cont.)





n.
            Stock-based compensation
      (Cont.)





The
following table summarizes share-based compensation expenses included in the
consolidated statements of operations:





2009
                      
                      
                      2008
                      
                      
                      2007Cost
      of revenue
                      
                      $
                      487
                      
                      
                      $
                      575
                      
                      
                      $
                      308Research
      and development
                      
                      
                      187
                      
                      
                      
                      262
                      
                      
                      
                      358Selling
      and marketing
                      
                      
                      734
                      
                      
                      
                      642
                      
                      
                      
                      514General
      and administrative
                      
                      
                      1,419
                      
                      
                      
                      1,528
                      
                      
                      
                      1,416Total
                      
                      
                      2,827
                      
                      
                      
                      3,007
                      
                      
                      
                      2,596





The
Company selected the Black-Scholes Merton 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 2007, 2008 and 2009 is estimated at the date of
grant using a Black-Scholes Merton options pricing model with the following
weighted average assumptions:





2009
                      
                      
                      2008
                      
                      
                      2007(*)Risk-free
      interest rate
                      
                      
                      1.48
                      %
                      
                      
                      1.28
                      %
                      
                      
                      -Expected
      life of options (in years)
                      
                      
                      6
                      
                      
                      
                      5.5
                      
                      
                      
                      -Expected
      volatility
                      
                      
                      41
                      %
                      
                      
                      40
                      %
                      
                      
                      -Expected
      dividend yield
                      
                      None
                      
                      
                      
                      None
                      
                      
                      
                      -





(*) No
options were granted during 2007.


F-16





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
2     -        SIGNIFICANT ACCOUNTING POLICIES
(Cont.)





o.
            Fair value of financial
      instruments





The
Company measures its cash equivalents, short term deposits, marketable
securities, ARS, accounts receivable, accounts payable, accrued liabilities and
foreign currency derivative contracts at fair value. 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. A three-tier fair value hierarchy is established as a basis for
considering such assumptions and for 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.





p.
            Reclassification





Certain
prior period amounts have been reclassified to conform to the current period
presentation.





q.
            Recent Accounting
      Pronouncements





In May
2009, the FASB issued Statement ASC 855-10. Statement 855-10 provides guidance
on management’s assessment of subsequent events. Historically, management had
relied on U.S. auditing literature for guidance on assessing and disclosing
subsequent events. Statement 165 represents the inclusion of guidance on
subsequent events in the accounting literature and is direct specifically to
management, since management is responsible for preparing an entity’s financial
statements. Statement 855-10 is not expected to significantly change practice
because its guidance is similar to that in AU section 560, with some important
modifications. The new standard clarifies that management must evaluate, as of
each reporting period, events or transactions that occur after the balance sheet
date “through the date that the financial statements are issued or are available
to be issued”. Management must perform its assessment for both interim and
annual financial reporting periods. The company does not expect that the
adoption of Statement ASC 855-10 will have a significant impact on its financial
statements.


F-17





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
2     -        SIGNIFICANT ACCOUNTING POLICIES
(Cont.)





r.
            Recent Accounting Pronouncements
      (Cont.)





In June
2009, the FASB issued Statement 168. The FASB notes that the “FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles”, which was primarily, codified into FASB Accounting
Standards Codification (“ASC”) Topic 105, “Generally Accepted Accounting
Standards”. ASC Topic 105 has become the single source of authoritative
nongovernmental generally accepted accounting principles (“GAAP”), superseding
existing FASB, American Institute of Certified Public Accountants, Emerging
Issues Task Force, and related accounting literature. This standard reorganizes
the GAAP pronouncements into accounting topics and displays them using a
consistent structure. ASC Topic 105 impacts the Company’s financial statements
and related disclosures as all references to authoritative accounting literature
reflect the newly adopted codification. This standard applies to the Company’s
consolidated financial statement for the fiscal year ended December 31,
2009.




NOTE
3     -           ACQUISITIONS





a.
            In April 2009, the Company
      acquired through its UK subsidiary Accountis Europe Ltd. all outstanding
      shares of InterSoftware Ltd. (“InterSoftware”), a provider of payments
      services located in England for an aggregate purchase price of
      approximately GBP 2,700 ($3,837) in
cash.





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 customer relationship
and goodwill. The purchase price attributed to customer relations is being
amortized over its estimated useful life, which is 10 years.





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
                    
                    
                    (167
                    )Customer
      relations
                    
                    
                    1,804Goodwill
                    
                    
                    2,200$
                    3,837




F-18





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      3     -
            ACQUISITIONS
      (Cont.)





b.
            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.





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. 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





c.
            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
      ($7,383) 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. During 2009, Fundtech paid $1,112 based
on Accountis’ 2008 financial performance.





The
financial results of Accountis 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 technology, backlog and goodwill. The purchase price attributed to
know-how is being amortized over its estimated useful life, which are 3 years
for backlog and 5 years for technology. In accordance with ASC 350-20, the
purchase price attributed to goodwill is not amortized, but rather is subject to
periodic impairment tests.




F-19




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
                      
                      $
                      (628
                      )Property
      and equipment
                      
                      
                      34Technology
                      
                      
                      4,250Know-how
                      
                      
                      402Goodwill
                      
                      
                      3,727$
                      7,785





d.
            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.





Conditions
of the purchase agreement related to an additional payment of $400 by the end of
2008 were not met and no further payment was made.





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




F-20




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      3     -
            ACQUISITIONS
      (Cont.)





e.
            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
($3,346) 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 ($830) paid in January 2009
and additional €597 ($830) paid in January 2010, which was already accounted for
in 2008.





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




F-21




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      3     -
            ACQUISITIONS
      (Cont.)





f.
            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.





The
financial results of Radius have been included in the Company’s financial
statements beginning on the acquisition date.





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-22





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      4     -
            MARKETABLE
      SECURITIES





December 31,Maturity year
                    
                    2009
                    
                    
                    2008Short-term
      investmentsHeld
      to maturity -Corporate
      bonds
                    
                    2010
                    
                    $
                    1,129
                    
                    
                    $
                    4,276Corporate
      notes
                    
                    2010
                    
                    
                    -
                    
                    
                    
                    4,678Bank
      certificate of deposits
                    
                    2010
                    
                    
                    11,027
                    
                    
                    
                    -Euro-dollar
      bonds
                    
                    
                    
                    
                    -
                    
                    
                    
                    609Government
      bonds
                    
                    
                    
                    
                    9,092
                    
                    
                    
                    -$
                    21,248
                    
                    
                    $
                    9,563Fair
      value
                    
                    
                    
                    $
                    21,259
                    
                    
                    $
                    9,479Long
      - term InvestmentsHeld
      to maturity -Corporate
      bonds
                    
                    -
                    
                    $
                    -
                    
                    
                    $
                    1,179Available
      for sale -Taxable
      auction securities
                    
                    
                    
                    
                    774
                    
                    
                    
                    1,025$
                    774
                    
                    
                    $
                    2,204Fair
      value
                    
                    
                    
                    $
                    774
                    
                    
                    $
                    2,263





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-23





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
2009 and 2008, the Company successfully liquidated ARS at total amounts of $275
and $4,285, respectively.





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 31,2009
                    
                    
                    2008Accounts
      receivable, net of allowance for doubtful accounts
                    
                    $
                    19,109
                    
                    
                    $
                    22,785Unbilled
      receivables
                    
                    
                    4,336
                    
                    
                    
                    5,479$
                    23,445
                    
                    
                    $
                    28,264


Management’s
assessment for uncertainties of outstanding debt collectability resulted in
doubtful accounts expenses of $333 for 2009, $753 for 2008 and income of $134
for 2007 in the statement of operations.





NOTE
      6     -
            PROPERTY AND EQUIPMENT,
      NET





December 31,2009
                            
                            
                            2008Cost:Office
      furniture and equipment
                            
                            $
                            3,325
                            
                            
                            $
                            3,425Computers
      and software
                            
                            
                            44,720
                            
                            
                            
                            40,972Motor
      vehicles
                            
                            
                            766
                            
                            
                            
                            663Leasehold
      improvements
                            
                            
                            4,414
                            
                            
                            
                            3,98553,225
                            
                            
                            
                            49,045Accumulated
      depreciation
                            
                            
                            39,920
                            
                            
                            
                            33,147Net
      book value
                            
                            $
                            13,305
                            
                            
                            $
                            15,898




F-24





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      7     -
            INTANGIBLE ASSETS,
      NET





December 31,Useful life
                                
                                
                                2009
                                
                                
                                2008Intangible assetsCost:Developed
      technology and know-how
                                
                                5
                                
                                
                                $
                                11,918
                                
                                
                                $
                                12,732Customer
      base
                                
                                3-5
                                
                                
                                
                                6,360
                                
                                
                                
                                4,397Other
      intangible assets
                                
                                
                                
                                
                                
                                58
                                
                                
                                
                                5818,336
                                
                                
                                
                                17,187Accumulated
      Amortization:Developed
      technology and know-how
                                
                                
                                
                                
                                
                                (9,008
                                )
                                
                                
                                (7,468
                                )Customer
      base
                                
                                
                                
                                
                                
                                (3,798
                                )
                                
                                
                                (3,666
                                )Other
      intangible assets
                                
                                
                                
                                
                                
                                (58
                                )
                                
                                
                                (58
                                )(12,864
                                )
                                
                                
                                (11,192
                                )Net
      book value
                                
                                
                                
                                
                                $
                                5,472
                                
                                
                                $
                                5,995





NOTE
      8     -
            OTHER ACCOUNTS PAYABLE AND
      ACCRUED EXPENSES





December 31,2009
                
                
                2008Accrued
      expenses
                
                $
                5,251
                
                
                $
                5,672Government
      authorities
                
                
                984
                
                
                
                1,522Other
                
                
                52
                
                
                
                34$
                6,287
                
                
                $
                7,228





NOTE
      9    -
            ACCRUED SEVERANCE PAY AND PENSION
      OBLIGATION





a.
            Severance expenses for the years
      ended December 31, 2009, 2008 and 2007, amounted to approximately $652,
      $879 and $695, respectively.





b.
            Israel





The
Company’s agreements with the majority of its employees in Israel are under
section 14 of the Severance Pay Law – 1963. The Company’s contributions for
severance pay shall be instead of its severance liability. Upon contribution of
the full amount of the employee’s monthly salary, no additional calculations
shall be conducted between the parties regarding the matter of severance pay and
no additional payments shall be made by the Company to the employee. Further,
the related obligation and amounts deposits on behalf of such obligation are not
stated on the balance sheet, as they are legally released from obligation to
employees once the deposit amounts have been paid.




F-25




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      9    -
            ACCRUED SEVERANCE PAY AND PENSION
      OBLIGATION (Cont.)





Other
Israeli employees that not under section 14 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.





c.
            Switzerland





The
Company is providing a pension plan for its employees in Switzerland and the
pension costs are allocated over the service period of employees in the plan.
The Company records a net periodic pension cost in the consolidated statement of
operations. The liabilities and annual income or expense of the pension plan is
determined using methodologies that involve several actuarial assumptions, the
most significant of which are the discount rate, and the long-term rate of asset
return (based on the market-related value of assets). The fair values of plan
assets are determined based on prevailing market prices.





d.
            Change
      in pension obligation





During
2009, the Company restated its severance and pension obligation to increase it
by $1,012. The Company noted that its pension obligation of defined guaranteed
return plan, relating to its Swiss subsidiary meet the definition of defined
benefit plan following a determination, in Switzerland, by Swiss Auditing
Chamber’s Auditing Practice Committee. That determination took place in 2007 and
as such the Company’s severance and pension obligation had to be restated to
reflect that determination in 2007. The effect of the restatement was to
increase the Company’s obligation with the corresponding increase in Other
Comprehensive Income, reflected in the opening balance of 2008. Management
concluded that the cumulative adjustment to the results of operations is not
material to the financial statements for the fiscal year ended December 31, 2007
nor to the financial statements for the year ended December 31, 2008, (total of
$56 for the years 2007 and 2008). Therefore, the adjustment to the
obligation and the increase in OCI was in 2009. Management does not believe that
restating the financial statements for the fiscal year ending December 31, 2007,
would have a material impact on the results of operations and the position of
the Company for the years ended December 31, 2007 and 2008.




F-26




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE 10
       -
            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 2020. The
minimum lease commitments under non-cancelable operating leases are as
follows:





Year ended December 31,2010
                  
                  $
                  4,0602011
                  
                  
                  3,9232012
                  
                  
                  3,6122013
                  
                  
                  3,4022014-
      thereafter
                  
                  
                  8,566$
                  23,563


Total
facilities lease expenses for the years ended December 31, 2009, 2008 and 2007
were approximately $3,896, $3,615 and $3,109 respectively.





b.
            Guarantees:




1.
            The Company has obtained a bank
      guarantee of $758 for BBP as required by Swiss
  Law.





2.
            The Company has obtained a bank
      guarantee of $610 for a customer to ensure performance of a software
      system.





NOTE
    11 -
            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
February 21, 2002, the Company’s Board of Directors authorized the Company to
purchase up to one million ordinary shares of the Company from time to time on
the open market. As of December 31, 2009 and 2008, the Company had purchased a
total of 1,286,178 and 403,122 shares respectively.




F-27




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      11   -
            SHAREHOLDERS’ EQUITY
      (Cont.)





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 4,892,815 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, 2009, an aggregate of 402,578 shares of the Company are still
      available for future grants.





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, 2009, the Company had issued 1,027,711 restricted shares of ordinary
      stock of which 609,740 are vested, the weighted average fair value at
      grant date was $11.2 and the weighted average vesting period at grant date
      was 3.3 years.





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 for which
      such options are exercised.




F-28




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)


NOTE
      11   -
              SHAREHOLDERS’
      EQUITY (Cont.)




e.
            Summary of the Company’s option
      activity under the Plans is as
follows:





Year ended December 31,2009
                
                
                2008
                
                
                2007Weighted
                
                
                
                
                
                Weighted
                
                
                
                
                
                WeightedAverage
                
                
                
                
                
                Average
                
                
                
                
                
                AverageNumber
                
                
                Exercise
                
                
                Number
                
                
                Exercise
                
                
                Number
                
                
                Exerciseof options
                
                
                Price
                
                
                of options
                
                
                Price
                
                
                of options
                
                
                PriceOutstanding
      at January 1
                
                
                1,572,062
                
                
                
                7.00
                
                
                
                1,609,387
                
                
                $
                6.74
                
                
                
                2,109,720
                
                
                $
                6.59Granted
                
                
                330,000
                
                
                
                12.02
                
                
                
                222,500
                
                
                
                7.81
                
                
                
                -
                
                
                
                -Exercised
                
                
                (111,539
                )
                
                
                6.76
                
                
                
                (242,590
                )
                
                
                5.86
                
                
                
                (405,010
                )
                
                
                5.78Forfeited/cancelled
                
                
                (38,313
                )
                
                
                8.94
                
                
                
                (17,235
                )
                
                
                9.41
                
                
                
                (95,323
                )
                
                
                7.50Outstanding
      at December 31
                
                
                1,752,210
                
                
                
                7.92
                
                
                
                1,572,062
                
                
                $
                7.00
                
                
                
                1,609,387
                
                
                $
                6.74Exercisable
      options at December 31
                
                
                1,272,440
                
                
                
                6.88
                
                
                
                1,316,308
                
                
                $
                6.78
                
                
                
                1,407,364
                
                
                $
                6.46





As of
December 31, 2009, the stock price was $12.27, the options outstanding as of
December 31, 2009, 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
                        
                        2009
                        
                        
                        Life (years)
                        
                        
                        Price
                        
                        
                        2009
                        
                        
                        Price$  3.55-9.35
                        
                        
                        1,233,221
                        
                        
                        
                        4.7
                        
                        
                        
                        6.48
                        
                        
                        
                        1,080,951
                        
                        
                        
                        6.30$  10.01-11.93
                        
                        
                        498,989
                        
                        
                        
                        8.3
                        
                        
                        
                        11.32
                        
                        
                        
                        188,989
                        
                        
                        
                        10.15$  13.43
                        
                        
                        20,000
                        
                        
                        
                        9.8
                        
                        
                        
                        13.43
                        
                        
                        
                        2,500
                        
                        
                        
                        13.431,752,210
                        
                        
                        
                        5.8
                        
                        
                        
                        7.92
                        
                        
                        
                        1,272,440
                        
                        
                        
                        6.88





All
options granted during 2004 to 2009 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.




F-29





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      12   -
            EARNINGS PER
      SHARE





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





Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Numerator:Net
      income
                    
                    $
                    4,673
                    
                    
                    $
                    1,240
                    
                    
                    $
                    7,107Numerator
      for basic earnings per share -income
      available to OrdinaryShareholders
                    
                    $
                    4,673
                    
                    
                    $
                    1,240
                    
                    
                    $
                    7,107Numerator
      for diluted net earnings pershare
      - income available to Ordinaryshareholders
      after assumed exercises
                    
                    $
                    4,673
                    
                    
                    $
                    1,240
                    
                    
                    $
                    7,107





Number of sharesDenominator:Denominator
      for basic net earnings per share - weighted - average
    shares
                            
                            
                            15,145,625
                            
                            
                            
                            15,769,588
                            
                            
                            
                            15,322,515Effect
      of dilutive securities:Employee
      stock options
                            
                            
                            471,485
                            
                            
                            
                            664,175
                            
                            
                            
                            1,270,768Denominator
      for diluted net earnings per share
                            
                            
                            15,617,110
                            
                            
                            
                            16,433,763
                            
                            
                            
                            16,593,283




F-30




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      13   -
            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 26% in 2009
(“Regular Tax Rate”). This rate is to be reduced to 25% in 2010and
thereafter.





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 under
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 has been
derived from such programs yet.




F-31




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      13   -
            INCOME TAXES
      (Cont.)





b.
            Israeli Taxation
      (Cont.)





2.
            (Cont.)





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,
2009, retained earnings included approximately $4,919 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”.





If such tax-exempt income
is distributed in a manner other than 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
$1,230 would be incurred as of December 31, 2009. 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, 2009, none of Fundtech income was generated under the provisions of
the Amendment.




F-32




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      13  -
            INCOME TAXES
      (Cont.)





b.
            Israeli Taxation
      (Cont.)





2.
            (Cont.)





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.





c.
            Net operating loss carry
      forwards





As of
December 31, 2009, the Company had approximately $21 million of Israeli net
operating loss carry forwards. The Israeli loss carry forwards have no
expiration date.





As of
December 31, 2009, Fundtech Corporation had a U.S. federal net operating loss
carry forward of approximately $43 million that can be carried forward and
offset against taxable income for 10-15 years and begins to expire in 2020
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.




F-33





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      13  -
            INCOME TAXES
      (Cont.)





Significant
components of the Company and its subsidiaries’ deferred tax assets are as
follows:





December 31,2009
                    
                    
                    2008Deferred
      tax assets:U.S.
      net operating loss carry forward
                    
                    $
                    17,149
                    
                    
                    $
                    17,251Israel
      net operating loss carry forward
                    
                    
                    5,201
                    
                    
                    
                    5,452Other
      reserve and allowances
                    
                    
                    3,730
                    
                    
                    
                    5,559Total
      deferred tax assets
                    
                    
                    26,080
                    
                    
                    
                    28,262Valuation
      allowance
                    
                    
                    (23,481
                    )
                    
                    
                    (26,502
                    )2,599
                    
                    
                    $
                    1,760Deferred
      tax liabilities:
                    
                    
                    (1,170
                    )
                    
                    
                    (1,585
                    )$
                    1,429
                    
                    
                    $
                    175





Deferred
tax assets for carry forward losses in the United States 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-34




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      13  -
            INCOME TAXES
      (Cont.)





d.
            Deferred income taxes
      (Cont.)





Deferred
income tax assets and liabilities at December 31, 2009 are included in the
accompanying consolidated balance sheets as follows:





December 31,2009
                  
                  
                  2008Short
      term deferred assets, net
                  
                  $
                  2,283
                  
                  
                  $
                  923Long
      Term deferred tax liability, net
                  
                  
                  (854
                  )
                  
                  
                  (748
                  )Net
      deferred income tax liabilities
                  
                  $
                  1,429
                  
                  
                  $
                  175





The
Company has provided valuation allowances in respect of deferred tax assets
resulting from net operating loss carry forwards in the United States 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 has received final tax assessments through the tax year ended December
31, 2003. Fundtech U.K. Ltd. has received final tax assessment through the tax
year ended December 31, 2007. BBP has received final tax assessment through the
tax year ended December 31, 2006. Fundtech India has received final tax
assessment through the tax year ended March 31, 2004. Prang has received final
tax assessment through the tax year 2007.Accountis Ltd. has
received final tax assessment through the tax year ended December 31, 2007.
Synergy Financial Systems Ltd has received final tax assessment through the tax
year ended December 31, 2007.




F-35




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      13  -
            INCOME TAXES
      (Cont.)





f.
            Composition of income tax
      expenses





Year ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007Income
      before income taxes:Domestic
                        
                        $
                        1,122
                        
                        
                        $
                        1,397
                        
                        
                        $
                        2,241Foreign
                        
                        
                        3,154
                        
                        
                        
                        943
                        
                        
                        
                        6,073$
                        4,276
                        
                        
                        $
                        2,340
                        
                        
                        $
                        8,314Income
      taxes:Current:Domestic
                        
                        $
                        (13
                        )
                        
                        $
                        159
                        
                        
                        $
                        149Foreign
                        
                        
                        870
                        
                        
                        
                        1,217
                        
                        
                        
                        1,178857
                        
                        
                        
                        1,376
                        
                        
                        
                        1,327Deferred:Domestic
                        
                        $
                        (524
                        )
                        
                        $
                        (940
                        )
                        
                        $
                        -Foreign
                        
                        
                        (730
                        )
                        
                        
                        664
                        
                        
                        
                        (120
                        )(1,254
                        )
                        
                        
                        (276
                        )
                        
                        
                        (120
                        )$
                        (397
                        )
                        
                        $
                        1,100
                        
                        
                        $
                        1,207




F-36




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      13  -
            INCOME TAXES
      (Cont.)





g.
            Theoretical
      taxes





The
following is a reconciliation of the theoretical tax expense assuming that all
income is taxed at the ordinary statutory corporate tax rate in Israel and other
jurisdictions and the actual tax expense in the statement of operations is as
follows:





Year ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Income
      before income taxes
                      
                      $
                      4,276
                      
                      
                      $
                      2,340
                      
                      
                      $
                      8,314Theoretical
      tax on the above amount
                      
                      $
                      1,502
                      
                      
                      $
                      760
                      
                      
                      $
                      2,946Increase
      (Decrease) in valuation allowance
                      
                      
                      (3,021
                      )
                      
                      
                      (989
                      )
                      
                      
                      19Non
      deductable expenses, net
                      
                      
                      973
                      
                      
                      
                      1,433
                      
                      
                      
                      (1,332
                      )Other,
      net
                      
                      
                      (149)
                      
                      
                      
                      104
                      
                      
                      
                      (426
                      )$
                      (397
                      )
                      
                      $
                      1,100
                      
                      
                      $
                      1,207





The
Company adopted the provisions of ASC 740-10 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:


2009
                      
                      
                      2008Beginning
      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




F-37




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      14  -
            OPERATING SEGMENT AND
      GEOGRAPHICAL INFORMATION





a.
            The Company evaluates its
      business activities in accordance with the provisions of ASC 280-10
      “Disclosure about Segments of an Enterprise and Related
      Information”.





The
Company has three operating business segments: Cash Management, Payments and
BBP.





The
Company’s cash management solutions enable small, mid and large-tier financial
institutions to deliver a complete set of cash management services through the
Internet and other delivery channels. The Company’s payments solutions automate
all aspects of the funds transfer, including foreign exchange settlement and
customer notification process, enabling straight-through-processing (STP) of
payments. BBP develops implements, maintains and operates systems for the
automatic processing and transport of data in the finance industry. BBP also
provides interbank gateway services. Its products include system solutions for
interbank applications, as well as integration modules for host connections. The
Company’s chief operating decision makers evaluate performance of each segment
based on income (loss) from operations before restructuring expenses, interest
expenses and income taxes.





The
Company does not identify or allocate its assets by operating segments as part
of the assessment of segment performance.





The
following table sets forth the Company’s revenue and operating income (loss)
from all reportable segments:


Year ended December 31,2009
                          
                          
                          2008
                          
                          
                          2007Cash Management:Revenues
                          
                          $
                          26,380
                          
                          
                          $
                          27,914
                          
                          
                          $
                          24,460Operating
      income
                          
                          $
                          868
                          
                          
                          $
                          821
                          
                          
                          $
                          1,057Payments:Revenues
                          
                          $
                          69,573
                          
                          
                          $
                          75,001
                          
                          
                          $
                          65,460Operating
      income
                          
                          $
                          15,967
                          
                          
                          $
                          17,206
                          
                          
                          $
                          17,672BBP :Revenues
                          
                          $
                          21,804
                          
                          
                          $
                          18,122
                          
                          
                          $
                          14,714Operating
      income
                          
                          $
                          1,210
                          
                          
                          $
                          1,071
                          
                          
                          $
                          1,108




F-38




FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In thousands)





NOTE
      14  -
            OPERATING
      SEGMENT AND GEOGRAPHICAL INFORMATION
(Cont.)





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





Year ended December 31,2009
                
                
                2008
                
                
                2007Total
      operating income of the reportable segments:
                
                $
                18,045
                
                
                $
                19,098
                
                
                $
                19,837Amounts
      not allocated to segments:Stock
      based compensation
                
                
                2,827
                
                
                
                3,007
                
                
                
                2,596General
      and administrative expenses
                
                
                9,960
                
                
                
                10,582
                
                
                
                7,742Marketing
      expenses
                
                
                1,214
                
                
                
                2,525
                
                
                
                3,382Consolidated
      operating income
                
                $
                4,044
                
                
                $
                2,984
                
                
                $
                6,117





c.
            Geographic
      information:


The
Company’s total revenues are attributed according to geographic information,
based on customers’ location in the following table:





Year ended December 31,2009
                
                
                2008
                
                
                2007Long -
                
                
                
                
                
                Long -
                
                
                
                
                
                Long -Total
                
                
                Lived
                
                
                Total
                
                
                Lived
                
                
                Total
                
                
                livedrevenues
                
                
                Assets
                
                
                revenues
                
                
                Assets
                
                
                revenues
                
                
                assetsIsrael
                
                $
                461
                
                
                $
                2,701
                
                
                $
                1,108
                
                
                $
                2,304
                
                
                $
                1,331
                
                
                $
                1,782United
      States
                
                
                48,523
                
                
                
                16,078
                
                
                
                49,228
                
                
                
                25,059
                
                
                
                46,028
                
                
                
                18,376Switzerland
                
                
                14,769
                
                
                
                13,154
                
                
                
                15,155
                
                
                
                8,578
                
                
                
                12,711
                
                
                
                8,341India
                
                
                2,066
                
                
                
                6,337
                
                
                
                2,350
                
                
                
                6,448
                
                
                
                2,302
                
                
                
                6,645United
      Kingdom
                
                
                19,304
                
                
                
                14,925
                
                
                
                17,758
                
                
                
                12,595
                
                
                
                19,966
                
                
                
                76Germany
                
                
                4,987
                
                
                
                10,137
                
                
                
                3,990
                
                
                
                10,383
                
                
                
                2,611
                
                
                
                7,851Others
                
                
                27,647
                
                
                
                13
                
                
                
                31,448
                
                
                
                4
                
                
                
                19,685
                
                
                
                5$
                117,757
                
                
                $
                63,345
                
                
                $
                121,037
                
                
                $
                65,371
                
                
                $
                104,634
                
                
                $
                43,076





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





Year ended December 31,2009
                
                
                2008
                
                
                2007Customer
      A
                
                
                7
                %
                
                
                8
                %
                
                
                10
                %Customer
      B
                
                
                9
                %
                
                
                10
                %
                
                
                11
                %




F-39





FUNDTECH
LTD.


NOTES TO THE FINANCIAL
STATEMENTS


(In
thousands)





NOTE
      15  -
            FINANCIAL
      INCOME, NET





Year ended December 31,2009
                        
                        
                        2008
                        
                        
                        2007Financial
      expenses:Interest
      and other
                        
                        $
                        65
                        
                        
                        $
                        39
                        
                        
                        $
                        28Foreign
      currency translation differences, net
                        
                        
                        78
                        
                        
                        
                        1,439
                        
                        
                        
                        58$
                        143
                        
                        
                        $
                        1,478
                        
                        
                        $
                        86Financial
      income:Interest
      and other
                        
                        $
                        375
                        
                        
                        $
                        1,526
                        
                        
                        $
                        2,283$
                        232
                        
                        
                        $
                        48
                        
                        
                        $
                        2,197




F-40





SCHEDULE
II





FUNDTECH
LTD.


VALUATION AND QUALIFYING
ACCOUNTS


(In
thousands)





Year ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Allowance
      for doubtful accounts at beginning of year
                    
                    $
                    1,588
                    
                    
                    $
                    859
                    
                    
                    $
                    1,078Provision
                    
                    
                    333
                    
                    
                    
                    753
                    
                    
                    
                    (134
                    )Translation
      adjustments
                    
                    
                    22
                    
                    
                    
                    (24
                    )
                    
                    
                    (6
                    )Accounts
      receivable written off
                    
                    
                    (598
                    )
                    
                    
                    -
                    
                    
                    
                    (79
                    )Allowance
      for doubtful accounts at end of year
                    
                    $
                    1,345
                    
                    
                    $
                    1,588
                    
                    
                    $
                    859




F-41