UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
20-F
 
 ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE
ACT OF 1934
 
 For
the fiscal year ended December 31, 2007
 
 Commission
file number:  000 30827
 
 ClickSoftware
Technologies Ltd.
 (Exact
name of Registrant as specified in its charter)
 
 State
of Israel
 (Jurisdiction
of incorporation or organization)
 
 2
Rechavam Ze’evi Street
 Givat
Shmuel, 54017 Israel
 (Address
of principal executive offices)
 
 Shmuel
Arvatz
 +972-3-7659-467
 2
Rechavam Ze’evi Street
 Givat
Shmuel, 54017 Israel
 (Name,
Telephone and/or Facsimile number and Address of Company Contact
Person)
 
 Securities
registered or to be registered pursuant to Section 12(b) of the
Act:
 
 Title of each
      class
              Name of each exchange
      on which registeredOrdinary
      Shares, par value of NIS 0.02
              Nasdaq
      Capital Market
 
 
 28,510,345 Ordinary Shares, par value
NIS 0.02 per share
 
 Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.
 
  ̈
Yes                      x No
 
 If
this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
 
  ̈
Yes                      x No
 
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      ClickSoftware Technologies Ltd.
                      
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      1
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 
 x
Yes                       ̈ No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
 
  ̈ Large Accelerated
Filer                                 ̈ Accelerated
Filer                           x Non-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
 
 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).
 
 x
Yes                       ̈ No


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TABLE OF
CONTENTS
 
 Item
      Number
              Title
              PagePART
      ONEItem
      1.
              Identity
      of Directors, Senior Management and Advisers
              4Item
      2.
              Offer
      Statistics and Expected Timetable
              4Item
      3.
              Key
      Information
              4Item
      4.
              Information
      on the Company
              16Item
      4A.
              Unresolved
      Staff Comments
              22Item
      5.
              Operating
      and Financial Review and Prospects
              23Item
      6.
              Directors,
      Senior Management and Employees
              35Item
      7.
              Major
      Shareholders and Related Party Transactions
              41Item
      8.
              Financial
      Information
              42Item
      9.
              The
      Offer and Listing
              43Item
      10.
              Additional
      Information
              44Item
      11.
              Quantitative
      and Qualitative Disclosures About Market Risk
              56Item
      12.
              Description
      of Securities Other than Equity Securities
              57PART
      TWOItem
      13.
              Defaults,
      Dividend Arrearages and Delinquencies
              58Item
      14.
              Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds
              58Item
      15T.
              Controls
      and Procedures
              58Item
      16A.
              Audit
      Committee Financial Expert
              58Item
      16B.
              Code
      of Ethics
              59Item
      16C.
              Principal
      Accountant Fees and Services
              59Item
      16D.
              Exemptions
      from the Listing Standards for Audit Committees
              59Item
      16E.
              Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
              59PART
      THREEItem
      17.
              Financial
      Statements
              60Item
      18.
              Financial
      Statements
              60Item
      19.
              Exhibits
              79
 
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ITEM
      1.
              IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISERS
 
 Not
applicable.
 
 
 ITEM
      2.
              OFFER
      STATISTICS AND EXPECTED TIMETABLE
 
 Not
applicable.
 
 
 ITEM
      3.
              KEY
      INFORMATION
 
  3A.          Selected
financial data
  
 Our
historical consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States (“GAAP”) and are
presented in U.S. dollars. The selected historical consolidated financial
information as of December 31, 2006 and 2007 and for each of the three years
ended December 31, 2005, 2006 and 2007 have been derived from, and should be
read in conjunction with, the consolidated financial statements of ClickSoftware
Technologies Ltd. and notes thereto appearing elsewhere in this annual
report.  The selected financial data as of  December 31,
2003, 2004 and 2005 and for each of  the years ended December 31, 2003
and 2004 have been derived from the audited financial statements of
ClickSoftware Technologies Ltd. not included in this annual report.
 
 The
information presented below is qualified by the more detailed historical
consolidated financial statements set forth in this annual report, and should be
read in conjunction with those consolidated financial statements, the notes
thereto and the discussion under Item 5 - Operating and Financial Review and
Prospects - included elsewhere in this annual report.
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Consolidated
Statement of Operations Data – Year Ended December 31
 (in
thousands of U.S. dollars, except per share data)
 
 2007
              2006
              2005
              2004
              2003Revenues
              $
      40,019
              $
      32,431
              $
      24,067
              $
      22,705
              $
      22,410Cost
      of revenues
              15,295
              12,561
              9,792
              7,504
              7,593Gross
      profit
              24,724
              19,870
              14,275
              15,201
              14,817Research
      and Development expenses, net
              5,767
              4,113
              3,128
              2,710
              1,926Selling
      and Marketing expenses
              13,203
              10,337
              10,124
              8,939
              7,840General
      and Administrative expenses
              4,399
              3,671
              3,138
              2,818
              3,569Total
      operating expenses
              23,369
              18,121
              16,390
              14,467
              13,335Operating
      income (loss)
              1,355
              1,749
              (2,115)
              734
              1,482Other
      Income
              404
              -
              -
              -
              -Interest  income,
      net
              899
              484
              122
              179
              259Net
      income (loss) before taxes
              2,658
              2,233
              (1,993)
              913
              1,741Taxes
      on income
              50
              95
              -
              -
              -Net
      income (loss)
              $
      2,608
              $
      2,138
              $
      (1,993)
              $     913
              $  1,741Basic
      net income (loss) per share
              $   0.09
              $   0.08
              $   (0.07)
              $    0.03
              $    0.07Diluted
      net income (loss) per share
              $   0.09
              $   0.08
              $   (0.07)
              $    0.03
              $    0.06Shares
      used in computing basic net  income (loss) per
    share
              28,254,926
              27,767,748
              27,514,262
              27,202,804
              25,847,758Shares
      used in computing diluted net income  (loss) per
      share
              29,794,261
              28,442,887
              27,514,262
              28,336,450
              26,874,351
 
 
 
 Consolidated
Balance Sheet Data – Year Ended December 31
 (in
thousands of U.S. dollars, except for shares data)
 
 2007
              2006
              2005
              2004
              2003Working
      capital
              $  18,947
              $  14,811
              $   8,824
              $
      10,328
              $   8,821Total
      assets
              35,233
              28,972
              21,004
              20,249
              17,455Long-term
      liabilities
              5,337
              4,521
              1,786
              1,677
              1,490Shareholders’
      equity
              16,812
              12,541
              9,263
              10,872
              9,613Number
      of shares outstanding
              28,510,345
              27,994,626
              27,634,707
              27,403,159
              27,080,955
 
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 3B.          Capitalization
and indebtedness
 
 Not
applicable.
 
 
 3C.          Reasons
for the offer and use of proceeds
 
 Not
applicable.
 
 
 3D.          Risk
factors
  In
conducting our business, we face many risks that may interfere with our business
objectives.  Some of these risks could materially and adversely affect
our business, financial condition and results of operations.  In
particular, we are subject to various risks resulting from changing economic,
political, industry, business and financial conditions.  The risks and
uncertainties described below are not the only ones we face.
 
 You
should carefully consider the following factors and other information in this
annual report before you decide to invest in our ordinary shares.  If
any of the negative events referred to below occur, our business, financial
condition and results of operations could suffer.  In any such case,
the trading price of our ordinary shares could decline, and you may lose all or
part of your investment.
  We
may not be able to maintain profitability.
 
 Although
we recorded a profit for fiscal years 2007 and 2006, we may not generate
sufficient revenues to maintain profitability in the future. To maintain
profitability, we must increase our revenues while containing or reducing our
expenses. We expect to continue to incur significant sales and marketing and
research and development expenses.  Some of our expenses, such as
administrative and management payroll and rent and utilities, are fixed in the
short term, must be incurred in advance of when revenue is generated and cannot
be quickly reduced if we experience revenue declines.  Therefore, if
our projected revenue does not meet our expectations, we are likely to
experience an even larger  impact on our operating profit. As a
result, we must generate and maintain growing revenues to maintain
profitability, which we may not accomplish.
  Our quarterly
operating results are subject to significant fluctuations and if we fail to meet
the expectations of securities analysts or investors, our share price may
decrease.
 
 Our
quarterly operating results are subject to significant fluctuations and are
difficult to predict.  For example, our operating history shows that a
significant percentage of our quarterly revenues is derived from orders placed
towards the end of a given quarter.  Frequently, our quarterly revenue
performance depends upon a sale of significant size to a single
customer.  A delay in the completion of any such sale past the end of
a particular quarter could materially and adversely impact our results for that
quarter.
 
 Our
future quarterly operating results may not meet the expectations of securities
analysts or investors, in which case our share price may
decrease.  The factors that may cause fluctuations in our quarterly
operating results include, but are not limited to, the following:
  ·
              the
      volume and timing of customer orders, including a trend toward larger
      customers generating larger
transactions;
  ·
              internal
      budget constraints and approval processes of our current and prospective
      clients;
  ·
              the
      length and unpredictability of our sales
cycle;
  ·
              the
      recognition of a portion of our revenues on a contract accounting
      basis;
  ·
              increases
      in operating expenses;
  ·
              the
      indirect nature of some of our sales efforts through our channel and
      strategic partners;
  ·
              the
      mix of revenue generated by product licenses and professional
      services;
  ·
              the
      geographic mix of revenue;
   
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  ·
              announcements
      or introductions of new products or product enhancements by us or our
      competitors;
  ·
              price
      and product competition;
  ·
              consolidation
      among our customers;
  ·
              changes
      in prices of and the adoption of different pricing strategies for our
      products and those of our
competitors;
  ·
              timing
      and amount of sales and marketing
expenses;
  ·
              changes
      in the composition and success of our business and partner
      relationships;
  ·
              technical
      difficulties or “bugs” affecting the operation of our
      software;
  ·
              foreign
      currency exchange rate fluctuations;
and
  ·
              general
      economic conditions.
  Because
of the numerous factors that may cause fluctuations in our quarterly operating
results, we believe that period-to-period comparisons of our results of
operations are not necessarily meaningful and that such comparisons should not
be relied upon as an indication of future performance.
  The
complexity of accounting regulations and related interpretations and policies,
particularly with regard to revenue recognition, could cause us to defer revenue
and materially affect our financial results for a given period.
 
 We
frequently enter into contracts where, due to revenue recognition criteria, we
recognize only a portion of the total revenue under the contract in the quarter
in which we enter into the contract. For example, we may recognize revenue on a
ratable basis over the life of the contract.  The portion of revenues
recognized on a deferred basis may vary significantly in any given quarter, and
revenues in any given quarter are a function both of contracts signed in such
quarter and contracts signed in prior quarters.  In addition, we may
be required to apply project accounting, based on SOP 81-1 “Accounting for
Performance of Construction-Type and Certain Production-Type Contracts,” using
contract accounting on the percentage-of-completion method based on the
relationship of actual working hours incurred to total working hours estimated
to be incurred over the duration of the contract.  When project
accounting is applied, license revenues may be adversely affected by delays in
the progress of the implementation. As a result, revenues in any quarter may be
difficult to predict and are an unreliable indicator of future performance
trends.
 
  Our
sales cycle is variable, often long, dependent on factors outside our control
and involves investment of significant resources on our part, but may never
result in actual sales.
   The
length of our sales cycle – the period between initial contact with a potential
customer and the signing of a license and related agreements - has historically
been lengthy and variable, typically lasting from three to nine months. 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, causing us to incur most of our selling and marketing expenses in
advance of a potential sale. In addition, a number of companies 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 results in a
competitor obtaining the desired contract from the customer or in a decision by
a customer not to proceed.  Sales of licenses are subject to a number
of risks outside our control, including budgeting, approval and competitive
evaluation processes that typically accompany significant capital
expenditures.  Potential customers consider many factors in evaluating
our products, and the length of time a customer devotes to evaluation, contract
negotiation and budgeting processes vary significantly from company to company.
Historically, a significant portion of our sales in any given quarter occur
towards the end of the quarter; if sales forecasted from a specific client for a
particular quarter are not realized in that quarter, we are often unlikely to be
able to generate revenues from alternate sources in time to compensate for the
shortfall.   The uncertain outcome of our sales efforts and the
length of our sales cycles could result in substantial fluctuations in license
revenues.  If our sales cycle lengthens, our quarterly operating
results may become less predictable and may fluctuate more widely than in the
past. 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.  Moreover, to the extent that significant sales occur earlier
than expected, revenue and operating results for subsequent quarters could be
materially and adversely affected.
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  Our
implementation cycle depends on factors outside our control.
 
 Depending
on the nature and specific needs of a client, the implementation of our products
typically takes six to twelve months.  During the implementation
cycle, there are a number of factors beyond our control that may affect the
implementation timeline, including a client’s budgetary constraints, a client’s
internal acceptance reviews, the success and continued internal support of a
client’s own development efforts, the nature, size and specific needs of a
client, the possibility that a client cancels an order and the level and quality
of service provided by third-party implementation and professional services
partners.  Delays in the implementation timeline may materially and
adversely affect our services revenues.
  The
general economic outlook may adversely affect the demand for our
products.
 
 Our
business depends on the overall demand for our products and services and on the
economic health of our current and potential customers. To the extent that
general economic conditions worsen and information technology spending does not
continue to improve or declines from current levels, the demand for our products
and services, and therefore our future revenues, could be materially and
adversely affected.  In addition, we may not accurately gauge the
effect of general economic conditions on our business and, as a result, fail to
react to such changing conditions in a timely manner.  Any such
adverse impacts caused by changing general economic conditions could materially
and adversely affect our business, financial condition and results of
operations.
  The
market may not accept our products and services.
 
 Historically,
all of our operating revenue has come from sales of, and services related to,
our Service Optimization Suite, which includes ClickSchedule, ClickFix,
ClickAnalyze, ClickPlan, ClickMobile, ClickRoster, ClickForecast and
ClickLocate.  We continually aim to improve and enhance our Service
Optimization Suite to meet market requirements and our growth depends on the
market acceptance of these products and services. If our products and services
do not achieve continued customer acceptance, our business, financial condition
and results of operations would be materially and adversely
affected.
  We
face intense competition, which could make it difficult to compete
successfully.
 
 The
market for our products is highly competitive and rapidly
changing.  Competition may increase in the future as current
competitors expand their product offerings and new companies attempt to enter
the market.  In addition, smaller competitors have been acquired by
large organizations with broader product offerings.  Our industry has
witnessed a substantial amount of merger and acquisition activity over the past
few years and the trend of consolidation in our industry may affect our ability
to remain competitive. Also, some of our current and potential competitors are
among the largest and most well capitalized software companies in the world and
have significant competitive advantages over us, including greater name
recognition, longer operating histories, larger customer bases and significantly
greater financial, technical, marketing, public relations, sales, distribution
and other resources than us. Because the market for service and delivery
optimization software is evolving, we expect additional competition from other
established and emerging companies if this market continues to develop and
expand. For example, we could face competition from our strategic partners or
from other companies that may in future decide to compete in our
market.   Competition could result in price reductions, fewer
customer orders, reduced gross margin and loss of market share, any of which
could cause our business, financial condition and results of operations to
suffer.  We may not be able to compete successfully with existing or
future competitors, and competitive pressures could materially and adversely
affect our business, financial condition and results of operations.
  If
we fail to expand our relationships with third parties that provide
implementation and professional services to our clients, we may be unable to
increase our revenues.
 
 In
order for us to focus more effectively on our core business of developing and
licensing software solutions, we must continue to establish relationships with
third parties that provide implementation and professional services to our
clients.  Third-party implementation and consulting firms can also be
influential in the choice of service optimization applications by new
clients.  If we are unable to establish and maintain effective,
long-term relationships with implementation and professional services providers,
or if these providers do not meet the needs or expectations of our clients, we
may be unable to increase our revenues, which would materially and adversely
affect our business, financial condition and results of
operations.  Even if we establish relationships with these third
parties, we may be unable to attain sufficient focus and resources from the
third-
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      ClickSoftware Technologies Ltd.
                  
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  party
providers to meet all of our clients’ needs as a result of the limited resources
and capacities of many third-party implementation providers. If sufficient
resources are unavailable, we could be required to provide these services
internally, which could limit our ability to meet other demands.  Even
if we are successful in developing relationships with third-party implementation
and professional services providers, we cannot control the level and quality of
service provided by these partners.
 
 If
we are unable to maintain our relationships with our distributors, value-added
resellers and agents, or if our distributors' businesses are adversely affected
by developments unrelated to us, our sales could be harmed.
 
 Our
marketing strategy includes selling through distributors, value-added resellers
and agents, as well as direct selling by our own sales force. For example, the
marketing strategy we are employing for our IMRS initiative, which was released
in 2007, is based on our cooperation with these partners. We may not be
successful extending the terms of our various agreements or establishing similar
relationships with these partners if our current agreements are not extended.
Changes in our relationships with our distributors, value-added resellers and
agents, or other changes to their respective businesses could have a material
adverse effect on our business, financial condition or results of
operations.
  Failure
to fully develop or maintain key business relationships could limit our ability
to sell additional licenses, thereby decreasing our revenues and increasing our
sales and marketing costs.
 
 Our
success in penetrating our target markets depends in part on our ability to
develop and maintain business relationships with software vendors, resellers,
systems integrators, distribution partners and customers.  For
example, we depend on certain suppliers for the development, supply and support
of third-party software components that are integrated into our solutions. If we
fail to continue developing these relationships, our growth could be
limited.  We do not have long-term contracts with some of these
suppliers, and they are not obligated to provide us with products or services
for any specified period of time.  We have entered into agreements
with third parties relating to the integration of our products with their
product offerings, distribution, reselling and consulting.  We
currently derive revenues from these agreements but may not be able to continue
to do so in the future. In addition, if any of our software vendors cease
production, cease operations or fail to make timely delivery of orders, we may
not be able to meet our delivery obligations to our customers, and may lose
revenues and harm our customer relationships. Furthermore, our growth may be
limited if prospective clients do not accept the solutions offered by our
strategic partners.
  We
depend on key personnel, and the loss of any key personnel could affect our
ability to compete and impair our ability to attract additional key
personnel.
 
 We
believe our future success will depend on the continued service of our executive
officers and other key sales and marketing, product development and professional
services personnel.  The services of our senior management team and
key personnel would be difficult to replace and the loss of any of these
employees could harm our business significantly.  Although we have
employment agreements with our executive officers that generally require 60 to
90 days notification prior to departure, our relationships with these officers
and key employees are at will and can be terminated by either party without
cause.  The loss of any of our key personnel could harm our ability to
execute our business strategy and remain competitive.
  If
we fail to expand our professional services organization, we may not be able to
service current or additional clients.
 
 We
may be unable to attract and retain a sufficient number of highly qualified
professional services personnel to meet our business
needs.  Competition for these employees can be intense, especially in
a number of our key markets and locations. Clients that license our software
typically engage our professional services organization to assist with the
installation and operation of our software applications.  Our
professional services organization also provides assistance to our clients
related to the maintenance, management and expansion of their software
systems.  Future growth in licenses of our software will depend in
part on our ability to continue providing clients with these
services.  In addition, we will be required to expand our professional
services organization to enable us to continue to support our existing installed
base of customers.  The market for the qualified personnel we require
is very competitive because of the limited number of people available with the
necessary technical skills and understanding of our products and technology. If
we are unable to maintain and expand our professional services organization, our
ability to support our service
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  business
would be limited.  In addition, a lack of professional services
resources on implementations of current customers would result in delays in the
recognition of revenues under contract accounting.
 
 Any
future mergers with or acquisitions of companies, products or technologies and
the resultant integration process may distract our management and disrupt our
business.
 
 One
of our business strategies is to consider strategic partnerships, alliances,
mergers and/or acquisitions of complementary businesses, products and
technologies. Pursuit of such alternatives would require significant investments
of management time and attention. Mergers with or acquisitions of companies
involve a number of risks, including the difficulty of assimilating the
operations and personnel of the merged or acquired companies and of maintaining
uniform standards, controls and policies. For example, any technology or rights
acquired by us might not be incorporated successfully into products we introduce
or market, and such products may not achieve market acceptance. Also, if we
consummate one or more acquisitions in which the consideration consists of
ordinary shares, current shareholders would suffer dilution of their interests
in us. These difficulties could disrupt our ongoing business, distract our
management and employees, increase our expenses, consume cash resources and
materially and adversely affect our business, financial condition or results of
operations.
  Our
market may experience rapid technological changes that could cause our products
to fail or require us to redesign our products, which would result in increased
research and development expenses.
 
 Our
market is characterized by rapid technological change, dynamic client needs and
frequent introductions of new products and product enhancements.  If
we fail to anticipate or respond adequately to technology developments and
client requirements, or if our product development or introduction is delayed,
our business will suffer.  Client product requirements can change
rapidly as a result of computer hardware and software innovations or changes in
and the emergence, evolution and adoption of new industry
standards.  The actual or anticipated introduction of new products has
resulted and will continue to result in some reformulation of our product
offerings.  Technology and industry standards can make existing
products obsolete or unmarketable or result in delays in the purchase of such
products.  As a result, the life cycles of our products are difficult
to estimate.  We must respond to developments rapidly and continue to
make substantial product development investments.  As is customary in
the software industry, we have previously experienced delays in introducing new
products and features, and we may experience such delays in the future that
could impair our revenue and operating results.  Our business,
financial condition and results of operations will be materially and adversely
affected if we fail to enhance our product functionality to meet our current and
future customer needs.
  Our
revenues depend on a small number of products, and our results may be vulnerable
to unexpected shifts in demand.
 
 ClickSchedule
accounted for the majority of our license revenues in each of the years ended
December 31, 2007, 2006 and 2005 and we expect that this will be the case in
future periods.  Accordingly, any decline in the demand for
ClickSchedule will have a material adverse effect on our license
revenues.   A decline in the demand for ClickSchedule may also
reduce revenues derived from our other products.
  Our
products could be susceptible to errors or defects or contain inaccurate data
from third-party vendors.
 
 Complex
software products, such as ours, often contain errors or defects, particularly
when first introduced or when new versions or enhancements are
released.  In the past, some of our products have contained errors and
defects that have delayed implementation or required us to expend additional
resources to correct the problems.  Despite internal testing, testing
by current and potential clients and the history of use by our installed base of
customers, our current and future products may contain as yet undetected defects
or errors.  Any such defects or errors could result in adverse
customer reaction, negative publicity and damage to our reputation, diversion of
resources, increased service and maintenance costs, loss of market demand, loss
of market share, loss of potential new customers, lost revenues, liability or a
delay in market acceptance of these products, any of which could have a material
adverse effect on our business, financial condition and results of
operations.
 
 The
performance of our products also depends, in part, upon the accuracy and
continued availability of third-party data.  We rely on third parties
that provide information such as street and address locations and mapping
functions that we incorporate into our products.  If these parties do
not provide accurate information, or if we
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  are
unable to maintain our relationships with them, our reputation and competitive
position could suffer and we could be unable to develop or enhance our products
as required.
  Our
intellectual property could be used by third parties without our consent because
protection of our intellectual property is limited.
 
 Our
success and ability to compete substantially depend upon our internally
developed technology, which we protect through a combination of trade secrets,
copyrights, trademarks, patents and intellectual property law, together with
non-disclosure and invention assignment agreements.  However, we may
not be able to adequately protect our intellectual property rights, which may
significantly harm our business.  Specifically, we may not be able to
protect our trademarks for our company name and our product names, and
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology.  Policing unauthorized use of our products and
technology is difficult and costly, particularly in countries where the laws may
not protect our proprietary rights as fully as in the United States, and the
steps we have taken may not prevent infringement or misappropriation of our
intellectual property rights.
 
 Our
end-user licenses are designed to prohibit unauthorized use, copying or
disclosure of our software and technology in the United States, Israel and other
foreign countries.  However, these provisions may be unenforceable
under the laws of some jurisdictions.  Unauthorized third parties may
be able to copy some portions of our products, reverse engineer or obtain and
use information and technology that we regard as proprietary.  Third
parties could also independently develop competing technology or design around
our technology.  If we are unable to successfully detect infringement
and/or to enforce our rights to our technology, we may lose competitive position
in the market.  Our means of protecting our intellectual property
rights may not be adequate and competing companies may independently develop
similar technology.  In addition, some of our licensed users may allow
additional unauthorized users to use our software, and if we do not detect such
use, we could lose potential license fees.
 
 Our
increased reliance on our channel and strategic partners may increase the
likelihood of the infringement of our intellectual property.  As we
deepen our ties with our channel and strategic partners, the number of people
who are exposed to and interact with our software and other intellectual
property will increase.  Despite our best efforts to protect our
intellectual property, our channel or strategic partners, or their employees or
customers, may copy some portions of our products or otherwise obtain and use
information and technology that we regard as proprietary.  Our channel
or strategic partners might also improperly incorporate portions of our
technology into their own products or otherwise exceed the authorized scope of
their licenses to our technology.  If we are unable to successfully
detect and prevent infringement and/or to enforce our rights to our technology,
our business, financial condition and results of operations could be materially
and adversely affected.
  Our
technology and other intellectual property may be subject to infringement
claims.
 
 Substantial
litigation regarding technology rights and other intellectual property rights
exists in the software industry both in terms of infringement and ownership
issues.  We expect that software products may be increasingly subject
to third-party infringement or ownership claims as the number of competitors in
our industry segment grows and the functionality of products in different
industry segments overlaps. A successful claim of patent, copyright or trademark
infringement or conflicting ownership rights against us could cause us to make
changes in our business or materially and adversely affect our business,
financial condition and results of operations.
 
 Third
parties may make a claim of infringement or conflicting ownership rights against
us with respect to our products and technology.  Any claims, with or
without merit, could:
  ·
              be
      time-consuming to defend;
  ·
              result
      in costly litigation;
  ·
              divert
      management’s attention and resources;
or
  ·
              cause
      product shipment and installation
delays.
  
 Further,
if an infringement or ownership claim is successfully brought against us, we may
have to pay significant damages or royalties, enter into a licensing agreement,
and/or stop selling the product or using the
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  technology
at issue.  Any such royalty or licensing agreements may not be
available on commercially reasonable terms, if at all.
 
 We
also indemnify some of our customers against claims that our products infringe
the intellectual property rights of others.  We have only conducted a
partial search for existing patents and other intellectual property
registrations, and our products may infringe issued patents.  In
addition, because most patent applications are not publicly disclosed until some
time after the application is filed, applications may have been filed that
relate to our products. If a successful claim was made against us and we failed
to commercially develop or license a substitute technology, our business,
financial condition and results of operations could be materially and adversely
affected.
 
 If
our relationships with our key customers are terminated, our revenues will
decline and our business will be adversely affected.
 
 During
2007, our five largest customers together accounted for approximately 42% of our
revenues. If for any reason, our relationships with key customers are
terminated, or if any of our key customers reduces purchases of our products,
then our business, financial condition and results of operations could be
materially and adversely affected. The impact of the termination or reduction of
our key customer relationships would be intensified if we were unable to
increase sales to other customers to offset this termination or
reduction.
  Our
business may become increasingly susceptible to numerous risks associated with
international operations.
 
 We
derive a substantial portion of our revenues and maintain significant portions
of our operations outside the United States.  Our facilities are
located in North America, Israel, the European continent, the United Kingdom,
Australia and Japan, and our executive officers and other key employees are
dispersed throughout the world.  This geographic dispersion requires
significant management resources that may place us at a disadvantage compared to
our locally-based competitors.  In addition, our international
operations are generally subject to a number of risks, including but not limited
to:
  ·
              foreign
      currency exchange rate
fluctuations;
  ·
              longer
      sales cycles;
  ·
              multiple,
      conflicting and changing governmental laws and
  regulations;
  ·
              expenses
      associated with customizing products for foreign
  countries;
  ·
              protectionist
      laws and business practices that favor local
  competition;
  ·
              difficulties
      in collecting accounts receivable;
and
  ·
              political
      and economic instability.
 
 We
expect international revenues to continue to account for a significant
percentage of total revenues and we believe we must continue to expand our
international sales and professional services activities to be
successful.  Our international sales growth will be limited if we are
unable to expand our international sales management and professional services
organizations, hire additional personnel, customize our products for local
markets and establish relationships with additional international distributors,
consultants and other third parties.  If we fail to manage our
geographically dispersed organization, we may fail to meet or exceed our
business plan and our revenues may decline.
  Our
risk exposure to foreign currency fluctuations is increasing, and we may not be
able to fully mitigate the risk.
 
 We
are exposed to movements in foreign currency exchange rates since we translate
foreign currencies into U.S. dollars for reporting purposes. Our primary
exposures have related to operating expenses and sales in Europe and Israel that
were not U.S. dollar-denominated. For example, in 2007 our operating expenses
increased, in part, due to exchange rate fluctuations. Weakness in the U.S.
dollar compared to foreign currencies has significantly increased the cost of
our European- and Israel-based operations in recent periods. We continue to
expand our operations in Europe, and revenue recognized in British pounds and
Euro is expected to continue to increase. We also expect our operations in Asia
to increase, particularly since we opened an office in Japan in
2007.  In 2007, 65% of our expenses and 45% of our revenues were
incurred in
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  non-U.S.
dollar currencies.  We incur a portion of our expenses, principally
with respect to salaries and related personnel expenses in Israel, in NIS. In
2007, 33% of our expenses were incurred in NIS.  We also incurred
expenses in Australian dollars and Japanese yen.  Currency
fluctuations in any of the currencies in which we operate could materially and
adversely affect our business, financial condition and results of
operations.  In addition, we have balance sheet exposure related to
foreign net assets. Although we engage in non-speculative hedging transactions
from time to time, we may be unable to adequately protect ourselves against
these risks.
  We
are incorporated in Israel and have important facilities and resources located
in Israel, which could be negatively affected due to military or political
tensions.
 
 We
are incorporated under the laws of the State of Israel and our research and
development facilities, as well as significant executive offices, are located in
Israel.  Although substantially all of our sales are to customers
located outside of Israel, political, economic and military conditions in Israel
could nevertheless materially and adversely affect our business, financial
condition and results of operations.  Since the establishment of the
State of Israel in 1948, a number of armed conflicts have taken place between
Israel and its Arab neighbors and a state of hostility, varying in degree and
intensity, has led to security and economic problems for
Israel.  Historically, Arab states have boycotted any direct trade
with Israel and, to varying degrees, have imposed a secondary boycott on any
company carrying on trade with, or doing business in,
Israel.  Although Israel has entered into agreements with Egypt,
Jordan and Palestinian representatives, there have been continued and increasing
difficulties in the relationship with the Palestinians and no prediction can be
made as to whether a resolution of past problems will be achieved or as to the
nature of any such resolution.  Beginning in September 2000, the
overall relationship and security situation between Israel and the Palestinians
deteriorated significantly and has been marked by frequent and continuing
violence.  In addition, during 2006 there occurred an outbreak of open
hostilities along Israel’s northern border with Lebanon, and there have recently
been hostilities, although to a lesser extent, in the Gaza Strip.  To
date, these matters have not had any material effect on our business and results
of operations, but they may do so in the future.
  Certain
of our employees in our office in Israel are required to serve in the Israel
Defense Forces and this could force them to be absent from our business for
extended periods.
 
 Certain
of our employees in our office in Israel are currently obligated to perform up
to 36-45 days of annual reserve duty in the Israel Defense Forces and are
subject to being called for active military duty at any time.  The
loss or extended absence of any of our key personnel due to these requirements
could harm our business.
  Our
need for additional financing is uncertain, as is our ability to obtain further
financing if required.
 
 Our
ability to maintain profitability using our currently available balance of cash,
cash equivalents and available credit will depend on our ability to maintain or
increase our revenues while continuing to control our expenses.  If we
are not successful in doing so, particularly given the uncertainties regarding
future information technology spending by our current and prospective customers,
we may need to raise additional capital to finance our operations and may not be
able to sell additional equity or debt securities.  If we are able to
issue equity or debt securities, these securities could have rights, preferences
and privileges senior to those of holders of our ordinary shares, and the terms
of these securities could impose restrictions on our operations.  The
sale of additional equity or convertible debt securities would result in
additional dilution to the stock holdings of our
shareholders.  Additionally, prior to the issuance of additional
equity or convertible debt securities to entities outside of Israel, we will
need to obtain approval from the Office of the Chief Scientist of the Ministry
of Industry and Trade (the “Chief Scientist”) and we may not be able to obtain
this consent in the future.
 
 Alternatively,
we may seek other forms of financing, such as credit from banks or institutional
lenders.  Additional financing may not be available in amounts or on
terms acceptable to us, if at all.  If we are unable to obtain
additional financing, we may be required to reduce the scope of our planned
product development and marketing efforts, which could harm our business,
financial condition or operating results.
  We
are incurring additional costs and devoting more management resources to comply
with increasing regulation of corporate governance and disclosure.
 
 We
spend an increased amount of management time and external resources to
understand and comply with changing laws, regulations and standards relating to
corporate governance and public disclosure, including the Sarbanes-Oxley Act of
2002, new SEC regulations and NASDAQ Stock Market rules. Devoting the necessary
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  resources
to comply with evolving corporate governance and public disclosure standards may
result in increased general and administrative expenses and a diversion of
management time and attention to compliance activities.
  The
tax benefits we expect to receive from the Government of Israel may be delayed,
reduced or terminated in the future.
 
 Pursuant
to the Law for the Encouragement of Capital Investments, the Government of
Israel through the Investment Center has granted “Approved Enterprise” status to
two of our existing capital investment programs and “Privileged Enterprise”
status to two other investment programs.  Consequently, we are
eligible for certain tax benefits for the first several years in which we
generate taxable income from these programs.  We have not, however,
begun to generate taxable income for purposes of this law and we do not expect
to utilize these tax benefits in the near future.  Once we begin to
generate taxable income, our financial condition could suffer if our tax
benefits were significantly reduced.  The benefits available to an
approved enterprise are dependent upon the fulfillment of certain conditions and
criteria.  If we fail to comply with these conditions and criteria,
the tax benefits we receive could be partially or fully canceled and we could be
forced to refund the amount of the benefits we received, adjusted for inflation
and interest.  From time to time, the Government of Israel has
discussed reducing or limiting the benefits.  We cannot assess whether
these benefits will be available in the future at their current levels, or at
all.
  It
may be difficult to enforce a U.S. judgment against us, our officers and
directors and the Israeli accountants named as experts in this annual report or
to assert U.S. securities laws claims in Israel or serve process on
substantially all of our officers and directors and these
accountants.
 
 We
are incorporated and maintain significant operations in Israel.  Some
of our executive officers and directors and the Israeli accountants named as
experts in this annual report reside outside the United States and a significant
portion of our assets and the assets of these persons are located outside the
United States.  Therefore, it may be difficult for an investor, or any
other person or entity, to effect service of process on us or any of those
persons or to enforce a U.S. court judgment based upon the civil liability
provisions of the U.S. federal securities laws, against us or any of those
persons, in an Israeli court.  Additionally, it may be difficult for
an investor or any other person or entity to enforce civil liabilities under
U.S. federal securities laws in original actions instituted in
Israel.
 
  Our
Chief Executive Officer owns a significant percentage of our ordinary shares and
could significantly influence the outcome of actions.
 
 As
of March 31, 2008, our Chief Executive Officer and Chairman of the Board, Dr.
Moshe BenBassat beneficially owned approximately 18% of our outstanding ordinary
shares. Dr. BenBassat may be able to influence certain matters requiring
approval by our shareholders, including the election of directors or a change of
control of our company, which could have a material adverse effect on our stock
price.  These actions may be taken even if our other investors oppose
them.
  We
are subject to anti-takeover provisions that could delay or prevent our
acquisition by another entity.
 
 Provisions
of Israeli corporate and tax law and of our articles of association may have the
effect of delaying, preventing or making more difficult any merger or
acquisition of us.  In addition, any merger or acquisition of us will
require the prior consent of the Chief Scientist.  Israeli law
regulates mergers, votes required to approve a merger, acquisition of shares
through tender offers and transactions involving significant
shareholders.  In addition, our articles of association provide for a
staggered board of directors.  Any of these provisions may make it
more difficult to acquire us.  Accordingly, our acquisition by another
entity could be delayed or prevented even if it would be beneficial to our
shareholders.
  The
government programs in which we currently participate and tax benefits we
currently receive require us to satisfy prescribed conditions and may be
delayed, terminated or reduced in the future.
 
 We
receive grants from the Government of Israel through the Chief Scientist for the
financing of a  portion of our research and development expenditures
in Israel, and we may apply for additional grants in the future.  We
may not continue to receive grants at the same rate or at all.  The
Chief Scientist’s budget has been subject to reductions that may affect the
availability of funds for Chief Scientist grants in the future.  The
percentage of
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  our
research and development expenditures financed using grants from the Chief
Scientist may decline in the future, and the terms of such grants may become
less favorable.  In 2007, 3% of our research and development
expenditures were financed using grants from the Chief Scientist, compared to 9%
and 16% of our research and development expenditures in 2006 and 2005,
respectively.  In connection with research and development grants
received from the Chief Scientist, we must make royalty payments to the Chief
Scientist on the revenues derived from the sale of products, technologies and
services developed with the grants from the Chief Scientist.  From
time to time, the Government of Israel changes the rate of royalties we must
pay, so we are unable to accurately predict this rate.  In addition,
our ability to manufacture products or transfer technology outside Israel
without the approval of the Chief Scientist is restricted under
law.  Any manufacture of products or transfer of technology outside
Israel will also require us to pay increased royalties to the Chief Scientist up
to 300%.  We currently conduct all of our manufacturing activities in
Israel and intend to continue doing so in the foreseeable future and therefore
do not believe there will be any increase in the amount of royalties we pay to
the Chief Scientist.  Currently, the Chief Scientist does not consider
the licensing of our software in the ordinary course of business a transfer of
technology and we do not intend to transfer any technology outside of
Israel.  Consequently, we do not anticipate having to pay increased
royalties to the Chief Scientist for the foreseeable future.  In
connection with our grant applications, we have made representations and
covenants to the Chief Scientist regarding our research and development
activities in Israel.  The funding from the Chief Scientist is subject
to the accuracy of these representations and covenants.  If we fail to
comply with any of these conditions, we could be required to refund payments
previously received together with interest and penalties and would likely be
denied receipt of these grants thereafter.
  Future
sales of our ordinary shares could depress the market price for our ordinary
shares.
 
 As
of December 31, 2007, we had 28,510,345 ordinary shares outstanding (net of
39,000 shares held in treasury).  In addition, as of December 31,
2007, we had 4,035,975 ordinary shares issuable upon exercise of outstanding
options and warrants, and 1,363,993 additional ordinary shares reserved for
issuance pursuant to our stock option plans and employee share purchase
plan.  If we or our existing shareholders sell a large number of our
ordinary shares, the price of our ordinary shares could fall
dramatically.
  If
we are characterized as a passive foreign investment company, our U.S.
shareholders will be subject to adverse tax consequences.
 
 If,
for any taxable year, either, (1) 75% or more of our gross income is passive
income or (2) 50% or more of the fair market value of our assets, including cash
(even if held as working capital), produce or are held to produce passive
income, we may be characterized as a “passive foreign investment company”
(“PFIC”) for United States federal income tax purposes.  Passive
income includes dividends, interest, royalties, rents annuities and the excess
of gains over losses from the disposition of assets, which produce passive
income.  For purposes of the asset test, cash is considered to be an
asset that produces passive income.  As a result of our cash position
and the value of our assets, we may be deemed to be a PFIC for U.S. federal
income tax purposes.
 
 If
we are characterized as a PFIC, our shareholders who are residents of the United
States will be subject to adverse U.S. tax consequences.  Our
treatment as a PFIC could result in a reduction in the after-tax return to
shareholders resident in the United States and may cause a reduction in the
value of such shares. If we were to be treated as a PFIC, our shareholders will
be required, in certain circumstances, to pay an interest charge together with
tax calculated at maximum rates on certain “excess distributions” including any
gain on the sale of ordinary shares.  In order to avoid this tax
consequence, they (1) may be permitted to make a “qualified electing fund”
election (however we do not currently intend to take the action necessary for
our shareholders to make a “qualified electing fund” election, in which case, in
lieu of such treatment they would be required to include in their taxable income
certain undistributed amounts of our income) or (2) may elect to mark-to-market
the ordinary shares and recognize ordinary income (or possible ordinary loss)
each year with respect to such investment and on the sale or other disposition
of the ordinary shares.  Prospective investors should consult with
their own tax advisors with respect to the tax consequences applicable to them
of investing in our ordinary shares.
 
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  Our
stock price could be volatile and could decline substantially.
  The
stock market has experienced significant price and volume fluctuations, and the
market prices of technology companies have been and continue to be particularly
highly volatile.  The price at which our ordinary shares trade could
be volatile and could decline substantially due to factors such as:
  ·
              our
      inability to meet guidance or forward-looking information, if
      provided;
 
 ·
              variations
      between our actual results and the expectations of investors or published
      reports or analyses regarding our
business;
  ·
              announcements
      of technological innovations;
  ·
              announcements
      relating to strategic
relationships;
  ·
              conditions
      affecting the software industry;
  ·
              trends
      related to the fluctuations of stock prices of companies such as
      ours;
  ·
              sales
      of our ordinary shares by existing
shareholders;
  ·
              announcements
      by us or others affecting our business, systems or expansion plans;
      and
  ·
              general
      conditions and trends in technology
industries.
 
 
 
 ITEM
      4.
              INFORMATION
      ON THE COMPANY
 
 4A.          History
and development
  
  Our
corporate name is ClickSoftware Technologies Ltd. for both legal and commercial
purposes. We were incorporated as a company under the laws of the State of
Israel in 1979 and are subject to the Israeli Companies Law – 1999 (Companies
Law).  From inception until 1996, we operated as a consulting company
in the area of optimization and intelligent decision support
systems.  Thereafter, we transformed our business model to provide
workforce and service management products and solutions.Our principal executive
offices are located at 2 Rechavam Ze’eviStreet, Givat Shmuel
54017, Israel, and the telephone number at that location is +972-3-765-9400. Our
website is located at http://www.clicksoftware.com. Our wholly owned U.S.
subsidiary, ClickSoftware, Inc., has been appointed our agent in the United
States and is located at 35 Corporate Drive, Suite 140, Burlington,
MA.
 
 Our
capital expenditures for fiscal years 2007, 2006, and 2005 amounted to $1.2
million, $0.7 million, and $0.4 million, respectively. These expenditures were
primarily for hardware and software in our offices.  Our capital
expenditures for 2007 and 2006 included investments of $0.7 million and $0.4
million, respectively, following a fire in our offices in Israel in
2006.   Our current capital expenditures are also primarily for
hardware and software, and we expect to finance these expenditures primarily
from cash on hand.
 
 4B.          Business
overview
 
 We
are a leading provider of workforce and service management software products and
solutions. Our products and solutions incorporate best business practices, key
business functions of field service operations, and sophisticated
decision-making algorithms that enable our clients to more efficiently manage
their field service operations in a scalable, integrated manner.
 
 Our
end-to-end service chain optimization suite of products is designed to increase
service revenue and customer responsiveness while reducing costs. Our Service
Optimization suite includes strategic and tactical workforce planning, optimized
service scheduling, intelligent problem resolution, mobile workforce management,
and business analytics, connecting various organizational levels and all
functions, from executive strategy to operational execution.
 
 We
have developed our service chain optimization solutions through years of
experience in a variety of service operations. The result is a highly advanced
technology with the flexibility to model and accommodate varying business types
and processes. The ease with which it can be integrated with leading customer
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  relationship
management (CRM) and enterprise resource planning (ERP) solutions, often with
standard interface adaptors, enables our customers to accelerate the deployment
of the solution.
 
 A
service operation is ultimately measured by its performance at the day of
service. Our products are mission critical applications that manage incoming
jobs from the moment a job is opened until it is successfully closed. Our
products are able to perform a number of tasks, including generating the
appointment time for a customer, assigning the job to the right technician,
designing the optimal route for the technician to minimize travel, and
monitoring progress during the day.
 
 A
typical day starts with the morning schedule that contains the assignments for
all the work orders of the day. As the day develops, emergencies may arise,
jobs may take longer or shorter than expected, and traffic problems may cause
unexpected delays. These contingencies present significant challenges, primarily
minimizing the disruptions to the existing work orders while accommodating the
new emergency orders that must be delivered on the same day. Integrating
real-time updates from the technician’s mobile devices and/or GPS-based location
reporting devices with our decision-making algorithms, our solutions offer
comprehensive coverage to address these challenges and help ensure that the
work-plan is continually optimized.
 
 The
maturity of mobile devices and GPS technology offer unique opportunities to
continually optimize service delivery execution. We believe that handheld
data communication devices and GPS location reports should be used far beyond
their traditional role of data transmission to and from the
field.  These tools can be used for real-time decision-making in order
to increase productivity and customer responsiveness. For instance, our products
and solutions enable a concept known as “drip feed” management by which,
initially, every technician receives only the first two tasks of the day. Upon
completing the first task, the technician confirms task completion and a new
task is assigned. This technique contributes to improved priority management,
travel minimization and customer responsiveness. Similarly, with a GPS reporting
system, the dispatcher need not ask technicians where they are located since he
or she knows at all times where every technician is located, generating
additional efficiencies by improved customer-technician
assignments.
 
 Our
solutions constantly monitor the incoming list of new tasks at all levels of
frequency in full synchronization with the delivery status of the existing tasks
and the availability of technicians and spare parts in order to maximize
productivity and output while complying with promised delivery dates and other
business rules.
 
 While
other service management applications, such as CRM, Asset Management, or
Inventory Management, manage primarily data processing aspects, we believe our
products drive automatic and semi-automatic decision-making processes. We
believe our solutions have become the backbone of daily operations management in
many leading organizations worldwide by addressing the fundamental question of
job fulfillment: Who does What, for Whom, With what, Where and
When.
 
 The
decision-making support our products offer does not start on the day of service.
By the time we reach the day of service, the workforce's size and skill mix have
already been decided down to the name of the individuals and the shift each one
of them will be staffing on that day. This capacity is the result of a sequence
of decisions, some of which may have been made as long as a year or more in
advance. Prior to staffing the shifts for a given week or month, we first ensure
that a given individual will be available to work on particular days, taking
into account parameters such as vacation and training. Hiring options at this
stage are fairly limited. This stage is for "master" planning, also known as
tactical resource planning.
 
 Long
before that, up to a year or more in advance, capacity planning takes place,
i.e. determining the size and the skill mix in each territory as a function of
the company's strategic plan, e.g. expanding/shrinking business lines or
territories, new product introduction, etc. At this stage, sufficient time is
available for hiring and training new employees or relocating or re-training
existing employees.
 
 For
each of these stages, a key input is demand forecasting by job type and
territories at the time granularity is required for that stage. The above
sequence, together with the daily service delivery decisions, establishes the
essence of the service chain decision making, a concept pioneered by our staff
in the 1990s, and for which a U.S. patent was awarded (see “Intellectual
Property” below).
 
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   Service
Optimization Solutions Suite:
  Our
Service Optimization solutions suite includes:
  ClickScheduleoptimizes
service scheduling and routing for improving workforce productivity by balancing
customer, service and asset resources, and organizational preferences, including
contractual commitments, priority, drive time, skills, and service and asset
resources availability. Configuration capabilities, a high degree of scalability
and use of standard eXtensible Markup Language (XML) interfaces are designed to
improve integration with enterprise systems and deployment according to
organizational business policies and processes. ClickSchedule is our main
software platform and accounted for the majority of our license revenues in each
of the years ended December 31, 2007, 2006 and 2005.
  ClickAnalyzeprovides
reporting, monitoring and service business analytics for workforce performance
measurement and strategic decision support. ClickAnalyze enables drill-down
analysis of key performance indicators, including resource productivity,
operational costs, and responsiveness to customers. Integrated within the
Service Optimization suite, ClickAnalyze provides executive level summaries as
well as operational detailed reporting and analysis by territory, job type, time
frame and other criteria.
  ClickPlan provides interactive
and automated workforce planning for staffing and deployment of the field
workforce based on forecasted workload. ClickPlan is designed to enable service
organizations to resolve workforce shortages and surpluses weeks and months in
advance. Comparing available resources to forecasted workloads, ClickPlan helps
determine the best strategy to ensure the right people are in the right place,
at the right time.
  ClickForecast provides field
service workload forecasting to help companies project workforce capacity.
ClickForecast can combine historical service workload with future business
events to create a forecast for each territory, job type, or business unit.
ClickForecast enables service managers, marketing, and sales to collaboratively
determine the demand levels of their customers, and create multiple forecast
scenarios, each with different business assumptions.
  ClickFixprovides intelligent
diagnostics and problem resolution for reducing service costs. ClickFix enables
faster resolution of customer issues at multiple levels of service contact, from
the call center to the field. Based on an intelligent engine that utilizes
specific knowledge about our customers’ equipment, ClickFix diagnoses and
resolves problems independent of the user’s skills, experience and knowledge.
Accessibility via the internet empowers customers to resolve problems themselves
at any time of day, and often without a service resource, requiring fewer onsite
visits.
  ClickMobileprovides wireless
workforce management for monitoring field workforce activities and reducing the
labor of dispatching personnel. ClickMobile enables job detail notification from
the field and allows for field updates even when service resources are out of
wireless coverage. Assignments created in ClickSchedule are dispatched to field
devices based on configurable workflows while enabling real-time visibility into
workforce activity including job status, start and end time.
 
 ClickLocate (LBS) captures the
location information of a field service engineer and/or his or her vehicle
obtained via GPS or other technology and integrates it with ClickSchedule for
use in optimized scheduling. LBS then enables service organizations to improve
their service operations by allowing them to make decisions and take actions
based on location information including, near real-time engineer locations. In
effect, LBS enables service managers to “see” the current location of the entire
mobile workforce at one time.
 
 ClickRoster provides
interactive and automated workforce shift planning based on forecasted workload,
planning decisions, working contracts, rules and regulations and engineer
preferences.
  Service Optimization Suite
combines each of the solutions described above into a synergetic combination of
capabilities aimed at addressing the requirements of various roles and functions
within service organizations. The Service Optimization Suite aims to create
additional value by coordinating these roles and functions to realize efficiency
gains and reduce costs.
  Installation, Maintenance and Repair
Services (IMRS), released in 2007, is a pre-configured package that has
been tailored to the needs of small and mid-sized companies. IMRS encompasses
order management, optimized scheduling and operational reports and is based on
our Service Optimization Suite and best practices that we have gained from our
extensive experience with small and medium-sized customers in the home
appliance, computer and office equipment, industrial equipment and other
industries. IMRS was designed and configured specifically to meet the needs of
installation, maintenance and repair services.  IMRS
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  features
pre-configured scheduling and reporting that reduces the expense, time and
effort typically required to custom-design and program schedules and reports. In
addition, the ready-to-use reports provide insight about service operations and
streamline decision-making on the part of both service management and
dispatchers.
 
 ClickSoftware for Water
Utilities, released in 2006, is a vertical offering that draws on our
depth of experience in serving water utility customers around the world. This
“out-of-the-box” solution is preconfigured with industry practices and is
designed to minimize the time, cost and risk associated with optimization
technology implementations.
  
 Each
of our services engagements follows a structured implementation methodology
which has proven successful in dozens of customer implementations.  This
methodology includes the following phases:  planning, requirements
gathering, design, delivery, training, testing, go-live and transition to
worldwide support organization.  Each phase requires the cooperation of and
contributions from the customer in order to ensure a successful
delivery.
 
 Customers
  We
sell our products to a broad base of customers representing a variety of
industries with unique needs, including telecommunications, utilities and energy
and high-technology service providers, as well as the markets listed below.
During 2007, our five largest customers accounted for approximately 42% of our
sales. See Item 3D – Risk factors “If our relationships with our key customers
are terminated, our revenues will decline and our business will be adversely
affected.”
  Principal
Markets
  Our
service optimization solutions are utilized by leading organizations in a number
of service industry segments, including: utilities and energy,
telecommunications, retail, insurance, high-technology, computer and office
equipment, industrial equipment, medical equipment, building automation,
aerospace & defense, and home services. Our largest vertical market
traditionally has been the telecommunications market. However, in recent years,
we have seen strong demand in other markets, particularly the utility market
which has benefited from deregulation and modernization trends and became our
largest vertical market in 2007.  Our solutions are designed to
deliver improvements in:
  ·
              field
      workforce productivity
  ·
              responsiveness
      to customers
  ·
              quality
      of service delivered
  ·
              profitability
      of the service operation
  ·
              reduction
      in missed customer commitments.
  
 See
Item 5 – Operating and Financial Review and Prospects – for a breakdown of
revenues by geographic market.
 
 Sales
and Marketing Channels
  We
market and sell our products mostly through our direct sales force located in
North America, Europe and the Asia Pacific region, as well as through reseller
agreements with partners. We continue to create and strengthen partner
relations. Our multidisciplinary sales teams consist of field sales executives,
sales support engineers and internal sales staff. The internal sales staff is
responsible for generating leads and qualifying prospective clients. Sales
support engineers assist the sales executives in the technical aspects of the
sales process, including preparing demonstrations and technical proposals. Our
sales executives are responsible for completing the sales process and managing
the post-sale client relationship, which consists of ongoing relationship
management and the sale of additional licenses and products, as clients require
additional resources. Our management also takes an active role in our sales
efforts. The knowledge gained by our sales and marketing force is also
communicated to our product marketing group, which guides our development team.
This enables our organization to align the functionality of our products with
customer needs.
  We
typically direct our sales and marketing efforts to the client’s executive
officers, including the vice president of customer service, the chief
information officer, the chief financial officer and other senior executives
responsible for improving customer service at our clients' organizations. In
order to effectively promote product awareness, we engage in marketing
activities in a wide variety of areas, including public
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  relations
and analyst relations, email campaigns, web seminars with our customers and
industry analysts, newsletters and advertising creation and placement, direct
mailings and trade shows.
  Our
alliances organization supports joint marketing activities with our business
partners. Our business relationships with large ERP and CRM vendors, such as SAP
A.G., enable us to use our partners' market presence and sales channels to
create additional revenue opportunities. Our strategy is based on having
approved certified adaptors that enable rapid integration and implementation of
our products into certain ERP and CRM systems.
  We
also market our products and services through resellers. Our reseller agreements
generally provide the parties with the right to use each other's name in
marketing and advertising materials, and to conduct joint marketing programs. We
provide sales materials and training to resellers on the marketing, selling and
implementation of our software solutions. We believe these relationships will
extend our presence and brand name in new and existing markets.
  We
have also established relationships with large System Integrator (SI)
organizations, such as Accenture Ltd. and International Business Machines
Corporation (IBM). These partners have committed various levels of resources to
integrate, customize and implement our solutions. Depending on the strength of
the relationship, we have co-invested in jointly developing industry-specific
solutions, training and certifying their professional services teams, developing
co-marketing programs, and incorporating our products into their
marketing/referral strategies.
  At
the end of the second quarter of 2004, we formalized a strategic alliance with
IBM pursuant to which we teamed with IBM to resell our workforce optimization
solutions.  In connection with this strategic alliance, we established
a Project Office with IBM to manage the day-to-day affairs in connection with
the relationship.  The terms of renewal of the Project Office are
currently under review by IBM and us.
 
 We
recently achieved “Gold Certified Partner” status with Microsoft Corporation and
have created a new sales channel to build our relationship with Microsoft
Corporation resellers for Dynamics AX and Dynamics CRM as the primary
“route-to-market” for IMRS.
 
 We
continue to value our relationships with our other channel partners, and believe
that these relationships will continue to be key contributors to our
growth.
 
 In
the second half of 2007, we formed the Channel Partner Program and the Channel
Sales Team to complement the efforts of our existing reseller programs in
growing a system of channels around our current strategic partners that
ultimately aims to expand our presence in the mid-market.
 
 We
initiated the Channel Partner Program to create a value proposition for our
partner community which will positively affect their business practices,
increase their opportunity landscape and expand their footprint in the mobility
and service optimization arena.  The Channel Partner Program provides
a framework for recruiting, training and enabling channel partners to become
more self sufficient in their mission to promote solution integration activities
combining ClickSoftware’s offerings. The Channel Partner Program’s seven-step
recruiting process provides a guideline to the partners for the selection of the
sales targets and ensures that the most qualified partners enter the
program.
 
 The
objective of the Channel Sales Team is to execute the Channel Sales Program in
order to penetrate the mobility and service optimization
mid-market.   The Channel Sales Team recruits, enables, trains
and certifies channel partners to sell and implement ClickSoftware’s new
products for the mid–market, starting with the IMRS package.  The
Channel Sales Team also promotes Channel Partner Program sales and manages the
opportunity pipeline.
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  Competition
  The
market for our products is competitive and rapidly changing. Competition may
increase in the future as the service optimization market gains size and
increased business focus, current competitors expand their product offerings,
and new companies enter the market.  Recent acquisitions and
consolidations in our field may also increase competitive
pressures.   Smaller competitors have been acquired by large
organizations with broader product offerings. See Item 3D – Risk factors – “We
face intense competition, which could make it difficult to compete
successfully.”
  The
principal competitive factors in the service optimization industry
are:
  ·
              the
      technological capabilities and performance of the
  solution;
 ·
              installed
      base, domain expertise and experience with large-scale implementations;
      and
 ·
              the
      acceptance and adaptability of the service optimization solution to the
      solution offerings of large SIs and CRM/ERP vendors, and the ability to
      form marketing alliances with the
foregoing.
  We
believe our solutions compare favorably based on these competitive factors and
that key competitive factors include a broad base of users, strategic alliances,
key reference customers, interoperability, integration of complementary products
and services, technological leadership, product performance, price, customer
support, name recognition, relationships with partners and distribution channels
and the ability to respond quickly to emerging opportunities.
   Our
current and potential competitors include:
   ·
              Vendors
      specializing in service optimization, including, but not limited to,
      ServicePower Technologies plc.;
  ·
              Software
      application vendors that offer field force management solutions with
      certain optimization modules as part of their overall offerings,
      including, but not limited to, Viryanet Ltd., Ventyx  and
      Trimble Navigation Ltd./@Road
Division;
  ·
              In
      the low-end market, traditional ERP and CRM software application vendors,
      such as Oracle; and
  ·
              Systems
      integrators and internal information technology departments that may elect
      to develop a solution in-house.
  Intellectual
Property
  We
believe that the improvement of our existing products and technologies and the
development of new products are important in establishing and maintaining a
competitive advantage.
  We
have been issued two patents. One of these patents was issued in the United
States and describes a method and system for assigning human resources to
provide services.  We own a similar patent in Israel. We also have
three patent applications pending. As we continue to develop new applications of
our products, we will consider submitting additional patent applications.
Patents may not issue from any of these pending applications and, even if
patents do issue, the claims allowed may not be sufficiently broad to protect
our technology. In addition, patents issued to us may be challenged, invalidated
or circumvented, and the rights granted thereunder may not adequately protect
us.
  We
own U.S. trademark registrations for the marks CLICKSOFTWARE, AITEST, CLICKSCHEDULE, CLICKANALYZE, CLICKFIX, CLICKFORECAST,CLICKMOBILEand CLICKPLAN, and have filed
applications for registration of the marks W6and W-6. In the European
Community, we own trademark registrations for CLICKFIX, CLICKSCHEDULE, CLICKANALYZE, CLICKFORECAST,
and CLICKPLAN,and have
filed an application of registration of the mark CLICKMOBILE.  We own
a U.K. trademark for CLICKSOFTWARE. In Israel, we
have filed applications for registration of the marks CLICKMOBILE, CLICKSOFTWARE, W6 and W-6.
  We
rely on a combination of trade secrets, copyrights, trademarks, patents and
intellectual property law, together with non-disclosure and invention assignment
agreements, to establish and protect the technology used in our
products. Although we rely on a combination of ways of protecting our
technology, we believe that factors such as the technological and creative
skills of our personnel, new product developments, frequent product enhancements
and reliable product maintenance are more essential to establishing and
maintaining a technology leadership position than intellectual property
protection. Others may develop technologies that are
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  similar
or superior to our technology. See Item 3D – Risk factors – “Our intellectual
property could be used by third parties without our consent because protection
of our intellectual property is limited” and “Competition”.
  We
generally enter into non-disclosure agreements with our customers, partners,
employees and consultants and generally control access to and distribution of
our software, documentation and other proprietary information. Also, our
end-user licenses are designed to prohibit unauthorized use, copying and
disclosure of our software and technology in the United States, Israel and other
foreign countries.
  Substantial
litigation regarding technology rights exists in the software industry, and we
expect that software products may be increasingly subject to third-party
infringement and ownership claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segments
overlap. See Item 3D – Risk factors – “Our technology and other intellectual
property may be subject to infringement claims”.
  Regulation
  Our
business is also affected by government regulations.  For example, in
2007, 3% percent of our research and development expenditures were financed with
grants from the Chief Scientist, compared to 9% and 16% of our research and
development expenditures in 2006 and 2005, respectively. We may not
continue to receive grants at the same rate or at all.  The Chief
Scientist’s budget has been subject to reductions that may affect the
availability of funds for Chief Scientist grants in the future. The percentage
of our research and development expenditures financed using grants from the
Chief Scientist may decline in the future, and the terms of such grants may
become less favorable.  See Item 3D – Risk factors – “The government
programs in which we currently participate and tax benefits we currently receive
require us to satisfy prescribed conditions and may be delayed, terminated or
reduced in the future.”
  
 4C.          Organizational
structure
 
 Our
directly and indirectly held principal operating wholly-owned subsidiaries and
their countries of incorporation are:
 
 ·
              ClickSoftware,
      Inc. (United States)
 ·
              ClickSoftware
      Central Europe GmbH (Germany)
 ·
              ClickSoftware
      Europe Limited (United Kingdom)
 ·
              ClickSoftware
      Belgium N.V. (Belgium)
 ·
              ClickSoftware
      Australia Pty Limited (Australia)
 ·
              ClickSoftware
      Japan KK (Japan).
 
  4D.          Property,
plants and equipment
 
 We
have a lease for approximately 8,800 square feet of office space in Burlington,
Massachusetts that expires in September 2009 and is used for sales, marketing
and implementation activities for the North American market. We also have a
lease for approximately 27,000 square feet of office space in Givat Shmuel,
Israel which is used for management, marketing, sales, research and
development.  This lease expires in January 2009. We signed a
lease for approximately 33,000 square feet of office space in Petach Tikva,
Israel to which we will move upon the expiration of the lease of the office
space in Givat Shmuel. We intend to use the additional office space
provided by the new property to accommodate our expected future
growth.
  Our
U.K. subsidiary currently operates from a leased facility of approximately 5,300
square feet in Burnham, near London, which is used for sales, marketing and
implementation activities for the European market. We also lease additional
smaller offices in various sites throughout Europe and Asia. We consider that
our current office space is sufficient to meet our anticipated needs for the
foreseeable future and is suitable for the conduct of our business.
 
 
 ITEM
4A.               UNRESOLVED
STAFF COMMENTS
 
 Not
applicable.
 
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  ITEM
5.                  OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
 
  Overview
  We
derive revenues from the licensing of our software products and the provision of
consulting and support services.
  Software
license revenues are comprised of perpetual software license fees primarily
derived from contracts with our direct sales clients and our indirect
distribution channels. We recognize revenues in accordance with the AICPA
Statement of Position 97-2, “Software Revenue
Recognition,” or
SOP 97-2, as amended. (See note 2 of the notes to our consolidated financial
statements attached hereto).
  Service
revenues are comprised of revenues from consulting, training, and post-contract
customer support. Consulting services are billed at an agreed-upon rate plus
incurred expenses. Clients licensing our products generally purchase consulting
agreements from us. Post-contract customer support arrangements provide
technical support and the right to software updates. Post-contract customer
support revenues are charged as a percentage of license fees depending upon the
level of support coverage requested by the customer. Our support contracts
typically renew automatically for successive 12-month periods unless the
customer informs us of its desire not to renew annual support.
  Our
revenues grew by 23% in 2007 representing growth in North America and Europe and
in all line items. Our growth was primarily attributable to our ability to
attract large customers and our further expansion into new vertical
markets.
  We
became profitable in the second quarter of 2006 and have maintained
profitability since then. During 2007, we generated $4.9 million in positive
cash-flow from operations.
  As
of December 31, 2007, our cash and cash-equivalents, and short and long-term
investments increased to $24.7 million from $19.8 million as of December 31,
2006.
 
 Our
reporting currency is the U.S. dollar.  A significant portion of our
research and development expenses and other expenses are incurred in NIS, and a
portion of our revenues and expenses are incurred in British pounds, Euro and
Australian dollars. The results of our operations are subject to fluctuations in
these exchange rates, which are influenced by various global economic
factors.  In 2007, the U.S. dollar weakened significantly against each
of the British pound, Euro, Australian dollar and New Israeli Shekel resulting
in increases in our expenses in absolute U.S. dollar terms. These increases were
partially offset by revenues we received in British pounds, Euro or Australian
dollars.
   Critical
Accounting Policies
 
 In
preparing our consolidated financial statements, we are required to make
estimates, judgments and assumptions that affect the reported amounts of
revenues and expenses, assets and liabilities and contingent assets and
liabilities at the date of the financial statements.
 
 On
an ongoing basis, we evaluate our estimates, judgments and assumptions,
including those related to revenue recognition, and bad debt provisions. We base
our estimates, judgments and assumptions on historical experience and forecasts,
and on various other factors that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following critical accounting
policies affect our more significant estimates, judgments and assumptions used
in the preparation of our consolidated financial statements.
  Revenue
Recognition
 
 Revenue
results are difficult to predict, and any shortfall in revenues or delay in
recognizing revenues could cause our operating results to vary significantly
from quarter to quarter and could result in future operating losses. In
addition, the timing of our revenue recognition influences the timing of certain
expenses, such as commissions and royalties. We follow very specific and
detailed guidelines in measuring revenues; however, certain judgments affect the
application of our revenue policy.
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 Our
revenues are principally derived from the licensing the rights to use our
software and sales of professional services, including consulting,
implementation and training. We recognize revenues in accordance with SOP 97-2.
Revenues from software license fees are recognized when persuasive evidence of
an arrangement exists, either by written agreement or a purchase order signed by
the customer, the software product has been delivered, the license fees are
fixed and determinable, and collection of the license fees is considered
probable.
 
 License
fees from software arrangements which involve multiple elements, such as
post-contract customer support, consulting and training, are allocated to each
element of the arrangement based on the relative fair values of the elements. We
determine the fair value of each element in multiple-element arrangements based
on vendor specific objective evidence, or VSOE. We determine the VSOE for each
element according to the price charged when the element is sold separately. In
judging the probability of collection of software license fees we continuously
monitor collection and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that we have identified. In connection with customers
with whom we have no previous experience, we may utilize independent resources
to evaluate the creditworthiness of those customers. For some customers,
typically those with whom we have long-term relationships, we may grant extended
payment terms. We perform on-going credit evaluations of our customers. If the
financial situation of any of our customers were to deteriorate, resulting in an
impairment of their ability to pay the indebtedness they incur with us,
additional allowances may be required.
 
 We
generally do not grant a right-of-return to our customers and generally provide
a warranty period for three months at no extra charge. As of December 31, 2007
and 2006, the provision for warranty cost is immaterial.
 
 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 services is recognized as the
services are performed.
 
 Revenue
from software licenses that require significant customization, integration and
implementation are recognized based on SOP 81-1 “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts,” using contract
accounting on the percentage-of-completion method, based on the relationship of
actual working hours incurred, to total working hours 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 services 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.  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.
 
 Service
revenues include post-contract customer support, consulting and training.
Post-contract customer support arrangements provide for technical support and
the right to unspecified updates on an if-and-when-available basis. Revenues
from those arrangements are recognized ratably over the term of the arrangement,
usually one year. Consulting services are recognized on a time and material
basis, or in a fixed price contract, on a percentage of completion basis.
Revenues from training are recognized as the services are provided.
  Allowance
for Doubtful Accounts
 
 We
maintain an allowance for doubtful accounts using estimates that we make based
on factors we believe appropriate, such as the composition of the accounts
receivable aging, historical bad debts, changes in payment patterns, customer
creditworthiness and current economic trends. If we used different assumptions,
or if the financial condition of customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional provisions for doubtful
accounts would be required and would increase our bad debt expense.
  Recent
Accounting Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring
fair value, and enhances disclosures about fair value measurements. The
measurement and disclosure requirements are effective for us beginning in the
first
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  quarter
of fiscal year 2008. We do not expect that the adoption of SFAS No. 157 will
have a significant impact on our financial statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS
No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard requires that
unrealized gains and losses on items for which the fair value option has been
elected be reported in earnings. SFAS No. 159 is effective for us beginning
in the first quarter of fiscal year 2008. We do not expect that the adoption of
SFAS No. 159 will have a significant impact on our financial
statements.
 
 In
June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue
No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development Activities” (EITF 07-3).
EITF 07-3 requires non-refundable advance payments for goods and services to be
used in future research and development activities to be recorded as an asset
and the payments to be expensed when the research and development activities are
performed. EITF 07-3 applies prospectively for new contractual arrangements
entered into beginning in the first quarter of fiscal year 2008. We do not
expect that the adoption of EITF 07-3 will have a significant impact on our
financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R) “Business Combinations”
(“SFAS 141(R)”) and SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statement” (“SFAS 160”). SFAS 141(R) requires
the acquiring entity in a business combination to record all assets acquired and
liabilities assumed at their respective acquisition-date fair values and changes
other practices under FAS 141, some of which could have a material impact
on how we account for business combinations. SFAS 141(R) also requires
additional disclosure of information surrounding a business combination, such
that users of the entity’s financial statements can fully understand the nature
and financial impact of the business combination. SFAS 160 requires
entities to report non-controlling (minority) interests in subsidiaries as
equity in the consolidated financial statements. We are required to adopt
SFAS 141(R) and SFAS 160 simultaneously in our fiscal year beginning
November 1, 2009. The provisions of SFAS 141(R) will only impact us if
we are a party to a business combination after the pronouncement has been
adopted. We do not expect that the adoption of SFAS 160 will have a
significant impact on our financial statements.
 
  5A.          Results
of operations
  Our
operating results for each of the five years ended December 31, 2007, 2006,
2005, 2004 and 2003 expressed as a percentage of revenues are as
follows:
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 YEAR
      ENDED DECEMBER 31,2007
              2006
              2005
              2004
              2003Revenues:Software
      license
              39%
              37%
              34%
              47%
              47%Services
              61%
              63%
              66%
              53%
              53%Total
      Revenues
              100
              100
              100
              100
              100Cost
      of Revenues:Software
      license
              6
              6
              6
              5
              4Services
              32
              33
              34
              28
              30Total
      cost of revenues
              38
              39
              40
              33
              34Gross
      Profit
              62
              61
              60
              67
              66Operating
      Expenses:Research
      and Development
                expenses,
      net
              14
              13
              13
              12
              8Selling
      and Marketing expenses
              33
              32
              42
              39
              35General
      and Administrative
                expenses
              11
              11
              13
              13
              16Total
      Operating Expenses
              58
              56
              68
              64
              59Operating  Income  (Loss)
              4
              5
              (8)
              3
              7Other income
              1
              -
              -
              -
              -Interest,
      net
              2
              2
              0
              1
              1Net  Income
      (Loss) before taxes
              7
              7
              (8)
              4
              8Taxes
      on Income
              0
              0
              -
              -
              -Net
      Income (Loss)
              7%
              7%
              (8%)
              4%
              8%
 
 
  Revenues
  Revenue
      Breakdown2007
              
              %
      Change
              
              2006
              
              %
      Change
              
              2005(In
      thousands)Revenues:Software
    license
              
              $
      15,602
              
              28%
              
              $
      12,145
              
              47%
              
              $  8,235Percentage of total
      revenues
              
              39%
              
              
              
              37%
              
              
              
              34%Services
              
              24,417
              
              20%
              
              20,286
              
              28%
              
              15,832Percentage of total
      revenues
              
              61%
              
              
              
              63%
              
              
              
              66%Total
      Revenues
              
              $
      40,019
              
              23%
              
              $
      32,431
              
              35%
              
              $
      24,067
 
  
  Revenues
increased 23% to $40.0 million in 2007, compared with $32.4 million in 2006, and
$24.1 million in 2005.  Our growth in 2007 was due to strong demand
for our products and services, particularly in the United States and in the U.S.
utility market, repeat orders from existing customers and expansion into new
vertical markets.  Revenues in 2006 increased by 35% compared to 2005
due to strong revenues in North America and our expansion into new industry
vertical markets.
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  Revenues By
      Territory
 2007
              
              %
      Revenues
              
              2006
              
              %
      Revenues
              
              2005
              
              %
      Revenues(In
      thousands)Revenues:North
      America
              $17,766
              
              44%
              
              $12,155
              
              37%
              
              $6,477
              
              27%Europe
              17,499
              
              44%
              
              14,606
              
              45%
              
              12,706
              
              53%Israel
              131
              
              0%
              
              305
              
              1%
              
              107
              
              0%Asia
      Pacific
              4,623
              
              12%
              
              5,365
              
              17%
              
              4,777
              
              20%Total
      Revenues
              $40,019
              
              100%
              
              $32,431
              
              100%
              
              $24,067
              
              100%
 
  In
2007, 44% of our revenues were generated in Europe (with 21% in the United
Kingdom, 9% in Germany), 44% in North America (with 40% in the United States),
and 12% in Asia Pacific. Revenues in North America grew by $5.6 million, or 46%,
compared to 2006.  The increase in revenues in North America was
attributed to the following factors:  (a) a recovery in the overall
economic climate in the United States, (b) the deregulation of, and a stronger
emphasis on efficiency and profitability in, the utilities market, and (c) our
emphasis on new vertical markets, including the retail sector.
  In
2006, 45% of our revenues were generated in Europe (with 19% in the United
Kingdom, 13% in Germany), 37% in North America (with 34% in the United States),
and 18% in Asia Pacific and Israel.  Revenues in North America nearly
doubled compared to 2005.  The increase in revenues in North America
was attributed to the following factors:  (a) a recovery in the
overall economic climate in the United States, (b) the deregulation of, and a
stronger emphasis on efficiency and profitability in, the utilities market, and
(c) our emphasis on new vertical markets, including the retail
sector.   Specifically, at the end of 2005 and during 2006, we
signed significant contracts with utilities in North America.
  In
2005, 53% of our revenues were generated in Europe (with 30% in the United
Kingdom, 14% in Germany), 27% in North America (with 23% in the United States),
and 20% in Asia Pacific. The slight increase in the percentage of revenues from
the Asia Pacific in 2005 was due to increased sales of our products to new and
existing customers.
  Software
Licenses
  As
reflected in the table entitled “Revenue Breakdown” above, software license
revenues were $15.6 million or 39% of revenues in 2007, compared with $12.1
million or 37% of revenues in 2006, and $8.2 million or 34% of revenues in 2005.
The increase in software license revenues from 2006 to 2007 by $3.5 million or
28% was primarily due to our ability to attract and implement large-scale
projects, particularly in North America and repeat orders from existing
customers. The increase in software license revenues from 2005 to 2006 by $3.9
million or 47% was primarily due to our ability to attract and implement
large-scale projects, particularly in North America.
  Services
  Service
revenues in 2007 were $24.4 million or 61% of revenues, compared with $20.3
million or 63% of revenues in 2006, and $15.8 million or 66% of revenues in
2005. The increase in service revenues from 2006 to 2007 was primarily due to
increased implementation services and an increase in post-contract support
agreements. The increase in service revenues from 2005 to 2006 was primarily due
to increased implementation services and an increase in post-contract support
agreements.
  Cost
of Revenues
  Cost
of revenues consists of cost of software license revenues and cost of services.
Cost of software license revenues consists of expenses related to costs of
software purchased or licensed for resale, royalties payments to the Chief
Scientist and media duplication and packaging of our products. Cost of
services consists of expenses related to salaries and expenses of our
professional services organizations, costs related to third-party consultants,
equipment costs and royalties payments to the Chief Scientist.
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  Cost
of revenues was $15.3 million or 38% of gross revenues in 2007, compared with
$12.6 million or 39% of revenues in 2006, and $9.8 million or 40% of revenues in
2005. The increase in the cost of revenues from 2006 to 2007 was primarily due
to higher costs associated with meeting increased demand for our software and
services. The increase in the cost of revenues from 2005 to 2006 was primarily
due to higher costs associated with meeting increased demand for our software
and services.
  Cost of Software
Licenses
  Cost
of software license revenues were $2.4 million or 6% of revenues in 2007,
compared with $2.0 million or 6% of revenues in 2006, and $1.5 million or 6% of
revenues in 2005. The increase in cost of software license revenues from 2006 to
2007 was primarily due to an increase in revenues from third-party licenses and
adaptors to other ERP and CRM systems sold during these years, resulting in
higher third-party costs, and an increase in royalties paid to the Chief
Scientist with respect to all license revenues. The increase in cost of software
license revenues from 2005 to 2006 was primarily due to an increase in revenues
from third-party licenses and adaptors to other ERP and CRM systems sold during
these years, resulting in higher third-party costs, and an increase in royalties
paid to the Chief Scientist with respect to all license revenues.
  Cost of Services
  Cost
of service revenues were $12.9 million or 32% of revenues in 2007, compared with
$10.6 million or 33% of revenues in 2006, and $8.3 million or 34% of revenues in
2005. The increase in the cost of services from 2006 to 2007 by $2.4 million or
22% was primarily due to increased demand for our services.  As a
result, there was an increase in our related payroll expenses by $1.8 million,
an increase in royalties paid to the Chief Scientist by $0.2 million and an
increase of $0.4 million in other costs, mainly overhead. The increase in the
cost of services from 2005 to 2006 by $2.3 million or 28% was primarily due to
increased demand for our services.  As a result, we increased our
related payroll expenses by $1.8 million, and increased our use of third-party
contractors by $0.2 million.  In addition, there was an increase in
royalties paid to the Chief Scientist.
  Gross Profit
  Gross
profit was $24.7 million or 62% of revenues in 2007, compared with $19.9
million, or 61% of revenues, in 2006, and $14.3 million, or 60% of revenues, in
2005. The increase in gross margins from 2006 to 2007 by $4.9 million or 24% was
primarily due to a change in the revenue mix in favor of higher–margin software
license revenues. The increase in gross margins from 2005 to 2006 by $5.6
million or 39% was primarily due to higher margins generated from software
license revenues and a change in the revenue mix in favor of higher–margin
software license revenues.
  Operating
Expenses
  Operating
expenses are categorized into research and development expenses, selling and
marketing expenses, and general and administrative expenses.
  Total
operating expenses were $23.4 million or 58% of revenues in 2007, compared with
$18.1 million or 56% of revenues in 2006, and $16.4 million or 68% of revenues
in 2005.
  The
increase in operating expenses from 2006 to 2007 by $5.2 million or 29% was
across all categories and reflects increases in our selling and marketing
activities, research and development activities and general and administrative
expenses. The increase in operating expenses, mainly in research and development
expenses and in sales and marketing expenses, reflects our efforts to maintain
our competitive advantage in the market and capture additional market
share.   We expect that operating expenses will continue to grow
in 2008.    The increase in operating expenses from 2005 to
2006 by $1.7 million or 11% reflects an increase in our research and development
activities and an increase in general and administrative expenses.
  Research
and Development Expenses, Net
  Research
and development expenses consist primarily of personnel costs to support product
development, net of grants received from the Chief Scientist. In return for some
of these grants, we are obligated to pay the Israeli government royalties as
described below which are included in cost of revenues. Software research and
development costs incurred prior to the establishment of technology feasibility
are included in research and development expenses as incurred. Software
development costs incurred subsequent to the establishment of technological
feasibility through the period of general market availability of the products
are capitalized, if
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  material,
after consideration of various factors, including net realizable value. To date,
software development costs that are eligible for capitalization have not been
material and have been expensed.
  Research
and development expenses, net of related grants, were $5.8 million or 14% of
revenues in 2007, compared with $4.1 million or 13% of revenues in 2006, and
$3.1 million or 13% of revenues in 2005. Research and development expenses,
prior to participation grants from the Chief Scientist, totaled $5.9 million for
the year ended December 31, 2007, compared with $4.5 million for the year ended
December 31, 2006, and $3.6 million for the year ended December 31, 2005. We
received or accrued grants from the Chief Scientist in the amount of $0.2
million in 2007, compared with $0.4 million in 2006, and $0.5 million in 2005.
The increase in research and development expenses from 2006 to 2007 by $1.7
million, or 40%, was primarily due to an increase in the number of our research
and development personnel and related payroll costs, which resulted in an
increase of $0.6 million in payroll, a decrease of $0.2 million in grants
received from the Office of the Chief Scientist, an increase of $0.3 million in
subcontractors costs and an increase of $0.6 million in other costs, mainly
overhead. The increase in payroll reflects the hiring of additional engineers
required to improve and expand our product offering.  The increase in
research and development expenses from 2005 to 2006 by $1.0 million, or 31%, was
primarily due to an increase in the number of our research and development
personnel and related payroll costs, which resulted in an increase of $0.7
million in payroll, a decrease of $0.1 million in grants received from the
Office of the Chief Scientist and an increase of $0.2 million in other
costs.
  Selling
and Marketing Expenses
 
 Selling
and marketing expenses consist primarily of personnel and related costs for
marketing and sales functions, including related travel, direct advertising
costs, expenditures on trade shows, market research and promotional
printing.
 
 Selling
and marketing expenses were $13.2 million or 33% of revenues in 2007, compared
with $10.3 million or 32% of revenues in 2006, and $10.1 million or 42% of
revenues in 2005. The increase in the selling and marketing expenses from 2006
to 2007 by $2.9 million or 28% was due to an increase in the number of employees
resulting in an increase of $1.7 million in payroll expenses, an increase in our
selling and marketing activities by $1.1 million and an increase in amortization
of stock-based compensation by $0.1 million.  These increases reflect
the hiring of additional direct-sales employees, costs relating to the formation
of our Japan office, additional investment in channel activities and additional
direct marketing activities, such as trade shows and other customer
events.  The increase in the selling and marketing expenses from 2005
to 2006 by $0.2 million or 2% was due to an increase in payroll expenses. The
reduction in selling and marketing expenses as a percentage of revenues from
2005 to 2006 is a result of our achievement of efficiencies and economies of
scale.
 
 General
and Administrative Expenses
  General
and administrative expenses consist primarily of personnel and related costs for
corporate functions, including information services, finance, legal, accounting,
human resources, facilities, provision for doubtful accounts and costs related
to our status as a public company.
  General
and administrative expenses were $4.4 million or 11% of revenues in 2007,
compared with $3.7 million or 11% of revenues in 2006, and $3.1 million or 13%
of revenues in 2005. General and administrative expenses were $4.4 million in
2007, $3.7 million in 2006, and $3.1 million in 2005. The increase of $0.7
million in general and administrative expenses from 2006 to 2007 was primarily
due to an increase in payroll expenses of $0.2 million, an increase of $0.4
million in other general and administrative expenses and an increase in
amortization of stock-based compensation by $0.1 million. The increase of $0.6
million in general and administrative expenses from 2005 to 2006 was primarily
due to an increase in payroll expenses of $0.4 million, a decrease of $0.1
million in other general and administrative expenses and an increase in
amortization of stock-based compensation by $0.3 million.
  Stock-Based
Compensation
  Compensation
cost related to stock options is recognized in operating results (included in
cost of revenues, research and development, selling and marketing, general and
administrative expenses) under SFAS No. 123R.
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  Interest,
Net
  Interest
includes interest income earned on our cash, cash equivalents and short and
long-term investments, offset by interest expense, and also include the effects
of foreign currency fluctuations.
  Interest
income net of interest expenses, was $0.9 million or 2% of revenues in 2007,
compared with $0.5 million or 2% of revenues in 2006, and $0.1 million in 2005.
The increase in interest income from 2006 to 2007 was attributable to a
combination of an increase in our cash and investments and improved returns on
our investments. The increase in interest income from 2005 to 2006 was
attributable to a combination of an increase in our cash and investments and
improved returns on our investments.
  Other
Income
  In
September 2006, our Tel Aviv office was damaged by fire. In October 2006, we
moved to our new location in Givat Shmuel, Israel.  The majority of
losses we suffered in the fire were covered by our insurance policies and we
believe that there was no material impact on our operations or financial
performance. Other income of $0.4 million in 2007 was attributable to funds
received from our insurance company in connection with our claim.
  Income Taxes
  Our
future consolidated tax expense is expected to reflect various statutory
tax rates from the United Kingdom, United States, Belgium, Australia Japan and
Germany, as further discussed below. Furthermore, future tax rates may
also increase due to tax withholdings by various tax authorities,
which are not expected to be utilized in the foreseeable
future.
  As
of December 31, 2007, net operating loss carry forwards in Israel amounted to
approximately $23.9 million compared with $22.4 million in 2006. Additional tax
loss carry forwards of approximately $21.8 million and $7.2 million remain
attributable to our U.S. subsidiary and the European subsidiaries, respectively.
The Israeli and the European net operating loss carry forwards have no
expiration date. The U.S. net operating loss carry forwards will expire
gradually from 2011 through 2024. Utilization of U.S. net operating losses
may be subject to substantial annual limitations due to the “change in
ownership” provisions of the Internal Revenue Code of 1986 and similar state law
provisions. The annual limitations may result in the expiration of net operating
losses before utilization.
  Net
Income (Loss)
  Net
income for 2007 was $2.6 million or 7% of revenues, compared with a net income
of $2.1 million or 7% of revenues in 2006, and net loss of $2.0 million or 8% of
revenues in 2005.
   5B.          Liquidity
and capital resources
   Our
cash and investments increased by $5.0 million or 25% to $24.7 million as of
December 31, 2007, compared with $19.8 million as of December 31, 2006, which
was an increase of  $5.9 million or 43%, compared with $13.8 million
as of December 31, 2005. Our primary sources of cash and investments, net,
during 2007 were cash flows of $4.9 million generated from operations and $0.9
million from exercises of employee stock options. Our primary sources of cash
and investments, net, during 2006 were cash flows of $5.7 million generated from
operations and $0.5 million from exercises of employee stock
options.
 
 As
of December 31, 2007, we had cash and cash equivalents of approximately $9.1
million, short-term investments of approximately $15.0 million and long-term
investments of approximately $0.6 million. As of December 31, 2007,
approximately $0.6 million in long-term investments had been deposited with
banks to secure letters of credit totaling approximately $0.6 million, which are
described below. Our cash, short-term investments and long-term investments are
invested or deposited primarily in low–risk and predominantly U.S dollar
denominated investments and bank deposits.
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 Cash and
      Investments
                December
      31,2007
              
              %
      Change
              
              2006
              
              %
      Change
              
              2005(In
      thousands)Cash
      and cash equivalents
              
              
              $  9,054
              
              
              
              $13,385
              
              
              
              $10,467Short-term
      investments
              
              
              15,054
              
              
              
              5,918
              
              
              
              3,111Long-term
      investments
              
              
              602
              
              
              
              451
              
              
              
              264Total
      Cash and investments
              
              
              $24,710
              
              25%
              
              $19,754
              
              43%
              
              $13,842
 
 
 For
the year ended December 31, 2007, net cash provided by operations was $4.9
million, comprising of net income of $2.6 million, an increase in trade
receivables of $0.4 million, an increase in other receivables of $0.5 million,
an increase in accounts payable of $1.3 million, and an increase in deferred
revenues of $0.3 million, which was partially offset by non-cash charges of $1.6
million.
  For
the year ended December 31, 2006, net cash provided by operations was $5.7
million, comprising of net income of $2.1 million, an increase in trade
receivables of $2.3 million, a decrease in other receivables of $0.1 million, an
increase in accounts payable of $1.0 million, and an increase in deferred
revenues of $3.4 million, which was partially offset by non-cash charges of $1.4
million. Cash-flows generated from operations in 2006 were positively influenced
by the prepayment of long-term support fees by one of our customers in the
amount of $2.5 million.
  For
the year ended December 31, 2005, net cash provided by operations was $2.0
million, comprising of net loss of $2.0 million, a decrease in trade receivables
of $1.2 million, an increase in other receivables of $0.1 million, an increase
in accounts payable of $0.2 million, and an increase in deferred revenues of
$2.1 million, which was partially offset by non-cash charges of $0.6
million.
  In
September 2006, our Tel Aviv office was damaged by fire. In October 2006, we
moved to our new location in Givat Shmuel, Israel.  The majority of
losses we suffered in the fire were covered by our insurance policies and we
believe that there was no material impact on our operations or financial
performance. We finalized our claim with our insurance company during 2007. In
total, we received $1.2 million from our insurance policy of which $0.8 million
was booked as proceeds from disposal of equipment and the remainder was booked
as an offset of extra expenses incurred by us.
  Net
cash used in investment activities was $10.1 million in 2007, consisting of $9.3
million invested primarily in deposits, $0.4 million provided by insurance
company proceeds for disposal of equipment and $1.2 million used for purchases
of equipment and systems, including computer equipment and fixtures and
furniture and for leasehold improvements. Net cash used in investment activities
was $3.2 million in 2006, consisting of $3.0 million invested primarily in
deposits, $0.5 million provided by disposal of equipment and $0.7 million used
for purchases of equipment and systems, including computer equipment and
fixtures and furniture and for leasehold improvements. Net cash provided by
investment activities was $4 million in 2005, consisting of $4.4 million
generated primarily from bank deposits and $0.4 million used for leasehold
improvements and purchases of equipment and systems, including computer
equipment and fixtures and furniture.
  Net
cash provided by financing activities was $0.9 million in 2007, as a result of
the employee options exercises. Net cash provided by financing activities
was $0.5 million in 2006, as a result of the employee options exercises. Net
cash provided by financing activities was $0.2 million in 2005, as a result of
the employee options exercises.
  As
of December 31, 2007, we had outstanding trade receivables of approximately $6.9
million, which represented approximately 17% of 2007 total revenues. As of
December 31, 2006, we had outstanding trade receivables of approximately $6.5
million, which represented approximately 20% of 2006 total revenues. As of
December 31, 2005, we had outstanding trade receivables of approximately $4.1
million, which represented approximately 17% of 2005 total revenues. Our trade
receivables are typically between 30 and 60 days, although we also negotiate
longer payment plans with some of our clients. Days sales outstanding (“DSO”),
calculated based on revenues for the most recent quarter and accounts receivable
at the balance sheet date,
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  decreased
to 59 DSO as of December 31, 2007, compared with 62 DSO as of December 31, 2006,
and 63 DSO as of December 31, 2005.
  
 Since
inception, we have received aggregate payments from the Government of Israel
through the Office of the Chief Scientist of the Ministry of Industry and Trade
in the amount of $8.7 million related to research and development. In return for
the Government of Israel participation, we are committed to pay royalties at a
rate of 3% to 5% of sales of the developed product, up to 100%-150% of the
amount of grants received with annual interest of LIBOR as of the date of
approval for programs approved from 1999 and thereafter. As of December 31,
2007, we had paid or accrued royalties related to the results of research and
development in the amount of $7.3 million. The estimated current net commitment
is approximately $1.4 million. The refund of the grant is contingent on future
sales, and we have no obligation to refund these grants, if sufficient sales are
not generated.
  Our
capital requirements depend on numerous factors, including market demand and
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of establishing
additional international operations and investments in computers, office
equipment and office fixtures. We intend to continue investing significant
resources in our selling and marketing, research and development operations in
the future and investments in computers, office equipment and office
fixtures.  Although we recorded a profit for fiscal years 2007 and
2006, we may not generate sufficient revenues to maintain profitability in the
future. Our ability to maintain profitability using our currently available
balance of cash, cash equivalents and available credit will depend on our
ability to maintain or increase our revenues while continuing to control our
expenses.  If we are not successful in doing so, we will be required
to seek new, external sources of financing, which may not be available to us on
favorable terms, or at all. See Item 3D – Risk factors “We may not be able to
maintain profitability” and “Our need for additional financing is uncertain, as
is our ability to obtain further financing if required.”
  We
believe that we will have sufficient cash to fund our operations for at least
the next 12 months.
 
  5C.         
Research and development
  We
have invested significant time and resources in creating a structured process
for undertaking all product development projects. These include documenting
product requirements, specifying product features and workflow, developing the
software, performing quality assurance and creating documentation and packaging.
Our research and development center in Israel is ISO 9001 compliant and
continuously updates its software development procedures to maintain an ongoing
improvement process and high quality products.
  Our
future research and development strategies will concentrate on strengthening our
product offerings in decision support, forecasting, capacity and shift planning
and monitoring and schedule optimization; continuing to enhance the technology
and scalability of our products; continuing to improve our mobile and
location-based capabilities; and continuing the development of offerings for
specific vertical industries.  We invested $5.8 million in 2007, $4.1
million in 2006 and $3.1 million in 2005 for research and
development.
 
 5D.          Trend
information
 
 We
operate in the rapidly evolving market for service workforce optimization; a
market that continues to be characterized by strong demand.  For
example, field service spending remained strong in 2007 and Gartner, an
information technology research and advisory company, expects IT budgeted
spending on mobile workforce management to more than triple by
2009.  According to Gartner, the percentage of field service workers
in North America and Europe using mobile applications will grow from less than
10% in 2005 to more than 30% in 2010.  With our service optimization
suite and our mobile and location-based services, we believe we are
well-positioned to benefit from these trends.
 
 Large
system integrators are building practices around the service optimization
market, another positive indication of the traction in this
market.  Our strategy is to continue to increase marketing efforts
through our channels and large system integrators.  We intend to
expand our marketing and implementation capacity through these third parties and
to generate sales by taking advantage of the market presence of these third
parties.  Companies in the mid-market are also seeking cost-effective
solutions to improve productivity and customer satisfaction.  Our IMRS
initiative, which was launched in 2007, is an attempt to address this
demand.
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 In
2007, the proportion of our revenues attributable to services decreased, while
the proportion of license revenues increased. We believe we will continue to win
contracts from new and repeat customers involving large implementation efforts
due to our attractive product offering and position in the market. As of
December 31, 2007, we had a backlog level and deferred revenues of
approximately $20.5 million, compared to $15.4 million in 2006.  We
expect license and services revenues to continue to grow in absolute terms in
2008 and that the ratio of licenses revenues to services revenues will be
similar to or slightly greater than the ratio in 2007.
 
 We
have continued to see strong demand in the utility market as a result of
deregulation and modernization trends. Our other vertical markets show healthy
growth as well. We believe that this trend will continue. We see positive trends
in our North American and European markets. In addition, we see potential in
developing countries, such as China and India, and we have approached these
markets mainly through partnering channels. In 2007, we opened an office in
Japan in an effort to penetrate the Japanese market.
 
 As
in previous years, we believe that our performance in 2008 will primarily depend
on our ability to continue attracting customers and implementing service
optimization solutions. Within the current sentiment of global economic
weakness, we will continue to monitor economic conditions, the markets and our
industry.  Should a recession occur, IT spending in the affected
markets could decline, thus affecting demand for our products. However, we
believe that we have a relatively low exposure to a potential recession since
our business is spread over several territories worldwide, our products help our
customers streamline their operations and cut costs and one of our primary
markets (utilities) is typically less volatile than other markets.
 
 In
2007, approximately 45% of our revenues and 65% of our expenses were denominated
in non-U.S. dollar currencies. Any changes in the value of the U.S. dollar
against these currencies affects our reported earnings in U.S. dollars. In 2007,
the U.S. dollar weakened significantly against each of the British pound, Euro,
Australian dollar and New Israeli Shekel resulting in increases in our expenses
in absolute U.S. dollar terms.  For example, in 2007, our operating
expenses increased in part due to exchange rate fluctuations. Weakness in the
U.S. dollar compared to foreign currencies has significantly increased the cost
of our European and Israel-based operations in recent periods. In 2008, the New
Israeli Shekel continues to strengthen against the U.S. dollar.  If
this trend continues, our operating expenses may continue to increase
significantly.
 
 
 This
trend information discussion is subject to risks and uncertainties. See Item
5.G. “Special Note Regarding Forward-Looking Statements.”
 
 
 5E.          
Off-balance sheet arrangements
 
 Except
for the arrangements with the Chief Scientist and the performance bonds to
certain customers as discussed in Item 5B above and Item 5F below, we do not
have any off-balance sheet arrangements.
 
 
 5F.           Tabular
disclosure of contractual obligations
 
 We
have various commitments primarily related to guarantees, letters of credit and
capital lease obligations. The following table provides details regarding our
contractual cash obligations and other commercial commitments as of December 31,
2007:
 
 Commercial
      Commitments
              Total
      Amounts Committed (in thousands)
              Amount
      of Commitment Expiration
                Per
      Period (in thousands)2009Guarantees/Letters
      of Credit
              $602
              602
 
 
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 Contractual    Obligations
              Payments Due By Period
      (in thousands)Total
              2008
              2009-2010
              2011-2012
              Later
      yearsLease
      Obligations
              $5,197
              $852
              $1,891
              $1,712
              $742
 
 We
have entered into standby letter of credit agreements with banks and financial
institutions primarily relating to the guarantee of rental agreements and future
performance on certain contracts. As of December 31, 2007, contingent
liabilities on outstanding letter of credit agreements aggregated approximately
$0.6 million.  We do expect to renew most of these letters of credit.
The letters of credit are secured by $0.6 million in deposits to cover potential
payments under the guarantees.
  As
permitted under Israeli law, we have agreements whereby we indemnify our
officers and directors for certain events or occurrences while the officer or
director is, or was serving, at our request in such capacity. The
indemnification period covers all pertinent events and occurrences during the
officer’s or director’s lifetime.  We have director and officer
insurance coverage that may limit our exposure and may enable us to recover a
portion of any future amounts paid.  In addition to the insurance
coverage, we have agreed to indemnify our directors in an amount not to exceed
$20 million, for all persons and all events to be indemnified, for certain
events and occurrences while the director is, or was serving, at our request in
such capacity in accordance with the Indemnification Agreements entered into
with the directors, which are substantially in the form of the Amended Form of
Indemnification Agreement filed as Exhibit 4.12 to this annual
report.
 
 5G.         
Safe Harbor
 
 SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  This
annual report contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 (Exchange Act)) and information relating to us
that are based on the beliefs of our management as well as assumptions made by
and information currently available to our management, including statements
related to products, markets, and future results of operations and
profitability, and may include implied statements concerning market acceptance
of our products, and our growing leadership role in the marketplace. In
addition, when used in this annual report, the words “likely,” “will,”
“suggests,” “may,” “would,” “could,” “anticipate,” “believe,” “estimate,”
“expect,” “intend,” “plan, “predict” and similar expressions and their variants,
as they relate to us or our management, may identify forward-looking statements.
Such statements reflect our judgment as of the date of this annual report with
respect to future events, the outcome of which are subject to certain risks that
may have a significant impact on our business, operating results or financial
condition, including the risk factors described in Item 3D – Risk factors.
Investors are cautioned that our forward-looking statements are inherently
uncertain. Should one or more of the risks that we describe in this annual
report or other uncertainties materialize, or should underlying assumptions
prove incorrect, actual results or outcomes may vary materially from those
described herein. We undertake no obligation to update forward-looking
statements, whether as a result of new information, future events or
otherwise.
 
 
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 ITEM
6.                  DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES
 
 6A.          Directors
and senior management
 
 Senior
Management
 
 The
members of our executive management are as follows:
 
 Name
              Age
              PositionDr.
      Moshe BenBassat
              60
              Chief
      Executive Officer and Chairman of the BoardShmuel
      Arvatz
              45
              Executive
      Vice President and Chief Financial OfficerHannan
      Carmeli
              49
              Chief
      Operating Officer
 
  DR. MOSHE BENBASSAT co-founded
ClickSoftware in 1979 and has served as our Chairman and Chief Executive Officer
since inception. From 1987 to 1999, Dr. BenBassat served as a Professor of
Information Systems at the Faculty of Management at Tel-Aviv University. Dr.
BenBassat has also held academic positions at the University of Southern
California and the University of California in Los Angeles. From 1996 to January
1999, Dr. BenBassat also served as a board member of Tadiran Telecommunications
Inc., a telecommunications company. From 1990 to 1996, Dr. BenBassat served as a
board member of Tadiran Electronic Systems Ltd., a defense electronics company.
Dr. BenBassat holds Bachelor of Science, Master of Science and PhD. degrees in
Mathematics and Statistics from Tel-Aviv University.
  SHMUEL ARVATZ has served as
our Executive Vice President and Chief Financial Officer since 2002. Prior to
joining ClickSoftware, Mr. Arvatz served as the Chief Financial Officer at
Shrem, Fudim, Kelner Technologies Ltd., a leading investment house in Israel.
From June 1999 to February 2001, Mr. Arvatz served as Executive Vice President
and Chief Financial Officer of Tecnomatix Technologies Ltd., a provider of
software e-manufacturing solutions. From 1990 to 1999, Mr.
Arvatz served as Vice President and Chief Financial Officer at ADC Israel Ltd.
(previously Teledata Communications Ltd., a telecommunications equipment
provider which was acquired by ADC Telecom Inc. in 1998). Mr. Arvatz holds a
Bachelor of Arts degree in Accounting and Economics from Bar-Ilan University in
Tel Aviv, Israel and is a Certified Public Accountant in Israel.
  HANNAN CARMELI has served as
our Chief Operating Officer since 2006.  Previously, he had served as
our Executive Vice President of Sales & Professional Services since August
2004. Prior to this position, he managed our Professional Services organizations
worldwide since 2001. From August 1996 to December 2000, Mr. Carmeli held
various executive roles, including General Manager of the ClickFix Division as
well as Manager of Product Services and Operations. Prior to joining us, Mr.
Carmeli held R&D and field positions with various software vendors ranging
from software development through product management and sales management. Mr.
Carmeli holds a Bachelor of Science degree from the Technion Institute of
Technology in Haifa, Israel and a Master of Science degree in Computer Science
from Boston University.
  Executive
officers serve at the discretion of our board of directors. The employment of
each of our executive officers is at will and may be terminated at any time,
with or without cause, subject to contractual notice provisions. There are no
family relationships between any of our members of executive management and our
directors.
 
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  Directors
 
 Our
Articles of Association currently provide for a board of directors of not less
than two members nor more than eleven members. We have a classified board of
directors as set forth below:
 
 Name of Director and
      Class
              Age
              Term
                Expires
              Independent
                Director
              Member
      of
                Audit
                Committee
              Member
      of
                Compensation
                Committee
              Member
      of
                Nominating
                CommitteeJames
      W. Thanos, Class I
              59
              2010
              X
              
              XRoni
      A. Einav, Class II
              63
              2008
              X
              
              
              XGil
      Weiser, Class II
              66
              2008
              X
              X
              XMoshe
      BenBassat, Class III
              60
              2009Israel
      Borovich, external director
              66
              2010
              X
              X
              XNaomi
      Atsmon, external director
              55
              2009
              X
              X
              
              XDan
      Falk, external director (1)
              63
              2009
              X
              X
              
              X
 
 (1)
“Financial Expert” as required by the Companies Law and NASDAQ requirements with
respect to membership on the Audit Committee.   See item 16A
below.
  JAMES THANOS has served as a
director since 2000.  Mr. Thanos served as Executive Vice President,
Worldwide Field Operations of BroadVision, Inc., an e-commerce software company
from October 1999 to June 2002. From March 1998 to October 1999, Mr. Thanos
served as BroadVision’s Vice President and General Manager, Americas. Prior to
working for BroadVision, Mr. Thanos served as Senior Vice President of Worldwide
Sales at Aurum Software, a sales force automation company. Mr. Thanos is a
member of the board of directors of SupportSoft, Selectica and
Corticon.  Mr. Thanos holds a Bachelor of Arts degree in Behavioral
Sciences from Johns Hopkins University.
  RONI EINAV has served as a
director since 2000.  Mr. Einav is the founder and General Manager of
Einav High-Tec Assets Ltd., an investment company focused on technology
ventures. From 1983 to 1999, Mr. Einav served as Chairman of New Dimension
Software, Ltd., a systems software company he had founded, which was
subsequently acquired by BMC Software. Mr. Einav serves on the board of
directors of Advantec, XciTel, Eurekify, Xenia, Impactia, M-Photo, Ivivo and
Gimao. Mr.
Einav has also played a key role in founding approximately a dozen other
software companies, including Liraz Computers, Jacada Ltd., M-Photo, Ivivo,
Impactia, Axxana, Eurekify, XciTel, CeDimension, ComDa, Computer Systems and
Einav Systems. Mr. Einav was a Major in the Israeli Defense Forces and served as
a systems analyst in a research and development division. Mr. Einav holds a
Bachelor of Science degree in Management and Industrial Engineering as well as a
Master of Science degree in Operations Research from the Technion Institute,
Haifa, Israel.
  GIL WEISER has served as a
director since 2003. Mr. Weiser has been active in the high tech environment for
the past 30 years, with experience ranging from design engineering to management
of international companies, as well as community and public activities, from
serving the Shevach/Mofet High School to chairing the Haifa University Executive
Board. Mr. Weiser is currently the Chief Executive Officer of Orsus Solutions
Ltd., an Israeli high-tech company, and is Chairman or a member of the board of
directors of the following companies: Fundtech, a software company; BBP, a
subsidiary of Fundtech; and Carmel, a company connected with Haifa University.
Mr. Weiser was also a member of the board of directors of the Tel Aviv Stock
Exchange from 2002 to 2004.  In 2002, Mr. Weiser served as Acting Vice
Chairman for ORAMA, an international investment banking group.  From
1995 to 2000, Mr. Weiser served as Chief Executive Officer of Hewlett-Packard
Israel, a technology company. From 1993 to 1995, Mr. Weiser served as Chief
Executive Officer of Fibronics Corporation, a communication company. From 1976
to 1993, Mr. Weiser served as Chief Executive Officer of Digital Israel, a
computing company. Mr. Weiser is Chairman of the Executive Committee of Haifa
University. Mr. Weiser was the Vice Chairman of the Israel Management Center,
heading the multi-national forum, and is a member of the Israel High-Tech
Association Executive Committee. Mr. Weiser holds a Bachelor of Science degree
in Electrical Engineering from the Technion Institute and a Master of Science
degree in Electronics/Computers from the University of Minnesota in
Minneapolis.
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 DR. ISRAEL BOROVICH has served
as a director since 1997 and as an external director according to the Israeli
Companies Law since 2001.  From 1988 to 2004, Dr. Borovich served as
President and Chief Executive Officer of Arkia Israeli Airlines Ltd. and
Knafaim-Arkia Holdings Ltd., an investment management company.  Dr.
Borovich serves as Chairman of El Al Israel Airlines Ltd. and Ayalon Highways
(Israel) Ltd.  Dr. Borovich also serves as a director and Deputy
Chairman of Knafaim Holdings, Ltd., an investment management company. Dr.
Borovich previously served as a Professor on the Faculty of Management of Tel
Aviv University where he is currently a Professor Emeritus. Dr. Borovich holds
Bachelor of Science and Master of Science degrees in Industrial Engineering and
a Ph.D. degree in Operations Research from the Polytechnic Institute in New York
City.
  NAOMI ATSMON has served
as a director since 2003.  Ms. Atsmon was employed by Amdocs Ltd., a
customer care and billing software company, from 1986 through 2002. From 1997
until 2002, Ms. Atsmon served as a Division President at Amdocs Ltd., managing
large scale billing projects for telephone companies in North America and
Europe, with overall responsibility for the profit and loss statement of the
division. From 1994 until 1997, Ms. Atsmon served as a Vice President at Amdocs
Ltd. From 1991 until 1994, she was a director for Amdocs Ltd. in charge of
software development and customer relations with one of the largest telephone
companies in the United States. Prior to joining Amdocs Ltd., Ms. Atsmon was a
project manager at Bank Hapoalim, in charge of a large financial project for the
bank controller. From 1976 to 1981, Ms.Atsmon was a system analyst with Agrexco
Ltd. Ms. Atsmon also serves as a board member of Jacada Ltd., a software
provider. Ms. Atsmon holds a Bachelor of Science degree in Management &
Industrial Engineering from the Technion Institute, and studied business
administration at Tel-Aviv University.
  DAN FALKhas served as a
director since 2003.  Mr. Falk served as the Chairman of Atara
Technology Ventures Ltd., an Israeli company engaged in investment in advanced
technology enterprises from 2000 to 2003. He is also a member of the boards of
directors of Orbotech Ltd., Nice Systems Ltd., Orad Ltd., Plastopil Ltd., Dmatek
Ltd., Nova Measuring Systems Ltd., Attunity Ltd., Jacada Ltd., Ormat Technology,
Inc. (publicly traded on NYSE), Poalim Ventures I, AVT Ltd. and Amiad Filtration
Systems Ltd. From July 1999 to November 2000, Mr. Falk served as President
and Chief Operating Officer of Sapiens International Corporation N.V., a company
engaged in the development of software solutions for large-scale, cross-platform
systems. Mr. Falk was Executive Vice President of Orbotech Ltd., a high
technology company, from August 1995 to July 1999, and between June 1994 and
August 1995 served as its Executive Vice President and Chief Financial Officer.
From October 1992 until June 1994, Mr. Falk was Vice President and Chief
Financial Officer of Orbotech Ltd. Mr. Falk was Director of Finance and Chief
Financial Officer of Orbot Systems, predecessor of Orbotech Ltd., from 1985
until 1992. Mr. Falk received a Master of Business Administration degree in 1973
from the Hebrew University School of Business and had 15 years experience in
finance and banking, including senior positions at Israel Discount Bank Ltd.,
prior to joining Orbot.
 
  6B.          Compensation
  The
aggregate compensation paid to all our directors and officers during 2007 was
approximately $1.3 million in salaries, directors’ fees, and
bonuses.  In addition, we granted 185,000 options to our officers and
directors at an average exercise price of $4.01 per share.  Options
expire seven to ten years after the date of the grant.
 
 The
employment agreements of the executive officers provide that the employment
relationship is “at-will” and may be terminated at any time by either us or the
executive. The agreements provide that in the event the executive resigns his
employment or the executive is terminated by us without cause, the executive
will be entitled to severance payments in amounts equal to twelve months of
annual base salary as of the date of termination for Dr. BenBassat and three
months of base salary as of the date of termination for Mr. Arvatz and Mr.
Carmeli (plus, in the case of Mr. Arvatz and Mr. Carmeli, a severance amount due
in accordance with applicable law). Our executive officers participate in a
bonus plan in which they will receive bonuses based on achieving company goals
on revenues and operating profit, and based on achieving personal
goals.  The goals for our Chief Executive Officer are determined on an
annual basis by the Compensation Committee, and the goals for our executive
officers are set by the Chief Executive Officer.
 
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 6C.         
Board practices
 
 We
are subject to the provisions of the Companies Law, which requires, in
part, that at least two External Directors (as such term is defined in the
Companies Law) serve on our board of directors.   A person
may not qualify as an External Director if he/she, or his/her
relative, partner, employer or any entity under his/her control has or had
at any time during the previous two years, any “affiliation” with the company,
any entity controlling the company or any entity controlled by the company or by
this controlling entity.  In addition, no individual may serve as an
External Director if the individual’s position or other activities create or may
create a conflict of interest with his/her role as an External Director. For a
period of two years from termination of office, a former External Director may
not serve as a member of the board of directors or employee of the company or
provide professional services to the company for compensation.
  External
Directors must be elected by the shareholders. The term of an External
Director is three years and may generally be extended, subject to
shareholder approval, for additional terms of three years. All
External Directors must serve on the company’s audit committee and at least one
External Director must serve on any other committee maintained by the company’s
board of directors.
  There
are no service contracts between us or any of our subsidiaries and our directors
in their capacity as directors providing for benefits upon termination of
employment, except for the termination provisions included in the employment
agreement of officers that also act as directors and that concern solely their
termination from their positions as employees.
 
 We
have entered into indemnification agreements with our directors and senior
management in an attempt to ensure continued service in an effective
manner.  The indemnification agreements provide protection against
personal liability due to an act performed or failure to act in the capacity as
a director or officer.  See Section 5F.
 
 Audit
Committee
 
 The
audit committee consists of Ms. Atsmon, Dr. Borovich, Mr. Falk and Mr. Weiser,
each of whom is “independent,” as such term is defined under Rule 4200(a)(15) of
the listing standards of the National Association of Securities Dealers. Our
board of directors has determined that Mr. Falk also qualifies as a “financial
expert” within the meaning of SEC and Nasdaq rules. The audit committee provides
assistance to the board of directors in fulfilling its legal and fiduciary
obligations with respect to matters involving the accounting, auditing,
financial reporting and internal control functions of our company and our
subsidiaries as well as complying with the legal requirements under Israeli law
and the Sarbanes-Oxley Act of 2002. Functions of the audit committee
include:
 
 ·
              to
      assist our board of directors to oversee our accounting and financial
      policies, internal controls, and financial reporting
      practices;
 
 ·
              to
      maintain and facilitate communication between our board of directors and
      our financial management and our
auditors;
  ·
              through,
      among other things, consultation with our internal and external auditors,
      to detect irregularities in the management of our business and our
      internal controls procedures;
  ·
              to
      communicate on a regular basis with our outside auditors and review their
      operation and remuneration; and
  ·
              to
      decide whether to approve acts or related-party transactions involving
      directors, executive officers, controlling shareholders and third
      parties.
 
 
 Our
audit committee convenes at least once per quarter to review our quarterly
financial results and to address other matters within the committee’s
responsibilities.
  
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 Compensation
Committee
 
 Our
compensation committee consists of Mr. Thanos, Mr. Weiser, and Mr. Borovich, and
meets as necessary several times per year regarding employee compensation
matters. Functions of the compensation committee include:
 
 ·
              To
      discharge the responsibilities of the board of directors relating to
      compensation of executive officers.
 
 ·
              To
      establish a compensation structure which allows us to attract and retain
      executive officers.
 
 Corporate
Governance and Nominating Committee
 
 Our
corporate governance and nominating committee consists of Mr. Einav, Ms. Atsmon,
and Mr. Falk, and meets as necessary regarding the selection and nomination of
qualified candidates for election to the board of directors. Functions of the
corporate governance and nominating committee include:
 
 ·
              Reviewing
      board structure, composition, and practices, and making recommendations on
      these matters to the board.
  ·
              Overseeing
      and monitoring our compliance with legal and regulatory requirements,
      except as compliance relates to financial statements or accounting matters
      (which is the duty of the audit
committee).
 
 
 
 6D.         
Employees
 
 At
December 31, 2007, we employed 220 full time employees.  Of these
employees, 123 were based in our facilities in Israel, 43 in the United States,
18 in Asia Pacific and 36 in Europe. The following is a detailed breakdown of
persons employed by main category of activity:
 
 YEAR
      ENDED DECEMBER 31,Department
              2007
              2006
              2005Services
              79
              79
              70Research
      & Development
              52
              45
              46Sales
      and Marketing
              57
              41
              40General
      and Administrative
              32
              29
              24Total
              220
              194
              180
 
 We
believe that our relations with our employees are good. Neither our employees
nor we are party to any collective bargaining agreements, except for provisions
of such agreements that are applicable to the industry by virtue of extension
orders issued under applicable Israeli laws.
 
 Israeli
law and certain provisions of the nationwide collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel) and the
Manufacturer's Association of Israel (MAI) ("Bargaining Agreements") apply to
our Israeli employees. These provisions principally concern the maximum length
of the work day and the work week, minimum wages, paid annual vacation,
contributions to a pension fund, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay and other
conditions of employment. We provide our employees with benefits and working
conditions above the required minimums. Furthermore, pursuant to such
provisions, the wages of most of our employees are subject to cost of living
adjustments, based on changes in the Israeli CPI. The amounts and frequency of
such adjustments are modified from time to time. Israeli law generally requires
the payment of severance pay upon the retirement or death of an employee or upon
termination of employment by the employer or, in certain circumstances, by the
employee. We currently fund our ongoing severance obligations for our Israeli
employees by making monthly payments for insurance policies and severance funds.
Severance payment expenses amounted to $700,000 in 2007, $603,000 in 2006, and
$352,000 in 2005. These increases were largely attributable to exchange rate
translations.  We obtain and maintain for all of our employees pension
funds or manager's insurance as required by the above Bargaining
Agreements.
 
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 We
maintain non-competition agreements with our employees which prohibit them, if
they cease working for us, from directly competing with us or working for our
competitors. Recently, Israeli courts have required employers seeking to enforce
non-compete undertakings of a former employee to demonstrate that the
competitive activities of the former employee will harm one of a limited number
of material interests of the employer which have been recognized by the courts,
such as the secrecy of a company’s confidential commercial information or its
intellectual property. If we cannot demonstrate that harm would be caused to us,
we may be unable to prevent our competitors from benefiting from the expertise
of our former employees.
 
 6E.          
Share ownership
 
 As
of March 31, 2008, each of the individuals listed in Item 6A beneficially owned
less than 1% of our ordinary shares, with the exception of Dr. Moshe BenBassat,
who owned 3,967,579 shares (or 14% of our outstanding shares) and 1,232,559
options.
 
 The
following table summarizes information about the options owned by Dr. Moshe
BenBassat that were outstanding and exercisable as of March 31,
2008:
 
 RANGE
      OF
                EXERCISE
      PRICE
                $
              NUMBER
      OUTSTANDING AT
                MARCH  31,
      2008
              EXPIRATION
                DATE1.3
              250,000
              20131.83-1.95
              953,392
              2009-20134.43
              29,167
              20141,232,559
 
 
 
 We
have established a number of employee option plans containing terms and
conditions for the vesting and exercising of options granted to employees for
the purchase of our ordinary shares.
 
 Our
umbrella stock option plan was adopted in 2000.  During 2003, the
board of directors increased the reserve for grants under the umbrella option
plan, the Amended and Restated 2000 Share Option Plan (the “ESOP”), by 400,000
options effective January 1, 2004. During 2005, the board of directors
increased the reserve for grants under ESOP, by 450,000 options effective
January 1, 2006.  During 2006, the board of directors ratified an
automatic increase of the reserve for grants under the ESOP by 1,250,000
effective January 1, 2007.  During 2007, the board of directors
ratified an automatic increase of the reserve for grants under the ESOP by
1,250,000 effective January 1, 2008. In 2001 we adopted the 2000 Approved
U.K. Share Scheme for our employees in the United Kingdom and in 2003 we adopted
the 2003 Israeli Share Option Plan for our employees in Israel, both of which
are pursuant to the ESOP.  We adopted an Employee Stock Purchase Plan
(ESPP) in 2000, details of which are set forth in Note 12(C) of the financial
statements.
  Options
generally have a term of between seven and ten years. Earlier termination may
occur if the employee’s employment with us is terminated or if certain corporate
changes or transactions occur. Our board of directors determines the grant and
the exercise price at the time the options are granted.
 
 The
exercise price per share is usually granted at the approximate fair market value
of the shares on the date of grant, as determined by the closing price for our
ordinary shares as reported by Nasdaq on the date prior to the date of grant for
stock options.
 
 Each
stock option agreement specifies the date and period over which the option
becomes exercisable. Options granted by us generally vest over a period of four
years.  Vesting is conditional upon employee remaining continuously
employed by the company or its subsidiaries.
 
 On
December 5, 2005, the board of directors approved the accelerated vesting of
unvested employee stock options granted to employees and officers with exercise
prices of $1.75 or above. Options to purchase approximately 0.8 million shares
became exercisable immediately. The accelerated options, which are considered
vested as of December 5, 2005, have exercise prices ranging from $1.75 to $4.25
per share.
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 ITEM
      7.
              MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
  7A.          Major
shareholders
  
 The
following table sets forth, as of March 31, 2008, the total number of ordinary
shares beneficially owned by (i) all shareholders known to us to own more than
5% of our outstanding ordinary shares, and (ii) all of our directors and
executive officers as a group.
 
 Ordinary Shares
      Beneficially OwnedName and
      Address
              Number
              PercentDr.
      Moshe BenBassat (1)
              5,200,138
              17.5%Austin
      W. Marxe and David M. Greenhouse (2)
              2,047,627
              7.2%G.  Nicholas
      Farwell (3)
              2,968,900
              10.4%Officers
      and directors as a group (4)
                (9
      persons)
              6,054,285
              20.5%
 
 (1)
              Includes,
      in addition to the ordinary shares held by Dr. BenBassat (i) 1,232,559
      options for ordinary shares held by Dr. BenBassat that are exercisable
      within 60 days of the date stated above and (ii) 2,246,887 ordinary shares
      held by Idit BenBassat, which may be deemed to be beneficially owned by
      Dr. BenBassat.
 
 (2)
              As
      reported on Amendment No. 3 to the Schedule 13G filed with the SEC on
      February 13, 2008 in a joint filing by Austin W. Marxe and David M.
      Greenhouse.  Messrs. Marxe and Greenhouse own the ordinary
      shares through various investment
vehicles.
 
 (3)
              As
      reported on schedule 13G filed with the SEC on February 12, 2008 by G.
      Nicholas Farwell.
 
 (4)
              Includes
      (i) 2,063,334 ordinary shares for which options granted to officers and
      directors are exercisable within 60 days of the date stated above, and
      (ii) 2,246,887 ordinary shares held by Idit BenBassat, which may be deemed
      to be beneficially owned by Dr. BenBassat.  Does not include
      317,958 ordinary shares for which options granted to officers and
      directors are outstanding but are not currently or within 60 days
      exercisable.
 
 Changes
in the percentage of ownership of major shareholders during the past three years
were as follows:
 
 Year
      Ended December 31,
              
              
              Year
      Ended December 31,2004
              
              
              2007%
              
              
              %Total
      shares
              27,403,159
              
              
              28,510,345G. Nicholas
      Farwell
              3,008,100
              11.0%
              
              2,968,900
              10.4%Austin
      W. Marxe and David M. Greenhouse
              2,503,095
              9.1%
              
              2,047,627
              7.2%
 
 Our
major shareholders do not have different voting rights from each other or other
shareholders.
 
 
 
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 7B.          Related
party transactions
  During
the past three years, we have engaged in no material commercial transactions
with related parties, nor are there any outstanding loans to related parties
concerning this period of time.
   The
following table sets forth information with respect to transactions between us
and Plataine Ltd. (formerly known as Nester Ltd.), a company controlled by Dr.
Moshe BenBassat:
   YEAR
      ENDED DECEMBER 31,2007
              2006
              2005(in
      thousands)Amounts
      received by us from Plataine for general and administrative
      expenses:
              $16
              $25
              $74Amounts
      received by Plataine  from us for the purchase of office
      equipment:
              -
              -
              $10
  
 7C.          Interests
of experts and counsel
  Not
applicable.
   ITEM
      8.
              FINANCIAL
      INFORMATION
 
 8A.          Consolidated
statements and other financial information
 
 See
Item 18 – Financial Statements.
 
 Export
Sales
 
 Export
sales in 2007 were $39.9 million or 99.8% of revenues, compared with $32.1
million or 99.1% of revenues in 2006, and $24.0 million, or 99.6 % of revenues
in 2005.
 
 Dividends
 
 We
currently intend to retain earnings, if any, for use in our business. We have
never declared or paid cash dividends and have no intention to pay any cash
dividends on our capital stock in the foreseeable future.
 Legal
Proceedings
  From
time to time, we are involved in various routine legal proceedings incidental to
the ordinary course of our business.  We do not believe that the
outcome of these pending legal proceeding will have significant effects on our
financial position and profitability.
    8B.          Significant
changes
  Except
as disclosed elsewhere in this annual report, there have been no other
significant changes since December 31, 2007.
 
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  ITEM
      9.
              THE
      OFFER AND LISTING
 
  9A.          Offer
and listing details
  Our
ordinary shares are listed for trading on Nasdaq.  The following table
sets forth for the periods listed the high and low closing prices of our
ordinary shares on Nasdaq.  These prices are over-the-counter market
quotations which reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual
transactions.
 
 High
              LowAnnual
      Information
              ($)
              ($)2003
              4.95
              0.122004
              5.28
              1.202005
              2.89
              1.282006
              3.56
              1.402007
              6.84
              2.91Quarterly
      InformationFirst
      quarter 2006
              2.00
              1.40Second
      quarter 2006
              1.79
              1.54Third
      quarter 2006
              2.51
              1.64Fourth
      quarter 2006
              3.56
              2.31First
      quarter 2007
              4.07
              3.07Second
      quarter 2007
              4.01
              2.91Third
      quarter 2007
              6.49
              3.77Fourth
      quarter 2007
              6.84
              3.36Monthly
      InformationOctober
      2007
              6.84
              5.15November
      2007
              5.40
              4.38December
      2007
              4.67
              3.36January
      2008
              4.00
              2.75February
      2008
              3.17
              2.85March
      2008
              3.12
              2.55
 
   9B.          Plan
of distribution
  Not
applicable.
 
   9C.          Market
for ordinary shares
  Our
ordinary shares have been quoted on the NASDAQ Capital Market under the symbol
CKSW since August 29, 2002 (except between November 6, 2002 and
March 6, 2003, when they were quoted under the symbol CKSWE).
    9D.          Selling
shareholders
  Not
applicable.
    9E.           Dilution
  Not
applicable.
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   9F.           Expenses
of the issue
  Not
applicable.
 
 
 
 ITEM
      10.
              ADDITIONAL
      INFORMATION
  10A.        Share
capital
  Not
applicable
    10B.        Memorandum
and articles of association
  Securities
Registers
 
 We
are registered with the Israeli Registrar of Companies. Our registration number
with the Israeli Registrar of Companies is 510829971.  Section 2 of
our Articles of Association provides that the Company may engage in any type of
lawful business as may be determined by the board of directors of the Company
from time to time.
 
 Board
of Directors
  The
Companies Law requires that certain transactions, actions and arrangements be
approved as provided for in a company’s articles of association and in certain
circumstances by the audit committee, by the board of directors itself and by
the shareholders.  The vote required by the audit committee and the
board of directors for approval of such matters, in each case, is a majority of
the disinterested directors participating in a duly convened
meeting.
  The
Companies Law requires that an office holder in the company or a controlling
shareholder in a public company  promptly disclose any personal
interest that he or she may have (either directly or by way of any corporation
in which he or she is, directly or indirectly, 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) and all related material information
known to him or her, in connection with any existing or proposed transaction by
the company, no later than the first meeting of the board of directors to
discuss such existing or proposed transaction.  In addition, if the
transaction is an extraordinary transaction (that is, a transaction other than
in the ordinary course of business, otherwise than on market terms, or is likely
to have a material impact on the company’s profitability, assets or
liabilities), the office holder in the company or a controlling shareholder in a
public company  also must disclose any personal interest held by his
or her spouse, siblings, parents, grandparents, descendants, spouse’s
descendants and the spouses of any of the foregoing.
  Once
the office holder in the company complies with the above disclosure requirement,
a company may approve the transaction in accordance with the provisions of its
articles of association.  If the transaction is with a third party in
which the office holder in the company in a public company has a personal
interest, the approval must confirm that the transaction is not adverse to the
company’s interest.  Furthermore, if the transaction is an
extraordinary transaction, then, in addition to any approval stipulated by the
articles of association, it also must be approved by the company’s audit
committee and then by the board of directors, and, under certain circumstances,
by a meeting of the shareholders of the company.
  Our
Articles of Association provide that, all actions done bona fide at any meeting
of the Board of Directors or by a committee thereof or by any person(s) acting
as Director(s) will, notwithstanding that it may afterwards be discovered that
there was some defect in the appointment of the participants in such meeting or
any of them or any person(s) acting as aforesaid, or that they or any of them
were disqualified, be as valid as if there were no such defector
disqualification.
 
 Our
Articles of Association provide that a Director who has a personal interest in
an extraordinary transaction which is brought for discussion before the Board of
Directors or the Audit Committee shall neither vote in nor attend discussions
concerning the approval of such transaction.  If said Director did
vote or attend as aforesaid, the approval given to the aforesaid activity or
arrangement will be invalid.
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  Our
Articles of Association provide that, subject to the Companies Law, the Board of
Directors may delegate its authorities in whole or in part to such committees of
the Board of Directors as it deems appropriate, and it may from time to time
revoke such delegation. To the extent permitted by the Companies Law, the Board
of Directors may from time to time confer upon and delegate to a President, CEO,
COO or other
Executive Officer then holding office, such authorities and duties of the Board
of Directors as they may deem fit, and they may delegate such authorities and
duties for such period and for such purposes and subject to such conditions and
restrictions which they consider in the bests interests of the Company, without
waiving the authorities of the Board of Directors with respect
thereto.
  Arrangements
regarding compensation of Directors require the approval of the Compensation
Committee, Audit Committee, Board of Directors and the
shareholders.
   Description
of Securities
  The
share capital of the Company is NIS 2,100,000, divided into: (i) 97,000,000
Ordinary Shares of NIS 0.02 nominal value each (“Ordinary Shares”); (ii)
3,000,000 Non-Voting Ordinary Shares of NIS 0.02 nominal value each, and (iii)
5,000,000 Special Preferred Shares of NIS 0.02 nominal value each.
  Our
Ordinary Shares do not have preemptive rights.  The ownership or
voting of Ordinary Shares by nonresidents of Israel or foreign owners is not
restricted or limited in any way by our Memorandum of Association or Articles of
Association, or by the laws of the State of Israel.
  Transfer of
Shares and Notices.  Fully paid up Ordinary Shares may be
freely transferred pursuant to our Articles of Association unless such transfer
is restricted or prohibited by another instrument.  Each shareholder
who would be entitled to attend and vote at a General Meeting of shareholders is
entitled to receive at least 10 days and not more than 60 days prior notice of
any such meeting.  For purposes of determining the shareholders
entitled to notice and to vote at such meeting, the Board of Directors will fix
a record date.
  Election of
Directors.  The Ordinary Shares do not have cumulative voting
rights in the election of Directors.  As a result, the holders of
Ordinary Shares that represents more than 50% of the voting power have the power
to elect all the Directors.
  Dividend and
Liquidation Rights.  The Board of Directors may declare a
dividend to be paid to the holders of Ordinary Shares according to their rights
and interests in our profits. The Directors may from time to time pay to the
shareholders on account of the next forthcoming dividend such interim dividends
as, in their judgment, the position of the Company
justifies.   All dividends unclaimed for one year after having
been declared may be invested or otherwise used by the Directors for the benefit
of the Company until claimed. No unpaid dividend or interest shall bear interest
as against the Company.
  Voting,
Shareholders’ Meetings and Resolutions.
  Each
shareholder has one vote for each share of which he is the holder, subject to
any rights or restrictions attached to any class or classes of
shares.  No business shall be transacted at any General Meeting unless
a quorum is present when the meeting proceeds to business. The quorum at any
Meeting shall be two shareholders present in person or by proxy, holding or
representing at least 33% of the total voting rights in the
Company.  A meeting adjourned for lack of quorum is adjourned to the
same day in the next week at the same time and place, or any time and hour as
the Board of Directors shall designate and state in a notice to the shareholders
entitled to vote at the original meeting, and if, at such adjourned meeting, a
quorum is not present within half an hour from the time appointed for holding
the meeting any two shareholders present in person or by proxy shall constitute
a quorum. Notwithstanding the aforesaid, if a General Meeting is convened at the
demand of shareholders as permitted by of the Companies Law, then a quorum at
such adjourned meeting shall be one or more shareholders holding in the
aggregate at least 5% of the issued share capital of the Company and at least 1%
of the voting rights in the Company or one or more shareholders who hold in the
aggregate at least 5% of the voting rights in the Company.
  Except
for External Directors (as defined in the Companies Law), all directors shall be
classified, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as possible, with the members of each
class to hold office until their successors have been duly elected and
qualified. At each
Annual Meeting, the class of directors whose term expires at that meeting shall
be elected to hold office for a term expiring at the Annual Meeting of the
Company held in the third year following the year of their election and until
their successors have been duly elected and qualified.
  General
Meetings are held at least once in every calendar year at such time (within a
period of 15 months after the holding of the last preceding General Meeting),
and at such time and place as may be determined by the
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  Board
of Directors. At a General Meeting, decisions shall be adopted only on matters
that were specified on the agenda. The board of directors is obligated to call
extraordinary general meeting of the shareholders upon a written request in
accordance with the Companies Law.  The Companies Law provides that an
extraordinary general meeting of shareholder may be called by the board of
directors or by a request of two directors or 25% of the directors in office, or
by shareholders holding at least 5% of the issued share capital of the company
and at least 1% of the voting rights, or of shareholders holding at least 5% of
the voting rights of the company.
  Except
as otherwise provided in the Articles, any resolution at a General Meeting shall
be deemed adopted if approved by the holders of a majority of the voting rights
in the Company represented at the meeting in person or by proxy and voting
thereon.
   10C.        Material
contracts not in the ordinary course of business
  We
have entered into an employment agreement with Moshe BenBassat, our Chief
Executive Officer.   The agreement provides that the employment
relationship is “at-will” and may be terminated at any time by either us or Dr.
BenBassat with or without cause.  The agreement provides that in the
event Dr. BenBassat’s employment is terminated other than for cause, he will be
entitled to severance payments in amounts equal to twelve months of base
salary as of the date of termination.  Dr. BenBassat is entitled to
full acceleration of option vesting in the event of a change in
control.  The right to receive the contractual severance benefits set
forth above will immediately terminate if Dr. BenBassat is terminated for cause,
as defined in the employment agreements.  The agreement provides for
an annual base salary of $300,000 and an annual performance bonus not to
exceed 200%, which amount shall be set by the Compensation
Committee.
   10D.        Exchange
controls
  There
are currently no Israeli currency control restrictions on payments of dividends
or other distributions with respect to our ordinary shares or the proceeds from
the sale of shares, except for the obligation of Israeli residents to file
reports with the Bank of Israel regarding certain
transactions.  However, legislation remains in effect pursuant to
which currency controls can be imposed by administrative action at any
time.
 
 Non-residents
of Israel who purchase our securities with non-Israeli currency will be able to
repatriate dividends (if any), liquidation distributions and the proceeds of any
sale of such securities, into non-Israeli currencies at the rate of exchange
prevailing at the time of repatriation, provided that any applicable Israeli
taxes have been paid (or withheld) on such amounts.
 
 Neither
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 with respect to citizens of countries that are in a state of war with
Israel.
 
 
 10E.        
Taxation
 
 The
following is a summary of the current tax structure, which is applicable to
companies in Israel, with special reference to its effect on us. The following
also contains a discussion of material Israeli and U.S. tax consequences to
persons purchasing our ordinary shares and government programs from which we and
some of our group companies benefit. To the extent that the discussion is based
on new tax legislation, which has yet to be subject to judicial or
administrative interpretation, there can be no assurance that the views
expressed in the discussion will accord with any such interpretation in the
future. 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. In July 2002, the Israeli Parliament approved a law enacting
extensive changes to Israel’s tax law (the “Tax Reform Legislation”) generally
effective January 1, 2003. Among the key provisions of the Tax Reform
Legislation are (i) changes which may result in the imposition of taxes on
dividends received by an Israeli company from its foreign subsidiaries; and (ii)
the introduction of the “controlled foreign corporation” concept according to
which an Israeli company may become subject to Israeli taxes on certain income
of a non-Israeli subsidiary if the subsidiary’s primary source of income is
passive income (such as interest, dividends, royalties, rental income or capital
gains). An Israeli company that is subject to Israeli taxes on the income of its
non-Israeli subsidiaries will receive a credit for income taxes paid/withheld or
that will be paid/withheld by the subsidiary in its country of residence,
according to the terms and conditions determined in the Israeli Tax
Ordinance.
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 The
following summary is included herein as general information only and is not
intended as a substitute for careful tax planning. Accordingly, each investor
should consult his or her own tax advisor as to the particular tax consequences
to such investor of the purchase, ownership or sale of an ordinary share,
including the effect of applicable state, local, foreign or other tax laws and
possible changes in tax laws.
 
 Israel Corporate Tax
Considerations
 
 General
Corporate Tax Structure
 
 Income
not eligible for “Approved enterprise” benefits is taxed in 2007 at a regular
corporate tax rate of 29% (31% in 2006).  The tax rate will be reduced
in subsequent tax years as follows: in 2008 27%, in 2009 26% and thereafter 25%.
This change does not have a material effect on the Company’s financial
statements. However, the effective rate of tax payable by a company which
derives income from an “Approved Enterprise” may be considerably lower – see
discussion below.
  
 Law
for the Encouragement of Capital Investments, 1959
 
 General. Certain of our
production and development facilities have been granted approved enterprise
status pursuant to the Law for the Encouragement of Capital Investments, 1959
(the “Investment Law”). The Investment Law provides that a capital investment in
eligible facilities may, upon application to the Investment Center of the
Ministry of Industry and Trade of the State of Israel, or the Investment Center,
be designated as an Approved Enterprise. Each certificate of approval for an
Approved Enterprise relates to a specific investment program delineated both by
its financial scope, including its capital sources, and by its physical
characteristics, e.g., the equipment to be purchased and utilized pursuant to
the program. The tax benefits derived from any such certificate of approval
relate only to taxable income attributable to the specific Approved
Enterprise.
 
 Subject
to certain provisions concerning income and subject to the Alternative Benefits
(see below), any distributed dividends are deemed attributable to the entire
enterprise, and the effective tax rate and the effective withholding tax rates
represent the weighted combination of the various applicable tax
rates.
 
 Tax Benefits. Taxable income
of a company derived from an Approved Enterprise is subject to company tax at
the rate of up to 25%, instead of the tax rates under the “General Corporate Tax
Structure” above, for a certain period of time. The benefit period is a period
of seven years commencing in the year in which the Approved Enterprise first
generates taxable income. The benefits may be shorter as it is limited to 12
years from the commencement of production of the Approved Enterprise or 14 years
from the date of approval, whichever is earlier. Under certain circumstances (as
further detailed below), the benefit period may extend to a maximum of ten years
or fifteen years (see the 2005 Amendment below)  from the commencement
of the benefit period. A company which operates under more than one approval or
that has capital investments which are only partly approved (such a company
being designated as a Mixed Enterprise), may have an effective company tax rate
that is the result of a weighted combination of the various applicable
rates.
 
 A
company owning an approved enterprise which was approved after April 1, 1986 may
elect to forego the entitlement to grants or state guarantees and apply for an
alternative package of tax benefits. These benefits provide that undistributed
income from the approved enterprise is fully tax exempt from corporate tax for a
defined period, which ranges between two and ten years from the first year of
taxable income, subject to the limitations described above, depending
principally upon the geographic location within Israel and the type of the
approved enterprise. Upon expiration of such period, the approved enterprise is
eligible for a beneficial tax rate (25% or lower in the case of an FIC, as
described below), for the remainder of the otherwise applicable period of
benefits, as described above.
 
 Should
the percentage of share capital of the companies having Approved Enterprises
held by foreign shareholders exceed 25%, future Approved Enterprises of such
companies would qualify for reduced tax rates for an additional three years,
after the seven years mentioned above.  The company tax rate
applicable to income earned from Approved Enterprise programs (currently, for
programs on which an application for an approved enterprise status was submitted
before December 31, 2004) in the benefit period by a company meeting these
qualifications is as follows:
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    %
      of Foreign Ownership
              Tax
      RateOver 25% but less
      than 49%
              25%49% or more but less
      than 74%
              20%74% or more but less
      than 90%
              15%90% or
      more
              10%
 
 Entitlement
to these tax benefits for enterprises to which Investment Center granted an
Approved Enterprise status prior to December 31, 2004 (see the 2005 Amendment
below) is subject to the final ratification of the Investment Center, and is
conditioned upon fulfillment of all terms of the approved program. However,
there can be no assurance that we will obtain approval for additional Approved
Enterprises, or that the provisions of the Investment Law will not change with
respect to future approvals, or that the above-mentioned shareholding portion
will be reached for each subsequent year. In the event of our failure to comply
with these conditions, the tax and other benefits could be canceled, in whole or
in part, and we might be required to refund the amount of the canceled benefits,
together with the addition of CPI linkage difference and interest. We believe
that our Approved Enterprise substantially complies with all such conditions at
present, but there can be no assurance that it will continue to do so. The
undistributed income derived from each of our approved enterprise programs is
tax-exempt for a two year period beginning with the first year in which it
generates otherwise taxable income and is subject to a reduced tax rate for the
remainder of the benefit period.
 
 A
company that pays a dividend out of income derived from the Approved
Enterprise(s) during the tax exemption period will be subject to deferred
company tax in respect of the amount distributed (including the recipient’s tax
thereon) at the rate which would have been applicable had such company not
elected the Alternative Package. This rate is generally 10% to 25%, depending on
the extent to which non-Israeli shareholders hold such company’s
shares.
 
 The
dividend recipient is taxed at the reduced rate applicable to dividends from
Approved Enterprises (generally 15% as compared to 25% for individuals or an
exemption for companies), if the dividend is distributed during the tax benefit
period or within 12 years after this period. However, the limitation does not
apply if the company qualifies as a foreign investors’ company. This tax must be
withheld by such company at source, regardless of whether the dividend is
converted into foreign currency.
 
 Subject
to certain provisions concerning income subject to Mixed Enterprises, all
dividends are considered to be attributable to the entire enterprise and the
effective tax rate on the dividend is the result of a weighted combination of
the various applicable tax rates. However, such company is not obliged to
distribute exempt retained profits under the Alternative Package, and such
company may generally decide from which year’s profits to declare
dividends.
 
 Each
application to the Investment Center is reviewed separately, and a decision as
to whether or not to approve such application is based, among other things, on
the then prevailing criteria set forth in the Investment Law, on the specific
objectives of the applicant company set forth in such application and on certain
financial criteria of the applicant company. Accordingly, there can be no
assurance that any such application by any of our group companies will be
approved. In addition, the benefits available to an Approved Enterprise are
conditional upon the fulfillment of certain conditions stipulated in the
Investment Law and its regulations and the criteria set forth in the certificate
of approval, as described above. In the event that these conditions are
violated, in whole or in part, a company with an Approved Enterprise would be
required to refund the amount of tax benefits, with the addition of the Israeli
consumer price index linkage differences and interest.
 
 A
company which qualifies as a foreign investment company (FIC) is a company, like
us, in which more than 25% of the share capital (in terms of shares, rights to
profit, voting rights and appointment of directors) and of the combined share
and loan capital is owned, directly or indirectly, by non-residents of Israel
and is therefore entitled to further tax benefits relating to its approved
enterprises. Such a company will be eligible for an extension of the period of
tax benefits for its approved enterprises (up to ten years) and further tax
benefits, should the level of foreign ownership in it increase above
49%.
 
 Notwithstanding
the foregoing, proceeds received from the sale of our products may be deemed to
be royalties under the domestic law of the country of residence of the
purchaser/licensee or under an applicable tax treaty and as such subject to
withholding tax in such country.
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 Where
withholding tax is paid by our company to the country of residence of the
purchaser/licensee, such tax would generally be creditable by our company for
Israeli income tax purposes, pursuant to any relevant income tax treaty and
under Israeli law against income derived from the same source. However, where we
do not have taxable income for Israeli tax purposes because of the application
of a tax exemption available to an Approved Enterprise or because of losses for
tax purposes, we would have no Israeli tax liability against which to credit the
foreign tax withheld and paid by us. Furthermore, under Israeli law, if certain
conditions are not met we may not carry forward such unused credit to utilize in
future tax years.
 
 From
time to time, the Government of Israel has discussed reducing the benefits
available to companies under the Investment Law and currently such proposal is
pending. The termination or substantial reduction of any of the benefits
available under the Investment Law could have a material adverse effect on
future investments by our company in Israel.
 
 The
law also provides that an approved enterprise is entitled to accelerated
depreciation on property and equipment included in an approved investment
program, generally ranging from 200% for equipment, to 400% for buildings, of
ordinary depreciation rates during the first five tax years of the operation of
these assets with a ceiling of 20% per year for depreciation on
buildings.
 
 Notwithstanding
the foregoing, on March 29, 2005, the Israeli Parliament passed an amendment to
the Investment Law, which revamps the Israeli tax incentives for future
industrial and hotel investments (the “2005 Amendment”). A tax “holiday” package
can now be elected for up to 15 years for a “Privileged Enterprise” as defined
in the 2005 Amendment, if certain conditions are met, without needing to obtain
approval. The extent of the tax benefits available depends upon the level of
foreign investment.
 
 The
2005 Amendment became effective on April 1, 2005. Taxpayers may, under certain
conditions, claim Privileged Enterprise status for new and expanded enterprises
with respect to 2004 or subsequent years, unless the Investment Center granted
such taxpayer Approved Enterprise status prior to December 31,
2004.
 
 Subject
to certain conditions, various alternative tax-only benefit packages can now be
elected with respect to investments in a “Privileged Enterprise”, without prior
approval. Companies in industry or tourism in Israel may elect
between:
 
 ·
              Tax
      “holiday” package – for a “Privileged Enterprise”: a tax exemption applies
      to undistributed profits for 2 to 15 years depending on geographical
      location of the “Privileged Enterprise” and the level of foreign
      ownership. Company tax rates of between 10% and 25% apply to distributed
      exempt profits or profits derived subsequent to the exempt period. The
      total period of tax benefits is 7 to 15 years,
  or
 
 ·
              Grant
      / Reduced tax package – for an “Approved Enterprise”: Fixed asset grants
      of between 20% and 32% for enterprises in a development area and reduced
      company tax rates between 0% and 25% for a period of 7 to 15
      years.
 
 Dividend
withholding tax also applies at a rate of 4% or 15% depending on the package
selected and the residency of the shareholder.
 
 Grants
under the Law for the Encouragement of Industrial Research and Development,
1984.
 
 Israeli
tax laws have allowed, under certain conditions, a tax deduction for
expenditures (including capital expenditures) in scientific research and
development projects, if the expenditures are approved or funded by the
Government of Israel and the research and development is for the promotion of
the enterprise and is carried out by or on behalf of the company seeking such
deduction. Expenditures not approved as above or funded are deductible in equal
portions over a three-year period.
 
 Under
the law for the Encouragement of Industrial Research and Development, 1984 (the
“Research Law”), research and development programs that meet specified criteria
and are approved by a committee of the Chief Scientist, are eligible for grants
of up to 50% of the program’s expenses. Under the provisions of Israeli law in
effect until 1996, royalties of 2%-3% of the revenues derived in connection with
products developed according to, or as a result of, a research and development
program funded by the Chief Scientist had to be paid to the State of Israel.
Pursuant to an amendment effected in 1996 effective with respect to Chief
Scientist programs funded in or after 1994, royalties at the rate of 3% during
the first three years, 4% over the following
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  three
years and 5% in or after the seventh year of the revenues derived in connection
with products developed according to such programs are payable to the State of
Israel. The maximum aggregate royalties will not exceed 100% (or, for funding
prior to 1994, 100%-150%) of the dollar-linked value of the total grants
received. Pursuant to an amendment effected in 2000, effective with respect to
Chief Scientist programs funded in or after 2000, the royalty rates described
above were updated to 3% during the first three years and 3.5% in or after the
fourth year, of the revenues derived in connection with products developed under
such programs. Pursuant to an amendment effected on January 1, 1999, effective
with respect to Chief Scientist programs approved in or after 1999, funds
received from the Chief Scientist shall bear annual interest at a rate equal to
LIBOR for twelve months.
 
 Generally,
the Research Law requires that the manufacturing of any product developed
through research and development funded by the Government of Israel shall be in
Israel. It also provides that know-how from the research and development that is
used to produce the product may not be transferred to third parties without the
approval of a research committee of the Chief Scientist.  Such
approval is not required for the export of any products resulting from such
research and development.
 
 However,
under the Regulations, in the event that any portion of the manufacturing is not
performed in Israel, if approved by the Chief Scientist, we would be required to
pay an increased royalty at the rates of 120%, 150% or 300% of the grant if the
manufacturing portion that is performed outside of Israel is less than 50%,
between 50% and 90% and more than 90%, respectively.
 
 In
2002, the Research Law was amended to, among other things, enable companies
applying for grants from the Chief Scientist to seek prior approval for
conducting manufacturing activities outside of Israel without being subject to
increased royalties. However, this amendment will not apply to any of our
existing grants. In addition, the amendment provides that one of the factors to
be taken into consideration by the Chief Scientist in deciding whether to
approve a grant application is the percentage of the manufacturing of the
relevant product that will be conducted outside of Israel. Accordingly, should
we seek additional grants from the Chief Scientist in connection with which we
also seek prior approval for manufacturing products outside of Israel, we may
not receive such grant or may receive a grant in an amount that is less than the
amount we sought.
 
 
 Law
for the Encouragement of Industry (Taxes), 1969
 
 Pursuant
to the Law for the Encouragement of Industry (Taxes), 1969, a company qualifies
as an “Industrial Company” if it is a resident of Israel and at least 90% of its
gross income in any tax year (exclusive of income from certain defense loans,
capital gains, interest and dividends) is derived from an “industrial
enterprise” it owns. An “industrial enterprise” is defined as an enterprise
whose major activity, in a given tax year, is industrial
manufacturing.
 
 We
believe that we currently qualify as an Industrial Company. Accordingly, we are
entitled to certain tax benefits, including a deduction of 12.5% per annum on
the purchase of patents or certain other intangible property rights (other than
goodwill) used for the development or promotion of the industrial enterprise
over a period of eight years beginning with the year in which such rights were
first used.
 
 The
tax laws and regulations dealing with the adjustment of taxable income for local
inflation provide that an industrial enterprise is eligible for special rates of
depreciation deductions. These rates vary in the case of plant and machinery
according to the number of shifts in which the equipment is being operated and
range from 20% to 40% on a straight-line basis, or 30% to 50% on a declining
balance basis (instead of the regular rates which are applied on a straight-line
basis).
 
 Moreover,
industrial enterprises which are Approved Enterprises (see above) can choose
between (a) the special rates referred to above and (b) accelerated regular
rates of depreciation applied on a straight-line basis with respect to property
and equipment, generally ranging from 200% (with respect to equipment) to 400%
(with respect to buildings) of the ordinary depreciation rates during the first
five years of service of these assets, provided that the depreciation on a
building may not exceed 20% per annum. In no event may the total depreciation
exceed 100% of the cost of the asset.
 
 In
addition, Industrial Companies may (i) elect to file consolidated tax returns
with additional related Israeli Industrial Companies and (ii) deduct expenses
related to public offerings in equal amounts over a period of three
years.
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 Eligibility
for benefits under the Encouragement of Industry Law is not contingent upon the
approval of any governmental authority. No assurance can be given that we will
continue to qualify as an Industrial Company, or will avail ourselves of any
benefits under this law in the future or that Industrial Companies will continue
to enjoy such tax benefits in the future.
 
 Employee
Stock Options
 
 Effective
from January 1, 2003, the Tax Reform Legislation enables a company to grant
options through one of three tax tracks:
 
 (a)  the
earned income track through a trustee pursuant to which the optionee pays income
tax rate as  earned income (according to the marginal tax rate of the
optionee - up to 48% tax in 2007) plus payments to the National Insurance
Institute and  health tax on the profit gained upon the earlier to
occur of the transfer of the options or the underlying shares from the trustee
to the optionee or the sale of the options or the underlying shares by the
trustee, and the company may recognize expenses pertaining to the options for
tax purposes.  The options (or upon their exercise, the underlying
shares), must be held by a trustee for a period of 12 months commencing from the
date the stock options were granted and deposited with a trustee;
or
 
 (b)  the
capital gains tax track through a trustee pursuant to which the optionee pays
capital gains tax at a rate of 25% on the profit upon, the earlier to occur of
the transfer of the options or the underlying shares from the trustee to the
optionee or the sale of the options or the underlying shares by the trustee.
However, if the underlying shares are listed in a stock exchange or will be
listed within 90 days after the date of grant, then the difference (if any)
between the average value of the underlying shares within 30 days prior to date
of grant or 30 days subsequent to the date of the listing of the shares, as
appropriate, and the exercise price is taxed as earned income rather than
capital gain. The optionee is not required to make payments to the National
Insurance Institute and health tax in respect of the portion of the income
classified as capital gain.  The Company may not recognize expenses
relating to the options for tax purposes except in respect of the portion of
income recognized as earned income. The options (or upon their exercise, the
underlying shares), must be held by a trustee for a period of 24 months from the
date the stock options were granted and deposited with a trustee ;
or
 
 (c)  the
track without a trustee pursuant to which the optionee pays income tax rate as
earned income (according to the marginal tax rate of the optionee up to 48% tax
in 2007) plus payments to the National Insurance Institute and health tax on the
profit upon the sale of the underlying shares, and the company may not recognize
expenses pertaining to the options for tax purposes.
 
 In
accordance with the provisions of the Tax Reform Legislation, if a company has
selected the capital gains track, the company must continue granting options
under the selected capital gains track until the end of the year following the
year in which the first grant of options under that trustee track will be made.
Notwithstanding the above, the company may at any time also grant options under
the provisions of the earned income track without a trustee.
 
 The
above rules apply only to employees, including officer holders but excluding
controlling shareholders.
 
 Taxation
under Inflationary Conditions
 
 The
Income Tax Law (Inflationary Adjustments), 1985 (“Inflationary Adjustments Law”)
is intended to neutralize the erosion of capital investments in business and to
prevent tax benefits resulting from deduction of inflationary interest expenses.
This law applies a supplementary set of inflationary adjustments to the normal
taxable profits computed under regular historical cost principles.
 
 Under
the Inflationary Adjustments Law, results for tax purposes are measured in real
terms, in accordance with the changes in the consumer price index. In addition,
subject to certain limitations, depreciation of fixed assets and losses carried
forward are adjusted for inflation on the basis of changes in the consumer price
index.
 
 The
salient features of the Inflationary Adjustments Law can be described generally
as follows:
 
 A
special tax adjustment for the preservation of equity, based on changes in the
CPI, whereby certain corporate assets are classified broadly into fixed
(inflation-resistant) assets and non-fixed assets. Where shareholders’ equity,
(as defined in the Inflationary Adjustment Law), exceeds the depreciated cost of
fixed assets (as defined in the Inflationary Adjustment Law), a tax deduction
which takes into account the effect of
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  the
annual rate of inflation on such excess is allowed (up to a ceiling of 70% of
taxable income for companies in any single year, with the unused portion carried
forward on a CPI-linked basis, without limit). If the depreciated cost of such
fixed assets exceeds shareholders’ equity, then such excess, multiplied by the
annual inflation rate, is added to taxable income.
 
 Subject
to certain limitations, depreciation deductions on fixed assets and losses
carried forward are adjusted for inflation based on the increase in the consumer
price index (from the beginning of the 1982 fiscal year, and as of the 1985
fiscal year, with respect to equipment); and gains on the sale of certain traded
securities are taxable. However, dealers in securities are subject to the
regular tax rules applicable to business income in Israel.
 
 Results
for tax purposes are measured in real terms, in accordance with the changes in
the CPI. We are taxed under this law. The discrepancy between the change in (i)
the CPI and (ii) the exchange rate of the Israeli currency to the dollar, each
year and cumulatively, may result in a significant difference between taxable
income and other items as denominated in dollars as reflected in our financial
statements (which are reported in dollars). In addition, subject to certain
limitations, depreciation of fixed assets and losses carried forward are
adjusted for inflation on the basis of changes in the Israeli CPI.
 
 The Knesset has approved the
cancellation (subject to transitional provisions) of the Income Tax Law
(Inflationary Adjustments), 1985, commencing from tax year 2008.
 
 Taxation
of our Shareholders
 
 Capital
Gain
 
 Capital
gain tax is imposed on the disposal of capital assets by an Israeli
resident, and on the
disposal of such assets by a non- Israel resident if those assets are either (i)
located in Israel; (ii) are shares or a right to a share in an Israeli resident
corporation (iii) represent, directly or indirectly, rights to assets located in
Israel. The Israeli Tax Ordinance distinguishes between “Real Gain” and the
“Inflationary Surplus”. Real Gain is the excess of the total capital gain over
Inflationary Surplus computed generally on the basis of the increase in the
Israeli CPI between the date of purchase and the date of disposal.
  The
capital gain accrued by individuals on the sale of an asset purchased on or
after January 1, 2003 will be taxed at the rate of 20%. However, if the
individual shareholder is a “Controlling Shareholder” (i.e., a  person who
holds, directly or indirectly, alone or together with other, 10% or more of one
of the Israeli resident company’s means of control at the time of distribution
or at any time during the preceding 12 months period) such gain will be taxed at
the rate of 25%. In addition, capital gain derived by an individual claiming
deduction of financing expenses in respect of such gain will be taxed at the
rate of 25%. The real capital gain derived by a corporation will be generally
subject to tax at the rate of 25%. However, the real capital gain derived from
sale of securities, as defined in Section 6 of the Inflationary Adjustment Law,
by a corporation, which was subject upon December 31, 2005 to the provisions of
Section 6 of the Inflationary Adjustment Law, will be taxed at the corporate tax
rate (29% in 2007). The capital gain accrued at the sale of an asset purchased
prior to January 1, 2003 will be subject to tax at a blended
rate.  The marginal tax rate for individuals (up to 48% in 2007) and
the regular corporate tax rate for corporations (29% in 2007) will be applied to
the gain amount which bears the same ratio to the total gain realized as the
ratio which the holding period commencing at the acquisition date and
terminating on January 1, 2003 bears to the total holding period.  The
remainder of the gain realized will be subject to capital gains tax at the rates
applicable to an asset purchased after January 1, 2003 (see
aforementioned).
  Individual
and corporate shareholder dealing in securities in Israel are taxed at the tax
rates applicable to business income (in 2007 – 29% tax rate for a corporation
and a marginal tax rate of up to 48% for individual). Notwithstanding the
foregoing, if the shareholder is a non-Israeli resident, then such taxation is
subject to the provision of any applicable double tax treaty. Moreover, capital
gain derived from the sale of the shares by a non-Israeli shareholder may be
exempt under the Israeli income tax ordinance from Israeli taxation provided the
following cumulative conditions are met: (i) the shares were purchased upon or
after the registration of the shares at the stock exchange, (ii) the seller
doesn’t have a permanent establishment in Israel to which the derived capital
gain is attributed, and (iii) if the seller is a corporation, less than 25% of
its means of control are held by Israeli resident shareholders.  In
addition, the sale of the shares may be exempt from Israeli capital gain tax
under an applicable tax treaty.  Thus, the U.S.-Israel Double Tax
Treaty exempts U.S. resident from Israeli capital gain tax in connection with
such sale, provided (i) the U.S. resident  owned, directly or
  
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  indirectly,
less than 10% of an Israeli resident company’s voting power  at any
time within the 12 – month period preceding such sale; (ii) the seller, being an
individual, is present in Israel for a period or periods of less than 183 days
at the taxable year; and (iii) the capital gain from the sale was not derived
through a permanent establishment of the U.S. resident in Israel.
  Either
the seller, the Israeli stockbroker or financial institution through which the
sold securities are held, are obliged, subject to the above mentioned
exemptions, to withhold tax upon the sale of securities from the real capital
gain at the rate of 25% in respect of a corporation and 20% in respect of an
individual.
 
 Generally,
within 30 days of a transaction, a detailed return, including a computation of
the tax due, should be submitted to the Israeli Tax Authority, and an advanced
payment amounting to the tax liability arising from the capital gain is
payable.  At the sale of traded securities, the aforementioned
detailed return may not be submitted and the advanced payment should not be paid
if all tax due was withheld at source according to applicable provisions of the
Israeli income tax ordinance and regulations promulgated
thereunder.  Capital gain is also reportable on the annual income tax
return.
 
  Dividends
   A
distribution of dividend from income attributed to an “Approved Enterprise” will
be subject to tax in Israel at the rate of 15%, subject to a reduced rate under
any applicable double tax treaty. A distribution of dividend from income, which
is not attributed to an “Approved Enterprise” to an Israeli resident individual,
will generally be subject to income tax at a rate of 20%. However, a 25% tax
rate will apply if the dividend recipient is a “Controlling Shareholder” (i.e.,
a person who holds, directly or indirectly, alone or together with other, 10% or
more of one of the Israeli resident company’s means of control at the time of
distribution or at any time during the preceding 12 months period). If the
recipient of the dividend is an Israeli resident corporation, such dividend will
be exempt from income tax provided the income from which such dividend is
distributed was derived or accrued within Israel.
  Under
the Israeli income tax ordinance, a non-Israeli resident (either individual or
corporation) is generally subject to an Israeli income tax on the receipt of
dividends at the rate of 20% (25% if the dividends recipient is a “Controlling
Shareholder” (as defined above)); those rates are subject to a reduced tax rate
under an applicable double tax treaty. Thus, under the Double Tax Treaty
concluded between the State of Israel and the U.S. the following rates will
apply in respect of dividends distributed by an Israeli resident company to a
U.S. resident: (i) if the U.S. resident is a corporation which holds during that
portion of the taxable year which precedes the date of payment of the dividend
and during the whole of its prior taxable year (if any), at least 10% of the
outstanding shares of the voting stock of the Israeli resident paying
corporation and not more then 25% of the gross income of the Israeli resident
paying corporation for such prior taxable year (if any) consists of certain type
of interest or dividends – the tax rate is 12.5%, (ii) if both the conditions
mentioned in section (i) above are met and the dividend is paid from an Israeli
resident company’s income which was entitled to a reduced tax rate applicable to
an “approved enterprise” under the Israeli Law for the Encouragement of Capital
Investments of 1959– the tax rate is 15%, and (iii) in all other cases, the tax
rate is 25%. The aforementioned rates under the Israel U.S. Double Tax Treaty
will not apply if the dividend income was derived through a permanent
establishment of the U.S. resident in Israel.
 
 An
Israeli resident company whose shares are listed in a stock exchange is
obligated to withhold tax, upon the distribution of a dividend attributed to an
Approved Enterprise’s income, from the amount distributed, at the following
rates: (i) Israeli resident corporation – 15%, (ii) Israeli resident individual
– 15%, and (iii) non-Israeli resident – 15%, subject to a reduced tax rate under
an applicable double tax treaty.  If the dividend is distributed from
an income not attributed to the Approved Enterprise, the following withholding
tax rates will apply: (i) Israeli resident corporation – 0%, (ii) Israeli
resident individual – 20% (iii) non-Israeli resident – 20%, subject to a reduced
tax rate under an applicable double tax treaty.
 
 Estate
and Gift Tax
 
 Israel
law presently does not impose estate or gift tax.
 
 
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 United States Federal Tax
Income Considerations
 
 
 The
following discussion is a summary of the material United States federal income
tax consequences of purchasing, holding and disposing of our ordinary shares.
This sectionis based
on the United States Internal Revenue Code of 1986, as amended (the “Code”),
Treasury regulations, judicial decisions and published positions of the United
States Internal Revenue Service (the “IRS”), all as in effect on the date
hereof.  This discussion does not address all aspects of United States
federal income taxation (including potential application of the alternative
minimum tax) that may be relevant to a particular shareholder based on such
shareholder’s particular circumstances. In particular, the following discussion
does not address the United States federal income tax consequences of
purchasing, holding or disposing of our ordinary shares to shareholders who own
(directly, indirectly or through attribution) 10% or more of our outstanding
voting stock or who are broker-dealers, insurance companies, tax-exempt
organizations, banks and other financial institutions, a person who holds our
ordinary shares as part of a straddle, constructive sale, hedge or conversion
transaction, a United States expatriate, a partnership or other pass through
entity or U.S. Holders (as defined below) whose functional currency is not the
U.S. dollar. The following discussion also does not address any aspect of state,
local or non-United States tax laws. Further, this summary generally considers
only a U.S. Holder that will own our ordinary shares as capital assets
(generally, assets held for investment). Each prospective investor should
consult its tax advisor with respect to the specific United States federal,
state and local tax consequences of purchasing, holding or disposing of our
ordinary shares.
 
 Taxation
of U.S. Holders
 
 For
purposes of this discussion, a “U.S. Holder” means any beneficial owner of our
ordinary shares that is not a partnership and that is for United States federal
income tax purposes, is: (i) a citizen or resident of the United States; (ii) a
corporation (or other entity or arrangement treated as a corporation or
partnership)organized in or under the laws of the United States or any state
thereof or the District of Columbia; (iii) an estate the income of which is
subject to United States federal income taxation regardless of source; or (iv) a
trust, if a United States court is able to exercise primary supervision over its
administration and one or more United States persons have the authority to
control all of its substantial decisions or a trust that was in existence on
August 10, 1996 and validly elected to continue to be treated as a domestic
trust. A “Non-U.S. Holder” is any beneficial owner other than a U.S. Holder. If
a partnership or any other entity or arrangement treated as a partnership holds
our ordinary shares, the United States federal income tax treatment of a partner
generally will depend upon the status of the partner and the activities of the
partnership. If you are a partner in a partnership holding our ordinary shares,
you should consult your tax advisor.
 
 Distributions. We do not
anticipate that we will make dividend distributions to shareholders in the
foreseeable future. If we do make any such distributions, the gross amount of
such distributions (before reduction for any Israeli withholding tax) will be
included in the gross income of U.S. Holders as dividend income to the extent of
our earnings and profits, as calculated under United States federal income tax
principles. Such dividends will not qualify for the dividends received deduction
available in certain circumstances to corporate
holders.    “Qualified dividend income” received by
individual U.S. Holders (as well as certain trusts and estates) for taxable
years beginning on or before December 31, 2010 generally will be taxed at a
preferential U.S. federal income tax rate (a maximum rate of 15 per cent.)
provided certain conditions are met, including a minimum holding period. For
this purpose, dividends paid by the Company will be “qualified dividend income”
provided that the Company is eligible with respect to substantially all of its
income for the benefits of the U.S.-Israel Tax Treaty and the Company is not
considered during the year the dividend is paid, or in the preceding year, a
“passive foreign investment company”. U.S. Holders are urged to consult their
tax advisers regarding the availability of the preferential rate in their
particular circumstances.  Subject to the PFIC discussion below, to
the extent that any such distribution exceeds our earnings and profits, such
distribution will be treated as a non-taxable return of capital to the extent of
the U.S. Holder’s adjusted basis in our ordinary shares and thereafter as
taxable capital gain. For United States federal income tax purposes, the amount
of any dividend that we pay in NIS to a U.S. Holder will equal the U.S. dollar
value of such NIS at the exchange rate in effect on the date the dividend is
considered to be received by the U.S. Holder, regardless of whether the NIS are
actually converted into U.S. dollars at that time. A U.S. Holder who receives a
foreign currency distribution and converts the foreign currency into U.S.
dollars subsequent to receipt will have foreign exchange gain or loss, based on
any appreciation or depreciation in the value of the foreign currency against
the U.S. dollar, which will generally be United States source ordinary income or
loss.
 
 Credit for Israeli Taxes
Withheld. Any dividends that we pay to a U.S. Holder with respect to our
ordinary shares generally will be treated for United States federal income tax
purposes as foreign-source income.
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  Subject
to certain conditions and limitations, any Israeli taxes withheld or paid with
respect to dividends on our ordinary shares generally will be eligible for
credit against the U.S. Holder’s United States federal income tax liability.
Such limitations include extensive separate computation rules under which
foreign tax credits allowable with respect to specific classes of foreign-source
income cannot exceed the United States federal income taxes otherwise payable
with respect to such classes of income. Subject to the particular circumstances
of a U.S. Holder, any dividends with respect to our ordinary shares generally
will be classified as “passive category income,” but could, in the case of
certain U.S. Holders, constitute “general category income”. The rules relating
to computing foreign tax credit or deducting foreign taxes are extremely
complex, and U.S. Holders are urged to consult their own tax advisors regarding
the availability of foreign tax credits with respect to any Israeli tax withheld
from payment.
 
 Alternatively,
a U.S. Holder may elect to claim a United States tax deduction for any such
Israeli tax, but only for a tax year in which the U.S. Holder elects to do so
with respect to all foreign income tax as paid. In addition, a non-corporate
U.S. Holder cannot elect to deduct Israeli taxes if such U.S. Holder does not
itemize deductions.
 
 Dispositions. If you are a
U.S. Holder and you sell, exchange or otherwise dispose of our ordinary shares,
you will recognize capital gain or loss for U.S. Federal income tax purposes
equal to the difference between the dollar value of the amount that you realize
and your adjusted tax basis, determined in dollars, in those ordinary shares.
Capital gain or loss will be short-term or long-term depending on whether you
hold the Shares for more than one year.  Long-term capital gains of
individuals are eligible for reduced rates of taxation, with respect to taxable
years beginning on or before December 31, 2010. The deductibility of capital
losses is subject to limitations.  In general, any gain or loss
recognized by a U.S. Holder on the sale or other disposition of our ordinary
shares will be United States-source income or loss for purposes of the United
States federal foreign tax credit limitation. However, a U.S. Holder who is also
a Treaty U.S. Resident and who sells our ordinary shares in Israel may elect to
treat gain from the sale or other disposition of our ordinary shares as
foreign-source income for purposes of the United States federal foreign tax
credit limitations. U.S. Holders should consult their tax advisors regarding the
application of the United States federal foreign tax credit limitation to gain
or loss recognized on the disposition of our ordinary shares and the treatment
of any foreign currency gain or loss on any NIS received in respect of the sale
or other disposition of our ordinary shares.
 
 Passive Foreign Investment Company
Status.
 
 The
Code provides special antideferral rules regarding certain distributions
received by U.S. persons with respect to, and sales and other dispositions
(including pledges) of, stock of a passive foreign investment company (“PFIC”).
Generally a non-United States corporation is treated as a PFIC for United States
federal income tax purposes in any taxable year in which either (i) 75% or more
of its gross income (including the pro rata gross income of any company
(domestic or foreign) in which such corporation is considered to own 25% or more
of the stock by value) for the taxable year is passive income, generally
referred to as the “income test,” or (ii) 50% or more of the average value of
its assets (including the pro rata value of the assets of any company in which
such corporation is considered to own 25% or more of the stock by value) during
the taxable year, measured at the end of each quarter, produce or are held for
the production of passive income in the taxable year, generally referred to as
the “asset test”.
 
 There
is no assurance that we are not a PFIC, and U.S. Holders of our ordinary shares
should consult their tax advisors about the PFIC rules, including the
possibility, and advisability of, and the procedure and timing for making
certain elections that may alleviate some of the tax consequences of the PFIC
rules in connection with their holding of ordinary shares, including options to
acquire our ordinary shares.
 
 Taxation
of Non-U.S. Holders
 
 Subject
to the discussion below with respect to the United States backup withholding
tax, a Non-U.S. Holder (i.e., any person other than a U.S. Holder) generally
will not be subject to United States federal income tax on dividends from us, if
any, or gain from the sale or other disposition of ordinary shares, unless (i)
such income is effectively connected with the conduct by the Non-U.S. Holder of
a United States trade or business, and in the case of a resident of a country
which has an income tax treaty with the United States, such income is
attributable to a permanent establishment (or in the case of an individual, a
fixed place of business) in the United States; or (ii) with respect to any gain
on the sale or other disposition of ordinary shares realized by an individual
Non-U.S. Holder, such individual Non-U.S. Holder is present in the United States
for 183 days or more in the taxable year of the sale or other disposition and
meets certain other conditions.
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 Backup
Withholding and Information Reporting
 
 Under
the Code, United States tax information reporting and “backup withholding” at
the appropriate rate (currently 28%) may generally apply to payments of
dividends on, and the proceeds of dispositions of, our ordinary shares made
within the United States, by a United States payor or through certain United
States-related financial intermediariesto both U.S. Holders and
Non-U.S. Holders, other than exempt recipients.  Backup withholding
will not apply, however, to a holder who furnishes a correct taxpayer
identification number or certificate of foreign status and makes any other
required certification or who is otherwise exempt from backup withholding.
Generally, a U.S. Holder will provide such certification on IRS Form W-9, and a
non-U.S. Holder will provide such certification on IRS Form W-8. Backup
withholding is not an additional tax.  Any amounts withheld under the
United States backup withholding rules will be allowed as a refund or credit
against the U.S. Holder’s or the non-U.S. Holder’s United States federal income
tax liability, provided the required information is furnished to the
IRS.
 
 
 10F.         Dividends
and paying agents
 
 Not
applicable.
 
 
 10G.        Statement
by experts
 
 Not
applicable.
 
 
 10H.        Documents
on display
 
 We
are subject to certain of the information reporting requirements of the Exchange
Act, as amended. As a foreign private issuer, we are exempt from the rules and
regulations 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, with respect to their purchase and sale of
our shares. In addition, we are not required to file reports and financial
statements with the SEC as frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act. However, we are required to
file with the SEC, within six months after the end of each fiscal year, an
annual report on Form 20-F containing financial statements audited by an
independent accounting firm.  We publish unaudited interim financial
information after the end of each quarter.  We furnish this quarterly
financial information to the SEC under cover of a Form 6-K.
 
 You
may read and copy any document we file with the SEC at its public reference
facilities at, 100 F Street, NE, Washington, D.C. 20549 and at the SEC’s
regional offices at 500 West Madison Street, Suite 1400, Chicago, IL 60661-2511.
You may also obtain copies of the documents at prescribed rates by writing to
the Public Reference Section of the SEC at 100 F Street, NE, Washington, D.C.
20549. The SEC also maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC. The address of this web site is http://www.sec.gov.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference facilities.
 
 10I.          Subsidiary
information
 
 Not
applicable.
 
  
 ITEM
11.                      QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  In
the ordinary course of our operations, we are exposed to certain market risks,
primarily changes in foreign currency exchange rates and interest
rates.
  Foreign Currency Exchange Rate
Risk.  We
develop products in Israel and sell them primarily in North America, Europe, and
the Asia Pacific regions. As a result, our financial results could be affected
by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. In 2007, 55% of our revenues and 35% of our
expenses were denominated in U.S. dollars. Since our financial results are
reported in U.S. dollars, fluctuations in the rates of exchange between the U.S.
dollar and non-U.S. dollar
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  currencies
may have a material adverse effect on our business, financial condition and
results of operations. We believe that our exposure to currency exchange rate
risk is somewhat reduced due to the number of different countries and currencies
in which we conduct business, including the main currencies of NIS, British
pounds and Euro.
  In
addition, we have balance sheet exposure arising from assets and liabilities
denominated in currencies other than U.S. dollars, mainly in Euro, British
pounds, NIS and Australian dollars.  Any change between the conversion
rates between the U.S. dollar and these currencies may create financial gain or
loss.   We enter from time to time into forward contracts related
to foreign currencies in order to protect against monetary balances denominated
in foreign currencies, and certain forecasted transactions. We do not
participate in any speculative investments.   At
December 31, 2007, we had short forward exchange contracts to sell up to
Euro 2.3 million for a total amount of $3.5 million, GBP 0.36 million for a
total amount of $0.7 million and NIS 2.1 million for a total amount of $0.5
million.
  Interest Rate
Risk.   As of December 31, 2007, we had cash, cash
equivalents and short-term investments of $24.1 million, which consist mainly of
cash and short-term bank deposits with major banks. Of this, a total of $3.5
million is denominated in non-U.S. dollar currencies. We believe a substantial
decrease in market interest rates would have an immaterial impact on our
business, financial condition and results of operations.
 
 The following table provides information about our investment
portfolio, cash, and investments as of December 31, 2007 and presents principal
cash flows and related weighted averages interest rates by expected maturity
dates.
 
 YEAR
      OF MATURITY
              
              
              2008(in
      thousands of dollars)A) Cash, cash
      equivalents and investments portfolio:Cash,
      cash deposits and money market funds
              
              
              $9,054Average
      interest rate
              
              
              3.1%Bank
      deposits
              
              
              $14,554Average
      interest rate
              
              
              5.0%Auction
      rate security(*)
              
              
              $500Average
      interest rate
              
              
              6.0%B) Long-term
      debts:None.
 
 (*)  Sold
      at cost in February 2008.
 
 
 
 ITEM
      12.
              DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY
SECURITIES
 
 Not
applicable.
 
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  PART
TWO
  ITEM
      13.
              DEFAULTS,
      DIVIDEND ARREARAGES AND
DELINQUENCIES
 
 None.
 
 
 ITEM
      14.
              MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
      PROCEEDS
  None.
 
 
 ITEM
      15T.
              CONTROLS
      AND PROCEDURES
 
 (a)  Disclosure
Controls and Procedures
 
 Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of December 31, 2007 (the Evaluation Date). Based on such
evaluation, those officers have concluded that, as of the Evaluation Date,
our disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
included in periodic filings under the Exchange Act and that such
information is accumulated and communicated to management, including our
principal executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure.
 
 (b)  Management’s
Annual Report on Internal Control Over Financial Reporting
 
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) of
the Exchange Act. Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based principally on the framework and criteria established
in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission as of the end of the period covered by
this report. Based on that evaluation, our management has concluded that our
internal control over financial reporting was effective as of December 31, 2007
at providing reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
  
 Attestation
Report of the Registered Public Accounting Firm
 
 This
report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporaryrules of
the Securities and Exchange Commission that permit us to provide only a
management's report in this annual report.
 
 (c)  Changes
in Internal Control Over Financial Reporting.
 
 During
the year ended December 31, 2007, there were no changes in our internal
control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
 
 
 ITEM
      16A.
              Audit
      Committee Financial Expert.
 
 Our
audit committee consists of Dan Falk, Naomi Atsmon, Israel Borovich and Gil
Weiser.  Our board of directors has determined that Mr. Falk qualifies
both as an independent member of the audit committee and as an audit committee
financial expert, as such terms are defined under Exchange Act
rules.  Mr. Falk also qualifies as an independent director as required
by Nasdaq rules.
 
   20-F
      ClickSoftware Technologies Ltd.
                  
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      58
 
 
 ITEM
16B.             Code
of Ethics.
 
 We
have adopted a written code of ethics that applies to our principal executive
officer, principal financial officer, principal controller, and to persons
performing similar functions.  Our Code of Business Conduct and Ethics
is posted on our website at www.clicksoftware.com.
 
 
 ITEM
16C.             Principal
Accountant Fees and Services.
 
 Brightman
Almagor & Co., a member of Deloitte Touche Tohmatsu, has served as our
independent public accountants for each of the three years ended December 31,
2007.
 
 Audit Fees.
 
 Audit
fees in 2007 amounted to approximately $85,000 and primarily related to
professional services rendered in connection with the audit of our financial
statements for the fiscal year ended December 31, 2007 and the review of our
financial statements during fiscal year 2007. Audit fees in 2006 amounted to
approximately $75,000 and primarily related to professional services rendered in
connection with the audit of our financial statements for the fiscal year ended
December 31, 2006 and the review of our financial statements during fiscal year
2006.
 
 Audit-Related
Fees.
 
 None.
 
 Tax  Fees.
 
 Tax
fees billed to us by Brightman Almagor in 2007 amounted to approximately $4,000
and primarily related to tax services.  Tax fees billed to us by
Brightman Almagor in 2006 amounted to approximately $7,500 and primarily related
to tax services. In addition, Deloitte & Touche of Boston billed us
approximately $10,000 for tax advice and tax planning services in
2006.
 
 All Other Fees.
 All
other fees amounted to approximately $3,000 in 2007 and primarily related to
Sarbanes-Oxley implementation.  All other fees amounted to an
aggregate of approximately $12,000 in 2006 and primarily related to Sarbanes
Oxley implementation and consulting relating to Chief Scientist
requests.
 
 Pre-Approval of Auditors’
Compensation.
 
 Our
audit committee is responsible for pre-approving audit and non-audit services
provided to us by our independent auditors and, if requested by the board of
directors, is also responsible for pre-approving services provided by other
public accounting firms (or subsequently approving non-audit services in those
circumstances where a subsequent approval is necessary and permissible). Absent
such a request from the board of directors, our management approves the
non-audit services provided to us by accountants other than the auditors and
provides periodic reports to the audit committee regarding such services. 100%
of the non-audit services provided to us by the independent auditors in 2007 and
2006 were either pre-approved by the full audit committee, or by Dan Falk, who
was delegated by the audit committee to approve the non-audit services provided
by our independent auditors for amounts up to $20,000 per instance (subject to
later ratification by the audit committee).
 
 
 ITEM
16D.             Exemptions
from the Listing Standards for Audit Committees
 
 Not
applicable.
 
 
 ITEM
16E.              Purchase
of Equity Securities by the Issuer and Affiliated Purchasers
 
 Not
applicable.
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      59




PART
THREE
 
 
 ITEM
17.                FINANCIAL
STATEMENTS
 
 Not
applicable.
 
 
 ITEM
      18.
              FINANCIAL
      STATEMENTS
 
 The
following consolidated financial statements, and the related notes thereto, and
the Report of Independent Public Accountants are filed as a part of this annual
report.
 
 Report
      of Independent Registered Public Accounting Firm
              61Consolidated
      Balance Sheets
              62Consolidated
      Statements of Operations
              63Consolidated
      Statements of Changes in Shareholders' Equity
              64Consolidated
      Statements of Cash Flows
              65Notes
      to Consolidated Financial Statements
              66
 
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      60







REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
the Shareholders of
 ClickSoftware
Technologies Ltd.
 
 
 We
have audited the accompanying consolidated balance sheets of ClickSoftware
Technologies Ltd. ("the Company") and its subsidiaries as of December 31, 2007
and 2006 and the related statements of operations, changes in shareholders'
equity and cash flows for each of the three years then ended. 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 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 the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion.  An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides 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, 2007 and 2006 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
 
 
 
 Brightman
Almagor & Co.
 Certified
Public Accountants
 A
member of Deloitte Touche Tohmatsu
 
 
 
 Tel
Aviv, Israel
 March
27, 2008
 
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      61
 
 
 
 CLICKSOFTWARE
      TECHNOLOGIES LTD.CONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share data)DECEMBER
      31,2007
              2006ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              $  9,054
              $
      13,385Short-term
      investments (note 3 & note 10b)
              15,054
              5,918Trade
      receivables, net of allowance for doubtful accounts of $269 and $254 as of
      December 31, 2007 and 2006, respectively (note 4)
              6,883
              6,465Other
      receivables and prepaid expenses (note 5)
              1,040
              953Total
      current assets
              32,031
              26,721LONG-TERM
      INVESTMENTS (NOTE 6 & NOTE 10B)
              602
              451SEVERANCE
      PAY DEPOSITS (NOTE 7)
              1,163
              996PROPERTY
      AND EQUIPMENT, NET (NOTE 8)
              1,437
              804Total
      assets
              $35,233
              $28,972LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
      payable and accrued expenses (note 9)
              $
      7,281
              $
      5,945Deferred
      revenues
              5,803
              5,965Total
      current liabilities
              13,084
              11,910LONG-TERM
      LIABILITIESAccrued
      severance pay (note 7)
              2,418
              2,031Deferred
      revenues
              2,919
              2,490Total
      long-term liabilities
              5,337
              4,521Total
      liabilities
              18,421
              16,431COMMITMENTS
      AND CONTINGENCIES (NOTE 10)SHAREHOLDERS'
      EQUITY: (NOTE 11)Special
      preferred shares NIS 0.02 par valueAuthorized
      – 5,000,000 as of December 31, 2007 and 2006;
                no
      issued and outstanding shares as of December 31, 2007 and
      2006;Ordinary
      shares of NIS 0.02 par value:
                Authorized
      -- 100,000,000 as of December 31, 2007 and 2006;
                Issued
      – 28,549,345 shares as of December 31, 2007 and
                28,033,626
      as of December 31, 2006;
                Outstanding
      – 28,510,345 shares as of December 31, 2007 and
                27,994,626
      shares as of December 31, 2006;
              115
              113Additional
      paid-in capital
              73,803
              72,205Deferred
      stock compensation
              -
              (63)Accumulated
      deficit
              (57,063)
              (59,671)16,855
              12,584Treasury
      shares, at cost: 39,000 shares
              (43)
              (43)Total
      shareholders’ equity
              16,812
              12,541Total liabilities and
      shareholders’ equity
              $35,233
              $28,972
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 CLICKSOFTWARE
      TECHNOLOGIES LTD.CONSOLIDATED
      STATEMENTS OF OPERATIONS(in
      thousands, except share and per share amounts)YEAR
      ENDED DECEMBER 31,2007
              2006
              2005Revenues
      (note 12):Software
      license
              $15,602
              $12,145
              $8,235Services
              24,417
              20,286
              15,832Total
      revenues
              40,019
              32,431
              24,067Cost
      of revenues:Software
      license
              2,358
              1,979
              1,541Services
              12,937
              10,582
              8,251Total
      cost of revenues
              15,295
              12,561
              9,792Gross
      profit
              24,724
              19,870
              14,275Operating
      expenses:Research
      and development expenses
              5,927
              4,498
              3,635Less
      – participation by the Chief Scientist of the Government of
      Israel  (note 10a)
              160
              385
              507Research
      and development expenses, net
              5,767
              4,113
              3,128Selling
      and marketing expenses
              13,203
              10,337
              10,124General
      and administrative expenses
              4,399
              3,671
              3,138Total
      operating expenses
              23,369
              18,121
              16,390Operating  income
      (loss)
              1,355
              1,749
              (2,115)Other
      Income
              404
              -
              -Interest
      income, net
              899
              484
              122Net
      income (loss) before taxes
              2,658
              2,233
              (1,993)Taxes
      on income (note 13)
              50
              95
              -Net
      income (loss)
              $
      2,608
              $
      2,138
              $
      (1,993)Basic
      net income (loss) per share
              $  0.09
              $  0.08
              $
      (0.07)Diluted
      net income (loss) per share
              $  0.09
              $  0.08
              $
      (0.07)Shares
      used in computing basic net income (loss) per share
              28,254,926
              27,767,748
              27,514,262Shares
      used in computing diluted net income (loss)  per
      share
              29,794,261
              28,442,887
              27,514,262
 
 
 
 
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
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      ClickSoftware Technologies Ltd.
                  
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      63
 
   
 CLICKSOFTWARE
      TECHNOLOGIES LTD.CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY(in
      thousands, except share data)NUMBER
      OF ORDINARY SHARES
              
              
              SHARE
      CAPITAL
              
              
              ADDITIONAL
      PAID-IN CAPITAL
              
              
              DEFERRED
      COMPENSATION
              
              
              ACCUMULATED
      DEFICIT
              
              
              TREASURY
      SHARES
              
              
              TOTALBalance
      as of December 31, 2004
              
              
              27,403,159
              
              
              $
              110
              
              
              $
              70,930
              
              
              $
              (309
              )
              
              $
              (59,816
              )
              
              $
              (43
              )
              
              $
              10,872Employee
      options exercised
              
              
              231,548
              
              
              
              1
              
              
              
              248
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              249Deferred
      stock compensation related to stock option grants to
      consultants
              
              
              -
              
              
              
              -
              
              
              
              42
              
              
              
              (42
              )
              
              
              -
              
              
              
              -
              
              
              
              -Stock-based
      compensation expense related to employeesand
      consultants (1)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              135
              
              
              
              -
              
              
              
              -
              
              
              
              135Net
      Loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,993
              )
              
              
              -
              
              
              
              (1,993
              )Balance
      as of December 31, 2005
              
              
              27,634,707
              
              
              $
              111
              
              
              $
              71,220
              
              
              $
              (216
              )
              
              $
              (61,809
              )
              
              $
              (43
              )
              
              $
              9,263Employee
      options exercised
              
              
              359,919
              
              
              
              2
              
              
              
              472
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              474Stock-based
      compensation expense related to employeesand
      consultants (1)
              
              
              -
              
              
              
              -
              
              
              
              513
              
              
              
              153
              
              
              
              -
              
              
              
              -
              
              
              
              666Net
      Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,138
              
              
              
              -
              
              
              
              2,138Balance
      as of December 31, 2006
              
              
              27,994,626
              
              
              $
              113
              
              
              $
              72,205
              
              
              $
              (63
              )
              
              $
              (59,671
              )
              
              $
              (43
              )
              
              $
              12,541Employee
      options exercised
              
              
              515,719
              
              
              
              2
              
              
              
              885
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              887Stock-based
      compensation expense related to employeesand
      consultants (1)
              
              
              -
              
              
              
              -
              
              
              
              713
              
              
              
              63
              
              
              
              -
              
              
              
              -
              
              
              
              776Net
      Income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,608
              
              
              
              -
              
              
              
              2,608Balance
      as of December 31, 2007
              
              
              28,510,345
              
              
              $
              115
              
              
              $
              73,803
              
              
              $
              -
              
              
              $
              (57,063
              )
              
              $
              (43
              )
              
              $
              16,812
 
 (1)
              $63,000,
      $153,000 and $116,000 were amortized during 2007, 2006 and 2005 as
      deduction from Revenues
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
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      64
 
 
 
 CLICKSOFTWARE
      TECHNOLOGIES LTD.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)YEAR
      ENDED DECEMBER 31,2007
              
              
              2006
              
              
              2005CASH
      FLOWS FROM OPERATING ACTIVITIES:Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Net
      income (loss)
              
              $
              2,608
              
              
              $
              2,138
              
              
              $
              (1,993
              )Depreciation
              
              
              615
              
              
              
              438
              
              
              
              425Stock-based
      compensation
              
              
              776
              
              
              
              666
              
              
              
              135Severance
      pay, net
              
              
              220
              
              
              
              209
              
              
              
              39Other
              
              
              (1
              )
              
              
              (8
              )
              
              
              35Trade
      receivables
              
              
              (418
              )
              
              
              (2,347
              )
              
              
              1,199Other
      receivables
              
              
              (491
              )
              
              
              130
              
              
              
              (101
              )Accounts
      payable and accrued expenses
              
              
              1,336
              
              
              
              1,021
              
              
              
              193Deferred
      revenues
              
              
              267
              
              
              
              3,424
              
              
              
              2,062Net
      cash provided by  operating activities
              
              
              4,912
              
              
              
              5,671
              
              
              
              1,994CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from realization of (purchase) of investments
              
              
              (9,287
              )
              
              
              (2,994
              )
              
              
              4,422Proceeds
      from disposal of equipment
              
              
              404
              
              
              
              452
              
              
              
              -Purchases
      of equipment
              
              
              (1,247
              )
              
              
              (683
              )
              
              
              (394
              )Net
      cash (used in)  provided by investing activities
              
              
              (10,130
              )
              
              
              (3,225
              )
              
              
              4,028CASH
      FLOWS FROM FINANCING ACTIVITIES:Employee
      and ESPP options exercised
              
              
              887
              
              
              
              472
              
              
              
              249Net
      cash provided by financing activities
              
              
              887
              
              
              
              472
              
              
              
              249Increase
      (decrease) in cash and cash equivalents
              
              
              (4,331
              )
              
              
              2,918
              
              
              
              6,271Cash
      and cash equivalents at beginning of year
              
              
              13,385
              
              
              
              10,467
              
              
              
              4,196Cash
      and cash equivalents at end of year
              
              $
              9,054
              
              
              $
              13,385
              
              
              $
              10,467Supplemental
      cash flow information:Cash
      paid for interest
              
              $
              1
              
              
              $
              6
              
              
              $
              1
 
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
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   CLICKSOFTWARE TECHNOLOGIES LTD.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (AS
OF DECEMBER 31, 2007 AND 2006 AND
 FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005)
 (IN
THOUSANDS OF DOLLARS)
 
 
  NOTE
1 -- GENERAL
  ClickSoftware
Technologies Ltd. (the "Company" or "ClickSoftware") was
incorporated in Israel and is a leading provider of workforce and service
management products and solutions. The ClickSoftware Service Optimization suite
consists of ClickSchedule, which enables
companies to optimize service scheduling and routing for improving workforce
productivity by balancing customer, service and asset resources, and
organizational preferences, including contractual commitments, priority, drive
time, skills, and service and asset resources availability;ClickAnalyze, ClickPlan, ClickForecast and
ClickRoster, which enable corporate decision makers to intelligently
analyze past performance, monitor current performance, and effectively plan for
future service needs; ClickFix, which
provides  intelligent diagnostics and problem resolution for reducing
service costs;ClickMobile, which provides wireless workforce management for monitoring
field workforce activities and reducing the labor of dispatching personnel; and
ClickLocate (LBS),which captures the
location information of a field service engineer and/or his or her vehicle and
integrates it with ClickSchedule for use in optimized scheduling. ClickSoftware
customers include a broad base of customers representing a variety of industries
with unique needs, including telecommunications, utilities and energy and
high-technology service providers.
  
  The
consolidated financial statements include the financial statements of the
Company and its wholly owned subsidiaries in the United States (ClickSoftware,
Inc.), in the United Kingdom (ClickSoftware Europe Limited), in Germany
(ClickSoftware Central Europe, GmbH), in Belgium (ClickSoftware Belgium, N.V.) ,
in Australia (ClickSoftware Australia Pty. Ltd, a wholly owned subsidiary of
ClickSoftware, Inc.) and in Japan (ClickSoftware Japan KK). The subsidiaries are
primarily engaged in the sale and marketing of the Company’s products in North
America, Europe and the rest of the world.
  
  NOTE
2 -- SIGNIFICANT ACCOUNTING POLICIES
  Basis
of presentation
  The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States.
  Principles
of consolidation
  The
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant material intercompany balances and transactions
have been eliminated.
  Financial
statements in U.S. dollars
  The
reporting currency of the Company is the U.S. dollar ("dollar"). The dollar is
the functional currency of the Company and its subsidiaries. Transactions and
balances originally denominated in dollars are presented at their original
amounts. Non-dollar transactions and balances are remeasured into dollars in
accordance with the principles set forth in Statement of Financial Accounting
Standards ("SFAS") No. 52. All exchange gains and losses from translation of
monetary balance sheet items resulting from transactions in non-dollar
currencies are recorded in the statement of operations as they
arise.
  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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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  Cash
and cash equivalents
  Cash
equivalents consist of short-term, highly liquid investments that are readily
convertible into cash with original maturities of three months or less. Bank
deposits with maturities of more than three months but less than one year are
included in short-term investments.
  Concentration
of credit risk
  Financial
instruments, which potentially subject the Company to credit risk, consist
principally of cash instruments and accounts receivable. The Company maintains
cash and cash equivalents and investments with major financial institutions in
the United States, Europe and Israel. The accounts receivable are derived from
sales to a large number of customers, mainly large industrial corporations and
their suppliers located mainly in Europe and the United States. The Company
generally does not require collateral. The Company performs ongoing credit
evaluations of its customers and maintains an allowance for doubtful accounts
which management believes adequately covers all anticipated losses in respect of
trade receivables.
  Property
and equipment
  Property
and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, ranging from
three to 16 years. Leasehold improvements are amortized using the straight-line
method, over the shorter of the lease term, including renewal options, or the
useful lives of the improvements.
  The
Company complies with provisions of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement requires that long-lived assets
and certain identifiable intangible assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to undiscounted future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less cost to sell.
  Software
research and development costs
  Software
research and development costs incurred prior to the establishment of
technological feasibility are included in research and development expenses. The
Company defines establishment of technological feasibility as the completion of
a working model. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the products are capitalized, if material, after consideration
of various factors, including net realizable value. To date, software
development costs that are eligible for capitalization have not been material
and have been expensed.
  Revenue
recognition
  The
Company recognizes revenues in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position 97-2, Software
Revenue Recognition, as amended.
 
 In
accordance with SOP 97-2, revenues from software license fees are recognized
when persuasive evidence of an arrangement exists, the software product covered
by written agreement or a purchase order signed by the customer has been
delivered, the license fees are fixed and determinable and collection of the
license fees is considered probable.
 
 Revenue
from software licenses that require significant customization, integration and
installation are recognized based on SOP 81-1 "Accounting for Performance of
Construction – Type and Certain Production - Type Contracts", using contract
accounting on the percentage of completion method, based on the relationship of
actual working hours incurred, to total working hours 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.
 
 When
software arrangements involve multiple elements the Company allocates revenue to
each element based on the relative fair values of the elements. The Company's
determination of fair value of each element in multiple element arrangements is
based on vendor-specific objective evidence (VSOE). The Company limits its
assessment of VSOE for each element to the price charged when the same element
is sold separately. If vendor specific objective evidence of fair value does not
exist for all elements to support the allocation of the total fee among all
delivered and undelivered elements of the arrangement, revenue is deferred until
such evidence exist for the undelivered elements, or until all elements are
delivered, whichever is earlier. If the fee
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  due
from the customer is not fixed or determinable, revenue is recognized as
payments become due from the customer, assuming all other revenue recognition
criteria have been met. The Company also enters into license arrangements with
resellers whereby revenues are recognized upon sale through to the end user by
the reseller.
 
 Service
revenues include consulting services, post-contract customer support and
training. Consulting revenues are generally recognized on a time and material
basis. However, revenues from certain fixed-price contracts are recognized on
the percentage of completion basis. Post-contract customer support agreements
provide technical support and the right to unspecified updates on an
if-and-when-available basis. Post-contract customer support revenues are
recognized ratably over the term of the support period (generally one year) and
training and other service revenues are recognized as the related services are
provided.
 
 Basic
and diluted net income (loss) per share
  Basic
and diluted net income (loss) per share are presented in conformity with SFAS No. 128 "Earnings per Share" for all
years presented. Basic and diluted net income (loss) per share have been
computed using the weighted-average number of ordinary shares outstanding during
the year. (See note 11).
 
 Outstanding
share options and shares issued and reserved for outstanding share options have
been excluded from the calculation of basic and diluted net income (loss) per
share to the extent such securities are anti-dilutive. The total number of
shares excluded from the calculations of diluted net income (loss) per share
were 2,236,340, 3,610,879 and 3,251,562 for the years ended December 31, 2007,
2006 and 2005, respectively.
  Fair
value of financial instruments
  The
financial instruments of the Company consist mainly of cash and cash
equivalents, short-term and long-term investments, current and non-current
accounts receivable, accounts payable. In view of their nature, the fair value
of the financial instruments included in working capital of the Company is
usually identical or close to their carrying amounts.
  Stock-based
compensation
   Stock-Based
Compensation Plans—Effective January 1, 2006, the Company adopted SFAS
No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R)
requiring that compensation cost relating to share-based payment awards made to
employees and directors be recognized in the financial statements. The principal
awards issued under Company stock-based compensation plans, which are described
in Note 12, “Stock-Based Compensation Plans” include stock options. The
cost for such awards is measured at the grant date based on the calculated fair
value of the award. The value of the portion of the award that is ultimately
expected to vest is recognized as expense over the requisite service periods
(generally the vesting period of the equity award) in the Company Consolidated
Statement of Operations. The following table summarizes the effects of
stock-based compensation resulting from the application of SFAS No. 123 (revised
2004) included in Statement of Operations as follows:
  YEAR
      ENDED DECEMBER 31,(in
      thousands)2007
              2006
              2005Cost
      of revenues
              
              $
      98
              $
      68
              $
      -Research
      and development expenses
              
              86
              61
              -Selling
      and marketing expenses
              
              156
              83
              -General
      and administrative expenses
              
              373
              301
              19Total
              
              $
      713
              $
      513
              $
      19
  
   Prior
to January 1, 2006, the Company accounted for share-based compensation cost
using the intrinsic value method in accordance with Accounting Principles Board
No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and
related interpretations. The Company also followed disclosure requirements of
SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS
No. 148, “Accounting for Stock-Based Compensation-Transition and
Disclosure”. Under APB No. 25 there was no material compensation cost
recognized in the Company Consolidated Statement of Operations for our stock
option awards.
   The
Company adopted SFAS No. 123R using the modified prospective method and,
accordingly, the Consolidated Statement of Operations for prior years has not
been restated to reflect the fair value method of
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  recognizing
compensation cost relating to stock options. Share-based compensation cost
relating to stock options recognized in 2006 is based on the value of the
portion of the award that is ultimately expected to vest. SFAS No. 123R
requires forfeitures to be estimated at the time of grant in order to estimate
the portion of the award that will ultimately vest. The estimate is based on the
Company historical rates of forfeiture.
   Compensation
cost related to stock options is recognized in operating results (included in
cost of revenues, research and development, selling and marketing, general and
administrative expenses) under SFAS No. 123R in 2007 was $713,000 and in
2006 was $513,000. Compensation cost related to stock options recognized in our
Consolidated Statement of Operations in 2007 and 2006 includes
(1) compensation cost for stock option awards granted prior to, but not yet
vested as of December 31, 2005, based on the grant-date fair value
estimated in accordance with the pro forma provisions of SFAS No. 123 and
(2) compensation cost for stock option awards granted subsequent to
December 31, 2005, based on the grant-date fair value estimated in
accordance with the provisions of SFAS No. 123R.
   The
following table illustrates the effect on net income and earnings per share as
if the Company had applied the fair value recognition provisions of SFAS No. 123
in the years prior to the adoption of FAS No. 123R.
  
 2005(in
      thousands, except share and per share amounts)Net
      (loss)As
      reported
              $(1,993)Add
      - stock based compensation determined under APB 25
              19Option
      Acceleration Expense (note 11D)
              (2,018)Deduct
      - stock based compensation determined under SFAS 123
              (1,232)Pro-forma
              $(5,224)Basic
      net (loss)  per shareAs
      reported
              $(0.07)Pro-forma
              $(0.19)Diluted
      net (loss)  per shareAs
      reported
              $(0.07)Pro-forma
              $(0.19)
 
 Under
SFAS 123, the fair market value of each option grant is estimated on the date of
grant using the “Black-Scholes
option pricing” method with the following weighted-average
assumptions:(1) expected life of 4.9 years (2006 – 4.5, 2005 – 5); (2) dividend
yield of 0% (3) expected volatility of 76% (2006 – 96%, 2005 – 133% ) and (4)
risk-free interest rate of 4.8% (2006 –5.1%, 2005 – 4.1%).
  Income
taxes
  The
Company accounts for income taxes, in accordance with the provisions of SFAS 109
"Accounting for Income
Taxes," under the liability method of accounting. Under the liability
method, deferred taxes are determined based on the differences between the
financial statement and tax basis of assets and liabilities at enacted tax rates
in effect in the year in which the differences are expected to reverse.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to amounts expected to be realized.
  The
Company adopted the provisions of FASB interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income Taxes, an Interpretation of  SFAS
109 on January 1,2007. There was no impact as result of this
adoption.
  Recent
accounting pronouncements
  
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
No. 157). The purpose of SFAS No. 157 is to define fair value, establish a
framework for measuring fair value, and enhance disclosures about fair value
measurements. The measurement and disclosure requirements are effective for the
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  Company
beginning in the first quarter of fiscal year 2008. The Company does not expect
that the adoption of  SFAS No. 157 will have a significant impact on
its financial statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS
No. 159 permits companies to choose to measure certain financial
instruments and certain other items at fair value. The standard requires that
unrealized gains and losses on items for which the fair value option has been
elected be reported in earnings. SFAS No. 159 is effective for the Company
beginning in the first quarter of fiscal year 2008, although earlier adoption is
permitted. The Company does not expect that the adoption of SFAS No. 159
will have a significant impact on its financial statements.
 
 
 In
June 2007, the FASB ratified Emerging Issues Task Force (EITF) Issue
No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development Activities” (EITF 07-3).
EITF 07-3 requires non-refundable advance payments for goods and services to be
used in future research and development activities to be recorded as an asset
and the payments to be expensed when the research and development activities are
performed. EITF 07-3 applies prospectively for new contractual arrangements
entered into beginning in the first quarter of fiscal year 2008. The adoption of
EITF 07-3 is not expected to have a significant impact on the Company's
consolidated financial statements.
 
 In
December 2007, the FASB issued SFAS No. 141(R) “Business Combinations”
(“SFAS 141(R)”) and SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statement” (“SFAS 160”). SFAS 141(R) requires
the acquiring entity in a business combination to record all assets acquired and
liabilities assumed at their respective acquisition-date fair values and changes
other practices under FAS 141, some of which could have a material impact
on how we account for business combinations. SFAS 141(R) also requires
additional disclosure of information surrounding a business combination, such
that users of the entity’s financial statements can fully understand the nature
and financial impact of the business combination. SFAS 160 requires
entities to report non-controlling (minority) interests in subsidiaries as
equity in the consolidated financial statements. We are required to adopt
SFAS 141(R) and SFAS 160 simultaneously in our fiscal year beginning
November 1, 2009. The provisions of SFAS 141(R) will only impact the
Company if it is a party to a business combination after the pronouncement has
been adopted. The Company does not expect that the adoption of SFAS 160
will have a significant impact on its financial statements.
 
 
 
 NOTE
3 -- SHORT-TERM INVESTMENTS
 
 DECEMBER
      31,2007
              2006(in
      thousands)Bank
      Deposits and Auction Rate Security(*)
              $
      15,054
              $
      5,918$
      15,054
              $
      5,918
 
 The
bank deposits bear interest at an average annual rate of 5.0%.
 (*)Includes
Auction Rate Security of $500 which was sold at cost in February
2008.
 
 NOTE
4 -- TRADE RECEIVABLES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
 A.
TRADE RECEIVABLES
 
 DECEMBER
      31,2007
              2006(in
      thousands)Accounts
      receivables billed
              $6,575
              $5,699Accounts
      receivables unbilled
              577
              1,020Allowance
      for doubtful accounts
              (269)
              (254)Trade
      receivables, net
              $6,883
              $6,465
 
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 B.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
 
 
 DECEMBER
      31,2007
              2006Balance
      at Beginning of Year
              (in
      thousands)$254
              $225Increase
      to allowance
              19
              48Write-offs
              (4)
              (19)Balance
      at Year end
              $269
              $254
 
 
 
 
 
 NOTE
5 -- OTHER RECEIVABLES AND PREPAID EXPENSES
 
 DECEMBER
      31,2007
              2006(in
      thousands)Prepaid
      expenses
              $   723
              $707Government
      participation and other government receivables
              46
              33Employees
              38
              17Other
      receivables
              233
              196$1,040
              $953
 
 
  NOTE
6 -- LONG-TERM INVESTMENTS
 
 DECEMBER
      31,2007
              2006(in
      thousands)Bank
      Deposits (see also note 10b)
              $602
              $451$602
              $451
 
 The bank deposits bear
interest at an average annual rate of 5.0%.
 
 
 NOTE
7 – ACCRUED SEVERANCE PAY
 
  Under
Israeli law and labor agreements, the Company is required to make severance
payments to its dismissed employees and employees leaving its employment in
certain other circumstances. The Company’s severance pay obligation to its
employees, which is calculated on the basis of the salary of each employee for
the last month of the reported period multiplied by the years of such employee's
employment, is reflected by the accrual presented in the balance sheet and is
partially funded by deposits with insurance companies and provident
funds.
  Severance
pay expenses amounted to $700,000 $603,000 and $352,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
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 NOTE
8 -- PROPERTY AND EQUIPMENT, NET
 
 DECEMBER
      31,2007
              2006(in
      thousands)CostComputers
      and office equipment
              $2,655
              $1,590Leasehold
      improvements
              171
              43Motor
      vehicles
              59
              59$2,885
              $1,692Accumulated
      Depreciation
              1,448
              888$1,437
              $804
 
  Due
to a fire at the Company’s Tel-Aviv office in September 2006 the Company
disposed of assets at cost of $2.3 million and Accumulated Depreciation of $1.9
million, net amount of $0.4 million which was fully covered by insurance
proceeds.
  
  NOTE
9 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
  DECEMBER
      31,2007
              2006(in
      thousands)Suppliers
              $2,377
              $2,539Employee
      and related expenses
              3,117
              2,265Government
      commitment
              953
              403Accrued
      royalties
              759
              662Other
              75
              76$7,281
              $5,945
 
   NOTE
10 -- COMMITMENTS AND CONTINGENCIES
   A:  In
connection with its research and development, the Company received grants from
the State of Israel in the total amount of $8.7 million. The Company is
committed to pay royalties at a rate of 3% to 5% of sales of the developed
product, up to 100% - 150% of the amount of grants received plus annual interest
of LIBOR as of the date of approval for programs approved from 1999 and
thereafter. The Company so far has paid or accrued royalties through December
31, 2007 of $7.3 million. The total additional contingent liability to pay
royalties is $1.4 million.  The payment of such additional royalties
is contingent on future sales and the Company has no obligation to refund these
grants, if sufficient sales are not generated.
  B:
The Company has entered into standby letters of credit agreements with banks and
financial institutions relating to the guarantee of future performance on
certain contracts. As of December 31, 2007, contingent liabilities on
outstanding letter of credit agreements which expire after December 31, 2008
aggregated approximately $0.6 million. The letters of credit are secured by $0.6
million in deposits to cover any potential payments under the
guarantees.
  C:
The Company operates from leased facilities in Israel, the United States, United
Kingdom, Germany and Australia, for periods expiring in the years 2008 through
2014. Minimum future rental payments, as of December 31, 2007 are as
follows:
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  (in
      thousands)2008
              
              $8522009
              
              9982010
              
              8932011
              
              8682012-2014
              
              1,586$5,197
 
  
 Rent
expense amounted to $864, $685 and $579 for the years ended December 31, 2007,
2006 and 2005, respectively.  The Company signed a lease for
approximately 41,000 square feet of office space in Petach Tikva, Israel to
which the Company is expected to move upon the expiration of the lease of the
office space in Givat Shmuel during 2009.
  
 From
time to time, we are involved in various routine legal proceedings incidental to
the ordinary course of our business.  The Company does not believe
that the outcome of these pending legal proceeding will have a material adverse
effect on the Company’s business or consolidated financial
condition
  
 NOTE
11 -- SHAREHOLDERS' EQUITY
 
 A.           PUBLIC
COMPANY
  The
Company’s shares are publicly traded on the NASDAQ Capital Market.
 
 B.           SHARE
CAPITAL
  Share
capital is comprised of issued and outstanding ordinary shares of NIS 0.02 par
value.
 
 C.           EMPLOYEE
STOCK PURCHASE PLAN
  
 During
2000, the board of directors approved the ESPP, effective August 2000.As of December 31, 2004,
766,691 ordinary shares were issued under the ESPP, and an additional 283,309
ordinary shares are reserved for issuance.  During 2004, the Company
board of directors resolved to temporarily cease the Company’s ESPP
program.
 
  D.           EMPLOYEE,
DIRECTORS, AND CONSULTANT OPTION PLANS
  The
Company adopted new option plans in 2000. Under these plans, the Company granted
506,000, 848,000, 657,000, 886,100 and 1,160,840 (including 39,840 shares
pursuant to an exchange offer at an average exercise price of $3.61, $1.73,
$1.84, $2.47 and $2.41 for the years ended December 31, 2007, 2006, 2005, 2004
and  2003  respectively.
  During
the years 2001-2006 the board of directors and Shareholders at the annual
meetings approved the grants of options to purchase 1,130,036 ordinary shares to
directors.
  During
the year ended December 31, 2007, the board of directors and shareholders at the
annual meeting approved the grants of options to directors to purchase 115,000
ordinary shares.
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 During
2003, the board of directors decided to increase the reserve for grants under
its umbrella option plan, the Amended and Restated 2000 Share Option Plan (the
"ESOP"), by 400,000 options effective January 1, 2004.
 
 During
2005, the board of directors decided to increase the reserve for grants under
the ESOP, by 450,000 options effective January 1, 2006.
 
 During
2006, the board of directors decided to increase the reserve for grants under
the ESOP, by 1,250,000 options effective January 1, 2007.
 
 During
2007, the board of directors decided to increase the reserve for grants under
the ESOP, by 1,250,000 options effective January 1, 2008.
 
 In
December 2005, the board of directors decided to accelerate the vesting of
unvested employee stock options granted to employees and officers with exercise
prices of $1.75 or above. Accordingly, options to purchase approximately 0.8
million shares became exercisable immediately. The accelerated options, which
were considered vested as of December 5, 2005, had exercise prices ranging from
$1.75 to $4.25 per share. The number and exercise prices of the shares involved
were unchanged.
 
 A
summary of the status of the Company's stock option plans as of December 31,
2007 and 2006 and changes during the years then ended are as
follows:
 
 
 OPTIONS
      AND SHARES AVAILABLE FOR GRANT
              OUTSTANDING
                OPTIONS
              WEIGHTED-AVERAGE
      EXERCISE PRICE PER SHARE
              WEIGHTED-AVERAGE
      FAIR VALUE OF  OPTIONOutstanding  December
      31, 2005
              614,296
              3,839,310
              2.12Increase
      in option pool
              450,000
              -
              -Granted
              (848,000)
              848,000
              1.73
              $1.30Forfeited
              228,873
              (228,873)
              3.72Exercised
              -
              (359,919)
              1.31Outstanding  December
      31, 2006
              445,169
              4,098,518
              2.02Increase
      in option pool
              1,250,000
              -
              -Granted
              (506,000)
              506,000
              3.61
              $2.28Forfeited
              177,824
              (177,824)
              4.38Exercised
              -
              (515,719)
              1.72Outstanding  December
      31, 2007
              1,366,993
              3,910,975
              2.16
 
 
 The
following table summarizes information about options outstanding and exercisable
as of December 31, 2007:
 
 OPTIONS
      OUTSTANDING
              OPTIONS
      EXERCISABLERANGE
      OF
                EXERCISE
      PRICE
                $
              NUMBER
      OUTSTANDING AT
                DECEMBER
      31, 2007
              WEIGHTED-AVERAGE
      REMAINING CONTRACTUAL LIFE
              WEIGHTED-AVERAGE
      EXERCISE PRICE
              NUMBER
      OUTSTANDING AT
                DECEMBER
      31, 2007
              WEIGHTED-AVERAGE
      EXERCISE PRICE0.21  –
      0.26
              136,942
              4.7
              $
      0.25
              136,942
              $
      0.251.21  –
      1.95
              2,720,633
              4.3
              $1.68
              2,280,360
              $1.692.04  –
      3.67
              636,100
              4.5
              $3.12
              234,038
              $2.884.15  –
      4.67
              400,500
              4.7
              $4.31
              287,083
              $4.268.00  –
      8.50
              16,800
              2.1
              $8.05
              16,800
              $8.053,910,975
              
              
              2,955,223
 
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   E.           
IBM
Share and Warrants Grants
 
 At
the end of the second quarter of 2004, the Company formalized a strategic
alliance with IBM pursuant to which the Company teamed with IBM to resell its
workforce optimization solutions.  In connection with this strategic
alliance, the Company established a Project Office with IBM to manage the
day-to-day affairs in connection with the relationship. In 2007 the Company
continued its cooperation with IBM. IBM has received certain warrants that are
exercisable into ordinary shares of the Company in connection with this
arrangement. Currently 125,000 of these warrants are outstanding.
 
 The
Company accounted for these warrants and options under the fair value method of
FAS No. 123 and EITF 96-18. The fair value was determined using the
Black-Scholes pricing model with the following assumptions: risk-free interest
rate of 4.8%; volatility rate of 76%; dividend yields of 0% and an expected life
of 4.9 years.
 
 Compensation
expenses of $63,000, $153,000 and $116,000 were deducted from Revenues and were
recognized for each of the years ended December 31, 2007, 2006 and 2005,
respectively.
 
 
  NOTE
12 -- SEGMENT REPORTING
  The
Company operates in one segment, the design, development, and marketing of
software solutions.
  The
Company’s revenues by geographic area are as follows:
 
 YEAR
      ENDED DECEMBER 31,2007
              2006
              2005(in
      thousands)RevenueUnited
      States
              $16,295
              $11,010
              $
      5,452Canada
              1,699
              1,080
              1,025United
      Kingdom
              8,242
              6,168
              7,176Germany
              3,665
              4,059
              3,478Other
      European countries
              5,383
              4,993
              2,158Australia
              4,448
              4,699
              4,455Israel
              131
              305
              107Rest
      of the world
              156
              117
              216$40,019
              $32,431
              $24,067Sales
      to a single customer exceeding 10% of total sales:2007
              2006
              2005%
              %
              %Customer
      A
              11
              12
              -Customer
      B
              -
              11
              13Customer
      C
              -
              -
              11Customer
      D
              -
              -
              10
 
 
 Long-lived
assets by geographical areas are as follows:
 
 YEAR
      ENDED DECEMBER 31,2007
              2006(in
      thousands)Net
      Property and EquipmentNorth
      America
              $
      174
              $
      164Europe
              219
              137Australia
              59
              35Israel
              985
              468$1,437
              $804
 
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  NOTE
13-- TAXES ON INCOME
  A.  Company
  The
Company is subject to the Israeli Income Tax Law (Inflationary Adjustments),
1985, measuring income on the basis of changes in the Israeli Consumer Price
Index.
  Part
of the Company’s investment in equipment has received approvals in accordance
with the Law for the Encouragement of Capital Investments, 1959 ("Approved Enterprise"
status). The Company has chosen to receive its benefits through the "Alternative Benefits" track,
and, as such, is eligible for various benefits. These benefits include
accelerated depreciation of fixed assets used in the investment program, as well
as a full tax exemption on undistributed income in relation to income derived
from the first plan for a period of 2 years and for the second and third plans
for a period of 4 years. Thereafter a reduced tax rate of 25% will be applicable
for an additional period of up to 5 years for the first plan and 3 years for the
second and third plans, commencing with the date on which taxable income is
first earned but not later than certain dates. In the case of foreign investment
of more than 25%, the tax benefits are extended to 10 years, and in the case of
foreign investment ranging from 49% to 100% the tax rate is reduced on a sliding
scale to 10%. The benefits are subject to the fulfillment of the conditions of
the letter of approval. The first plan benefit period has already expired. The
benefit periods of the second and third plans have not yet
commenced.
  On
April 1, 2005, an amendment to the Investment Law came into effect ("the
Amendment") and has significantly changed the provisions of the Investment Law.
The Amendment limits the scope of enterprises which may be approved by the
Investment Center by setting criteria for the approval of a facility as a
Privileged Enterprise, such as provisions   generally requiring
that at least 25% of the Privileged Enterprise's Income will be derived from
export. Additionally, the Amendment enacted major changes in the manner in which
tax benefits are awarded under the Investment Law so that companies no longer
require          Investment
Center approval in order to qualify for tax benefits.  However, 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. Therefore, the Israeli companies with
Approved Enterprise status will generally not be subject to the provisions of
the Amendment. As a   result of the amendment, tax-exempt income
generated under the provisions of the new law, will subject the Company to taxes
upon distribution or liquidation.
   The
first investment plan (First plan) benefit period has already
expired.
 
 The
second investment plan (Second plan) benefit period has already
expired.
 
  In
1996, the Company received approval for its second expansion program (Third
plan). The commencing year for the third plan is 2000 and the expected
expiration year is 2010.  Due to the fire mentioned in note 8, the
Company received approval for updating the investment scope of
assets.
  In
2006, the Company received approval by the amendment to the Investment Law
(Fourth plan) as Privileged Enterprise. The commencing year is
2004.  The Company did not generate income subject to the provision of
the new law. The expected expiration year is 2015.  Due to the fire
mentioned in note 8, the Company received approval for updating the investment
scope of assets.
 
 In
2007, the Company received approval by the amendment to the Investment Law
(Fifth plan) as Privileged Enterprise.  The commencing year is
2006.  The Company did not generate income subject to the provision of
the new law. The expected expiration year is 2017.
 
 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 a
regular rate of 29% (31% in 2006).  On July 25, 2005 an amendment to
the Israeli tax law was approved by the Israeli parliament,
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  which
reduces the tax rates imposed on Israeli companies to 29% for 2007, This
amendment states that the corporate tax rate will be further reduced in
subsequent tax years as follows: in 2008 27%, in 2009 26%  and
thereafter 25%. This change does not have a material effect on the Company's
financial statements.
  In
the event of distribution by the Company of a cash dividend out of retained
earnings that were tax exempt due to its approved enterprise status, the Company
would have to pay a 25% corporate tax on the income from which the dividend was
distributed. A 15% withholding tax may be deducted from dividends distributed to
the recipients.
  The
Company has not provided deferred taxes on future distributions of tax-exempt
earnings, as management and the Board of Directors have determined not to make
any distribution that may result in a tax liability for the Company.
Accordingly, such earnings have been considered to be permanently
reinvested.
  To
date, the Company has not had earnings attributable to Approved Enterprise
programs.
  
  B.   Tax
assessments
  Final
tax assessments in Israel have been received up to and including the 2003 tax
year.
  C.   Deferred
taxes
 Deferred
tax assets consist of the following significant items:
   YEAR
      ENDED DECEMBER 31,2007
              
              2006(in
      thousands)Net
      operating loss carry forwards in Israel*
              $5,974
              
              $5,607Net
      operating loss carry forwards of non-Israeli subsidiaries
              10,007
              
              10,683R&D
      cost temporary differences
              1,188
              
              693Other
      timing differences
              816
              
              642Deferred
      tax asset
              17,985
              
              17,625Valuation
      allowance
              (17,985)
              
              (17,625)Long-term
      deferred tax asset, net of allowance
              $            
      -
              
              $            
      -
 
 *Based
on 25% tax rate.
 
 Under
SFAS No. 109, deferred tax assets are to be recognized for the anticipated tax
benefits associated with net operating loss carry-forwards and deductible
temporary differences; unless it is more-likely-than-not that some or all of the
deferred tax assets will not be realized. The adjustment is made by a
valuation allowance. Since the realization of the net operating loss
carry-forwards and deductible temporary differences is less likely than not, a
valuation allowance has been established for the full amount of the
tax benefits.
 
 As
of December 31, 2007, net operating loss carryforwards in Israel amounted to
approximately $23.9 million, approximately $21.8 million attributable to the
federal tax of the U.S. subsidiary, and approximately $7.2 million attributable
to the European subsidiaries. The tax loss carryforwards for Israel and the
European companies have no expiration date. The tax loss carryforwards in the
U.S. expire between 2011 and 2024. Utilization of U.S. net operating losses
may be subject to substantial annual limitations due to the “change in
ownership” provisions of the Internal Revenue Code of 1986 and similar state law
provisions. The annual limitations may result in the expiration of net operating
losses before utilization.
  Israel
and International components of income profit (loss) before taxes
are:
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 YEAR
      ENDED DECEMBER 31,2007
              2006
              2005Israel
              (in
      thousands)$
      254
              $
      665
              $(1,559)International
              2,404
              1,568
              (434)$2,658
              $2,233
              $(1,993)
 
 
   D.   Tax
reconciliation
  The
following is a reconciliation of the theoretical tax expense, assuming that all
income is taxed at the ordinary statutory average corporate tax rate in Israel
and other jurisdictions and the actual tax expense in the statement of
operations, is as follows:
 
 YEAR
      ENDED DECEMBER 31,2007
                2006(in
      thousands)Net
      income before taxes
                $2,658
                $2,233Average
      Statutory tax rates
                34%
                36%Theoretical
      tax
                904
                804Non-deductible
      expenses
                597
                727Increase
      in valuation allowance
                360
                239Other
                (103)
                (257)854
                709Actual
      tax expense
                $                50
                $              95
 
 
 NOTE
14 -- TRANSACTIONS WITH RELATED PARTIES
  
 YEAR
      ENDED DECEMBER 31,2007
              2006
              2005(in
      thousands)Transactions
      with Plataine Ltd.:Participation
      in General and administrative expenses
              $16
              $25
              $74Purchase
      of Assets
              -
              -
              $10
 
 
 Plataine
Ltd. is a company controlled by Dr. Moshe BenBassat.
 
 
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 ITEM
19.                      EXHIBITS
 
 
 EXHIBIT
INDEX
 
 EXHIBIT
                NUMBER
              DESCRIPTION
      OF DOCUMENT1  (1)
              Articles
      of Association of ClickSoftware Technologies Ltd., amended and restated as
      of July 9, 20074.1  (2)
              Fourth
      Amended and Restated Registration Rights Agreement, dated December 15,
      19994.2
      (3)
              Form
      of 2000 Share Option Plan, as amended4.3
      (2)
              Form
      of 2000 Employee Share Purchase Plan4.4
      (2)
              Form
      of 1996 Option Plan4.5
      (2)
              Form
      of 1997 Option Plan4.6
      (2)
              Form
      of 1998 Option Plan4.7
      (2)
              Form
      of 1999 Option Plan4.8
      (2)
              Form
      of 2000 Israeli Plan4.9
      (2)
              Form
      of 2000 Unapproved U.K. Share Scheme4.10
      (2)
              Form
      of 2000 Approved U.K. Share Scheme4.11
      (4)
              Employment
      Agreement between ClickSoftware Technologies Ltd. and Shmuel
      Arvatz4.12
              Amended
      Form of Indemnification Agreement4.13
      (5)
              Amended
      Employment Agreement between ClickSoftware Technologies Ltd. and Moshe
      BenBassat4.14
      (5)
              2003
      Israeli Share Option Plan4.15
      (6)
              Form
      of 2000 Unapproved U.K. Share Scheme, as amended4.16(7)
              Form
      of 2000 U.K. Share Scheme, as amended4.17
      (8)
              Employment
      Agreement between Clicksoftware Technologies Ltd. and Hannan
      Carmeli4.18(7)
              Summary
      of Material Terms of the Lease Agreement (in Hebrew) by and between
      ClickSoftware Technologies Ltd. and Multiline Services Limited related to
      premises in Givat Shmuel, Israel4.19
              Summary
      of Material Terms of the Lease Agreement (in Hebrew) by and between
      ClickSoftware Technologies Ltd. and Azorim M.L.L. Industries Ltd. related
      to premises in Petach Tikva, Israel4.20(7)
              Second
      Amendment to Employment Agreement between ClickSoftware Technologies Ltd.
      and Moshe BenBassat8.1
      (8)
              Subsidiaries
      of the Registrant12.1
              Certification
      of the Chief Executive Officer pursuant to Rule 13a-14(a) of the
      Securities Exchange Act of 193412.2
              Certification
      of the Chief Financial Officer pursuant to Rule 13a-14(a) of the
      Securities Exchange act of 193413.1
              Certification
      of the Chief Executive Officer pursuant to Rule 13a-14(b) of the
      Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200213.2
              Certification
      of the Chief Financial Officer pursuant to Rule 13a-14(b) of the
      Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  200215.1
              Consent
      of Brightman Almagor & Co., a member of Deloitte Touche
      Tohmatsu
 
 (1)
Incorporated by reference to the Registrant’s Registration Statement on Form S-8
(file no. (333-149825).
 (2)
Incorporated by reference to the Registrant’s Registration Statement on Form
S-1/A (file no. 333-30274), as amended.
 (3)
Incorporated by reference to the Registrant’s definitive proxy statement filed
with the SEC on August 6, 2001.
 (4)
Incorporated by reference to the Registrant’s annual report on Form 10-K filed
with the SEC on March 24, 2003.
 (5)
Incorporated by reference to the Registrants definitive proxy statement filed
with the SEC on April 30, 2003.
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  (6)
Incorporated by reference to the Registrant's annual report on Form 10-K filed
with the SEC on March 22, 2004.
 (7)
Incorporated by reference to the Registrant's annual report on Form 20-F filed
with the SEC on April 11, 2007.
 (8)
Incorporated by reference to the Registrant's annual report on Form 10-K filed
with the SEC on March 17, 2005.
 
 
 
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    SIGNATURES
 
 
 
 Clicksoftware
Technologies Ltd. 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,
 
  CLICKSOFTWARE
TECHNOLOGIES LTD.
 
  By:  /s/
Shmuel Arvatz
 ------------------------------
 Shmuel
Arvatz
 Chief
Financial Officer
  Date:        April
16, 2008
  
  
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