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, 2008





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)





Azorim
Park, Oren Building


94
Em Hamoshavot Road


Petach
Tikva 49527 Israel


(Address
of principal executive offices)





Shmuel
Arvatz


Tel.
+972-3-7659-400


Fax
+972-3-7659-401


Email:
Shmuel.Arvatz@clicksoftware.com


Azorim
Park, Oren Building


94
Em Hamoshavot Road


Petach
Tikva 49527 Israel


(Name, Telephone, Email 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




Securities
registered or to be registered pursuant to Section 12(g) of the
Act:  None





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





Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report.







28,655,670
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 bycheck 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








20-F ClickSoftware Technologies
      Ltd.
            Page
  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 filingrequirements 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
            xNon-Accelerated
      Filer





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





U.S.GAAPxInternational Financial Reporting
      Standards as issued by the International
      AccountingStandards Board ̈





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





Item 17 ̈Item
18 ̈





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





 ̈  Yes
            x  No








20-F ClickSoftware Technologies
      Ltd.
            Page
  2

















TABLE OF
CONTENTS





Item
      Number
            Title
            Page





PART
ONE





Item
      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
              23Item
      5.
              Operating
      and Financial Review and Prospects
              23Item
      6.
              Directors,
      Senior Management and Employees
              35Item
      7.
              Major
      Shareholders and Related Party Transactions
              42Item
      8.
              Financial
      Information
              43Item
      9.
              The
      Offer and Listing
              44Item
      10.
              Additional
      Information
              45Item
      11.
              Quantitative
      and Qualitative Disclosures About Market Risk
              58Item
      12.
              Description
      of Securities Other than Equity Securities
              59PART
      TWOItem
      13.
              Defaults,
      Dividend Arrearages and Delinquencies
              60Item
      14.
              Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds
              60Item
      15.
              Controls
      and Procedures
              60Item
      16.
              [Reserved]
              60Item
      16A.
              Audit
      Committee Financial Expert.
              61Item
      16B.
              Code
      of Ethics.
              61Item
      16C.
              Principal
      Accountant Fees and Services.
              61Item
      16D.
              Exemptions
      from the Listing Standards for Audit Committees
              61Item
      16E.
              Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers
              62Item
      16F.
              Change
      in Registrant's Certifying Accountant
              62Item
      16G.
              Corporate
      Governance
              62PART
      THREEItem
      17.
              Financial
      Statements
              63Item
      18.
              Financial
      Statements
              63Item
      19.
              Exhibits
              82








20-F ClickSoftware Technologies
      Ltd.
            Page
  3

















PART ONE







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 and are presented
in U.S. dollars. The selected historical consolidated financial information as
of December 31, 2007 and 2008 and for each of the three years ended December 31,
2006, 2007 and 2008 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, 2004, 2005 and 2006 and
for each of  the years ended December 31, 2004 and 2005 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.










20-F ClickSoftware Technologies
      Ltd.
            Page
  4

















Consolidated
Statement of Operations Data – Year Ended December 31


(in
thousands of U.S. dollars, except per share data)





2008
                                                                                        
                                                                                        
                                                                                        2007
                                                                                        
                                                                                        
                                                                                        2006
                                                                                        
                                                                                        
                                                                                        2005
                                                                                        
                                                                                        
                                                                                        2004Revenues
                                                                                        
                                                                                        $
                                                                                        52,262
                                                                                        
                                                                                        
                                                                                        $
                                                                                        40,019
                                                                                        
                                                                                        
                                                                                        $
                                                                                        32,431
                                                                                        
                                                                                        
                                                                                        $
                                                                                        24,067
                                                                                        
                                                                                        
                                                                                        $
                                                                                        22,705Cost
      of revenues
                                                                                        
                                                                                        
                                                                                        18,079
                                                                                        
                                                                                        
                                                                                        
                                                                                        15,295
                                                                                        
                                                                                        
                                                                                        
                                                                                        12,561
                                                                                        
                                                                                        
                                                                                        
                                                                                        9,792
                                                                                        
                                                                                        
                                                                                        
                                                                                        7,504Gross
      profit
                                                                                        
                                                                                        
                                                                                        34,183
                                                                                        
                                                                                        
                                                                                        
                                                                                        24,724
                                                                                        
                                                                                        
                                                                                        
                                                                                        19,870
                                                                                        
                                                                                        
                                                                                        
                                                                                        14,275
                                                                                        
                                                                                        
                                                                                        
                                                                                        15,201Research
      and Development expenses, net
                                                                                        
                                                                                        
                                                                                        6,459
                                                                                        
                                                                                        
                                                                                        
                                                                                        5,767
                                                                                        
                                                                                        
                                                                                        
                                                                                        4,113
                                                                                        
                                                                                        
                                                                                        
                                                                                        3,128
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,710Selling
      and Marketing expenses
                                                                                        
                                                                                        
                                                                                        16,002
                                                                                        
                                                                                        
                                                                                        
                                                                                        13,203
                                                                                        
                                                                                        
                                                                                        
                                                                                        10,337
                                                                                        
                                                                                        
                                                                                        
                                                                                        10,124
                                                                                        
                                                                                        
                                                                                        
                                                                                        8,939General
      and Administrative expenses
                                                                                        
                                                                                        
                                                                                        5,446
                                                                                        
                                                                                        
                                                                                        
                                                                                        4,399
                                                                                        
                                                                                        
                                                                                        
                                                                                        3,671
                                                                                        
                                                                                        
                                                                                        
                                                                                        3,138
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,818Total
      operating expenses
                                                                                        
                                                                                        
                                                                                        27,907
                                                                                        
                                                                                        
                                                                                        
                                                                                        23,369
                                                                                        
                                                                                        
                                                                                        
                                                                                        18,121
                                                                                        
                                                                                        
                                                                                        
                                                                                        16,390
                                                                                        
                                                                                        
                                                                                        
                                                                                        14,467Operating
      income (loss)
                                                                                        
                                                                                        
                                                                                        6,276
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,355
                                                                                        
                                                                                        
                                                                                        
                                                                                        1,749
                                                                                        
                                                                                        
                                                                                        
                                                                                        (2,115
                                                                                        )
                                                                                        
                                                                                        
                                                                                        734Other
      income
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        404
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Interest
      income, net
                                                                                        
                                                                                        
                                                                                        149
                                                                                        
                                                                                        
                                                                                        
                                                                                        899
                                                                                        
                                                                                        
                                                                                        
                                                                                        484
                                                                                        
                                                                                        
                                                                                        
                                                                                        122
                                                                                        
                                                                                        
                                                                                        
                                                                                        179Net
      income (loss) before taxes
                                                                                        
                                                                                        
                                                                                        6,425
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,658
                                                                                        
                                                                                        
                                                                                        
                                                                                        2,233
                                                                                        
                                                                                        
                                                                                        
                                                                                        (1,993
                                                                                        )
                                                                                        
                                                                                        
                                                                                        913Tax
      benefit (taxes on income)
                                                                                        
                                                                                        
                                                                                        1,686
                                                                                        
                                                                                        
                                                                                        
                                                                                        (50
                                                                                        )
                                                                                        
                                                                                        
                                                                                        (95
                                                                                        )
                                                                                        
                                                                                        
                                                                                        -
                                                                                        
                                                                                        
                                                                                        
                                                                                        -Net
      income (loss)
                                                                                        
                                                                                        $
                                                                                        8,111
                                                                                        
                                                                                        
                                                                                        $
                                                                                        2,608
                                                                                        
                                                                                        
                                                                                        $
                                                                                        2,138
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (1,993
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        913Basic
      net income (loss) per share
                                                                                        
                                                                                        $
                                                                                        0.28
                                                                                        
                                                                                        
                                                                                        $
                                                                                        0.09
                                                                                        
                                                                                        
                                                                                        $
                                                                                        0.08
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (0.07
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        0.03Diluted
      net income (loss) per share
                                                                                        
                                                                                        $
                                                                                        0.27
                                                                                        
                                                                                        
                                                                                        $
                                                                                        0.09
                                                                                        
                                                                                        
                                                                                        $
                                                                                        0.08
                                                                                        
                                                                                        
                                                                                        $
                                                                                        (0.07
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        0.03Shares
      used in computing basic net  income (loss) per
    share
                                                                                        
                                                                                        
                                                                                        28,564,496
                                                                                        
                                                                                        
                                                                                        
                                                                                        28,254,926
                                                                                        
                                                                                        
                                                                                        
                                                                                        27,767,748
                                                                                        
                                                                                        
                                                                                        
                                                                                        27,514,262
                                                                                        
                                                                                        
                                                                                        
                                                                                        27,202,804Shares
      used in computing diluted net income (loss) per share
                                                                                        
                                                                                        
                                                                                        29,503,217
                                                                                        
                                                                                        
                                                                                        
                                                                                        29,794,261
                                                                                        
                                                                                        
                                                                                        
                                                                                        28,442,887
                                                                                        
                                                                                        
                                                                                        
                                                                                        27,514,262
                                                                                        
                                                                                        
                                                                                        
                                                                                        28,336,450





Consolidated
Balance Sheet Data – Year Ended December 31




(in
thousands of U.S. dollars, except for shares data)





2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Working
      capital
                
                $
                27,898
                
                
                $
                18,947
                
                
                $
                14,811
                
                
                $
                8,824
                
                
                $
                10,328Total
      assets
                
                
                46,162
                
                
                
                35,233
                
                
                
                28,972
                
                
                
                21,004
                
                
                
                20,249Long-term
      liabilities
                
                
                5,854
                
                
                
                5,337
                
                
                
                4,521
                
                
                
                1,786
                
                
                
                1,677Shareholders’
      equity
                
                
                26,086
                
                
                
                16,812
                
                
                
                12,541
                
                
                
                9,263
                
                
                
                10,872Number
      of shares outstanding
                
                
                28,655,670
                
                
                
                28,510,345
                
                
                
                27,994,626
                
                
                
                27,634,707
                
                
                
                27,403,159








20-F ClickSoftware Technologies
      Ltd.
            Page
  5

















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.




Our
quarterly operating results are subject to significant
fluctuations.





Our
quarterly operating results are subject to significant fluctuations and are
difficult to predict.  Historically, a significant percentage of our
quarterly revenues has been derived from orders placed towards the end of a
given quarter.  If sales forecasted from a specific customer for a
particular quarter are not realized in that quarter, we may not be able to
generate revenues from alternate sources in time to compensate for the
shortfall.  Also, frequently our quarterly revenue performance depends
upon a sale of significant size to a single customer.  Due to the
relatively large size of some orders, a lost or delayed sale could have a
material adverse effect on our quarterly revenue.





The
factors that may cause significant 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
  customers;·
                    the
      length and unpredictability of our sales cycle;·
                    the
      recognition of a portion of our revenues on a contract accounting
      basis;·
                    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;·
                    new
      product introductions or enhancements by us or our
      competitors;·
                    price
      and product competition;·
                    changes
      to our pricing strategies 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 affecting the operation of our software;·
                    foreign
      currency exchange rate fluctuations;·
                    general
      economic conditions, including a prolonged economic recession;
      and·
                    difficulties
      in collecting accounts
receivable.








20-F ClickSoftware Technologies
      Ltd.
            Page
  6











Because of the numerous factors that
may cause significant 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.




We
may not be able to maintain profitability.





Although
we recorded a profit for fiscal years 2006 through 2008, we may not generate
sufficient revenues to maintain profitability in the future. To maintain
profitability, we must increase our revenues while controlling 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 adverse impact on our operating profit. As a result,
we must generate and maintain growing revenues to maintain profitability, which
we may not accomplish.




The
deteriorating general economic outlook may adversely affect our
business.





Our
business depends on the overall demand for our products and services and on the
economic health of our current and potential customers.  As widely
reported, financial markets throughout the world have been experiencing extreme
disruption in recent months, including, among other things, extreme volatility
in security prices, severely diminished liquidity and credit availability,
rating downgrades of certain investments and declining valuations of others,
failure and potential failures of major financial institutions and unprecedented
government support of financial institutions.  These developments and
the related general economic downturn may adversely affect our business in a
number of additional ways, including impacts beyond those typically associated
with other recent downturns in the U.S. and foreign economies.  The
slowdown may adversely affect the budgeting and purchasing behavior of our
customers, which could adversely affect our product sales. The current
tightening of credit in financial markets and the general economic downturn may
adversely affect the ability of our customers, suppliers and channel partners
(e.g., distributors and resellers) to obtain financing for significant purchases
and operations and to perform their contractual obligations with us.  As a
result, we could encounter, among other adverse effects, a decrease in
or cancellation of orders for our products and services and an
increase in additional reserves for uncollectible accounts receivable being
required.





We
are unable to predict the duration and severity of the current economic downturn
and disruption in financial markets or their effects on our business, but the
consequences may be materially adverse and more severe than other recent
economic slowdowns.  To the extent that general economic conditions
continue to worsen and information technology spending declines, the demand for
our products and services, and therefore our future revenues, could be
materially and adversely affected.





Nearly
all of our cash, cash equivalents and short and long-term investments do not
benefit from deposit insurance.





As
of December 31, 2008, we had cash, cash equivalents and short and long-term
investments of approximately $32 million, compared to $25 million at the end of
2007.  The vast majority of this cash and investments is held mainly
in bank deposits located in various countries.  Although the Federal
Deposit Insurance Corporation (the "FDIC") protects depositors against the loss
of their deposits if an FDIC-insured bank or savings association fails, such
protection is limited to an insurance amount of $250,000 per depositor, per
insured bank.  Nearly all of our cash and investments are not insured
by the FDIC or similar governmental deposit insurance outside the United
States.  In the event that a bank holding our cash or investments is
unable to honor its deposit obligations, we could lose our cash or investments
and such losses may not be fully insured.  Any such event could
materially and adversely affect our business, financial condition and results of
operations.




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








20-F ClickSoftware Technologies
      Ltd.
            Page
  7











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 could be deferred and our financial results for a
given period could be materially affected by our treatment of revenue
recognition.




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.  In certain circumstances, we may invest significant
resources in a sales process that does not result in actual sales.




Our
implementation cycle depends on factors outside our control.





Depending
on the nature and specific needs of a customer, 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 customer’s budgetary constraints
and  internal acceptance reviews, the success and continued internal
support of a customer’s own development efforts, the nature, size and specific
needs of a customer, the possibility that a customer cancels an order and the
level and quality of service provided by third-party implementation and
professional services partners.  Long implementation cycles may delay
the recognition of revenue as some of our customers engage us to perform system
implementation services, which can defer revenue recognition for the related
software license revenue. In addition, when we experience long implementation
cycles, we may incur costs at a higher level than anticipated, which may reduce
the anticipated profitability of a given implementation. Because our
implementation cycle depends on factors outside of our control, we may
experience delays or other complications with our implementation timeline that
may 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 end-to-end service chain optimization suite of products (our "Service
Optimization Suite"), which includes ClickSchedule, ClickFix, ClickAnalyze,
ClickPlan, ClickMobile, ClickRoster, ClickForecast, ClickLocate, ClickIMRS and
ClickContact.  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 competition, which could make it difficult to compete
successfully.





The
market for our products is 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.








20-F ClickSoftware Technologies
      Ltd.
            Page
  8











Our
industry has witnessed a substantial amount of merger and acquisition activity
over the past few years and this trend of industry consolidation will likely
continue, particularly as larger, better capitalized companies seek to acquire
smaller, weaker rivals that have been adversely affected by the economic
downturn.





Competitors
vary in size and in the scope and breadth of the products and services they
offer.  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 enter and compete in our
market.  In particular, since our contracts with resellers generally
do not include non-competition provisions, it may be easier for these partners
to compete with us in the future. 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.  If we fail to compete successfully against
current and future competitors, our business, financial condition and results of
operations would be materially and adversely affected.




If
we fail to expand our relationships with third parties that provide
implementation and professional services to our customers, 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
customers.  Third-party implementation and professional services firms
can be influential in the choice of service optimization applications by new
customers.  These third parties are under no obligation to recommend
or support our products; they could recommend or give higher priority to the
products of other companies or to their own products.  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 customers, 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 party implementation and
professional services firms, we may be unable to attract sufficient focus and
resources from them to meet all of our customers’ needs as a result of the
limited resources and capacities of many third-party providers.  If
sufficient resources are unavailable, we could be required to provide these
services internally, which could limit our ability to meet other demands. We
cannot control the level and quality of service provided by these
partners.




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 expenses.





Our
success in penetrating our target markets depends, in part, on our ability to
develop and maintain key business relationships with software vendors,
value-added resellers, agents, 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 products.  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. If we fail to maintain these
relationships, our ability to sell additional licenses could be
limited.  We have entered into agreements with third parties relating
to the integration of our products with their product offerings and
distribution, reselling and consulting services. For example, in 2008 we entered
into a global reseller agreement with SAP AG, pursuant to which SAP will resell
our Service Optimization Suite. We derive revenues from these agreements, but
may not be able to continue to do so in the future.  Also, 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 for our IMRS product, which was introduced in
2007, is based on 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 expire or are
terminated. Furthermore, if any of our software vendors cease production, cease
operations or fail to timely deliver orders, we could be required to provide
these services internally, which could limit our ability to meet other demands
and we may not be able to meet our delivery obligations to our customers, in
which case we could lose revenues and harm our customer
relationships.  If we fail to fully develop or maintain key
business








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relationships,
we could materially and adversely affect our business, financial condition or
results of operations.




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.





Our
future success depends on the continued service of our executive officers and
other key sales and marketing, product development and professional services
personnel.  Competition for these employees can be intense, including
in a number of our key markets and locations, such as Israel and
India.  For example, in April 2009, we acquired the workforce
management business of Manchitra Services Private Limited ("Manchitra"), a
business based in India, for approximately $2.7 million.  Competition
for qualified information technology employees in India is particularly intense,
and we may have difficulty retaining key employees at Manchitra and recruiting
new employees.  More generally, we may be unable to attract and retain
a sufficient number of highly qualified professional services personnel to meet
our business needs.




Customers
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 typically assists with
the maintenance, management and expansion of our customers' software
systems.  Future growth in licenses of our software will depend, in
part, on our ability to continue providing customers with these services. To
the extent that we receive several large orders simultaneously or in close
proximity to one another, we could place added strain on our existing
personnel.  The market for the qualified personnel we require is very
competitive because of the limited number of people available with the necessary
technical and sales 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 business would be
limited.





The
services of our 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.




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.  Mergers with or acquisitions of companies, products or
technologies involve a number of risks, including:




·
            the
      diversion of management time and resources;·
            the
      difficulty of assimilating the operations and personnel of the merged or
      acquired companies;·
            the
      possibility the business cultures will not be
  compatible;·
            the
      difficulty of incorporating acquired technology and rights into our
      products and services;·
            unanticipated
      expenses related to integration of the acquired
  companies;·
            difficulties
      in implementing and maintaining uniform standards, controls and
      policies;·
            the
      impairment of relationships with employees and customers as a result of
      any integration of new personnel;·
            potential
      inability to retain, integrate and motivate key management, marketing,
      technical sales and customer support personnel;·
            potential
      unknown liabilities associated with acquired businesses;
    and·
            impairment
      of goodwill and other assets
acquired.





Our
acquisition of Manchitra presents a number of challenges. For example, our
business culture may clash with the business culture of
Manchitra.  Also, because the information technology market in India
is characterized by a high rate of turnover among information technology
professionals, we may have difficulty retaining key employees at Manchitra and
recruiting new employees. Pursuant to our business strategy, we will continue to
consider additional merger or acquisition transactions.








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Any
future merger and acquisition activity could distract our management and disrupt
our business, thereby materially and adversely affecting 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 customer needs
and frequent introductions of new products and product
enhancements.  If we fail to anticipate or respond adequately to
technology developments and customer 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.  We have
previously experienced delays in introducing new products and features, and we
may experience 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 respond to our rapidly
changing market by enhancing our product functionality to meet our customers'
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 2008, 2007 and
2006 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.  Testing of our products is
particularly challenging because it is difficult to simulate the wide variety of
customer environments in several geographic markets into which our products are
deployed.  Despite internal testing, testing by current and potential
customers and the history of use by our installed base of customers, our current
and future products may contain defects or errors.  Any such defects
or errors could result in adverse customer reaction and publicity, 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 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.  These legal
protections provide only limited protection.  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.  The
steps we have taken may not prevent infringement or misappropriation of our
intellectual property rights.








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      Technologies
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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 portions of our products, reverse engineer or obtain and use
information and technology that we regard as proprietary.  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.  In addition, 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 increases.  Despite our
best efforts to protect our intellectual property, our channel or strategic
partners, or their employees or customers, may copy 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 infringement and/or to enforce our
intellectual property rights, our competitiveness may be adversely
effected.




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 require us to make
changes in our business.





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
      expensive and time-consuming to defend;·
              divert
      management’s attention and resources;·
              cause
      product shipment and installation delays; or·
              require
      us to enter into royalty or licensing agreements to obtain the right to
      use a necessary product or component, which 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
2008, our five largest customers together accounted for approximately 38% of our
revenues.  If for any reason, our relationship with a key customer is
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 in
demand of a key customer would be intensified if we were unable to increase
sales to other customers to offset this termination or reduction in
demand.  We expect that a significant portion of our future revenues
will continue to be derived from a small number of customers.




Our
business is susceptible to numerous risks associated with international
operations.





We
derive a substantial portion of our revenues from international sales and we
maintain significant portions of our operations outside the United
States.  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 facilities are located in North America, Israel, the
European continent, the United Kingdom, Australia, India and Japan, and our
executive officers and other key








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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;·
              difficulties
      in staffing and managing foreign operations;·
              licenses,
      tariffs and other trade barriers;·
              loss
      of proprietary information due to piracy, misappropriation or weaker laws
      regarding intellectual property protection;·
              difficulties
      in communication and monitoring compliance with our internal corporate
      controls and policy;·
              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.





One
or more of these risks could harm our future international sales.  Our
business, financial condition and results of operations could be materially and
adversely affected if we fail to manage the risk of doing business
internationally.




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 realize our
revenues and expenses in several currencies and we translate foreign currencies
into U.S. dollars for reporting purposes. Our primary exposures have related to
operating expenses and sales, principally in Europe and Israel, which were not
U.S. dollar-denominated. For example, in 2008 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 global
operations, and revenue recognized in currencies other than U.S. dollars may
increase.  In 2008, 65% of our expenses and 43% of our revenues were
incurred in 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 2008, 34% of our expenses were incurred in
NIS.  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 to minimize the impact of changes in
foreign currency exchange rates on earnings, we may not be able to fully
mitigate 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, we are directly influenced by the political, economic
and military conditions in Israel.  Since the establishment of the
State of Israel in 1948, a number of armed conflicts have taken place between
Israel and its Arab neighbors 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 in the Gaza Strip.








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In
addition, 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.





To
date, these matters have not had a material and adverse effect on our business,
financial condition or results of operations, but they may do so in the
future.




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 rules. Devoting the necessary 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.




Your
rights and responsibilities as a shareholder will be governed by Israeli Law and
differ in some respects from the rights and responsibilities of shareholders
under U.S. law.





We
are incorporated under the laws of the State of Israel. The rights and
responsibilities of holders of our Ordinary Shares are governed by our
memorandum of association, articles of association and by Israeli law. These
rights and responsibilities may differ in some respects from the rights and
responsibilities of shareholders in U.S. corporations. In particular, a
shareholder of an Israeli company has a duty to act in good faith in exercising
his or her rights and fulfilling his or her obligations toward the company and
other shareholders and to refrain from abusing his power in the company,
including, among other things, in voting at the general meeting of shareholders
on certain matters. Israeli law provides that these duties are applicable in
shareholder votes at the general meeting with respect to, among other things,
amendments to a company's articles of association, increases in a company's
authorized share capital, mergers and actions and transactions involving
interests of officers, directors or other interested parties which require the
shareholders' general meeting's approval. In addition, a controlling shareholder
of an Israeli company or a shareholder who knows that he or she possesses the
power to determine the outcome of a vote at a meeting of our shareholders, or
who has, by virtue of the company's articles of association, the power to
appoint or prevent the appointment of an office holder in the company, or any
other power with respect to the company, has a duty of fairness toward the
company. The Israeli Companies Law does not establish criteria for determining
whether or not a shareholder has acted in good faith. Moreover, the law is
relatively new and there is no case law available on the duty of a
non-controlling shareholder to act in good faith.




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





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 affect 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, 2009, our Chief Executive Officer and Chairman of the Board, Dr.
Moshe BenBassat beneficially owned approximately 16% of our outstanding ordinary
shares in the form of ordinary shares and options for the purchase of our
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








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      Ltd.
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company.  These
actions may be taken even if our other investors oppose them. The influence of
our Chief Executive Officer could adversely affect our stock price.




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, as well as the Investment
Center of the Israeli Ministry of Industry, Trade and Employment (the
“Investment Center”) .  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 or
adversely affect our stock price.




The
government programs in which we have participated and the tax benefits we
receive require us to satisfy prescribed conditions and may be delayed,
terminated or reduced in the future.




We
have accepted grants from the Chief Scientist that have helped us finance a
portion of our research and development expenditures in Israel.  In
2008, 2% of our research and development expenses were financed with grants from
the Chief Scientist, compared to 3% and 9% of our research and development
expenses in 2007 and 2006, respectively.  Although we rely on finance
provided by the Chief Scientist to a lesser extent than we did a few years ago
and we expect this trend to continue, we must continue to satisfy the conditions
of the grants. For example, if we fail to comply with the representations and
covenants we made to the Chief Scientist concerning our research and development
activities in Israel, we could be required to refund the amount of the benefits
we have received, adjusted for interest, inflation and penalties.




In
addition, we are subject to other restrictions with respect to products
developed with grants from the Chief Scientist.  For example, we are
required to make royalty payments to the Chief Scientist based on the revenues
we derive from the sale of products, technologies and services developed with
the grants.  Also, any know-how from the research developed with the
grants from the Chief Scientist may not be transferred to third parties without
prior approval of the Chief Scientist, and approval is contingent on the
recipient agreeing to abide by the provisions of the Encouragement of Industrial
Research and Development, 1984 (the “Research Law”), and related
regulations.  Also, our ability to manufacture products outside Israel
without the approval of the Chief Scientist is restricted under Israeli law and
we are required to pay increased royalties to the Chief Scientist of up to 300%
with respect to any products manufactured outside Israel.  Since we
conduct all of our manufacturing activities in Israel and intend to continue
doing so, we do not expect any increase in the amount of royalties we pay to the
Chief Scientist.




We
are also eligible for certain tax benefits for the first several years in which
we generate taxable income from two of our existing capital investment programs
that qualify as “Approved Enterprises” and two other programs that qualify as
“Privileged Enterprises”, in each case pursuant to the Law for the Encouragement
of Capital Investments.  We have not begun generating taxable income
from these programs and we do not expect to utilize these tax benefits in the
near future.  If we fail to comply with the relevant conditions, the
tax benefits we eventually receive could be partially or fully
canceled.  The Government of Israel may also delay, terminate or
reduce these tax benefits.  These tax benefits may not be available in
the future at their current levels, or at all.




Future
sales of our ordinary shares could depress the market price for our ordinary
shares.





As
of December 31, 2008, we had 28,655,670 ordinary shares outstanding (net of
39,000 shares held in treasury).  In addition, as of December 31,
2008, we had 4,441,230 ordinary shares issuable upon exercise of outstanding
options, and 1,683,606 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








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      Ltd.
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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.




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.




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.  We financed
our operations in the early stages of development by raising money from venture
capital firms, and in 2000 from our initial public offering on the NASDAQ stock
market.  Our principal executive offices are located at Azorim Park,
Oren Building, 94 Em Hamoshavot Road, Petach Tikva 49527,  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,
Massachusetts.





Our
capital expenditures for 2008, 2007, and 2006 amounted to $1.5 million, $1.2
million, and $0.7 million, respectively. These expenditures were primarily for
hardware and software and leasehold improvements.  In 2008, we
invested $0.6 million in new office space located in Israel. We moved into these
offices in 2009. Our capital expenditures for 2007 and 2006 included investments
of $0.7 million and $0.4 million, respectively,








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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.We derive revenues from the licensing of
our software products and the provision of consulting and support services.Our products and solutions
incorporate best business practices, key business functions of field service
operations, and sophisticated decision-making algorithms that enable ourcustomers to more efficiently manage their field
service operations in a scalable, integrated manner.





OurService Optimization Suiteis designed to increase service revenue
and customer responsiveness while reducing costs. Our Service OptimizationSuite includes strategic and tactical
workforceforecasting andplanning, 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 ourService Optimization Suitethrough 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 whichour Service Optimization
Suitecan be integrated
with leading customer relationship management (CRM), enterprise resource
planning (ERP) and Enterprise Asset Management (EAM) solutions, often with standard interface
adaptors, enables our customers toefficiently deploy oursolutions.





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 theappropriatetechnician, designing the optimalroute for the technician to
minimize travel, and monitoring progress.





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,cancellations may
occur,jobs may take longer or shorter than
expected, and traffic problems may cause unexpected delays. These contingencies
present significant challengesand an effective workforce management
solution must minimizethe
disruptions to the existing work orders whileaccommodating 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 completionand 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 sheknows 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.





In
addition, we develop and market solutions capable of optimally performing shift
and roster planning for large organizations. These take into account the makeup
of the shift and skill requirements, as well as employee calendars and
preferences.








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While other service management applications,
such as CRM,EAM, or Inventory Management, manage
primarily data processing aspects, our products drive automatic and
semi-automatic decision-making processes. We believe our solutions have become
the backbone of dailyoperations 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.





Up to a year or more in
advanceof the master
planning stage, capacity
planning takes place. This
phase involvesdetermining the size and the skill mix
in each territory as a function of the company's strategic plan. For example, the company may wish to
expand orshrinkitsbusiness lines or
territoriesor introducenew products. At this stage, sufficient
timeis 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 aU.S.patent was awarded (see “Intellectual Property”below).




Products
and Services




Our Service OptimizationSuiteincludes:





ClickScheduleoptimizes service
scheduling and routing to improve 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 2008, 2007 and 2006.





ClickMobileprovides wireless
workforce management for monitoring field workforce activities and reducing the
labor costs associated with 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 and 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.





ClickContact,released in 2008, is a customer
interaction management solution that enables self-service appointment booking,
order updating, automatic customer notifications and customer satisfaction
surveying. From scheduling the initial appointment through enabling a
post-service follow-up survey, ClickContact provides enhanced
customerinteraction management throughout the
service lifecycle.





ClickAnalyzeprovides
reporting, monitoring and service business analytics for workforce performance
measurement and strategic decision support. ClickAnalyze enables analysis of key
performance indicators,








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including resource productivity,
operational costs, and responsiveness to customers. Integrated within the
Service OptimizationSuite, ClickAnalyze provides executive
level summaries,as well as operational detailed reporting and analysis
by territory, job type, time frame and other criteria.





ClickPlanprovides 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 rightplace at the right
time.





ClickForecastprovides 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, jobtype, or business unit. ClickForecast
enables service managers, marketing, and sales to collaboratively determine the
demand levels of customers, andtocreate 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 problemsbythemselves at any time of day, and often
without a service resource,
requiring fewer onsite visits.





Service Optimization
Suitecombines 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.We expect to release a new version of
the Service Optimization Suite (version 8.0) inthe second half of 2009.We expect that the new version will
strengthen our existing product offering by providing additional agility and
more robust features.





Additionally,
we offer variations of our products for certain vertical markets:




Mid-Market Package - Installation,
Maintenance and Repair Services (IMRS) 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 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 Utilitiesis a
vertical offering that draws on our depthof experience serving water
utility customers worldwide. 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.





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.





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.










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Principal Markets




We
have over 120 customers.  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, public security, and home services. Our largest
vertical market traditionally has been the telecommunications market. In recent
years, we have seen strong demand in other markets as well. For example, the
utility market, which has benefited from deregulation and modernization trends,
has been a significant market in recent years.  See Item 5 – Operating
and Financial Review and Prospects – for a breakdown of revenues by category of
activity and by geographic market for each of the last three years.





We
sell our products to a broad base of customers representing a variety of
industries with unique needs. During 2008, our five largest customers together
accounted for approximately 38% of our revenues. 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.”





Sales and Marketing
Channels




We market and sell our products mostly
through our direct sales force located in North America,Europeand 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 supportconsultantsand internal sales staff. The internal
sales staff is responsible for generating leads andscreeningprospectivecustomers. 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-salecustomerrelationship, which consists of ongoing
relationship management and the sale of additional licenses and products. 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 thecustomer’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 ourcustomers' organization.To effectively promote product awareness, we
engage in marketing activities in a wide variety of areas, including public
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, CRM and EAM vendors enable us to use our partners'
market presence andsales
channels to create additional revenue opportunities. Our strategy is based onestablishing and
maintaining relationships withapproved certified adaptors that enable
rapid integration and implementation of our products into other major ERP, CRM
andEAM
systems.In
2008, weachieved“Gold Certified Partner”status with Microsoft Corporation andmaintain asales channel to build our relationship
with Microsoft Corporation resellers for Dynamics AX and Dynamics CRM as the
primary “route-to-market”forIMRS.




We also market our products and services
through resellers. Our reseller agreements generally provideeachparty withthe right to usetheother's name in marketing and
advertising materials, and to conduct joint marketing programs. We provide salesmaterials and training to
resellers on the marketing, selling and implementation of our solutions. We
believe these relationshipscanextend our presence and brand name in
new and existing markets, including the small and medium-sized business
market.




In 2008,weentered into aglobal reseller agreement with
SAPAG, pursuant to whichSAP will resellour Service Optimization Suite. Our
products are included onSAP’s global pricelist in specified
bundles and sold under the standard SAP end-user license agreement and global support
commitments.We
believethat our alliance
with SAP will increase our presence in our existing markets and will assist with
introducing our products into new markets.




We also have established relationships
with large System
Integrator (SI) organizations, such as Accenture Ltd. andInternational Business Machines
Corporation (IBM).  These partners provide
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 the partner's
professional







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services teams, developing co-marketing
programs, and incorporating our products into their marketing/referral
strategies.In addition, in
2004 weformed astrategic alliance
withIBM,pursuant to which we teamed with IBM to
resell our workforce optimization solutions.




In 2007, we formed the Channel Partner
Program and the ChannelSales Team to complement the efforts of our existing reseller
programsand to highlightthebenefitsofour IMRS product offering to small to medium sized
customers.TheChannel Partner Programaimstoimprove our partners' 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 combiningourofferings.The Channel Sales Teamaimsto 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 implementournew products for the mid–market, starting withIMRS.





Recent Acquisition




In
April 2009, we completed the acquisition of the workforce management business of
Manchitra, a business based in India, for approximately $2.7
million.  These assets were transferred to our newly formed
subsidiary, ClickSoftware India Private Limited.  We believe that this
acquisition will enable us to strengthen our local presence in this region and
provides us with an implementation and delivery vehicle in India to provide a
new range of benefits to customers in that region. We also believe that the
acquisition may provide us with a base from which to pursue off-shore research
and development activities.





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.SeeItem
3D–Risk factors–“We
face competition, which could make it difficult to compete
successfully.”




In
2008, Gartner, an independent consulting company, identified us among a select
group of companies included in Gartner's Magic Quadrant for Field Service
Management.  We were positioned in the "visionaries" quadrant along
with
just one other company.The
Aberdeen Group, another independent consulting company, identified usin
its Mobile Field Services Axis Q1 2009 reportasa
top performeramong mobile field service software solution or platform
providers.




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 favorablywith our competitors'
solutionsbased on these
competitive factors. Otherkey competitive factors
include a broad base of users, strategic alliances, key reference customers,
interoperability, integration of complementary productsand services, technological leadership,
product performance, price, customer support, name recognition, relationships
with partners and distribution channels,the ability to respond quickly to
emerging opportunitiesand
our financial strength.




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,  Ventyx,
      Trimble NavigationLtd./@RoadDivision and Viryanet
      Ltd.;·
            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.









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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
threepatent applications pending in theUnited Statesand three patent applications pending
inIsrael. As we continue to develop new
applications of ourproducts, 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 marksCLICKSOFTWARE,W6, W-6,AITEST,CLICKSCHEDULE,CLICKANALYZE,CLICKFIX,
CLICKFORECAST,CLICKMOBILEandCLICKPLAN, and have filed applications for
registration of the markOPTIMIZE TO
GOALS. In the European
Community, we own trademark registrations forCLICKFIX,CLICKSCHEDULE,CLICKANALYZE,
CLICKFORECAST, andCLICKPLAN,and have filed an application of registration of the
markCLICKMOBILE.  We own aU.K.trademark forCLICKSOFTWARE. InIsrael, we own the marksCLICKMOBILE,CLICKSOFTWARE,W6andW-6.




Our success and ability to compete
substantially depend on 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.  These legal protections provide only limited protection.SeeItem 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”.Although we rely on a combination ofmeans by which to protect
our intellectual
property, 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.




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 theUnited States,Israeland other foreign
countries.




Substantial litigation regarding
technologyrights 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 affected by government
regulations.For example,ourability to manufacture products outsideIsraelwithout the approval of the Chief
Scientist is restricted under law and we are required to pay increased royalties
to the Chief Scientist of up to 300% with respect to any products manufactured
outsideIsrael.See Item 3D–Risk factors–“The government programs in which we have
participated and the tax benefits we receive require us to satisfy prescribed
conditions and may be delayed, terminated or reduced in the future.”Also,any merger or acquisition of us will
require the priorconsent
of the Chief Scientist,as well as authorization from theInvestmentCenter.In addition, we spendan increased amount of
management time and external resources to understand and comply with changing
laws, regulations and standards relating tocorporate governance and public disclosure,
including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq rules.See Item 3D–Risk factors–"We are incurring additional costs and
devoting more management resources to comply with increasing regulation of corporate
governance and disclosure."







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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)·
            ClickSoftware
      India Private Limited (India).





4D.
            Property,
      plants and equipment





We have a lease for approximately 8,800
square feet of office spacelocatedinBurlington,Massachusetts. This leaseexpires in September 2010. This office space is used for sales, marketing and implementation
activities for the North American market.




We also have a lease for approximately
33,000 square feet of office spacelocatedinPetach Tikva,Israel. This lease expires inJanuary2014 and includes an option allowing us to extend the lease term
toJanuary2019.  This office space is
used formanagement,
marketing, sales, research and development.




Our
U.K. subsidiary operates from a leased facility of approximately 5,300 square
feet located in Burnham, near London.  This lease expires in May
2013.  The office space 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.







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.We recognize revenues in accordance with
the AICPA Statement of Position 97-2,“Software Revenue
Recognition,”or SOP 97-2,
as amended (seeNote 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.Consultingservices are billed at an agreed-upon
rate,plus incurred expenses. Customers licensing our products
generallyenter into consulting
agreements with us. Post-contract customer support arrangementsprovide technical support and the right
to software updates. Post-contract customer support revenues are
charged as a percentage of
license fees depending on 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.




Our revenues grew by 31% in 2008
compared to 2007, representing growth in North America, Europe andAsia, and in all line items. Our growth was
primarily attributable to our ability to attract large customers–mainly in the telecommunications
andutility markets, strong
repeat business and further expansion into new vertical
markets.









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Wehave maintained profitabilitysince thesecond quarter of 2006, andwe generated $8.5 million in positive
cash-flow from
operationsin
2008.




As of December 31, 2008, our cash and
cash-equivalents, and short and long-term investments increased to $32.0 million
from $24.7 million as of December 31, 2007.




Critical
Accounting Policies





Inpreparingour 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 revenuerecognitionpolicy.




Our revenues are principally derived
from licensing the rights to use our software and sales of professional
services, including consulting, implementationand 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 bywrittenagreement 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 arrangementsthatinvolve multiple elements, such asconsulting, training andpost-contract
customer support, 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 determinethe VSOE for each element according to
the price charged when the element is sold separately.  For
post-contract customer support,we determine the VSOE based on the
renewal price charged. For other services,such as consulting and
training,we determine the VSOE based onthefixed hourly/daily rate charged in
stand-alone service transactions. Under the residual method, consideration is
allocated to undelivered elements based upon the VSOE of those elements, with
the residual of the arrangement fee allocatedto and recognized as software license
revenue.




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, 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 relationshipof 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 reflectedin 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.









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Service revenues are comprised of
revenues from consulting, training, and post-contract customer
support.Revenues from consulting servicesare 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.Post-contract customer support
arrangements provide for technical support and the right to unspecified updates on
an if-and-when-available basis. Revenues from these arrangements are recognized ratably
over the term of thearrangement, usually one year.




We categorize revenue as either software
license revenue or services revenue.We allocate revenue to each of these
categories based on theVSOE for elements in each revenue arrangement
andbased onthe application of the residual method
for arrangements in which we have establishedthe VSOEfor all undelivered elements.Where we are unable toestablishthe VSOEfor all undelivered elements,we take a systematic
approach, whereby we firstallocate revenue to any undelivered
elements for whichthe VSOEhas been established,andthen allocate revenue to any undelivered
elements for whichthe VSOEhas not been established based on
management’s best estimate ofthefair value of those undelivered
elements. We then applya residual method to
determine the license fee. Management’s best estimate of fair value of
undelivered elements for whichthe VSOEhas not been established is based upon
theVSOEof similar offerings and other objective
criteria.




Our standard payment terms are between
30 and 120 days.  We do not grant extended payment terms to our
customers.




We generally do not grant a
right-of-return to our
customers. Wegenerally provide a warranty period for
three months at no extra charge. As of December 31, 2008 and 2007, the provision
for warranty costwasimmaterial.




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.




Injudging the probability that we will be
able to collect software license fees, we continuously monitor collection and
payments from our customers and maintain a provision for estimated credit losses
based on our historical experience generally, as well asour experience with specific customers.
In connection withcustomers with whom we have no previous
experience, wetypicallyutilize public financial
information or independent resources to evaluate the creditworthiness of these
customers. We perform on-going credit evaluations of our customers.




Stock-Based
Compensation





Compensation cost related to stock
options is recognized in operating results (included incost of revenues, research and
development, selling and marketing, general and administrative expenses)
under SFAS No. 123R.




Derivative
Financial Instruments





Weaccount for derivatives and hedging
based on SFAS No.133, “Accounting for Derivative Instruments
and Hedging Activities”(“SFASNo. 133”), as amended and relatedinterpretations. SFAS No. 133
requiresusto recognize all derivatives on the balance sheet
at fair value. If a derivative meets the definition of a hedge and is so
designated, depending on the nature of the hedge, changes in the fair value of
the derivative will either beoffset against the change in fair
value of the hedged assets,
liabilities, or firm commitments through earnings (forfair value hedge transactions) or
recognized in other comprehensive income until the hedged item is recognized in
earnings (forfairvaluecashflow transactions). The
ineffective portion (which
was immaterial during 2008, 2007 and 2006) of a derivative’s change in fair value is recognized in
earnings. If a derivative does not meet the definition of a hedge the changes in
the fair value are included in earnings. Cash flows related to such hedges are classified as
operating activities.









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As
part of our hedging strategy, we enter into forward exchange contracts in order
to protect us from balance sheet exposure arising from assets and liabilities
denominated in currencies other than U.S. dollars.




We
also enter into forward exchange contracts and options strategies in order to
limit the exposure to exchange rate fluctuation associated with payroll expenses
mainly incurred in NIS. We elected not to follow the designation and
documentation processes required to qualify for the hedge accounting method
under SFAS 133, and any gain or loss derived from such instruments is recognized
immediately as financial expenses, net.




Recent
Accounting Pronouncements





In December 2007, the FASB issued
SFAS No.141(R)
“Business
Combinations”(“SFAS141(R)”) and SFAS No.160, “Non-controlling Interests in
Consolidated Financial Statement”(“SFAS160”). 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. Wewererequired to adopt SFAS 141(R) and
SFAS 160 simultaneously in our fiscal year beginning January 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.




In February 2008, the FASB issued FSP
157-2, which delays the effective date of SFAS 157 for all nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually). SFAS 157
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. FSP 157-2 partially defers the effective date of
SFAS 157 to fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years for
items within the scope of this FSP. The adoption of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities is effective for us beginning
January 1, 2009. We do not expect that the adoption of SFAS 157
willhave a significant impact on our
financial statements.




In
April 2008, the FASB issued FSP 142-3. This guidance is intended to improve the
consistency between the useful life of a recognized intangible asset under
SFAS 142, and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R when the underlying arrangement includes
renewal or extension of terms that would require substantial costs or result in
a material modification to the asset upon renewal or extension. Companies
estimating the useful life of a recognized intangible asset must now consider
their historical experience in renewing or extending similar arrangements or, in
the absence of historical experience, must consider assumptions that market
participants would use about renewal or extension as adjusted for SFAS 142’s
entity-specific factors. FSP 142-3 is effective for us beginning January 1,
2009. The provisions of FSP 142-3 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 FSP 142-3 will have a significant impact on our financial
statements.









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5A.
            Results
      of operations




Our
operating results for each of the five years ended December 31, 2008, 2007,
2006, 2005 and 2004 expressed as a percentage of revenues are as
follows:





Year
      Ended December 31,2008
                                                                                                                                        
                                                                                                                                        2007
                                                                                                                                        
                                                                                                                                        2006
                                                                                                                                        
                                                                                                                                        2005
                                                                                                                                        
                                                                                                                                        2004Revenues:Software
      license
                                                                                                                                        38%
                                                                                                                                        
                                                                                                                                        39%
                                                                                                                                        
                                                                                                                                        37%
                                                                                                                                        
                                                                                                                                        34%
                                                                                                                                        
                                                                                                                                        47%Services
                                                                                                                                        62%
                                                                                                                                        
                                                                                                                                        61%
                                                                                                                                        
                                                                                                                                        63%
                                                                                                                                        
                                                                                                                                        66%
                                                                                                                                        
                                                                                                                                        53%Total
      Revenues
                                                                                                                                        100
                                                                                                                                        
                                                                                                                                        100
                                                                                                                                        
                                                                                                                                        100
                                                                                                                                        
                                                                                                                                        100
                                                                                                                                        
                                                                                                                                        100Cost
      of revenues:Software
      license
                                                                                                                                        4
                                                                                                                                        
                                                                                                                                        6
                                                                                                                                        
                                                                                                                                        6
                                                                                                                                        
                                                                                                                                        6
                                                                                                                                        
                                                                                                                                        5Services
                                                                                                                                        31
                                                                                                                                        
                                                                                                                                        32
                                                                                                                                        
                                                                                                                                        33
                                                                                                                                        
                                                                                                                                        34
                                                                                                                                        
                                                                                                                                        28Total
      cost of revenues
                                                                                                                                        35
                                                                                                                                        
                                                                                                                                        38
                                                                                                                                        
                                                                                                                                        39
                                                                                                                                        
                                                                                                                                        40
                                                                                                                                        
                                                                                                                                        33Gross
      profit
                                                                                                                                        65
                                                                                                                                        
                                                                                                                                        62
                                                                                                                                        
                                                                                                                                        61
                                                                                                                                        
                                                                                                                                        60
                                                                                                                                        
                                                                                                                                        67Operating
      expenses:Research
      and development expenses, net
                                                                                                                                        12
                                                                                                                                        
                                                                                                                                        14
                                                                                                                                        
                                                                                                                                        13
                                                                                                                                        
                                                                                                                                        13
                                                                                                                                        
                                                                                                                                        12Selling
      and marketing expenses
                                                                                                                                        31
                                                                                                                                        
                                                                                                                                        33
                                                                                                                                        
                                                                                                                                        32
                                                                                                                                        
                                                                                                                                        42
                                                                                                                                        
                                                                                                                                        39General
      and administrative expenses
                                                                                                                                        10
                                                                                                                                        
                                                                                                                                        11
                                                                                                                                        
                                                                                                                                        11
                                                                                                                                        
                                                                                                                                        13
                                                                                                                                        
                                                                                                                                        13Total
      Operating expenses
                                                                                                                                        53
                                                                                                                                        
                                                                                                                                        58
                                                                                                                                        
                                                                                                                                        56
                                                                                                                                        
                                                                                                                                        68
                                                                                                                                        
                                                                                                                                        64Operating
      income (loss)
                                                                                                                                        12
                                                                                                                                        
                                                                                                                                        4
                                                                                                                                        
                                                                                                                                        5
                                                                                                                                        
                                                                                                                                        (8)
                                                                                                                                        
                                                                                                                                        3Other income
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        1
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        -Interest,
      net
                                                                                                                                        0
                                                                                                                                        
                                                                                                                                        2
                                                                                                                                        
                                                                                                                                        2
                                                                                                                                        
                                                                                                                                        0
                                                                                                                                        
                                                                                                                                        1Net
      income (loss) before taxes
                                                                                                                                        12
                                                                                                                                        
                                                                                                                                        7
                                                                                                                                        
                                                                                                                                        7
                                                                                                                                        
                                                                                                                                        (8)
                                                                                                                                        
                                                                                                                                        4Tax
      benefit (taxes on Income)
                                                                                                                                        4
                                                                                                                                        
                                                                                                                                        0
                                                                                                                                        
                                                                                                                                        0
                                                                                                                                        
                                                                                                                                        -
                                                                                                                                        
                                                                                                                                        -Net
      income (loss)
                                                                                                                                        16%
                                                                                                                                        
                                                                                                                                        7%
                                                                                                                                        
                                                                                                                                        7%
                                                                                                                                        
                                                                                                                                        (8%)
                                                                                                                                        
                                                                                                                                        4%







Revenues




Revenue
      Breakdown2008
                        %
      Change
                        2007
                        %
      Change
                        2006(In
      thousands)Revenues:Software license
                        $
      19,819
                        27%
                        $
      15,602
                        28%
                        $
      12,145Percentage of total
      revenues
                        38%
                        
                        39%
                        
                        37%Services
                        32,443
                        33%
                        24,417
                        20%
                        20,286Percentage of total
      revenues
                        62%
                        
                        61%
                        
                        63%TotalRevenues
                        $
      52,262
                        31%
                        $
      40,019
                        23%
                        $
      32,431




Revenues
increased 31% to $52.3 million in 2008, compared with $40.0 million in 2007 and
$32.4 million in 2006.  The significant growth in revenues in 2008 was
primarily attributable to an increase in the volume of products and services
sold.  Specifically, we attracted large customers, particularly in the
telecommunications and utility markets, we generated strong repeat business, and
we expanded into new vertical markets.  Our revenue 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.









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Revenues By Territory2008
                        
                        
                        %
      Revenues
                        
                        
                        2007
                        
                        
                        %
      Revenues
                        
                        
                        2006
                        
                        
                        %
      Revenues(In
      thousands)Revenues:North
      America
                        
                        $
                        18,617
                        
                        
                        
                        36
                        %
                        
                        $
                        17,766
                        
                        
                        
                        44
                        %
                        
                        $
                        12,155
                        
                        
                        
                        37
                        %Europe
                        
                        
                        24,545
                        
                        
                        
                        47
                        %
                        
                        
                        17,499
                        
                        
                        
                        44
                        %
                        
                        
                        14,606
                        
                        
                        
                        45
                        %Israel
                        
                        
                        563
                        
                        
                        
                        1
                        %
                        
                        
                        131
                        
                        
                        
                        0
                        %
                        
                        
                        305
                        
                        
                        
                        1
                        %Asia
      Pacific
                        
                        
                        8,537
                        
                        
                        
                        16
                        %
                        
                        
                        4,623
                        
                        
                        
                        12
                        %
                        
                        
                        5,365
                        
                        
                        
                        17
                        %Total
      Revenues
                        
                        $
                        52,262
                        
                        
                        
                        100
                        %
                        
                        $
                        40,019
                        
                        
                        
                        100
                        %
                        
                        $
                        32,431
                        
                        
                        
                        100
                        %


In
2008, 47% of our revenues were generated in Europe (with 21% in Germany, 15% in
the United Kingdom), 36% in North America (with 28% in the United States and 8%
in Canada), and 16% in Asia Pacific (with 12% in Australia) and 1% in Israel.
Revenues in Europe grew by $7.0 million, or 40%, compared to
2007.  The increase in revenues in Europe was attributed mainly to
large repeat orders from an existing customer.




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),
17% in Asia Pacific and 1% in 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.




Software
Licenses




Software
license revenues were $19.8 million, or 38% of revenues, in 2008, compared with
$15.6 million, or 39% of revenues, in 2007, and $12.1 million, or 37% of
revenues, in 2006. The increase in software license revenues from 2007 to 2008
of $4.2 million, or 27%, was primarily due to an increase in the volume of
products sold, particularly repeat orders from existing customers in Europe. The
increase in software license revenues from 2006 to 2007 of $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.




Services




Service
revenues were $32.4 million, or 62% of revenues in 2008, compared with $24.4
million, or 61% of revenues, in 2007, and $20.3 million, or 63% of revenues, in
2006. The increase in service revenues from 2007 to 2008 was primarily due to an
increase in the volume of services sold, particularly increased implementation
services and post-contract support agreements. The increase in service revenues
from 2006 to 2007 was similarly 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,
royaltypayments 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 $18.1
million,or 35% of revenues,in 2008, compared with $15.3
million,or 38% of revenues,in2007 and $12.6 million,or 39% of revenues,in 2006. The increase in the cost of
revenues from 2007 to 2008and from 2006 to 2007was 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 $1.9 million, or 4% of revenues, in 2008,
compared with $2.4 million, or 6% of revenues, in 2007 and $2.0 million, or 6%
of revenues, in 2006. The decrease in cost of software license revenues from
2007 to 2008 in absolute and percentage terms was primarily due to lower costs
for third-party licenses and adaptors to other ERP and CRM systems sold during
2008. The increase in cost of software license revenues from 2006 to 2007 was
primarily due to an increase in revenues derived from third-party licenses and
adaptors to other ERP and CRM systems, 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 $16.1 million, or 31% of revenues, in 2008, compared
with $12.9 million, or 32% of revenues, in 2007 and $10.6 million, or 33% of
revenues, in 2006. The increase in the cost of services revenues from 2007 to
2008 of $3.2 million, or 25%, was primarily due to increased demand for our
services. As a result, there was an increase in our related payroll expenses of
$1.5 million, an increase in subcontractors' costs of $0.8 million, an increase
in travel costs of $0.2 million and an increase of $0.7 million in other costs,
mainly overhead. The increase in the cost of services revenues from 2006 to 2007
of $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 of $1.8
million, an increase in royalties paid to the Chief Scientist of $0.2 million
and an increase of $0.4 million in other costs, mainly overhead.




Gross
Profit




Gross
profit was $34.2 million, or 65% of revenues, in 2008, compared with $24.7
million, or 62% of revenues, in 2007, and $19.9 million, or 61% of revenues, in
2006. The increase in gross profit from 2007 to 2008 of $9.5 million, or 38%,
was primarily due to lower cost of software licenses and improved gross profit
from our service activities.  The increase in gross profit from 2006
to 2007 of $4.9 million, or 24%, was primarily due to 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 $27.9 million, or 53% of revenues, in 2008, compared with $23.4 million, or
58% of revenues, in 2007 and $18.1 million, or 56% of revenues, in
2006.




The
increase in operating expenses from 2007 to 2008 of $4.5 million, or 19%,
reflects increases across all categories. The increases in sales and marketing
expenses and research and development expenses reflect our efforts to maintain
our competitive advantage in the market and capture additional market share. We
expect that operating expenses will continue to increase in 2009. The increase
in operating expenses from 2006 to 2007 of $5.2 million, or 29%, also reflected
increases across all categories.




Research
and Development Expenses, Net




Research and development expenses
consist primarily of personnel costsforproduct development, net of grants
received from the Chief Scientist. In return for some of these grants, we are
obligated to pay the Israeligovernment 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 material, after
consideration of various factors, including net realizable value. Todate, 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 $6.5 million, or 12% of
revenues, in 2008, compared with $5.8 million, or 14% of revenues, in 2007 and
$4.1 million, or 13% of revenues, in 2006. Research and development expenses,
prior to participation grants from the Chief Scientist, totaled $6.6
million









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for
2008, compared with $5.9 million for 2007 and $4.5 million for 2006. We received
or accrued grants from the Chief Scientist in the amount of $0.1 million in
2008, compared with $0.2 million in 2007 and $0.4 million in 2006. The increase
in research and development expenses from 2007 to 2008 by $0.7 million, or 12%,
was primarily due to an increase of $0.4 million in payroll expenses, a decrease
of $0.1 million in grants received from the Chief Scientist and an increase of
$0.2 million in other costs, mainly overhead. The increase in payroll reflects
the hiring of additional personnel required to improve and expand our
product offering.  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 Chief Scientist, an increase of $0.3 million
in subcontractors' costs and an increase of $0.6 million in other costs, mainly
overhead.




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 $16.0 million, or 31% of revenues, in 2008, compared
with $13.2 million, or 33% of revenues, in 2007 and $10.3 million, or 32% of
revenues, in 2006. The increase in the selling and marketing expenses from 2007
to 2008 of $2.8 million, or 21%, was due to an increase in the number of
employees, resulting in an increase of $2.1 million in payroll expenses and an
increase in our selling and marketing activities of $0.7 million. These
increases reflect the hiring of additional direct-sales employees, 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 2006 to 2007 of $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 of $1.1
million and an increase in amortization of stock-based compensation of $0.1
million. These increases reflect the hiring of additional direct-sales
employees, costs relating to the formation of our office located in Japan,
additional investment in channel activities and additional direct marketing
activities, such as trade shows and other customer events.





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 $5.4 million, or 10% of revenues, in 2008,
compared with $4.4 million, or 11% of revenues, in 2007 and $3.7 million, or 11%
of revenues, in 2006. The increase of $1.0 million in general and administrative
expenses from 2007 to 2008 was primarily due to an increase in payroll expenses
of $0.7 million and an increase of $0.3 million in other general and
administrative expenses. 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.




Interest
Income, Net




Interest
includes interest income earned on our cash, cash equivalents and short and
long-term investments, offset by interest expense, and also includes the effects
of foreign currency fluctuations.




Interest
income net of interest expenses, was $0.1 million, or 0% of revenues, in 2008,
compared with $0.9 million, or 2% of revenues, in 2007 and $0.5 million, or 1%
of revenues, in 2006. The decrease in interest income from 2007 to 2008 was
attributable to a combination of losses due to foreign currency exchange rate
fluctuations and lower returns on our investments due to lower interest
rates. 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.





Other
Income




In
September 2006, our office located in Tel Aviv was damaged by fire. The majority
of losses we suffered in the fire were covered by our insurance
policies.









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In
2007, we recognized other income of $0.4 million, reflecting the funds we
received from our insurance company in connection with this claim.




Income Taxes




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. We established a valuation allowance for the full
amount of the tax benefits since, in previous years, the realization of net
operating loss carry-forwards and deductible temporary differences was less
likely than not. For 2008, based on historical taxable income from continuing
operations and projections for future taxable income, we reversed part of the
valuation allowance since we determined that it is more likely than not that
some of our deferred tax assets will be realized. The reversal of the valuation
allowance and other adjustments to the deferred tax assets resulted in the
recognition of income tax benefits of $1.9 million in 2008.




Our
future consolidated tax expense is expected to reflect various statutory tax
rates in the United Kingdom, the United States, Germany, Australia, Japan and
Belgium. 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, 2008, net operating loss carry forwards in Israel amounted to
approximately $24 million, compared with approximately $24 million in 2007.
Additional tax loss carry forwards of approximately $24 million and $5.1 million
remain attributable to our U.S. subsidiary and our 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 2012 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




Net income for 2008 was $8.1
million,or 16% of revenues, compared with net
income of $2.6 million,or 7%of revenues,in 2007 and net income of $2.1
million,or 7% of revenues,in 2006.




Foreign Currency
Fluctuations




Our reporting currency is the U.S.
dollar.  A significant portion of our research and development
expenses and other expenses are incurred inNIS, 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.In 2008, 65% of our expenses and 43% of
our revenues were incurred
in non-U.S. dollar currencies.  In the first half of 2008, the U.S.
dollar weakened against theNIS, theEuroand the Australian dollar,resulting in increases in our expenses
in absolute U.S. dollar terms. However, in the second half of 2008,
this trendreversed and the
U.S. dollar strengthened against most major currencies, including against theNIS, theEuroand the Australian dollar, resulting in a lowering of our
expenses in absolute U.S. dollar terms.See Item 3D–Risk factors "Our risk exposure toforeign currency fluctuationsis increasing, and wemay not be able to fully
mitigate the risk."




5B.
            Liquidity
      and capital resources




Our
cash and investments increased by $7.3 million, or 29%, to $32.0 million as of
December 31, 2008, compared with $24.7 million as of December 31, 2007, which
was an increase of  $5.0 million, or 25%, compared with $19.8 million
as of December 31, 2006. Our primary sources of cash and investments during 2008
were cash flows of $8.5 million generated from operations and $0.2 million from
exercises of employee stock options. Our primary sources of cash and investments
during 2007 were cash flows of $4.9 million generated from operations and $0.9
million from exercises of employee stock options.




As
of December 31, 2008, we had cash and cash equivalents of $17.4 million,
short-term investments of $13.9 million and long-term investments of $0.7
million. As of December 31, 2008, $0.7 million in long-term investments had been
deposited with banks to secure letters of credit totaling $0.7 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. The bank deposits are









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typically
held in the form of certificates of deposit for a period of more than three
months and up to 12 months and bear fixed income interest. As of December 31,
2008, these bank deposits had an average interest rate per annum of
2.5%.




Nearly
all of our cash and investments are not insured by the FDIC or other similar
governmental insurance limits.  See Item 3D – “Nearly all of our cash,
cash equivalents and short and long-term investments do not benefit from deposit
insurance.”





Cash and
      Investments
                                                          December
      31,2008
                                                        
                                                        %
      Change
                                                        
                                                        2007
                                                        
                                                        %
      Change
                                                        
                                                        2006(In
      thousands)Cash
      and cash equivalents
                                                        
                                                        $
                                                        17,427
                                                        
                                                        
                                                        
                                                        $
                                                        9,054
                                                        
                                                        
                                                        
                                                        $
                                                        13,385Short-term
      investments
                                                        
                                                        
                                                        13,857
                                                        
                                                        
                                                        
                                                        
                                                        15,054
                                                        
                                                        
                                                        
                                                        
                                                        5,918Long-term
      investments
                                                        
                                                        
                                                        699
                                                        
                                                        
                                                        
                                                        
                                                        602
                                                        
                                                        
                                                        
                                                        
                                                        451Total
      Cash and investments
                                                        
                                                        $
                                                        31,983
                                                        
                                                        29%
                                                        
                                                        $
                                                        24,710
                                                        
                                                        25%
                                                        
                                                        $
                                                        19,754





For
the year ended December 31, 2008, net cash provided by operations was $8.5
million, comprising net income of $8.1 million, an increase in trade receivables
of $0.9 million, an increase in deferred taxes of $1.9 million, a decrease in
other receivables of $0.1 million, an increase in accounts payable of $1.5
million, and a decrease in deferred revenues of $0.1 million, which was
partially offset by non-cash charges of $1.7 million.




For
the year ended December 31, 2007, net cash provided by operations was $4.9
million, comprising 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 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.




In
2006, our office located in Tel Aviv was damaged by fire. As a result, we moved
to a temporary location located in Givat Shmuel, Israel. The majority of losses
we suffered in the fire were covered by our insurance policies. We finalized our
claim with our insurance company in 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 provided by investment activities was $1.1 million in 2008 and $1.5 million
was used for purchases of equipment and systems, including computer equipment
and fixtures and furniture and for leasehold improvements (of which $0.6 million
was for investment in new company offices to which we moved in 2009). 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 financing activities was $0.2 million in 2008, $0.9 million in
2007 and $0.5 million in 2006, in each case as a result of the exercise of
employee stock options.




As
of December 31, 2008, we had outstanding trade receivables of approximately $7.8
million, which represented approximately 15% of revenue in 2008. As of December
31, 2007, we had outstanding trade receivables of approximately $6.9 million,
which represented approximately 17% of revenue in 2007. As of December 31, 2006,
we had outstanding trade receivables of approximately $6.5 million, which
represented









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approximately
20% of revenues in 2006. Our payment terms are typically between 30 and 60 days,
and do not exceed 120 days. Days sales outstanding (“DSO”), calculated based on
revenues for the most recent quarter and accounts receivable at the balance
sheet date, decreased to 50 DSO as of December 31, 2008, compared with 59 DSO as
of December 31, 2007, and 62 DSO as of December 31, 2006.




Since
inception, we have received aggregate payments from the Chief Scientist in the
amount of $8.7 million related to research and development. In return, 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, 2008, we had paid or accrued royalties related to
the results of research and development in the amount of $8.7 million,
consisting of our entire commitment to the Chief Scientist. The final amount of
$0.7 million was paid in 2009. However, even though we have repaid all grants
received from the Chief Scientist, we are still subject to the restrictions in
the Research Law regarding transfer of our intellectual property developed with
the Chief Scientist’s funding. See Item 3D – Risk Factors “The government
programs in which we have participated and the tax benefits we receive require
us to satisfy prescribed conditions and may be delayed, terminated or reduced in
the future”.




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 expect to continue investing in computers, office equipment and
office fixtures. 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 controlling our
expenses.  See Item 3D – Risk factors “We may not be able to maintain
profitability.”




We
believe that we 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
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 may explore opportunities to pursue off-shore
research and development activities in India, in connection with our acquisition
in 2009 of Manchitra.




We
invested $6.5 million in 2008, $5.8 million in 2007 and $4.1 million in 2006 for
research and development.





5D.
            Trend
      information





We operate in the rapidly evolving
market for service workforce optimization.  Field service spending
remained strong in 2008 and in the beginning of 2009.  Despite the current
economic downturn and disruption in financial markets, we have continued to
experience strong demand for our products and services.




Large system integrators continue to
build practices around the service optimization market.  Ourstrategy is to continue to
increase marketing efforts through our channel and strategic partners to target
these potential customers.  Companies in the mid-market are also
seeking solutions to improve productivity.  In 2007, we introduced our
IMRS initiative and our Channel Partner Program to
addressdemand from mid-market customers.  To date,
approximately 10 companies have joined our Channel Partner Program.




In 2008, the proportion of our revenues
attributable to servicesslightlyincreased, while the proportion of license revenuesslightlydecreased. We expect license and
services revenues to continue to grow inabsoluteterms in 2009 and that the ratio of
license revenues to service revenues will be similar to the ratio in
2008.







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The
global economic slowdown has adversely affected certain segments of our
end-markets. For example, in 2008 we experienced lower demand from the retail
and office equipment sectors. However, we experienced increased demand from
other sectors, such as telecommunications and utilities.Energy Insights (an IDC
company) expects information technology spending by the utility sector in the
United States and in Europe, the Middle East and Africa to grow in 2009, with
growth driven by the need of businesses to reduce operational expenses and by
increased spending related to green initiatives.




We expect to continue to grow our
revenues in 2009 despite the adverse economic conditions.  We believe
that we are well positioned to benefit from the current economic downturn since
companies focused on cost control are likely to demand products and services,
such as our workforce optimization solutions, that aim to maximize efficiency
and decrease customers' operating expenses.  We also believe
thatwe have ahealthy backlog of
orders for our products and services.  As of December 31, 2008,we had a
backlog of approximately $17.9 million, compared to $20.5 million at the end of
2007.  Although our backlog at the end of 2008 was lower than at the
end of 2007, our backlog level remains substantial and has increased in
the beginning of 2009.




The economic downturn and disruption in
financial markets may affect the competitive environment in our
industry.  For example, larger, better capitalized companies may seek to acquire smaller,
weaker rivals that have been adversely affected by the economic
downturn.  In April 2009, we acquired the workforce management
business of Manchitra, a business based inIndia.  Pursuant to our business
strategy, wewill continue to consider merger and
acquisition transactions.




In
2008, approximately 43% 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 2008,
our operating expenses increased in absolute dollar terms due to the
strengthening of the NIS and Euro against the U.S. dollar during most of the
year.  In the beginning of 2009, the U.S. dollar has strengthened
against each of the NIS and Euro and has remained steady against the British
pound.  If this trend continues, we would expect to benefit from lower
operating expenses in 2009.




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 Scientistdiscussed
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, 2008:





Commercial
      Commitments
            Total
      Amounts Committed
              (in
      thousands)
            Amount
      of Commitment Expiration Per Period
              (in
      thousands)2009Guarantees/Letters
      of Credit
            $699
            $699








Contractual Obligations
            Payments
      due by period
              (in
      thousands)Total
            2009
            2010
            2011-2012
            2013-2014Lease
      Obligations
            $4,923
            $1,110
            $1,134
            $1,835
            $844











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We have entered into standby letter of
credit agreements with banks and financial institutions primarily relating
to the guarantee of rental agreements. As of December 31, 2008, contingent
liabilities on outstanding letter of credit agreements aggregated $0.7
million.  We expect to renew most of these letters of credit. The
letters of credit are secured by $0.7 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.








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
            61
            Chief
      Executive Officer and Chairman of the BoardShmuel
      Arvatz
            46
            Executive
      Vice President and Chief Financial OfficerHannan
      Carmeli
            50
            President
      and Chief Operating Officer







DR. MOSHE
BENBASSATco-founded
ClickSoftware in 1979 and has served as our Chairman and Chief Executive Officersince inception. From 1987
to 1999, Dr. BenBassat served as a Professor of Information Systems at the
Faculty of Management atTel-AvivUniversity. Dr. BenBassat has also held academic
positions at theUniversityofSouthern Californiaand theUniversityofCaliforniainLos Angeles. From 1996 to1999, Dr. BenBassat 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 defenseelectronics company. Dr. BenBassat holds Bachelor of Science, Master of Science
and PhD. degrees in Mathematics and Statistics fromTel-AvivUniversity.









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SHMUEL
ARVATZhas served as our
Executive Vice President
and Chief Financial Officer since 2002.Mr. Arvatz serves as a member of the
board of directors and member of the audit committee of MIND CTI Ltd., an
Israeli software company.Prior to joining ClickSoftware, Mr.
Arvatz served as the Chief Financial Officer at Shrem, Fudim, Kelner
Technologies Ltd., a leading investment house inIsrael. From 1999 to 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.
Mr. Arvatz holds a Bachelor of Arts degree in Accounting and Economics fromBar-IlanUniversityin Tel Aviv,Israeland is a Certified Public Accountant inIsrael.




HANNAN
CARMELIhas served as our
Chief Operating Officer since 2006 and as our President since
2008.  Previously, he served as our Executive Vice
President of Sales &
Professional Servicesand
managed ourProfessional
Services organizations worldwide.From 1996 to 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 heldresearch and
development andfield
positions with various software vendors ranging from software development
through product management and sales management. Mr. Carmeli holds a Bachelor of
Science degree fromthe
Technion Institute of Technology inHaifa,Israeland a Master of Science degree in
Computer Science fromBostonUniversity.




Our executive officers serve at the
discretion of our board of directors. The employment of each of our executive
officers isat will and may
be terminated at any time, with or without cause, subject to contractual notice
provisions.




There are no family relationships
between any members of our executive management and our
directors.




There are no arrangements or
understandings with major
shareholders, customers, suppliers or others pursuant to which any of our
executive management or our directors were selected.




Directors





Our articles of association provide for
a board of directors of not less than two members nor more than
eleven members. Except for
External Directors (as defined in the Companies Law), all directors are
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 eachannualmeeting, the class of directors whose
term expires at that meeting shall be elected to hold office for a term expiring
attheannualmeeting held in the third year following the year of
their election and until their successors have been duly elected and
qualified.





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
            60
            2010
            X
            
            XRoni
      A. Einav, Class II
            65
            2011
            X
            
            
            XGil
      Weiser, Class II
            67
            2011
            X
            X
            XMoshe
      BenBassat, Class III
            61
            2009Naomi
      Atsmon, external director
            56
            2009
            X
            X
            
            XDan
      Falk, external director (1)
            64
            2009
            X
            X
            X
            X





(1)
“Financial Expert” as required by the Companies Law and Nasdaq rules with
respect to membership on the Audit Committee.  See Item 16A
below.









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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 1999 to 2002. From 1998 to 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. Einavis the founder and General Manager of
EinavHigh-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 founded, which was subsequently acquired by BMC Software.Mr. Einavwas a founder of Eurekify, a security software
company,in 2002 and served
asitsdirector and chairman until 2008, when
Eurekify was acquired by CA.Mr. Einav serves on the board ofdirectors of Advantec,
XciTel,Impactia, M-Photo
and Gimao, as well as
on the advisory board ofXenia.Mr. Einav has also played a key role in
founding approximately a dozen other software companies, including Liraz
Computers, Jacada, Axxana, CeDimension, ComDa,EinavComputer Systems and Einav Systems. Mr.
Einav was a Majorin 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 fromthe Technion Institute,Haifa,Israel.





GIL WEISER has served as a
director since 2003. Mr. Weiser has been active in the high tech industry for
the past 30 years, with experience ranging from design engineering to management
of international companies, as well as community and public activities. Mr.
Weiser is currently the Chief Executive Officer of Orsus Solutions Ltd., an
Israeli high-tech company, and is a member of the board of directors of Fundtech
and Infocall. Mr. Weiser was also a member of the board of directors of the Tel
Aviv Stock Exchange from 2002 to 2004, as well as other hi-tech
companies.  From 1995 to 2000, Mr. Weiser served as Chief Executive
Officer of Hewlett-Packard Israel. 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 served as Chairman of the Executive Committee of
Haifa University from 1994 to 2006. Mr. Weiser holds a Bachelor of Science
degree from the Technion Institute and a Master of Science degree from the
University of Minnesota in Minneapolis.





NAOMI ATSMONhas 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 1997to2002, Ms. Atsmon served as a Division
President at Amdocs Ltd., managing large scale billing projects for telephone
companies in North America andEurope, with overall responsibility
forthe profit and loss
statement of the division. From 1994to1997, Ms. Atsmon served as a Vice
President at Amdocs Ltd. From 1991to1994, she was a director for Amdocs Ltd.
in charge of software development and customer relations with one of the largest
telephone companies in theUnited 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 atTel-AvivUniversity.





DANFALKhas served as a director since
2003.  Mr. Falkserves asChairman of Orad Hi-Tech Systems Ltd.and Chromagen Ltdandis also a member of the board of
directors of Orbotech Ltd., Nice Systems Ltd., Plastopil Ltd., Nova Measuring
Systems Ltd., AttunityLtd., Jacada Ltd., Ormat Technology, Inc. (publicly traded on NYSE), Poalim
Ventures I, AVT Ltd.,Amiad Filtration Systems
Ltd.andOridion Medical Ltd.From 1999 to 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 1995 to 1999, and between 1994 and 1995 served asits Executive Vice President and Chief
Financial Officer. From 1992 until 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 OrbotechLtd., 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.,
priorto joining Orbot.









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6B.
            Compensation





The
aggregate amount of compensation paid to all of our directors and officers in
2008 was $1.7 million in salaries, directors’ fees, and bonuses, compared to
$1.3 million in 2007. In addition, we granted 295,000 options to our officers
and directors at an average exercise price of $2.45 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 may receive bonuses based on achieving company goals on
revenues and operating profit, and based on achieving personal
performance-related 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 determined by the Chief Executive
Officer.





6C.
            Board
      practices





We are subject to the provisions of
the Companies Law, which requires, in part, thatIsraeli companies
whose shares have been offered to the public in or outside of Israel appoint
at least twoexternaldirectors (as such term is defined in the
Companies Law)to serve on theirboard of directors.




There
are no service contracts between us or any of our subsidiaries, on the one hand,
and our directors in their capacity as directors, on the other hand, 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.





External
and Independent Directors





Under
Israeli law, publicly held Israeli companies, such as us, are required to
appoint at least two external directors, each of whom must also serve on the
audit committee. All other board committees exercising powers delegated by the
board of directors must include at least one external director. Our external
directors must be appointed by the holders of a majority of our ordinary shares
and must meet certain non-affiliation criteria—all as provided under Israeli
law. An external director is appointed for an initial term of three consecutive
years, and may be reappointed for an additional three-year term, subject to
certain conditions under Israeli law.





Dan
Falk and Naomi Atsmon each serves as an external director. On March 31, 2009 Dr.
Israel Borovich resigned from our board of directors after it was determined
that the duration of his service as an external director exceeded the length
permissible by Israeli law.





Israeli
law further requires that at least one external director have financial and
accounting expertise, and that at least one other external director have
professional competence, as determined by the company’s board of directors.
Under relevant regulations, a director having financial and accounting expertise
is a person who, due to his or her education, experience and talents, is highly
skilled in respect of, and understands, business and accounting matters and
financial reports, in a manner that enables him or her to have an in-depth
understanding of the company’s financial information and to stimulate discussion
in respect of the manner in which the financial data is presented. Under
relevant regulations, a director having professional competence is a person who
has an academic degree in either economics, business administration, accounting,
law or public administration or an academic degree in an area relevant to the
company’s business, or has at least five years experience in a senior position
in the business management of a corporation with a substantial scope of
business, in a senior position in the public service or in the field of the
company’s business.








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Dan
Falk was determined by our board of directors to be a financial and accounting
expert and Naomi Atsmon was determined to have professional competence, each as
determined by Israeli law.





Audit
Committee





The
audit committee consists of Ms. Atsmon, 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;·
            to
      decide whether to approve acts or related-party transactions involving
      directors, executive officers, controlling shareholders and third
      parties;·
            to
      monitor generally the services provided by our external auditors to ensure
      their independence;·
            to
      review, and either approve or disapprove, all audit and non-audit services
      provided by external auditors;·
            to
      receive reports from our external and internal auditors who report
      regularly to the audit committee at its meetings;·
            to
      discuss with our external auditors the quality, not just the
      acceptability, of the accounting principles, the reasonableness of
      significant judgments and the clarity of disclosures in our financial
      statements, as and when it deems it appropriate to do so;
    and·
            be
      responsible for the appointment, compensation, retention and oversight of
      the work of our external auditors.





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.





Compensation
Committee





Our
compensation committee consists of Mr. Thanos, Mr. Weiser, and Mr. Falk, 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; and·
            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:









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·
            reviewing
      board structure, composition, and practices, and making recommendations on
      these matters to the board; and·
            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, 2008, we employed 226 full time employees.  Of these
employees, 120 were based in Israel, 44 in the United States, 20 in Asia Pacific
and 42 in Europe. In addition, pursuant to the terms of our acquisition of the
workforce management business of Manchitra in April 2009, approximately 25
employees based in India joined us.  We plan to retain these
employees.





The
following is a detailed breakdown of persons employed by main category of
activity, as at December 31, 2008:




Year
      Ended December 31,Department
                                        2008
                                        
                                        2007
                                        
                                        2006Services
                                        87
                                        
                                        79
                                        
                                        79Research
      & Development
                                        47
                                        
                                        52
                                        
                                        45Sales
      and Marketing
                                        57
                                        
                                        57
                                        
                                        41General
      and Administrative
                                        35
                                        
                                        32
                                        
                                        29Total
                                        226
                                        
                                        220
                                        
                                        194





In
addition to the number of full-time employees listed above, as at December 31,
2008 we had 22 full-time contractors in Israel who work at an offsite location,
focusing on quality assurance.





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 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 $739,000 in 2008, $700,000 in 2007, and
$603,000 in 2006. 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.





We
typically 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 enforce these non-competition agreements and our competitors
may be able to benefit from the expertise of our former employees.









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6E.
            Share
      ownership




As
of March 31, 2009, each of our executive officers and directors beneficially
owned less than 1% of our ordinary shares, with the exception of Dr. Moshe
BenBassat, who beneficially owned 3,600,255 shares (or 12.5% of our outstanding
shares) and 1,244,475 options for the purchase of our ordinary
shares.





The
following table summarizes information about the options for the purchase of our ordinary
shares owned by Dr. Moshe BenBassat that were outstanding and exercisable
as of March 31, 2009:





RANGE
      OF
                            EXERCISE
      PRICE
                            $
                          NUMBER
                            OUTSTANDING
                            AT
                            MARCH  31,
      2009
                          EXPIRATION
                            DATE1.3
                          250,000
                          20131.83-1.95
                          962,392
                          2009-20134.43
                          
                          32,083
                          20141,244,475




Stock
Option Plans




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, theboard of directors increased the
reserve for grants under the umbrella option plan, the Amended and Restated 2000
Share Option Plan (the “Plan”), by 400,000 options effective January
1, 2004. During 2005, the board of directors increased the reserve forgrants under the Plan 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 Plan by
1,250,000optionseffective January 1,
2007.  During 2007, the board of directors ratified an automatic increase of
the reserve for grants under the Plan by 1,250,000optionseffective January 1, 2008. During 2008,
the board of directors ratified an automatic increase of the reserve for grants
under the Plan by 900,000optionseffective January 1,
2009.




In 2001 we adopted the2000 Approved U.K. Share Scheme for our
employeeslocatedin theUnited Kingdomand in 2003 we adopted the2003 Israeli Share Option Plan for our
employeeslocatedinIsrael, both of whichwere adopted in accordance withthe Plan.




Wealsoadopted an Employee Stock Purchase Plan
(ESPP) in 2000, details of which are set forth in Note 12(C) of theconsolidated financial statements
appearing elsewhere in this annual report.




The purpose of the Plan is to enable us
to attract and retain
qualified persons as employees, officers, directors, consultants, advisors and
service providers and to motivate such persons by providing them with an equity
participation inus. The Plan will expirein 2014, unless terminated earlierby the board of
directors.




The Plan is administered by our board of
directors or a committee of our board of directors which has broad discretion,
subject to certain limitations, to determine the persons entitled to receive
options.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 timethe options are
granted.




Under the Plan, the terms and conditions
under which options are granted and the number of shares subject theretoisdetermined by our board of directors or
a committee of our board of directors. The board of directors or such
committee also has
discretion to determine the nature of the consideration to be paid upon the
exercise of an option under the Plan. Such consideration generallyconsists of cash, but mayinclude a recourse promissory
note.




Theordinaryshares acquired upon exercise of an option are subject to
certain restrictions on transfer, sale or hypothecation. Options are exercisable
and restrictions on disposition of shares lapse pursuant to the terms of the
individual agreements under which the options were granted orthe shares were
issued.










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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 asreported 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 the employee remaining
continuously employed by us.




ITEM
      7.
            MAJOR
      SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS




7A.
            Major
      shareholders





The
following table sets forth, as of March 31, 2009, 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)
              4,844,730
              16.2%G.  Nicholas
      Farwell (2)
              2,836,660
              9.9%Austin
      W. Marxe and David M. Greenhouse (3)
              2,476,142
              8.6%Officers
      and directors as a group(4)
                (8
      persons)
              5,727,518
              19.2%





(1)
            Includes,
      in addition to the ordinary shares held by Dr. BenBassat (i)
      1,244,475  options for ordinary shares held by Dr. BenBassat
      that are exercisable within 60 days of the date stated above and (ii)
      2,213,887 ordinary shares held by Idit BenBassat, which may be deemed to
      be beneficially owned by Dr. BenBassat.(2)
            As
      reported on Amendment No. 1 to the schedule 13G filed with the SEC on
      February 13, 2009 by G. Nicholas Farwell.(3)
            As
      reported on Amendment No. 4 to the Schedule 13G filed with the SEC on
      February 13, 2009 in a joint filing by Austin W. Marxe and David M.
      Greenhouse.  Messrs. Marxe and Greenhouse own the ordinary
      shares through various investment vehicles.(4)
            Includes
      (i) 2,103,891 ordinary shares for which options granted to officers and
      directors are exercisable within 60 days of the date stated above, and
      (ii) 2,213,887 ordinary shares held by Idit BenBassat, which may be deemed
      to be beneficially owned by Dr. BenBassat.  Does not include
      385,000 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
      31,2005
                                                  
                                                  2008%
                                                  
                                                  
                                                  
                                                  %Total
shares
                                                  27,634,707
                                                  
                                                  
                                                  
                                                  28,655,670Dr. Moshe
      BenBassat
                                                  5,596,689
                                                  
                                                  19.5%
                                                  
                                                  4,844,730
                                                  
                                                  16.2%G. Nicholas
      Farwell
                                                  3,008,100
                                                  
                                                  10.9%
                                                  
                                                  2,836,660
                                                  
                                                  9.9%Austin W. Marxe and David M.
      Greenhouse
                                                  4,622,397
                                                  
                                                  16.7%
                                                  
                                                  2,476,142
                                                  
                                                  8.6%


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.




In
2008, we entered into a reseller agreement with Plataine Ltd. (formerly known as
Nester Ltd.) (“Plataine”), a company controlled by Dr. Moshe BenBassat, under
which Plataine will sell our products. As of December 31, 2008, we had not
generated any revenues in connection with this agreement.




We
have also entered into other agreements with Plataine, pursuant to which we
provided Plataine certain administrative activities.  This arrangement was
terminated at the end of 2007.  The following table sets forth information
with respect to these arrangements:




Year
      Ended December 31,2008
                2007
                2006(in
      thousands)Amounts
      received by us from Plataine for general and administrative
      expenses:
                $-
                $16
                $25




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 2008 were $51.7 million, or 98.9% of revenues, compared with $39.9
million, or 99.8% of revenues, in 2007, and $32.1 million, or 99.1% of revenues,
in 2006.





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 legal proceedings have had in the recent past, or will have
(with respect to any pending proceedings), significant effects on our financial
position or profitability.




Dividends




Since
our inception, we have retained all earnings 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.





8B.
            Significant
      changes




Except
as disclosed elsewhere in this annual report, there have been no other
significant changes since December 31, 2008.









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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
              ($)
              ($)2004
              5.28
              1.202005
              2.89
              1.282006
              3.56
              1.402007
              6.84
              2.912008
              4.00
              1.81Quarterly
      InformationFirst
      quarter 2007
              4.07
              3.07Second
      quarter 2007
              4.01
              2.91Third
      quarter 2007
              6.49
              3.77Fourth
      quarter 2007
              6.84
              3.36First
      quarter 2008
              4.00
              2.55Second
      quarter 2008
              3.17
              2.77Third
      quarter 2008
              2.90
              2.00Fourth
      quarter 2008
              2.90
              1.81Monthly
      InformationOctober
      2008
              2.90
              1.93November
      2008
              2.89
              2.06December
      2008
              2.30
              1.81January
      2009
              2.25
              2.88February
      2009
              3.04
              2.11March
      2009
              3.81
              2.68





9B.
            Plan
      of distribution




Not
applicable.




9C.
            Market
      for ordinary shares





Our
ordinary shares have been quoted on the Nasdaq Capital Market since August 29,
2002 under the symbol CKSW (except between November 6, 2002 and
March 6, 2003, when they were quoted under the symbol CKSWE).  Prior
to that, our ordinary shares had been quoted on the Nasdaq National Market since
June 22, 2000.





9D.
            Selling
      shareholders





Not
applicable.





9E.
            Dilution





Not
applicable.





9F.
            Expenses
      of the issue





Not
applicable.








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ITEM
      10.
            ADDITIONAL
      INFORMATION





10A.
            Share
      capital





Not
applicable.





10B.
            Memorandum
      and articles of association





Securities
Register





We are registered with the Israeli
Registrar of Companies. Our registration number is 510829971. Section 2 of our
articles of association provides thatwemay engage in any type of lawful
business as may be determined byourboard of directorsfrom time to time.




Board ofDirectors




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 ofdirectors 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 CompaniesLaw 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
courseof 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 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 the
shareholders.




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 our board of
directors or our audit committee shall neither vote in nor attend discussions
concerning the approval of such transaction.  If the director did vote
or attend as aforesaid, the approval given to the aforesaid activity or
arrangement will be invalid.




Our
articles of association provide that, subject to the Companies Law, our board of
directors may delegate its authority, 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, our board
of directors may from time to time confer upon and delegate to a President,
Chief Executive Officer, Chief Operating Officer or other executive officer then
holding office, such authorities and duties of the board of directors as it
deems 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 our best interests, without waiving the authorities of the board of
directors with respect thereto.









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Arrangements
regarding compensation of directors require the approval of the Compensation
Committee, Audit Committee, our board of directors and the
shareholders.




Rights, preferences and restrictions of
shares




General.  Our
share capital 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
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.  Our board of directors may declare a dividend to be
paid to the holders of our Ordinary Shares according to their rights and
interests in our profits and may fix the record date for eligibility and the
time for payment. 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, our position justifies. All dividends unclaimed for one year after
having been declared may be invested or otherwise used by the directors for our
benefit until claimed. No unpaid dividend or interest shall bear interest as
against us. Our board of directors may determine that a dividend may be paid,
wholly or partially, by the distribution of certain of our assets or by a
distribution of paid up shares, debentures or debenture stock or any of our
securities or of any other companies or in any one or more of such ways in the
manner and to the extent permitted by the Companies Law.




Transfer of shares.
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.




Voting; annual general and
extraordinary meetings. Subject to any rights or restrictions for the
time being attached to any class or classes of shares, each shareholder shall
have one vote for each share of which he or she is the holder, whether on a show
of hands or on a poll.  Our articles of association do not permit
cumulative voting and it is not mandated by Israeli law.  Votes may be
given either personally or by proxy. A proxy need not be a
shareholder.  If any shareholder is without legal capacity, he may
vote by means of a trustee or a legal custodian, who may vote either personally
or by proxy.  If two or more persons are jointly entitled to a share
then, in voting upon any question, the vote of the senior person who tenders a
vote, whether in person or by proxy, shall be accepted to the exclusion of the
votes of the other registered holders of the share and, for this purpose
seniority shall be determined by the order in which the names stand in the
shareholder register.




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 our total voting rights.  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 our issued share
capital and at least 1% of our voting rights or one or more shareholders
who hold in the aggregate at least 5% of our voting rights.




Unless a longer period for notice is
prescribed by the Companies Law,at least 10 days and not more than 60
days notice of any general meeting shall be given, specifying the place, the day
and the hour of the meeting and, in the case of special business, the nature of
such business, shall be given in the manner hereinaftermentioned, to such shareholders as are
under the provisions of ourarticles of association, entitled to
receive notices from us.Only shareholders of record as reflected
on our share register at the close of business on the date fixed by the board of directors as the record
date determining the thenshareholders who will be entitled to
vote, shall be entitled to notice of, and to vote, in person or by proxy, at a
general meeting and any postponement or adjournment thereof.









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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 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 of association, any resolution at a
General Meeting shall be deemed adopted if approved by the holders of a majority
of our voting rights represented at the meeting in person or by proxy and voting
thereon. In the case of an equality of votes, the chairman of the meeting shall
not be entitled to a further or casting vote.




Discrimination against
shareholders. According to our articles of association, there are no
discriminating provisions against any existing or prospective holders of our
shares as a result of a shareholder holding a substantial number of
shares.





Modification
of Class Rights




If, at any time, the share capital is
divided into different classes of shares, the rights attached to any class
(unless otherwise provided by the terms of issuance of the shares of that class)
may be varied with the
consent in writing oftheholdersof all the issued shares of that class,
or with the sanction of a majority vote at a meeting of the shareholders passed
at a separate meeting of the holders of the shares of the class.  The
provisions of our articles
of association relating to general meetings shall apply, mutatis mutandis, to
every such separate general meeting. Any holder of shares of the class present
in person or by proxy may demand a secret poll.




Unless otherwise provided by the
conditions of issuance, the
enlargement of an existing class of shares, or the issuance of additional shares
thereof, shall not be deemed to modify or abrogate the rights attached to the
previously issued shares of such class or of any other class.  These
conditionsprovide for the minimum shareholder
approvals permitted by the Israeli Companies Law.





Restrictions
on Shareholders Rights to Own Securities




Our articles of association and the laws
of the State of Israel do not restrict in anyway the ownership or voting
or our shares by
non-residents ofIsrael, except with respect to subjects of
countries which are in a state of war withIsrael.





Potential
Issues that Could Delay a Merger




Ourarticles of association provides for a
staggered board of directors, which coulddelay, defer or prevent a change of
control.In addition,
certain provisions of Israeli corporate and tax law may have the effect
of delaying, preventing or making more difficult any merger or acquisition of
us.  For example, any merger or acquisition of us will require the
prior consent of the Chief Scientist, as well as the Investment
Center.  See Item 3.D – Risk factors “We are subject to anti-takeover
provisions that could delay or prevent our acquisition by another
entity.”





Requirement
of Disclosure of Shareholder Ownership




There are no provisions of our
memorandum of association or articles of association governing the ownership
threshold above which shareholder ownership must be
disclosed.





Changes
in Capital




Our memorandum of association and articles of
association do not impose
any conditions governing changes in capital that are more stringent than
required by the Israeli Companies Law.









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10C.
            Material
      contracts not in the ordinary course of
business





We haveentered 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 twelvemonths 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%of annual base
salary, 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.





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 2008 at a regular
corporate tax rate of 27% (29% in 2007 and 31% in 2006).  The tax rate
will be reduced in subsequent tax years as follows: in 2009 26% and thereafter
25%. This change does not have a material effect on the Company’s financial
statements.








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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”). Pursuant to the Investment Law, an Industrial Company is
a company resident in Israel, if at least 90% of the income of which, in a given
tax year, determined in Israeli currency (exclusive of income from some
government loans, capital gains, interest and dividends), is derived from an
Industrial Enterprise owned by it. An “Industrial Enterprise” is defined as an
enterprise whose major activity in a given tax year is industrial production
activity. 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:





% 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









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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.





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









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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 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 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









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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.





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 47% tax in 2008) plus payments to the









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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 47% tax
in 2008) 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 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.







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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 (27% in 2008). 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 47% in 2008) and
the regular corporate tax rate for corporations (27% in 2008) 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 2008 – 27% tax rate for a corporation
and a marginal tax rate of up to 47% 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 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








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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 than 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.








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








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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. 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.









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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.





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.









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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 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 region. 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 2008, 57% 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 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,
2008, we had short forward exchange contracts to sell up to Euro 3.2 million for
a total amount of $4.5 million, GBP 1.17 million for a total amount of $1.7
million, AUD 0.8 million for a total amount of $0.5 million, CAD 0.2 million for
a total amount of $0.2 million and NIS 18.6 million for a total amount of $4.8
million.







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Interest Rate
Risk.  As of December 31, 2008, we had cash, cash equivalents
and short-term investments of $31.3 million, which consist mainly of cash and
short-term bank deposits with major banks. Of this, a total of $4.3 million is
denominated in non-U.S. dollar currencies. Nearly all of these cash and
investments are not insured by the FDIC or similar governmental deposit
insurance outside the United States. 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, 2008 and presents principal cash flows and related weighted
averages interest rates by expected maturity dates.





YEAR OF
    MATURITY
                                              2009(in thousands
      of dollars)A)
      Cash, cash equivalents and investments portfolio:Cash, bank deposits and money
      market funds
                                              $17,427Average interest
      rate
                                              0.8%Bank
    deposits
                                              $13,857Average interest
      rate
                                              2.5%B)
      Long-term debts:None.








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
      15.
            CONTROLS
      AND PROCEDURES





(a)  Disclosure Controls and
Procedures





Our management, with the participation
of our Chief Executive Officerand 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, 2008 (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 theExchange Actand 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 ControloverFinancial 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, 2008
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.




(c)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 SEC that permit us to provide only a management's report in this annual
report.





(d)  Changes in Internal ControloverFinancial
Reporting.





During the year ended December 31, 2008, 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
      16.
            [RESERVED]











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ITEM
      16A.
            Audit
      Committee Financial Expert.





Our
audit committee consists of Dan Falk, Naomi Atsmon 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.








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 Zohar & Co., a member of Deloitte Touche Tohmatsu, has served as our
independent public accountants for each of the three years ended December 31,
2008.





Audit Fees.





Audit
fees in 2008 amounted to approximately $93,000 and primarily related to
professional services rendered in connection with the audit of our financial
statements for the fiscal year ended December 31, 2008 and the review of our
financial statements during 2008. 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 2007.





Audit-Related
Fees.





None.





Tax  Fees.





Tax
fees billed to us by Brightman Almagor Zohar & Co. in 2008 amounted to
approximately $6,000 and primarily related to tax services.  Tax fees
billed to us by Brightman Almagor Zohar & Co. in 2007 amounted to
approximately $4,000 and primarily related to tax services.





All Other Fees.





All
other fees amounted to approximately $0 in 2008 and $3,000 in 2007 and primarily
related to Sarbanes-Oxley compliance.





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 2008 and
2007 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.








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ITEM
      16E.
            Purchases
      of Equity Securities by the Issuer and Affiliated
    Purchasers





Not
applicable.








ITEM
      16F.
            Change
      in Registrant's Certifying
Accountant





Not
applicable.








ITEM
      16G.
            Corporate
      Governance





Under
Nasdaq Marketplace Rule 4350 ("Rule 4350"), foreign private issuers, such as us,
are permitted to follow certain home country corporate governance practices
instead of certain provisions of Rule 4350. A foreign private issuer that elects
to follow a home country practice instead of any of such provisions of Rule 4350
must submit to Nasdaq, in advance, a written statement from an independent
counsel in such issuer's home country certifying that the issuer's practices are
not prohibited by the home country's laws. We have provided Nasdaq with a notice
of non-compliance with respect to certain Nasdaq rules. Below is a concise
summary of the significant ways in which our corporate governance practices
differ from the corporate governance requirements of Nasdaq applicable to
domestic U.S. listed companies.





We
have chosen to follow our home country practice in lieu of the requirements of
Rule 4350(b)(1)(A), relating to an issuer's furnishing of its annual report to
shareholders. However, we post our annual report on Form 20-F on our web site as
soon as practicable following the filing of the annual report on Form 20-F with
the SEC.









20-F ClickSoftware Technologies
      Ltd.
            Page
  62










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
                                                                    64Consolidated
      Balance Sheets
                                                                    65Consolidated
      Statements of Operations
                                                                    66Consolidated
      Statements of Changes in Shareholders' Equity
                                                                    67Consolidated
      Statements of Cash Flows
                                                                    68Notes
      to Consolidated Financial Statements
                                                                    69











20-F ClickSoftware Technologies
      Ltd.
            Page
  63











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, 2008
and 2007 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, 2008 and 2007 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.











Brightman
Almagor Zohar & Co.


Certified
Public Accountants


A
member of Deloitte Touche Tohmatsu











Tel
Aviv, Israel


April
27, 2009











20-F ClickSoftware Technologies
      Ltd.
            Page
  64

















CLICKSOFTWARE
      TECHNOLOGIES LTD.CONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share data)DECEMBER
      31,2008
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  17,427
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  9,054Short-term
      investments (Note 3 & Note 10b)
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  13,857
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  15,054Trade
      receivables, net of allowance for doubtful accounts of $352 and $269 as
      of
                                                                                                                                                                    December
      31, 2008 and 2007, respectively (Note 4)
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  7,825
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  6,883Deferred
      taxes (Note 13)
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,940
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  -Other
      receivables and prepaid expenses (Note 5)
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,071
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,040Total
      Current Assets
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  42,120
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  32,031Long-Term
      Investments (Note 6 & Note 10b)
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  699
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  602Severance
      Pay Deposits (Note 7)
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,218
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,163Property
      and Equipment, Net (Note 8)
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  2,125
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  1,437TOTAL
      ASSETS
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  46,162
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  35,233LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable and accrued expenses (Note 9)
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  8,780
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  7,281Deferred
      revenues
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  5,442
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  5,803Total
      Current Liabilities
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  14,222
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  13,084Long-Term
      Liabilities:Accrued
      severance pay (Note 7)
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  2,653
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  2,418Deferred
      revenues
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  3,201
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  2,919Total
      Long-Term Liabilities
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  5,854
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  5,337Total
      Liabilities
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  20,076
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  18,421Commitments
      and Contingencies (Note 10)Shareholders'
      Equity (Note 11):Special
      preferred shares NIS 0.02 par valueAuthorized
      – 5,000,000 as of December 31, 2008 and 2007;
                                                                                                                                                                    no
      issued and outstanding shares as of December 31, 2008 and
      2007;Ordinary
      shares of NIS 0.02 par value:
                                                                                                                                                                    Authorized
      -- 100,000,000 as of December 31, 2008 and 2007;
                                                                                                                                                                    Issued
      – 28,694,670 shares as of December 31, 2008 and
                                                                                                                                                                    28,549,345
      as of December 31, 2007;
                                                                                                                                                                    Outstanding
      – 28,655,670 shares as of December 31, 2008 and
                                                                                                                                                                    28,510,345
      shares as of December 31, 2007;
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  116
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  115Additional
      paid-in capital
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  74,771
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  73,803Accumulated
      other comprehensive income
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  194
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  -Accumulated
      deficit
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (48,952
                                                                                                                                                                  )
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (57,063
                                                                                                                                                                  )26,129
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  16,855Treasury
      shares, at cost: 39,000 shares
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (43
                                                                                                                                                                  )
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  (43
                                                                                                                                                                  )Total
      shareholders’ equity
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  26,086
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  16,812TOTAL LIABILITIES AND
      SHAREHOLDERS’ EQUITY
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  46,162
                                                                                                                                                                  
                                                                                                                                                                  
                                                                                                                                                                  $
                                                                                                                                                                  35,233


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








20-F ClickSoftware Technologies
      Ltd.
            Page
  65












CLICKSOFTWARE
      TECHNOLOGIES LTD.CONSOLIDATED
      STATEMENTS OF OPERATIONS(in
      thousands, except share and per share amounts)YEAR
      ENDED DECEMBER 31,2008
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2007
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2006Revenues
      (Note 12):Software
      license
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              19,819
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              15,602
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              12,145Services
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              32,443
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              24,417
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              20,286Total
      revenues
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              52,262
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              40,019
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              32,431Cost
      of revenues:Software
      license
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              1,933
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2,358
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              1,979Services
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              16,146
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              12,937
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              10,582Total
      cost of revenues
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              18,079
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              15,295
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              12,561Gross
      profit
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              34,183
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              24,724
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              19,870Operating
      expenses:Research
      and development expenses
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              6,569
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              5,927
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              4,498Less
      – participation by the Chief Scientist of the Government of Israel (Note
      10a)
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              110
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              160
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              385Research
      and development expenses, net
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              6,459
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              5,767
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              4,113Selling
      and marketing expenses
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              16,002
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              13,203
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              10,337General
      and administrative expenses
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              5,446
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              4,399
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              3,671Total
      operating expenses
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              27,907
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              23,369
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              18,121Operating
      income
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              6,276
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              1,355
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              1,749Other
      Income
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              404
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              -Interest
      income, net
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              149
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              899
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              484Net
      income before taxes
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              6,425
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2,658
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              2,233Tax
      benefit (Taxes on income) (Note 13)
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              1,686
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (50
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (95
                                                                                                                                                              )Net
      income
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              8,111
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              2,608
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              2,138Basic
      net income per share
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              0.28
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              0.09
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              0.08Diluted
      net income per share
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              0.27
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              0.09
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              0.08Shares
      used in computing basic net income per share
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              28,564,496
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              28,254,926
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              27,767,748Shares
      used in computing diluted net income per share
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              29,503,217
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              29,794,261
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              28,442,887




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











20-F ClickSoftware Technologies
      Ltd.
            Page
  66














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
                        
                        
                        Accumulated
                          Other
      Comprehensive Income
                        
                        
                        Treasury
      Shares
                        
                        
                        TotalBalance
      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 employees and 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 employees and consultants
    (1)
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        713
                        
                        
                        
                        63
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        776Net
      Income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,608
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        2,608Balance
      as of December 31, 2007
                        
                        
                        28,510,345
                        
                        
                        $
                        115
                        
                        
                        $
                        73,803
                        
                        
                        $
                        -
                        
                        
                        $
                        (57,063
                        )
                        
                        
                        
                        
                        $
                        (43
                        )
                        
                        $
                        16,812Employee
      options exercised
                        
                        
                        145,325
                        
                        
                        
                        1
                        
                        
                        
                        189
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        190Stock-based
      compensation expense related to employees and consultants
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        779
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        779Accumulated
      other comprehensive income (2)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        194
                        
                        
                        
                        
                        
                        
                        
                        194Net
      Income
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        8,111
                        
                        
                        
                        
                        
                        
                        
                        -
                        
                        
                        
                        8,111Balance
      as of December 31, 2008
                        
                        
                        28,655,670
                        
                        
                        $
                        116
                        
                        
                        $
                        74,771
                        
                        
                        $
                        -
                        
                        
                        $
                        (48,952
                        )
                        
                        $
                        194
                        
                        
                        $
                        (43
                        )
                        
                        $
                        26,086





(1)
            $63,000
      and $153,000 were amortized during 2007 and 2006 as deduction from
      Revenues(2)
            Gain
      on derivatives designated for cash flow
hedge





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











20-F ClickSoftware Technologies
      Ltd.
            Page
  67














CLICKSOFTWARE
      TECHNOLOGIES LTD.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)YEAR
      ENDED DECEMBER 31,2008
                                                                                                      
                                                                                                      
                                                                                                      2007
                                                                                                      
                                                                                                      
                                                                                                      2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Adjustments
      to reconcile net income to net cash provided by operating
      activities:Net
      income
                                                                                                      
                                                                                                      $
                                                                                                      8,111
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      2,608
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      2,138Depreciation
                                                                                                      
                                                                                                      
                                                                                                      752
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      615
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      438Stock-based
      compensation
                                                                                                      
                                                                                                      
                                                                                                      779
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      776
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      666Severance
      pay, net
                                                                                                      
                                                                                                      
                                                                                                      180
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      220
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      209Other
                                                                                                      
                                                                                                      
                                                                                                      15
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (1
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (8
                                                                                                      )Trade
      receivables
                                                                                                      
                                                                                                      
                                                                                                      (942
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (418
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (2,347
                                                                                                      )Deferred
      taxes
                                                                                                      
                                                                                                      
                                                                                                      (1,940
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      -Other
      receivables
                                                                                                      
                                                                                                      
                                                                                                      163
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (491
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      130Accounts
      payable and accrued expenses
                                                                                                      
                                                                                                      
                                                                                                      1,499
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,336
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,021Deferred
      revenues
                                                                                                      
                                                                                                      
                                                                                                      (79
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      267
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      3,424Net
      cash provided by operating activities
                                                                                                      
                                                                                                      
                                                                                                      8,538
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      4,912
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      5,671CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from realization of (purchase) of investments
                                                                                                      
                                                                                                      
                                                                                                      1,100
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (9,287
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (2,994
                                                                                                      )Proceeds
      from disposal of equipment
                                                                                                      
                                                                                                      
                                                                                                      -
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      404
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      452Purchases
      of equipment
                                                                                                      
                                                                                                      
                                                                                                      (1,455
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (1,247
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (683
                                                                                                      )Net
      cash used in investing activities
                                                                                                      
                                                                                                      
                                                                                                      (355
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (10,130
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      (3,225
                                                                                                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Employee
      options exercised
                                                                                                      
                                                                                                      
                                                                                                      190
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      887
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      472Net
      cash provided by financing activities
                                                                                                      
                                                                                                      
                                                                                                      190
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      887
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      472Increase
      (decrease) in cash and cash equivalents
                                                                                                      
                                                                                                      
                                                                                                      8,373
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      (4,331
                                                                                                      )
                                                                                                      
                                                                                                      
                                                                                                      2,918Cash
      and cash equivalents at beginning of year
                                                                                                      
                                                                                                      
                                                                                                      9,054
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      13,385
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      10,467Cash
      and cash equivalents at end of year
                                                                                                      
                                                                                                      $
                                                                                                      17,427
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      9,054
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      13,385Supplemental
      cash flow information:Cash
      paid for interest
                                                                                                      
                                                                                                      $
                                                                                                      6
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      1
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      6








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









20-F ClickSoftware Technologies
      Ltd.
            Page
  68











CLICKSOFTWARE
TECHNOLOGIES LTD.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(AS
OF DECEMBER 31, 2008 AND 2007 AND


FOR
THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006)


(IN
THOUSANDS OF DOLLARS)










NOTE
1 -- GENERAL




ClickSoftware Technologies Ltd. (the
"Company" or "ClickSoftware") was incorporated inIsraeland is a leading provider of workforce
and service management products and solutions.The Company’s products and solutions incorporate
best business practices, key business functions of field service operations, and
sophisticated decision-making algorithms that enable itscustomers to more efficiently manage their field
service operations in a scalable, integrated manner.





The Company’s Service Optimization Suite is designed
to increase service revenue and customer responsiveness while reducing costs.
The Company’s 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.







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.









20-F ClickSoftware Technologies
      Ltd.
            Page
  69










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. Nearly all of our cash and investments is
not insured by the FDIC or other similar governmental insurance limits. 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, collection of the
license fees is considered probable and vendor-specific objective evidence
(VSOE) of the fair value of undelivered elements exists.





License fees from software arrangements
that involve multiple elements, such as consulting, training and post-contract
customer support, are allocated to each element of the arrangement based on the
relative fair values of the elements. The Company determines the fair value of each element
in multiple-element arrangements based on vendor specific objective evidence, or
VSOE. The Company determines the VSOE for each element according to the price
charged when the element is sold separately.  For post-contract customer support, The Company
determines the VSOE based on the renewal price charged. For other services, such
as consulting and training, The Company determines the VSOE based on the fixed
hourly/daily rate charged in stand-alone service transactions. Under the residual method,
consideration is allocated to undelivered elements based upon the VSOE of those
elements, with the residual of the arrangement fee allocated to and recognized
as software license revenue.The Company also enters into
software arrangements with
resellers whereby revenues are recognized upon sale through to the end user by
the reseller.








20-F ClickSoftware Technologies
      Ltd.
            Page
  70











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, revenue allocable to theservices 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 revenuesbased on the percentage-of-completion
method,the Company estimatestime to completion with revisions to
estimates reflected in the period in which changes become known. 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 are comprised of
revenues from consulting, training, and post-contract customer support. Revenues
from consulting services are recognized on atime 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.  Post-contract customer
support arrangements provide for technical support and the right to
unspecified updates on an
if-and-when-available basis. Revenues from these arrangements are recognized
ratably over the term of the arrangement, usually one year.




The Company categorizesrevenue as either software license
revenue or services revenue. TheCompany allocatesrevenue to each of these categories
based on the VSOE for elements in each revenue arrangement and based on the
application of the residual method for arrangements in whichthe Companyhasestablished the VSOE for all
undelivered elements. Wherethe Companyisunable to establish the VSOE for all
undelivered elements,the
Companytakesa systematic approach, wherebythe Company first allocatesrevenue to any undelivered elements for
which the VSOE has been established, and then allocatesrevenue to any undelivered elements for which
the VSOE has not been established based on management’s best estimate of the fair value of
those undelivered elements. The Company then appliesa residual method to determine the
license fee. Management’s best estimate of fair value of undelivered
elements for which the VSOE has not been established is based upon the VSOE of
similar offerings and other objective criteria.




Basic
and diluted net income per share




Basic
and diluted net income per share are presented in conformity with SFAS No. 128 "Earnings per Share" for all
years presented. Basic and diluted net income 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 per share to
the extent such securities are anti-dilutive. The total number of shares,
excluded from the calculations of diluted net income per share, were 3,502,509,
2,236,340 and 3,610,879 for the years ended December 31, 2008, 2007 and 2006,
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 accounts receivable,
and 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:









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      Ltd.
            Page
  71
















YEAR
      ENDED DECEMBER 31,(in
      thousands)2008
                          
                          
                          2007
                          
                          
                          2006Cost
      of revenues
                          
                          $
                          115
                          
                          
                          $
                          98
                          
                          
                          $
                          68Research
      and development expenses
                          
                          
                          108
                          
                          
                          
                          86
                          
                          
                          
                          61Selling
      and marketing expenses
                          
                          
                          225
                          
                          
                          
                          156
                          
                          
                          
                          83General
      and administrative expenses
                          
                          
                          331
                          
                          
                          
                          373
                          
                          
                          
                          301Total
                          
                          $
                          779
                          
                          
                          $
                          713
                          
                          
                          $
                          513







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 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 2008 was $779,000 and in
2007 was $713,000. Compensation cost related to stock options recognized in our
Consolidated Statement of Operations in 2008 and 2007 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.







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 4.8 years (2007 – 4.9, 2006 – 4.5); (2)
dividend yield of 0% (3) expected volatility of 73% (2007 – 76%, 2006 – 96% )
and (4) risk-free interest rate of 3.2% (2007 –4.8%, 2006 – 5.1%).




Derivative
financial instruments




The Company accounts for derivatives and hedging based on
SFAS No.133,
“Accounting for Derivative
Instruments and Hedging Activities”(“SFASNo. 133”), as amended and related
Interpretations. SFAS No. 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. If a derivative meets the
definition of a hedge and is so designated, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments through earnings (forFair Valuehedge transactions) or recognized in
other comprehensive income until the hedged item is recognized in earnings (for
Fair ValueCash
Flowtransactions). The
ineffective portion (which was immaterial during 2008, 2007 and 2006) of a
derivative’s change in fair value is recognized in
earnings. If a derivative does not meet the definition of a hedge the changes in
the fair value are included in earnings. Cash flows related to such hedges are
classified as operating activities.




As
part of its hedging strategy, the Company enters into forward exchange contracts
in order to protect the Company from balance sheet exposure arising from assets
and liabilities denominated in currencies other than U.S. dollars.




The
Company also enters into forward exchange contracts and options strategies in
order to limit the exposure to exchange rate fluctuation associated with payroll
expenses mainly incurred in NIS. The Company elected








20-F ClickSoftware Technologies
      Ltd.
            Page
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not
to follow the designation and documentation processes required to qualify for
the hedge accounting method under SFAS 133, and any gain or loss derived from
such instruments is recognized immediately as financial expenses,
net.




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
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
January 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.





In
February 2008, the FASB issued FSP 157-2, which delays the effective date of
SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). SFAS 157 establishes a framework for
measuring fair value and expands disclosures about fair value measurements. FSP
157-2 partially defers the effective date of SFAS 157 to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years for items within the scope of this FSP. The adoption of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities is effective for the company
beginning January 1, 2009. The company does not expect the impact of this
adoption to be material.





In
April 2008, the FASB issued FSP 142-3. This guidance is intended to improve the
consistency between the useful life of a recognized intangible asset under
SFAS 142, and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141R when the underlying arrangement includes
renewal or extension of terms that would require substantial
costs or result in a material modification to the asset upon renewal or
extension. Companies estimating the useful life of a recognized intangible asset
must now consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or extension as
adjusted for SFAS 142’s entity-specific factors. FSP 142-3 is effective for us
beginning January 1, 2009. The provisions of FSP 142-3 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 FSP 142-3 will
have a significant impact on its financial statements.









20-F ClickSoftware Technologies
      Ltd.
            Page
  73











NOTE
3 -- SHORT-TERM INVESTMENTS





DECEMBER
      31,2008
                                      2007(in
      thousands)Bank
      Deposits and Auction Rate Security(*)
                                      $
      13,857
                                      $
      15,054$
      13,857
                                      $
      15,054





The
bank deposits bear interest at an average annual  rate of
2.5%.


(*)
2007 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
      31,2008
                            2007(in
      thousands)Accounts
      receivables billed
                            $7,335
                            $6,575Accounts
      receivables unbilled
                            842
                            577Allowance
      for doubtful accounts
                            (352)
                            (269)Trade
      receivables, net
                            $7,825
                            $6,883







B.
ALLOWANCE FOR DOUBTFUL ACCOUNTS








DECEMBER
      31,2008
                                2007Balance
      at Beginning of Year
                                (in
      thousands)$269
                                $254Increase
      to allowance
                                87
                                19Write-offs
                                (4)
                                (4)Balance
      at Year end
                                $352
                                $269










NOTE
5 -- OTHER RECEIVABLES AND PREPAID EXPENSES





DECEMBER
      31,2008
                    2007(in
      thousands)Prepaid
      expenses
                    $   671
                    $   723Government
      participation and other government receivables
                    108
                    46Employees
                    62
                    38Other
      receivables
                    230
                    233$1,071
                    $1,040









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      Ltd.
            Page
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NOTE
6 -- LONG-TERM INVESTMENTS





DECEMBER
      31,2008
            2007(in
      thousands)Bank
      Deposits (see also Note 10b)
            $699
            $602$699
            $602


The
bank deposits bear interest at an average annual rate of
2.5%.








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 $739,000 $700,000 and $603,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.







NOTE
8 -- PROPERTY AND EQUIPMENT, NET





DECEMBER
      31,2008
                                2007(in
      thousands)CostComputers
      and office equipment
                                $3,293
                                $2,655Leasehold  improvements
                                790
                                171Motor
      vehicles
                                59
                                59$4,142
                                $2,885Accumulated
      Depreciation
                                2,017
                                1,448$2,125
                                $1,437







NOTE
9 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES




DECEMBER
      31,2008
                        2007(in
      thousands)Suppliers
                        $3,028
                        $2,377Employee
      and related expenses
                        3,981
                        3,117Government
      commitment
                        948
                        953Accrued
      royalties
                        709
                        759Other
                        114
                        75$8,780
                        $7,281









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      Ltd.
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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, 2008 of $8.7 million.




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, 2008, contingent liabilities on
outstanding letter of credit agreements which expire after December 31, 2009
aggregated approximately $0.7 million. The letters of credit are secured by $0.7
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 2009 through
2014. Minimum future rental payments, as of December 31, 2008 are as
follows:




(in
      thousands)2009
                1,1102010
                1,1342011
                9302012
                9052013-2014
                844$4,923







Rent expense amounted to $1,024, $864
and $685 for the years ended December 31, 2008, 2007 and 2006, respectively. The
Company signed a lease for approximately 33, 000 square feet of office
space inPetach
Tikva,Israelto which the Companyis movedupon 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.








20-F ClickSoftware Technologies
      Ltd.
            Page
  76













D.           EMPLOYEE,
DIRECTORS, AND CONSULTANT OPTION PLANS




The
Company adopted new option plans in 2000. Under these plans, the Company granted
731,000, 506,000, 848,000, 657,000 and 886,100 at an average exercise price of
$2.49, $3.61, $1.73, $1.84 and $2.47 for the years ended December 31, 2008,
2007, 2006, 2005 and 2004 respectively.




During
the years 2001-2007 the board of directors and Shareholders at the annual
meetings approved the grants of options to purchase 1,245,036 ordinary shares to
directors.




During
the year ended December 31, 2008, the board of directors and shareholders at the
annual meeting approved the grants of options to directors to purchase 115,000
ordinary shares.




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.





During
2008, the board of directors decided to increase the reserve for grants under
the ESOP, by 900,000 options effective January 1, 2009.





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,
2008 and 2007 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, 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
                                                                2.16Increase
      in option pool
                                                                1,250,000
                                                                -
                                                                -Granted
                                                                (731,000)
                                                                731,000
                                                                2.49
                                                                
                                                                $1.52Forfeited
                                                                80,922
                                                                (80,922)
                                                                2.47Exercised
                                                                -
                                                                (119,823)
                                                                1.59Outstanding  December
      31, 2008
                                                                1,966,915
                                                                4,441,230
                                                                2.23









20-F ClickSoftware Technologies
      Ltd.
            Page
  77










The
following table summarizes information about options outstanding and exercisable
as of December 31, 2008:




OPTIONS
      OUTSTANDING
                    OPTIONS
      EXERCISABLERANGE
      OF
                      EXERCISE
      PRICE
                      $
                    NUMBER
                      OUTSTANDING
                      AT
                      DECEMBER 31,
                      2008
                    WEIGHTED-
                      AVERAGE
                      REMAINING
                      CONTRACTUAL
                      LIFE
                    WEIGHTED-
                      AVERAGE
                      EXERCISE
                      PRICE
                    NUMBER
                      OUTSTANDING
                      AT
                      DECEMBER
      31,
                      2008
                    WEIGHTED-
                      AVERAGE
                      EXERCISE
                      PRICE0.21  –
      0.26
                    126,942
                    3.7
                    $
      0.25
                    126,942
                    $
      0.251.21  –
      2.00
                    2,740,388
                    3.6
                    $1.71
                    2,403,346
                    $1.692.04  –
      3.67
                    1,161,100
                    5.2
                    $2.88
                    355,517
                    $3.074.15  –
      4.67
                    396,000
                    4.0
                    $4.31
                    341,542
                    $4.298.00  –
      8.50
                    16,800
                    1.2
                    $8.05
                    16,800
                    $8.054,441,230
                    
                    
                    3,244,145







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 tomanage the day-to-day affairs in
connection with the relationship. During 2008, 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.
During 2008 IBM exercised a total 25,502 of
warrants on a “cashless
exercise”basis..





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 and $153,000 were deducted from Revenues and were recognized
for each of the years ended December 31, 2007 and 2006,
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 31,2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006(in
      thousands)RevenueUnited
      States
                                  
                                  $
                                  14,611
                                  
                                  
                                  $
                                  16,295
                                  
                                  
                                  $
                                  11,010Canada
                                  
                                  
                                  4,009
                                  
                                  
                                  
                                  1,699
                                  
                                  
                                  
                                  1,080United
      Kingdom
                                  
                                  
                                  7,637
                                  
                                  
                                  
                                  8,242
                                  
                                  
                                  
                                  6,168Germany
                                  
                                  
                                  10,955
                                  
                                  
                                  
                                  3,665
                                  
                                  
                                  
                                  4,059Other
      European countries
                                  
                                  
                                  5,985
                                  
                                  
                                  
                                  5,383
                                  
                                  
                                  
                                  4,993Australia
                                  
                                  
                                  6,386
                                  
                                  
                                  
                                  4,448
                                  
                                  
                                  
                                  4,699Israel
                                  
                                  
                                  563
                                  
                                  
                                  
                                  131
                                  
                                  
                                  
                                  305India
                                  
                                  
                                  1895
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Rest
      of the world
                                  
                                  
                                  221
                                  
                                  
                                  
                                  156
                                  
                                  
                                  
                                  117$
                                  52,262
                                  
                                  
                                  $
                                  40,019
                                  
                                  
                                  $
                                  32,431Sales
      to a single customer exceeding 10% of total sales:2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006%
                                  
                                  
                                  %
                                  
                                  
                                  %Customer
      A
                                  
                                  
                                  18
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Customer
      B
                                  
                                  
                                  -
                                  
                                  
                                  
                                  11
                                  
                                  
                                  
                                  12Customer
      C
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  11





20-F ClickSoftware Technologies
      Ltd.
            Page
  78

















Long-lived
assets by geographical areas are as follows:





YEAR
      ENDED DECEMBER 31,2008
                                    
                                    
                                    2007(in
      thousands)Net
      Property and EquipmentNorth
      America
                                    
                                    $
                                    133
                                    
                                    
                                    $
                                    174Europe
                                    
                                    
                                    412
                                    
                                    
                                    
                                    219Australia
                                    
                                    
                                    229
                                    
                                    
                                    
                                    59Israel
                                    
                                    
                                    1,351
                                    
                                    
                                    
                                    985$
                                    2,125
                                    
                                    
                                    $
                                    1,437





NOTE 13 – TAX BENEFIT (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.




In 2006, the Company received approval
by the amendment to the Investment Law (Fourth plan) as Privileged Enterprise.
The commencing year is 2004.  TheCompany did not generate income subject
to the provision of the new law. The expected expiration year is
2015.






20-F ClickSoftware
      Technologies
      Ltd.
            Page
  79











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.





In 2008, based on Company investments in
property and equipment in the years 2007 and 2008, the  Company submitted a
request to approve  a new plan (sixth plan)  as Privileged
Enterprise in accordance with the Amendment to the Investment
Law.  The commencing year is 2008. The expected expiration year is
2019.





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 27% (29% in
2007).  On July 25, 2005 an amendment to the Israeli tax law was
approved by the Israeli parliament, which reduces the tax rates imposed on
Israeli companies to 27% for 2008, This amendment states that the corporate tax
rate will be furtherreduced in subsequent tax years as
follows: 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 2004 tax
year.






C.   Deferred
taxes


Deferred
tax assets consist of the following significant items:







YEAR
      ENDED DECEMBER 31,2008
                                                                    
                                                                    
                                                                    2007(in
      thousands)Net
      operating loss carry forwards in Israel*
                                                                    
                                                                    $
                                                                    4,290
                                                                    
                                                                    
                                                                    $
                                                                    5,974Net
      operating loss carry forwards of non-Israeli
      subsidiaries
                                                                    
                                                                    
                                                                    8,553
                                                                    
                                                                    
                                                                    
                                                                    10,007R&D
      cost temporary differences
                                                                    
                                                                    
                                                                    1,300
                                                                    
                                                                    
                                                                    
                                                                    1,188Other
      timing differences
                                                                    
                                                                    
                                                                    1,067
                                                                    
                                                                    
                                                                    
                                                                    816Deferred
      tax asset
                                                                    
                                                                    
                                                                    15,210
                                                                    
                                                                    
                                                                    
                                                                    17,985Valuation
      allowance
                                                                    
                                                                    
                                                                    (13,270
                                                                    )
                                                                    
                                                                    
                                                                    (17,985
                                                                    )Long-term
      deferred tax asset, net of allowance
                                                                    
                                                                    $
                                                                    1,940
                                                                    
                                                                    
                                                                    $
                                                                    -


*Based
on 26% 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 in previous years the realization of the net
operating loss carry-forwards and deductible temporary differences was less
likely than not, a valuation allowance has been established for the full amount
of the tax benefits. For 2008, based on historical taxable income from
continuing operations and








20-F ClickSoftware Technologies
      Ltd.
            Page
  80











projections
for future taxable income the Company determined that it is more likely than not
that some of its deferred tax assets are expected to be realized, and reversed
part of the valuation allowance. The reversal of the valuation allowance and
other adjustments to the deferred tax assets resulted in the recognition of
income tax benefits of $1,940 in 2008.





As
of December 31, 2008, net operating loss carryforwards in Israel amounted to
approximately $24.1 million, approximately $23.7 million attributable to the
federal tax of the U.S. subsidiary, and approximately $5.1 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 2012 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 before taxes are:




YEAR
      ENDED DECEMBER 31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006(in
      thousands)Israel
                                    
                                    $
                                    5,268
                                    
                                    
                                    $
                                    254
                                    
                                    
                                    $
                                    665International
                                    
                                    
                                    1,157
                                    
                                    
                                    
                                    2,404
                                    
                                    
                                    
                                    1,568$
                                    6,425
                                    
                                    
                                    $
                                    2,658
                                    
                                    
                                    $
                                    2,233




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 31,2008
                                                                                                                  
                                                                                                                  
                                                                                                                  2007(in
      thousands)Net
      income before taxes
                                                                                                                  
                                                                                                                  $
                                                                                                                  6,425
                                                                                                                  
                                                                                                                  
                                                                                                                  $
                                                                                                                  2,658Average
      Statutory tax rates
                                                                                                                  
                                                                                                                  
                                                                                                                  30
                                                                                                                  %
                                                                                                                  
                                                                                                                  
                                                                                                                  34
                                                                                                                  %Theoretical
      tax
                                                                                                                  
                                                                                                                  
                                                                                                                  1,927
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  904Non-deductible
      expenses
                                                                                                                  
                                                                                                                  
                                                                                                                  1,194
                                                                                                                  
                                                                                                                  
                                                                                                                  
                                                                                                                  597Change  in
      valuation allowance
                                                                                                                  
                                                                                                                  
                                                                                                                  (4,775
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  360Other
                                                                                                                  
                                                                                                                  
                                                                                                                  (32
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  (103
                                                                                                                  )(3,613
                                                                                                                  )
                                                                                                                  
                                                                                                                  
                                                                                                                  854Actual
      tax (benefit) expense
                                                                                                                  
                                                                                                                  $
                                                                                                                  (1,686
                                                                                                                  )
                                                                                                                  
                                                                                                                  $
                                                                                                                  50










NOTE
14 -- TRANSACTIONS WITH RELATED PARTIES







YEAR
      ENDED DECEMBER 31,2008
            2007
            2006(in
      thousands)Transactions
      with Plataine Ltd.:Participation
      in General and administrative expenses
            -
            $16
            $25





Plataine
Ltd. is a company controlled by Dr. Moshe BenBassat.







20-F ClickSoftware Technologies
      Ltd.
            Page
  81










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 UnapprovedU.K.Share
    Scheme4.10(2)
            Form of 2000 ApprovedU.K.Share
    Scheme4.11(4)
            Employment Agreement between
      ClickSoftware Technologies Ltd. and Shmuel
Arvatz4.12(9)
            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(9)
            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 Zohar & 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.


(6)
Incorporated by reference to the Registrant's annual report on Form 10-K filed
with the SEC on March 22, 2004.









20-F ClickSoftware Technologies
      Ltd.
            Page
  82











(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.


(9)
Incorporated by reference to the Registrant’s annual report on Form 20-F filed
with the SEC on April 16, 2008.










20-F ClickSoftware Technologies
      Ltd.
            Page
  83














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 ArvatzShmuel
      ArvatzChief
      Financial OfficerDate:   May
      4,
2009














20-F ClickSoftware Technologies
      Ltd.
            Page
  84