---

---

SECURITIES
AND EXCHANGE COMMISSIONWashington D.C. 20549

FORM 20-F

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

OR

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the fiscal year ended December 31, 2008
|- | --------------------------------------------------------------------------------------------------------------------------------------------

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------
|  | For the transition period from __________ to __________                                       

|o | SHELL
      COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934Date of event requiring this shell company report
      .................
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commission
file number: 001-33487

STARLIMS
Technologies Ltd.(Exact Name of Registrant as specified in its charter and translation
of Registrants name into English)

Israel(Jurisdiction of incorporation or organization) 32B Habarzel
Street, Tel Aviv 69710, Israel(Address of principal executive offices)

Chaim Friedman, +972-3-7694000 (phone), +972-3-6474373 (fax)
32B Habarzel Street, Tel Aviv 69710, Israel(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

|Title of
      each class                | Name of
      each exchange on which registered
|---------------------------------------- | -----------------------------------------------
|Ordinary Shares,
      NIS 1.0 Par Value | NASDAQ Global
      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:

Ordinary
Shares, par value NIS 1.0 per share...............8,407,742(as of
December 31, 2008)

Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.

Yes oNo x

If this report is an annual
or transition report, indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.

Yes oNo x

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

Yes xNo o



---

---

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

|Large
      accelerated filer o | Accelerated filer o | Non-accelerated filer x
|------------------------------- | ------------------- | -----------------------
|                                |                     |                        

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

|            |                                                                                                                              |        
|----------- | ---------------------------------------------------------------------------------------------------------------------------- | -------
|U.S. GAAP x | International Financial 
      Reporting Standards as issued 
      by the International 
      Accounting Standards Board o | Other o
|            |                                                                                                                              |        

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 oItem 18 o

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 oNo x

This annual report on Form
20-F is incorporated by reference into our Form S-8 Registration Statement File
No. 333-146593.



---

---

INTRODUCTION

STARLIMS
Technologies Ltd. is a leading provider of laboratory information management systems, or LIMS, and
has over 20 years of experience in the LIMS market. We develop, market and sell configurable off-the-shelf
LIMS software solutions trade-named STARLIMS®. STARLIMS manages the collection, processing,
storage, retrieval and analysis of information generated in laboratories. Our software improves the
reliability of sampling processes, supports compliance with domestic and international regulations
and industry standards, provides comprehensive reporting, monitoring and analysis capabilities, and
enables our customers to manage their globally distributed laboratories more efficiently and effectively.
We are one of the first LIMS vendors to offer a true web-based, configurable, off-the-shelf LIMS
solution. The adaptable nature of our software allows us to offer solutions to customers in a wide
range of industries and in multiple disciplines, but primarily in quality assurance and control,
testing and monitoring, and research and development. Our STARLIMS software is used by more than
500 laboratories in over 40 countries around the world. The primary users of STARLIMS are government,
manufacturing and life sciences organizations. Our strongest presence is in North America.

In
November 1993, we completed an initial public offering of our ordinary shares in Israel and our ordinary
shares have traded on the Tel Aviv Stock Exchange since such time. Since our public offering in the
United States in May 2007, our ordinary shares have also been listed on the NASDAQ Global Market
(symbol: LIMS). As used in this annual report, the terms we, us and our mean STARLIMS Technologies Ltd. and its subsidiaries, unless otherwise indicated.

We
own the trademark and service mark STARLIMS, and we own the registered trademarks in the United States,
the European Union and China for STARLIMS for computer software.All other trademarks and trade names
appearing in this annual report are owned by their respective holders.

Our
consolidated financial statements appearing in this annual report are prepared in U.S. dollars and
in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. All
references in this annual report to dollars or $ are to U.S. dollars and
all references in this annual report to NIS are to New Israeli Shekels.

Statements
made in this annual report concerning the contents of any contract, agreement or other document are
summaries of such contracts, agreements or documents and are not complete descriptions of all of
their terms. If we filed any of these documents as an exhibit to this annual report or to any registration
statement or annual report that we previously filed, you may read the document itself for a complete
description of its terms.

Except
for the historical information contained in this annual report, the statements contained in this
annual report are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, as amended, with respect
to our business, financial condition and results of operations. Such forward-looking statements reflect
our current view with respect to future events and financial results. We urge you to consider that
statements which use the terms anticipate, believe, do not believe,
expect, plan, intend, estimate, anticipate
and similar expressions are intended to identify forward-looking statements. We remind readers that
forward-looking statements are merely predictions and therefore inherently subject to uncertainties
and other factors and involve known and unknown risks that could cause the actual results, performance,
levels of activity, or our achievements, or industry results, to be materially different from any
future results, performance, levels of activity, or our achievements expressed or implied by such
forward-looking statements. Such forward-looking statements are also included in Item 4  Information
on the Company and Item 5  Operating and Financial Review and Prospects. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.  Except as required by applicable law, including the securities
laws of the United States, we undertake no obligation to publicly release any update or revision
to any forward-looking statements to reflect new information, future events or circumstances, or
otherwise after the date hereof.  We have attempted to identify significant uncertainties and
other factors affecting forward-looking statements in the Risk Factors section that appears in Item
3D. Key Information - Risk Factors.

---

---

TABLE OF CONTENTS

|           |                                                             |                                                         | Page 
|---------- | ----------------------------------------------------------- | ------------------------------------------------------- | -----
|           |                                                             |                                                         |      
|           |                                                             |                                                         |      
|**PART I** |                                                             |                                                         | **4**
|           |                                                             |                                                         |      
|ITEM 1.    | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS       | 4                                                       |      
|ITEM 2.    | OFFER STATISTICS AND EXPECTED TIMETABLE                     | 4                                                       |      
|ITEM 3.    | KEY INFORMATION                                             | 4                                                       |      
|           | A.                                                          | Selected Financial Data                                 | 4    
|           | B.                                                          | Capitalization and Indebtedness                         | 5    
|           | C.                                                          | Reasons for the Offer and Use of Proceeds               | 5    
|           | D.                                                          | Risk Factors                                            | 5    
|ITEM 4.    | INFORMATION ON THE COMPANY                                  | 14                                                      |      
|           | A.                                                          | History and Development of the Company                  | 14   
|           | B.                                                          | Business Overview                                       | 15   
|           | C.                                                          | Organizational Structure                                | 24   
|           | D.                                                          | Property, Plants and Equipment                          | 24   
|ITEM 4A.   | UNRESOLVED STAFF COMMENTS                                   | 24                                                      |      
|ITEM 5.    | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                | 24                                                      |      
|           | A.                                                          | Operating Results                                       | 24   
|           | B.                                                          | Liquidity and Capital Resources                         | 37   
|           | C.                                                          | Research and Development                                | 38   
|           | D.                                                          | Trend Information                                       | 39   
|           | E.                                                          | Off-Balance Sheet Arrangements                          | 39   
|           | F.                                                          | Tabular Disclosure of Contractual Obligations           | 39   
|ITEM 6.    | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                  | 39                                                      |      
|           | A.                                                          | Directors and Senior Management                         | 39   
|           | B.                                                          | Compensation                                            | 41   
|           | C.                                                          | Board Practices                                         | 43   
|           | D.                                                          | Employees                                               | 48   
|           | E.                                                          | Share Ownership                                         | 49   
|ITEM 7.    | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS           | 52                                                      |      
|           | A.                                                          | Major Shareholders                                      | 52   
|           | B.                                                          | Related Party Transactions                              | 54   
|           | C.                                                          | Interests of Experts and Counsel                        | 54   
|ITEM 8.    | FINANCIAL INFORMATION                                       | 54                                                      |      
|           | A.                                                          | Consolidated Statements and Other Financial Information | 54   
|           | B.                                                          | Significant Changes                                     | 55   
|ITEM 9.    | THE OFFER AND LISTING                                       | 55                                                      |      
|           | A.                                                          | Offer and Listing Details                               | 55   
|           | B.                                                          | Plan of Distribution                                    | 56   
|           | C.                                                          | Markets                                                 | 56   
|           | D.                                                          | Selling Shareholders                                    | 56   
|           | E.                                                          | Dilution                                                | 56   
|           | F.                                                          | Expense of the Issue                                    | 57   
|ITEM 10.   | ADDITIONAL INFORMATION                                      | 57                                                      |      
|           | A.                                                          | Share Capital                                           | 57   
|           | B.                                                          | Memorandum and Articles of Association                  | 57   
|           | C.                                                          | Material Contracts                                      | 61   
|           | D.                                                          | Exchange Controls                                       | 61   
|           | E.                                                          | Taxation                                                | 61   
|           | F.                                                          | Dividend and Paying Agents                              | 71   
|           | G.                                                          | Statement by Experts                                    | 71   
|           | H.                                                          | Documents on Display                                    | 71   
|           | I.                                                          | Subsidiary Information                                  | 72   
|ITEM 11.   | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS | 72                                                      |      
|ITEM 12.   | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES      | 72                                                      |      
|           |                                                             |                                                         |      

---

---

|**PART II**             |                                                                              | **72** | 
|----------------------- | ---------------------------------------------------------------------------- | ------ | 
|                        |                                                                              |        | 
|ITEM 13.                | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 72     | 
|ITEM 14.                | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 72     | 
|ITEM 15.                | CONTROLS AND PROCEDURES                                                      | 73     | 
|ITEM 16.                | [RESERVED]                                                                   | 74     | 
|ITEM 16A.               | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 74     | 
|ITEM 16B.               | CODE OF ETHICS                                                               | 74     | 
|ITEM 16C.               | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 74     | 
|ITEM 16D.               | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE                    | 75     | 
|ITEM 16E.               | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 75     | 
|ITEM 16F.               | CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT                                | 75     | 
|ITEM 16G.               | CORPORATE GOVERNANCE                                                         | 75     | 
|                        |                                                                              |        | 
|**PART III**            |                                                                              | **76** | 
|                        |                                                                              |        | 
|ITEM 17.                | FINANCIAL STATEMENTS                                                         | 76     | 
|ITEM 18.                | FINANCIAL STATEMENTS                                                         | 76     | 
|ITEM 19.                | EXHIBITS                                                                     | 76     | 
|                        |                                                                              |        | 
|**S I G N A T U R E S** | 78                                                                           |       
|                        |                                                                              |        | 



---

---

**PART I**

ITEM 1.        IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not













applicable.

ITEM 2.        OFFER STATISTICS AND EXPECTED TIMETABLE

Not













applicable.

ITEM 3.        KEY INFORMATION

A.            SELECTED FINANCIAL DATA

The
following selected consolidated financial data for and as of the five years ended December 31, 2008
are derived from our audited consolidated financial statements, which have been prepared in accordance
with U.S. GAAP. Our audited consolidated financial statements for the three years ended December
31, 2008 and as of December 31, 2007 and 2008 appear elsewhere in this annual report. Our selected
consolidated financial data as of December 31, 2004, 2005 and 2006 and for the years ended December
31, 2004 and 2005 have been derived from audited consolidated financial statements not included in
this annual report. The selected consolidated financial data set forth below should be read in conjunction
with Item 5. Operating and Financial Review and Prospects, and our consolidated financial
statements and notes thereto included elsewhere in this annual report. Our historical results are
not necessarily indicative of results to be expected for any future period.

|                                                                                                | **Year Ended December 31,**                                  |          
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------
|                                                                                                |                                                              |          
|                                                                                                | **2004**                                                     |          
|                                                                                                |                                                              |          
|                                                                                                | (U.S. dollars in thousands, except share and per share data) |          
|                                                                                                |                                                              |          
|**Statements of Income Data:**                                                                  |                                                              |          
|Revenues:                                                                                       |                                                              |          
|Software licensing                                                                              | $                                                            | 5,191    
|Maintenance                                                                                     |                                                              | 1,615    
|                                                                                                |                                                              |          
|Total product revenues                                                                          |                                                              | 6,806    
|Services                                                                                        |                                                              | 2,826    
|                                                                                                |                                                              |          
|Total revenues                                                                                  |                                                              | 9,632    
|Cost of Revenues:                                                                               |                                                              |          
|Cost of products                                                                                |                                                              | 92       
|Cost of services                                                                                |                                                              | 1,928    
|                                                                                                |                                                              |          
|Total cost of revenues                                                                          |                                                              | 2,020    
|                                                                                                |                                                              |          
|Gross profit                                                                                    |                                                              | 7,612    
|Research and development expenses                                                               |                                                              | 806      
|Selling and marketing expenses                                                                  |                                                              | 3,087    
|General and administrative expenses                                                             |                                                              | 1,280    
|                                                                                                |                                                              |          
|Operating income                                                                                |                                                              | 2,439    
|Financial income, net                                                                           |                                                              | 494      
|Income tax expense                                                                              |                                                              | 846      
|                                                                                                |                                                              |          
|Net income                                                                                      | $                                                            | 2,087    
|                                                                                                |                                                              |          
|Basic earnings per share                                                                        | $                                                            | 0.33     
|                                                                                                |                                                              |          
|Weighted average number of ordinary shares 
       used in computing basic earnings per share   |                                                              | 6,352,922
|                                                                                                |                                                              |          
|Diluted earnings per share                                                                      | $                                                            | 0.33     
|                                                                                                |                                                              |          
|Weighted average number of ordinary shares 
       used in computing diluted earnings per share |                                                              | 6,376,276
|Dividends paid*                                                                                 | $                                                            | 1,064    

_____________* We paid annual dividends of NIS 0.75 per ordinary share in January 2004; NIS 1.00 per ordinary share
in January 2005 and 2006 and NIS 1.25 per ordinary share in January 2007. In June 2008, we paid an
annual dividend of NIS 1.15 per ordinary share, or $2.9 million in total.

4

---

---

|                           | **2004**                    |        | **2005** |   | **2006** |  | **2007** |        | **2008** |  
|-------------------------- | --------------------------- | ------ | -------- | - | -------- |  | -------- | ------ | -------- | -
|                           |                             |        |          |   |          |  |          |        |          |  
|                           | (U.S. dollars in thousands) |       
|                           |                             |       
|**Balance Sheets Data:**   |                             |        |          |   |          |  |          |        |          |  
|Cash and cash equivalents  | $                           | 2,422  |          | $ | 3,397    |  | $        | 2,539  |          | $
|Total assets               |                             | 11,237 |          |   | 15,641   |  |          | 19,661 |          |  
|Working capital            |                             | 6,630  |          |   | 7,928    |  |          | 9,460  |          |  
|Total shareholders equity | $                           | 7,442  |          | $ | 9,736    |  | $        | 13,969 |          | $

**B.           CAPITALIZATION AND INDEBTEDNESS**

Not













applicable.

**C.           REASONS FOR THE OFFER AND USE OF PROCEEDS**

Not
applicable.

**D.           RISK FACTORS**

Investing in our ordinary shares involves a high degree of risk. You should consider carefully the
risks described below, together with the financial and other information contained in this annual
report, before you decide to invest in our ordinary shares. If any of the following risks actually
occurs, our business, financial condition or results of operations would suffer. In that case, the
trading price of our ordinary shares would likely decline and you might lose all or part of your
investment.

Risks Related to Our Company

Recent worldwide economic downturn may adversely affect our customers, which directly impacts our business
and results of operations.

Our
operations and performance depend on our customers, including those from the governmental sector,
having adequate resources to purchase our products and services. The unprecedented turmoil in the
credit markets and the global economic downturn generally adversely impact our customers and potential
customers. These economic conditions have continued to deteriorate despite government intervention
globally, and may remain volatile and uncertain for the foreseeable future. Customers have altered
and may continue to alter their purchasing activities in response to lack of credit, economic uncertainty
and concern about the stability of markets in general, and have reduced or delayed purchases of our
products and services or other sales activities that affect purchases of our products and services.
If we are unable to adequately respond to changes in demand resulting from deteriorating economic
conditions, our financial condition and operating results may be materially adversely affected.

We are exposed to credit risk and payment delinquencies on our accounts receivable. This risk is heightened
during periods when economic conditions worsen.

Our
outstanding accounts receivables are not covered by collateral. As economic conditions deteriorate,
certain of our customers may face liquidity concerns and may delay or be unable to satisfy their
payment obligations, which would have a material adverse effect on our financial condition and operating
results.

5

---

---

Our cash and cash equivalents could be adversely affected if the financial institutions in which we
hold our cash and cash equivalents fail.

Our
cash and cash equivalents are highly liquid investments with original maturities of three months
or less at the time of purchase. We maintain the cash and cash equivalents with reputable major financial
institutions. Deposits with these banks exceed the Federal Deposit Insurance Corporation insurance
limits or similar limits in foreign jurisdictions. While we monitor daily the cash balances in the
operating accounts and adjust the balances as appropriate, these balances could be adverselyimpacted if one or more of the financial institutions with which we deposit fails or is subject to
other adverse conditions in the financial or credit markets.  Access to our invested cash and
cash equivalents could be impacted by adverse conditions in the financial and credit markets.

We operate in a highly competitive industry and, if we are not able to compete effectively, our business
and operating results may be adversely affected.

We
operate in a highly competitive industry.  Some of our competitors are large international analytical
instrument suppliers who also supply LIMS software. These competitors have greater name recognition,
longer operating histories and significantly greater resources than we have. As a result, our competitors
may be able to respond more quickly and effectively than we can to new or changing opportunities,
technologies, standards (regulatory or otherwise) or customer requirements. In addition, if the market
experiences a greater degree of consolidation, we may face competitors that have greater market share,
a larger customer base, more widely adopted proprietary technologies, greater marketing expertise
and larger sales forces than we have, which could put us at a competitive disadvantage. With the
growth of the LIMS market, we may face increased competition in the future if new entities enter
our markets. Increased competition may result in pricing pressures, which could negatively impact
our sales, gross margins or market share. Further, we may encounter difficulties in the future should
we attempt to enter into geographical or vertical markets in which we have no prior experience. We
may not be able to maintain or enhance our competitive position against current and future competitors.
Our failure to compete effectively could adversely affect our business, financial condition or results
of operations, which could negatively impact our revenues and our ability to generate profits.

Furthermore,
the market for our software products is characterized by evolving regulatory requirements and industry
standards, as well as frequent new product and service introductions and enhancements that may render
existing product offerings obsolete. As a result, we are susceptible to rapid and significant declines
in market share due to unforeseen changes in the quality, features, functions or pricing of competing
products.

Our quarterly operating results have historically fluctuated and may do so in the future.

Our
revenues are generally attributable to a small number of transactions in each quarter. Such transactions
are dependent upon our customers initial decisions to replace their existing LIMS, and consequently,
a decision as to which product to purchase. These are major decisions and accordingly, the sales
cycle for our software product offerings can vary significantly and typically ranges from six to
12 months from initial contact to execution of contract and delivery. Customers often defer the closing
of a transaction to the end of our quarter, so quarterly results generally cannot be adequately predicted
and frequently are not known until the end of the quarter.

Our
software products are generally shipped as binding orders are received, and accordingly, revenues
in any quarter are dependent on orders booked and shipped in that quarter and can not be predicted
with a high degree of certainty. Furthermore, a single sale transaction may represent a significant
portion of our revenues and profit for a quarter. A delay in just one of these transactions from
one quarter into a subsequent quarter, or a loss of one of these potential transactions, could cause
our quarterly results to fluctuate significantly.

Our
quarterly revenues may also fluctuate in the future, as a result of a number of other factors including,
without limitation:

6

---

---

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | government requirements that certain budgets be utilized during a specified period;                                                            
| |   |                                                                                                                                                
| |  | the timing of new product announcements and product introductions by us or our competitors;                                                    
| |   |                                                                                                                                                
| |  | market acceptance of new products, applications and product enhancements;                                                                      
| |   |                                                                                                                                                
| |  | our success in expanding our sales and marketing programs;                                                                                     
| |   |                                                                                                                                                
| |  | deferrals of customer orders in anticipation of new products, applications, product enhancements, or
public and private sector initiatives; and
| |   |                                                                                                                                                
| |  | general market and economic factors.                                                                                                           

Because
a significant percentage of our quarterly expenses are fixed, a variation in the timing of closing
transactions can cause significant variations in operating results from quarter to quarter. Accordingly,
the loss or deferral of even one such transaction can have a significant adverse impact on our quarterly
revenues and profitability and could also cause us to achieve quarterly financial results that are
below projections of securities analysts and, as a result, may negatively impact the market price
of our shares. Based on the foregoing, we believe that interim period-to-period comparisons of our
results of operations are not necessarily meaningful and should not be relied upon as indications
of future performance. Further, our historical operating results are not necessarily indicative of
future performance for any particular period.

A significant portion of our sales are to laboratories in the public sector and our financial condition,
operating results and prospects would be adversely affected by U.S. government budget cutbacks or
spending reductions or if our U.S. subsidiary was excluded in the future from U.S. federal government
projects because it is a foreign-owned company.

In
2006, 2007 and 2008, sales to laboratories in the public sector accounted for 44%, 42% and 39% of
our total revenues, respectively. Of the total revenues in 2006, 2007 and 2008, 32%, 33% and 27%,
respectively, were attributable to U.S. federal, state and local government contracts. We believe
that the success and growth of our business will continue to depend upon our successful procurement
of government contracts. Companies that are not incorporated and located in the United States, or
that are owned by non-U.S. entities, may be excluded from certain U.S. federal government projects.
Our financial condition and operating results would be adversely affected if our U.S. subsidiary
were excluded in the future from U.S. federal government projects because it is a foreign-owned company.
In addition, the award of additional contracts from government agencies could be adversely affected
by spending reductions or budget cutbacks at government agencies that currently use or are likely
to use our products. Accordingly, changes in government contracting policies, budgetary constraints
and delays or changes in the appropriations process could have an adverse affect on our business,
financial condition and results of operations.

We could incur substantial costs resulting from software product liability claims relating to our software
products or our customers use of our software products. Material software product errors could
adversely affect our reputation, result in significant costs to us, expose us to a risk of litigation
and possible liability and impair our ability to sell our software products in the future.

Software
products as complex as ours often contain undetected errors or failures. Our software is used in
critical systems and our customers may have a greater sensitivity to product errors and failures
than customers of other software products due to the sensitive nature of the information captured
by our LIMS solution. We have in the past discovered errors in our software applications and will
likely continue to do so in the future. Material product errors could adversely affect the collection
and processing of data by our customers and as a result, harm our reputation, result in significant
costs to us, expose us to a risk of litigation and possible liability, impair our ability to sell
our products in the future and result in our inability to attract or retain customers. The costs
arising from such litigation could adversely affect our operating margins. Further, we cannot assure
you that our existing general liability insurance coverage will continue to be available at reasonable
terms or will be available in amounts sufficient to cover one or more large claims, or that the insurer
will not disclaim coverage as to any future claim.

7

---

---

We participate in a program that facilitates sales of our products and services to U.S. federal government
laboratories. If we are unable to continue to participate in this program in the future, or if we
do not comply with the terms of our U.S. federal government contracts, our revenues and prospects
would be materially harmed.

In
2004, we were awarded a U.S. General Services Administration, or GSA, Information Technology Schedule
70, or GSA Schedule 70. The GSA Schedule 70 program is intended to facilitate efficient sales to
U.S. federal government agencies and requires that we provide government agencies with most-favored
nation type pricing with respect to sales of our products to the government agencies.
In addition, government agencies that purchase our products pursuant to GSA contracts are permitted
to conduct administrative audits of us as part of their routine audits and investigations of government
contracts. As part of the audit process, among other things, the government agency may review our
performance under the contract, cost structure, including the cost of comparable products to third
parties, and compliance with applicable laws, regulations and standards. If any of our winning bids
is found to be improperly priced, a portion of the revenue received by us may have to be refunded
and an additional penalty may have to be paid by us. Any future audit with unfavorable results could
materially adversely affect our competitive position, prospects and our operating results and financial
condition. If our GSA Schedule 70 award is not extended after its initial term, which expires in
July 2009, or if we do not comply with the terms of our contracts with the GSA, or if in the future
the U.S. federal government ceases to do business with us or significantly decreases the amount of
business it currently does with us, our revenues and prospects would be materially harmed.

Our future success depends upon our ability to develop new products and enhance our existing products.
Failure to successfully introduce new or enhanced products to the market in a timely manner may adversely
affect our business, financial condition and results of operations.

Our
future success depends on our ability to develop enhancements to our existing products and to timely
introduce new products that keep pace with rapid technological developments and changes in customers needs. We must continue to modify and enhance our products to keep pace with changes in network platforms,
operating systems, software technology and changing customer demands. Any failure of our products
to operate effectively with future network platforms and technologies could reduce the demand for
our products and result in customer dissatisfaction.

Furthermore,
any new products or enhancements that we develop may not be released in a timely manner and may not
achieve the market acceptance necessary to generate significant sales revenues. As a result, we may
expend significant resources towards research and development for new or enhanced products, which
may not gain market acceptance or generate sufficient sales to offset the costs of research and development.
If we are unable to timely and successfully develop new products or improve our existing products,
or if we fail to position or price our products to meet market demand, our business, financial condition
and results of operations will be adversely affected.

We are dependent on the key members of our management and if we are unable to retain these key managers
and hire additional skilled personnel, we may be unable to achieve our goals.

Our
future success depends upon our ability to attract, train and retain highly skilled employees and
contract workers, particularly our management team, sales and marketing personnel, professional services
personnel and software engineers. Two of our executive officers may terminate their relationship
with us upon 180 days prior written notice, three are required to provide 90 days prior written notice
and the remaining two may terminate their relationship with us at any time. Some of our non-executive
employees may terminate their relationship with us at any time, while others are subject to a prior
written notice requirement of between 30 and 90 days. The loss of any key member of our management
team might significantly delay or prevent the achievement of our business or development objectives.
Our ability to replace key members of our management team and hire additional skilled personnel in
the future might be negatively impacted by the use of restrictive covenants in our industry and market.
Because of the technical nature of our software products and the dynamic market in which we compete,
any failure to attract and retain qualified direct sales, professional services and product development
personnel, as well as our contract employees, could have a material adverse affect on our ability
to generate sales, deploy our software products or successfully develop new software products and enhancements.

8

---

---

The global nature of our business exposes us to multiple risks and these risks may increase in the
future due to the expected global expansion of our business.

For
the years ended December 31, 2006, 2007 and 2008, approximately 26%, 32% and 32%, respectively, of
our revenues were derived from operations outside of North America. We expect that our international
operations will account for a more significant portion of our revenues in the future. As a result
of our international operations, we are exposed to many risks and uncertainties, including:

| |  | difficulties in staffing, managing and supporting operations in multiple countries;                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                          
| |  | different and changing legal and regulatory requirements in the jurisdictions in which we currently
operate or may operate in the future;
| |   |                                                                                                                                          
| |  | government currency control and restrictions on repatriation of earnings;                                                                
| |   |                                                                                                                                          
| |  | fluctuations in foreign currency exchange rates; and                                                                                     
| |   |                                                                                                                                          
| |  | political and economic changes, hostilities and other disruptions in regions where we currently operate
or may operate in the future.    

Negative
developments in any of these areas in one or more countries could result in a reduction in demand
for our software products, the cancellation or delay of orders already placed, difficulty in collecting
receivables, and a higher cost of doing business, any of which could adversely affect our business,
results of operations or financial condition. These risks may increase in the future due to the expected
global expansion of our business.

Tax benefits that are available to us require us to meet several conditions and may be terminated or
reduced in the future, which would increase our future tax expenses.

In
June 2006, we received a pre-ruling from the Israeli Tax Authority according to which a development
center we established in November 2006 in Ashkelon, Israel will be regarded as a Benefited
Enterprise.  This entitles us to tax benefits under the Israeli Law for the Encouragement
of Capital Investments, 1959, referred to as the Investments Law. The benefits include full exemption
from corporate tax on undistributed taxable income attributable to the Benefited Enterprise, reduced
tax on dividends and accelerated depreciation for manufacturing assets. For a ten-year period ending
December 31, 2015, any taxable income attributable to an increase in the revenues we account for
in Israel over $3.5 million will be tax exempt. The result of this tax benefit in 2008 was a reduction
in our total tax expenses of approximately $300,000. The benefits are conditional on our compliance
with certain conditions in the Investments Law and the terms of the pre-ruling from the Israeli Tax
Authority. Under the Investments Law, we must comply with at least one of three conditions during
the period of entitlement, of which the following two conditions are applicable to our business:
(i) that revenues of our Benefited Enterprise from any single country not exceed 75% of its total
revenues; and (ii) that at least 25% of our Benefited Enterprises revenues during the benefit
period derive from sales into a single country with a population of at least 12 million. Under the
pre-ruling, we are bound by several other requirements, including that we remain controlled and managed
from Israel throughout the benefit period, that we not change our line of business or business model,
and that we not significantly reduce the volume of our production or variety of our products. In
addition, under the pre-ruling, during the benefit period, a certain percentage of our employees
that are engaged in core research and development must be located in Israel; a certain percentage
of our employees that are engaged in quality control must be located in Israel, and no fewer than
12 of our employees engaged in core research and development must have been recruited and be employed
in Israel. If we do not comply with each of those conditions, we may be required to pay the monetary
equivalent of the tax benefits we received under the pre-ruling, plus linkage differentials, interest
and penalties, and the benefits may be discontinued, in whole or in part. Such a result would adversely
affect our results of operations and financial condition.

9

---

---

We may engage in future acquisitions that may be expensive and time-consuming and from which we may
not realize anticipated benefits.

We
may acquire additional businesses, technologies and products if we determine that these additional
businesses, technologies and products are likely to serve our strategic goals. The specific risks
we may encounter in these types of transactions may include:

| |  | potentially dilutive issuances of our securities, the incurrence of debt and contingent liabilities
and amortization expenses related to intangible assets, which could adversely affect our results
of operations and financial conditions;                                                  
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                               
| |  | the diversion of managements attention from other business concerns;                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                               
| |  | difficulties in integrating the operations, technologies, products, existing contracts and personnel
of the target business and realizing the anticipated synergies of the combined businesses;                                                                                               
| |   |                                                                                                                                                                                                                                                                                               
| |  | the purchase price or other resources that we devote to an acquisition may exceed the value that we
eventually realize from the acquisition, or that we could have realized had we allocated the amount
of the purchase price or such other resources to a different business opportunity; and
| |   |                                                                                                                                                                                                                                                                                               
| |  | the possibility that acquired assets will become impaired, requiring us to record an impairment charge
to earnings, which could materially adversely affect our results of operations.                                                                                                        

The
failure to successfully evaluate and execute acquisitions or investments or otherwise adequately
address these risks could materially harm our business, financial condition and results of operations.

Claims that we or our technologies infringe upon the intellectual property or other proprietary rights
of a third party may require us to incur significant costs, enter into royalty or licensing agreements
or develop or license substitute technology.

We
may in the future be subject to claims that our technologies infringe upon the intellectual property
or other proprietary rights of a third party, and our technologies may now or in the future infringe
such rights. The legal framework for software patents is rapidly evolving and software developers
may increasingly be subject to infringement claims. Any claims of infringement could cause us to
incur substantial costs defending against the claim, even if the claim is without merit, and could
distract our management from our business. Moreover, any settlement or adverse judgment resulting
from the claim could require us to pay substantial amounts or obtain a license to continue to use
the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the
technology. We might not be able to obtain a license from the third party asserting the claim on
commercially reasonable terms, if at all. We also may not be able to successfully develop alternative
technology on a timely basis, if at all, or be able to obtain a license from another provider of
suitable alternative technology to permit us to continue offering, and to permit our customers to
continue using, the applicable technology. In addition, we generally state in our customer agreements
that we will indemnify our customers against third party infringement claims relating to our technology
provided to the customer, and could be obligated to fund significant amounts in the event that a
suit is brought directly against us and our customers. Infringement claims asserted against us or
our distributors could have a material adverse effect on our business, results of operations or financial condition.

10

---

---

We may be unable to adequately protect, and we may incur significant costs in defending, our intellectual
property and other proprietary rights.

We
rely upon a combination of trademark, trade secret, copyright and unfair competition laws, as well
as license agreements and other contractual provisions, to protect our intellectual property and
other proprietary rights. In addition, in general we require our employees and consultants to enter
into confidentiality and non-competition agreements and assignment of invention agreements. To the
extent that our intellectual property and other proprietary rights are not adequately protected,
third parties might gain access to our proprietary information, develop and market products similar
to ours, or use trademarks similar to ours, each of which could materially harm our business. Existing
U.S. federal and state intellectual property laws offer only limited protection. If we resort to
legal proceedings to enforce our intellectual property rights or to determine the validity and scope
of the intellectual property or other proprietary rights of others, the proceedings could be burdensome
and expensive, even if we were to prevail. The failure to adequately protect our intellectual property
and other proprietary rights could have a material adverse effect on our business, results of operations
or financial condition.

In the course of conducting our business, we possess or could be deemed to possess confidential information,
and if we fail to keep such information properly protected, we could be exposed to significant liability.

Our
STARLIMS software is used to collect, manage and report information produced in laboratories. Some
of this information is, or could be considered to be, confidential information. Regulation of the
use and disclosure of confidential information is complex and constantly changing. Increased focus
on individuals rights to confidentiality of their personal information, including personal
medical information, could lead to an increase of existing and future legislative or regulatory initiatives
giving direct legal remedies to individuals, including rights to damages against entities deemed
responsible for not adequately protecting such personal information. In addition, courts may look
to regulatory standards in identifying or applying a common law theory of liability, whether or not
the applicable law affords a private right of action. If we fail to properly protect confidential
information that is in our possession or deemed to be in our possession, we could be exposed to significant liability, which could harm our business.

We may fail to maintain effective internal control over financial reporting in accordance with Section
404 of the Sarbanes-Oxley Act of 2002, which could have an adverse effect on our financial results
and the market price of our ordinary shares.

Section
404 of the Sarbanes-Oxley Act of 2002 requires a company subject to the reporting requirements of
the U.S. securities laws to do a comprehensive evaluation of its and its subsidiaries internal
control over financial reporting. To comply with this statute, we are required to document and test
our internal control procedures; our management is required to assess and issue a report concerning
our internal control over financial reporting, and our independent registered public accounting firm
will be required to issue an opinion on managements assessment of those matters. Our compliance
with Section 404 of the Sarbanes-Oxley Act started in connection with the filing of this annual report
on Form 20-F in connection with which our management has assessed and issued a report regarding our
internal control over financial reporting.  The rules governing the standards that must be met
for management to assess our internal control over financial reporting are complex and new to us
and require significant documentation, testing and possible remediation to meet the detailed standards
under the rules.  During the course of its testing, our management may identify material weaknesses
or significant deficiencies, which may not be remedied prior to the deadline imposed by the Sarbanes-Oxley
Act.  Failure to maintain effective internal control over financial reporting could result in
investigation or sanctions by regulatory authorities and could have a material adverse effect on
our operating results, investor confidence in our reported financial information and the market price of our ordinary shares.

Risks Relating to Our Ordinary Shares

The price of our ordinary shares may be highly volatile and may decline in the future regardless of
our operating performance.

The
market price of our ordinary shares could be subject to significant fluctuations in response to:

| |  | fluctuations in our quarterly or annual operating results;                                                                                                                        
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                   
| |  | changes in financial estimates or investment recommendations by securities analysts and our failure
to achieve operating results consistent with securities analysts projections;
| |   |                                                                                                                                                                                   

11

---

---

| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the publics response to our press releases, our other public announcements and our filings with
the Securities and Exchange Commission and the Israeli Securities Authority;  
| |   |                                                                                                                                                                                
| |  | changes in accounting standards, policies, guidance, interpretations or principles;                                                                                            
| |   |                                                                                                                                                                                
| |  | sales of ordinary shares by our directors, officers and significant shareholders;                                                                                              
| |   |                                                                                                                                                                                
| |  | announcements of technological innovations or enhanced or new products by us or our competitors;                                                                               
| |   |                                                                                                                                                                                
| |  | the operating and stock price performance of other companies that investors may deem comparable to
us;                                                                         
| |   |                                                                                                                                                                                
| |  | broad market and industry factors;                                                                                                                                             
| |   |                                                                                                                                                                                
| |  | changes in regulatory requirements that apply to our customers;                                                                                                                
| |   |                                                                                                                                                                                
| |  | political and economic conditions, such as a recession or interest rate or currency rate fluctuations
or political events; and                                                 
| |   |                                                                                                                                                                                
| |  | other events or factors in any of the countries in which we operate, including those resulting from
war, incidents of terrorism, natural disasters or responses to such events.

The
market prices of ordinary shares of software companies have been extremely volatile. Stock prices
of many software companies have often fluctuated in a manner unrelated or disproportionate to the
operating performance of such companies. In the past, following periods of market volatility, shareholders
have often instituted securities class action litigation relating to the stock trading and price
volatility of the software company in question. If we were involved in any securities litigation,
it could result in substantial cost to us to defend and divert resources and the attention of management
from our business.

Three of our shareholders, who are also directors and executive officers, are parties to a voting agreement,
beneficially own in the aggregate approximately 34% of our ordinary shares and may be able to influence
our affairs.

Itschak
Friedman, chairman of our board of directors and our chief executive officer, Dinu Toiba, vice chairman
of our board of directors and our executive vice president and chief information officer, and Chaim
Friedman, a director and our chief financial officer, are parties to a voting agreement dated October
31, 1993, as amended on December 21, 2005. The voting agreement also grants the parties a right of
first refusal on sales of each others shares of our company. Such persons beneficially own
an aggregate of approximately 34% of our outstanding shares. As a result, these persons may have
a significant influence on the election of our directors and other matters requiring a shareholder
vote. This concentration of ownership of our ordinary shares could delay or prevent proxy contests,
mergers, tender offers, open-market purchase programs or other purchases of our ordinary shares that
might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing
market price for our ordinary shares. This concentration of ownership may also adversely affect our share price.

Our ordinary shares are traded on more than one market and this may result in price variations.

Our
ordinary shares have traded on the Tel Aviv Stock Exchange, or the TASE, since November 1993 and
on The NASDAQ Global Market since May 2007. Trading in our ordinary shares on these markets is made
in different currencies (dollars on The NASDAQ Global Market and New Israeli Shekels, or NIS, on
the TASE), and at different times (resulting from different time zones, different trading days and
different public holidays in the United States and Israel). Consequently, the trading prices of our
ordinary shares on these two markets often differ. Additionally, any decrease in the trading price
of our ordinary shares on one of these markets may, and often does, cause a decrease in the trading
price of our ordinary shares on the other market.

12

---

---

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 Israeli law. 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 differ in some respects from the rights and responsibilities of shareholders
in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act
in good faith and in a customary manner in exercising his or her rights and fulfilling his or her
obligations toward the company and other shareholders and to refrain from abusing his or her 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.

Risks Related to Our Operations in Israel

Conducting business in Israel entails special risks.

We
are incorporated in the State of Israel, and one of our research and development facilities is located
in Israel. Two members of our management who also serve as directors, four other directors and approximately
14% of our staff is located in Israel. Accordingly, we are influenced to a limited extent by the
political, economic and military conditions affecting Israel. Any major hostilities involving Israel,
or the interruption or curtailment of trade between Israel and its present trading partners, could
have a material adverse effect on our business, financial condition and results of operations.

Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between
Israel and its Arab neighbors, and a state of hostility, varying from time to time in intensity and
degree, has led to security and economic problems for Israel. Although Israel has entered into various
agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest
and terrorist activity in Israel, which began in September 2000 and which has continued with varying
levels of severity through 2008. There were extensive hostilities along Israels northern border
with Lebanon in the summer of 2006. Since June 2007, when Hamas effectively took control of the Gaza
Strip, there have been extensive hostilities along Israels border with the Gaza Strip. Hamas
and other Palestinian militants fired thousands of rockets and mortars into Israel before a six-month
ceasefire went into effect in June 2008. Both sides largely honored the ceasefire. Following the
expiration of the ceasefire, however, renewed rockets attacks from Gaza spurred Israel to initiate
a coordinated aerial, naval and ground invasion into the Gaza strip. During that three-week operation,
Hamas and other groups launched hundreds of rockets and mortar shells into Israel, some of which
hit Ashkelon, the city in which our Israeli research and development center is located. Israel withdrew
its forces from Gaza in January 2009, but tensions remain extremely high and rockets continue sporadically
to be fired into Israel from Gaza. Ongoing violence between Israel and the Palestinians may have
a negative effect on the research and development activities that we conduct in Israel and may adversely affect our share price.

Some
of our employees in Israel are obligated to perform annual reserve duty in the Israeli Defense Forces
and may be called for active duty under emergency circumstances at any time. If a military conflict
or war arises, these individuals could be required to serve in the military for extended periods
of time. Our operations could be disrupted by the absence for a significant period of key employees
or a significant number of other employees due to military service. Any disruption in our operations
could adversely affect our business.

13

---

---

Investors and our shareholders generally may have difficulties asserting U.S. securities laws claims
in Israel or enforcing a U.S. judgment against us, some of our executive officers and directors and
the Israeli experts named in this annual report.

We
are incorporated in Israel and some of our directors, executive officers and the Israeli experts
named in this annual report reside outside the United States. Service of process upon them may be
difficult to effect within the United States. Furthermore, most of our assets and the assets of our
executive officers and directors and some of the experts named in this annual report are located
outside the United States. Therefore, a judgment obtained against us or any of them in the United
States, including one based on the civil liability provisions of the U.S. federal securities laws,
may not be collectible in the United States and may not be enforced by an Israeli court. It also
may be difficult for you to assert U.S. securities law claims in original actions instituted in Israel.
For more information regarding the enforceability of civil liabilities against us, our directors
and executive officers and the Israeli experts named in this annual report, including the terms under
which certain judgments may be enforced by an Israeli court, please see Enforceability
of Civil Liabilities.

As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we may follow certain
home country corporate governance practices instead of certain NASDAQ requirements. We follow Israeli
law and practice instead of NASDAQ rules regarding the director nomination process.

As
a foreign private issuer whose shares are listed on the NASDAQ Global Market, we are permitted to
follow certain home country corporate governance practices instead of certain requirements of The
NASDAQ Marketplace Rules. We follow Israeli law and practice instead of The NASDAQ Marketplace Rules
regarding the director nomination process. As a foreign private issuer listed on the NASDAQ Global
Market, we may also follow home country practice with regard to, among other things, composition
of the board of directors, compensation of officers and quorum at shareholders meetings. In
addition, we may follow home country practice instead of the NASDAQ requirement to obtain shareholder
approval for certain dilutive events (such as for the establishment or amendment of certain equity-based
compensation plans, an issuance that will result in a change of control of the company, certain transactions
other than a public offering involving issuances of a 20% or more interest in the company and certain
acquisitions of the stock or assets of another company). A foreign private issuer that elects to
follow a home country practice instead of NASDAQ requirements 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. In addition, a foreign
private issuer must disclose in its annual reports filed with the Securities and Exchange Commission
each such requirement that it does not follow and describe the home country practice followed by
the issuer instead of any such requirement. Accordingly, our shareholders may not be afforded the
same protection as provided under NASDAQs corporate governance rules.

ITEM 4.         INFORMATION ON THE COMPANY

A.History and Development of the Company

We
were incorporated under the laws of the State of Israel in May 1986 as L.I.M.S. Laboratory Information
and Management Systems Ltd. We changed our name to LIMS Laboratory Information Management Systems
Ltd. in January 2006 and to STARLIMS Technologies Ltd. in April 2007. We are a public limited liability
company under the Israeli Companies Law 5759-1999 and operate under this law and associated legislation.
Our principal subsidiary, STARLIMS Corporation, is incorporated in Florida, the United States. In
2006, we established three additional subsidiaries, STARLIMS Canada organized in Canada, STARLIMS
Asia Pacific organized in Hong Kong and STARLIMS Europe organized in the United Kingdom.In May 2008,
we acquired STARLIMS UK, which served as our professional services provider in the United Kingdom,
and we intend to merge the new subsidiary into STARLIMS Europe.  Our principal executive offices
are located at 32B Habarzel Street, Tel Aviv 69710, Israel and our telephone number is + 972-3-7694000.
STARLIMS Corporation is located at 4000 Hollywood Boulevard, Hollywood, Florida 33021-6755 and its
telephone number is 954-964-8663. Our website address is http://www.starlims.com.  The information contained on our website is not a part of this annual report.

Our
capital expenditures for the years ended December 31, 2006, 2007 and 2008 were approximately $1.69
million, $520,000 and $1.74 million, respectively. The expenditures in 2006 were primarily attributable
to the acquisition of STARLIMS Canada. The expenditures in 2008 were primarily attributable to the
acquisition of STARLIMS UK.

14

---

---

B.         BUSINESS OVERVIEW

Our Business

We
are a leading provider of laboratory information management systems, or LIMS, and have over 20 years
experience in the LIMS market. We develop, market and sell configurable off-the-shelf LIMS software
solutions trade-named STARLIMS ®. STARLIMS manages the collection, processing, storage, retrieval
and analysis of information generated in laboratories. Our software improves the reliability of sampling
processes, supports compliance with domestic and international regulations and industry standards,
provides comprehensive reporting, monitoring and analysis capabilities, and enables our customers
to manage their globally distributed laboratories more efficiently and effectively. In March 2006,
we were one of the first LIMS vendors to introduce a true web-based, configurable off-the-shelf LIMS
solution, which enables our customers to manage their globally distributed laboratories more efficiently
and effectively.

Our
STARLIMS software is used by more than 500 laboratories in over 40 countries around the world. Our
strongest presence is in North America. The adaptable nature of our software allows us to offer solutions
to customers in a wide range of industries and in multiple disciplines, but primarily in quality
assurance and control, testing and monitoring, and research and development. The primary users of
STARLIMS are government, manufacturing and life sciences organizations.

We
released our web-based, configurable off-the-shelf STARLIMS Version 10 in March 2006 and unlike many
traditional LIMS that were augmented by web-enabled capabilities, STARLIMS Version 10 was developed
from inception as a true web-based product. STARLIMS Version 10 requires no client-side installation
or maintenance and enables us to offer a solution that facilitates global deployment and centralized
management.

Industry Background

According
to a study of the LIMS market recently published by ARC Advisory Group, the projected revenues for
suppliers of commercials LIMS were approximately $395 million in 2008 and the global market is expected
to grow at a compound annual rate of 3% through 2013, when it is expected to reach approximately
$455 million.

LIMS
originated approximately 30 years ago and were developed by organizations wishing to simplify their
own laboratory data acquisition and reporting processes. Most first-generation LIMS were custom-designed
systems developed by internal engineering resources as well as by instrument manufacturers to enable
the efficient capture of laboratory data. Laboratory processes and regulatory requirements, as well
as the need to share laboratory data across a customers organization and to other parties,
have evolved quickly in the past two decades, often in directions not supported by such customized
systems. In some cases, this has rendered legacy LIMS non-compliant and unable to meet present-day
needs. In other cases, code has been added to the legacy LIMS, often by individuals other than the
original programmers of the system. This has resulted in systems which are generally difficult to
manage and have an inherently high cost of development and maintenance and which tend to be less
reliable and flexible than commercial LIMS.

The
increasing geographic reach of many organizations has resulted in laboratories being dispersed in
various geographic sites across the globe. For example, a pharmaceutical company may conduct research
and development in one country, clinical trials in a second country, and manufacturing and quality
control in a third. Nevertheless, analytical results pertaining to a single product must be cohesively
managed so that the various departments and individuals of those organizations can access the information
they require. The improvement in the connectivity between dispersed locations of organizations and
the adoption of internet-based technologies has resulted in an increased demand for web-based applications,
including web-based LIMS solutions, such as STARLIMS.

15

---

---

The
growing market for commercial LIMS has also benefited in recent years from increasingly stringent
regulatory requirements. Evolving general and industry-specific standards and regulations require
improved documentation (including traceability) of laboratory tests and an enhanced ability to share
test results with other departments and third parties in real-time. One of the crucial functions
of LIMS is their ability to trace each event in the lifecycle of a sample, which is essential in
defending laboratory results and for regulatory compliance. While commercial LIMS, such as STARLIMS,
are easily adapted to emerging regulatory requirements, legacy LIMS have often not been able to keep
pace with evolving regulations.

As
a result of the foregoing, in recent years many laboratories have transitioned from legacy LIMS to
commercial systems, such as STARLIMS. User demands for standard business tools have spawned a new
generation of LIMS that are more user friendly, interoperable with other enterprise business systems
and easily upgraded.

Additionally,
demand has emerged for comprehensive scientific content management, primarily in research and development
laboratories. Historically LIMS have been designed to manage structured sample data produced in quality
control laboratories. Data produced in scientific research is primarily unstructured (such as an
individuals interpretation of data in the form of written reports, email discussions between
colleagues and original raw data from instruments) and to date have not been managed effectively
by LIMS. Such data is currently beginning to be managed by electronic laboratory notebooks, or ELNs,
and SDMSs, which are in early stages of industry-adoption and are generally provided by small to
mid-size software vendors and two major instrument manufacturers. Many industry participants believe
that it is not viable for the scientific and analytical communities to continue to maintain separate
repositories for structured and unstructured data. We believe that many of our current and prospective
customers are seeking a single solution that incorporates disparate types of data, enabling users
to efficiently store and re-use data rather than spend laborious time alternating between different
data repositories. We recently developed what we believe is the first LIMS solution that provides
SDMS and ELN functionalities. We released our first LIMS solution providing SDMS functionalities
during the fourth quarter of 2007, and, in March 2009, we released our STARLIMS Electronic Notebook,
which provides the functionality of ELNs used in routine analysis laboratories.

Our Strategy

Our
growth strategy is to:

Expand our international sales.  According to the recent ARC Advisory Group report on the LIMS market, the projected geographic
distribution of LIMS revenues in 2008 was approximately 55% in North America, 35% in Europe, Middle
East and Africa, 8% in the Asia Pacific region and 2% in Latin America. In 2006, 2007 and 2008, approximately
74%, 68% and 68% of our revenues, respectively, were derived from sales in North America. We entered
into the fast growing and emerging markets of China, Southeast Asia and Eastern Europe in the last
four years and intend to leverage our position in these markets.  We also intend to continue to pursue market
share in developed markets in Western Europe and the Pacific Rim, where we have been devoting more
resources than in previous years.  We believe that these markets represent a significant opportunity
for our LIMS solution.  For this purpose, in 2006, we established a subsidiary in Hong Kong
and expanded our office in Latin America.  In May 2008, we acquired our professional services
provider in the United Kingdom.  This acquisition enhances our service capabilities in the United
Kingdom and assists in further expanding our operations throughout Europe.

Expand our presence in the LIMS replacement market.  Home-grown and custom-designed first-generation LIMS have become obsolete and in certain instances
non-compliant, spurring growth in the LIMS replacement market. In addition, several LIMS providers
are no longer supporting their legacy LIMS. This presents an opportunity for us to leverage our web-based
technology and expertise. We have begun to identify likely targets for our marketing and sales efforts
in the replacement market and have made initial sales in this market.

Continue to expand our product offerings to address the emerging requirements of the laboratory informatics
market. Our recognized expertise and technology have enabled us to develop innovative solutions in a timely
manner, including our web-based LIMS solution, our integrated SDMS and our recently released ELN.
Our extended technology portfolio now allows us to offer a unified informatics platform that incorporates
all three of these products. With a unified platform, customers no longer need to maintain multiple
computing platforms, applications or costly interfaces, and it eliminates the need to train users
on the configuration, synchronization and usage of multiple systems. Furthermore, depending on its
specific priorities, each laboratory can select which components to implement first and add functions
as needed. This strategy follows what we believe to be the prevailing view among industry analysts that standalone laboratory technologies are converging, eliminating the traditional
architectural distinctions between LIMS, ELN, and SDMS.  With the addition of our ELN component,
we believe we are the first major LIMS provider to deliver a comprehensive solution that anticipates
this convergence.  We intend to further strengthen this leading technology position by incorporating
into our software platform additional solutions that are currently handled in an isolated manner.
 We plan to develop these new software products internally, as well as through acquisitions
and licensing of third-party technology providers.

16

---

---

Continue to expand our product offerings to adjacent markets. An additional opportunity we are pursuing is in the market for clinical laboratory information systems,
or LIS, particularly in the high-end or complex portion of that market in areas such as reference
laboratories, clinical trials and bio-specimen management. We believe that portion of the LIS market
can be well served with our existing products and we completed a number of transactions in that market
during 2008.

Pursue business acquisitions.  We intend to pursue targeted complementary business acquisitions where we believe we can enhance
value. We currently have no significant commitments, proposals, arrangements or agreements with respect
to any acquisitions.

Hire Strategically. We have recently dedicated increased resources to hiring high-level, LIMS-industry veterans and intend
to continue to do so in the future. In July 2007, we hired a 20-year veteran of the LIMS and general
software industry to serve as our chief of business development, and hired another LIMS veteran to
serve as our director of clinical operations in order to enable us to expand our business into the
adjacent LIS  market. In May 2008, we established a strategic informatics consulting unit by
acquiring the assets of a U.S.-based consultancy specializing in LIMS and laboratory informatics.
The founder of that company, a veteran of 24 years in LIMS consultancy, now heads the new unit. In
August 2008, we established an additional United Kingdom subsidiary as a result of the May 2008 acquisition
of our long-standing professional services provider in the United Kingdom, and hired a 20-year LIMS veteran to serve as the general manager of the new subsidiary.
 Should we discern similar opportunities in the future, we will continue to pursue them.

Our Products and Services

STARLIMS

Our
configurable off-the-shelf STARLIMS software is our flagship product. STARLIMS is designed to assist
laboratories in automating their processes, improving performance and complying with regulatory requirements.
Such regulations typically require stringent automated electronic record-keeping of all events in
a samples lifecycle, including chain-of-custody, sampling, preparation, testing, approval and
electronic signatures. STARLIMS continuously guides the physical movement of a sample in the laboratory,
tracking and recording each step of the process enabling sample traceability.

STARLIMS
has been designed to provide a complete software solution enabling the definition of laboratory workflow
and the management of a wide variety of laboratory processes. These processes include sample collection,
test preparation, testing, results entry, review and approval. Our STARLIMS solution ensures that
the laboratorys specific processes and requirements are properly and consistently carried out.

Typically,
the workflow of a laboratory that uses STARLIMS commences with the receipt of the sample by laboratory
personnel. The STARLIMS user interface then prompts the user to register certain required sample
data (for example, the sample source, handling requirements, safety measures and due date) and the
testing that is required. Based on this input, STARLIMS generates a distribution list indicating
how the sample will be divided among the relevant laboratory departments (for example, organic chemistry,
metals and microbiology). Laboratory technicians then divide and deliver the sample to the appropriate
departments. STARLIMS then schedules the testing utilizing the information historically obtained
by the system or entered into the system by the user and other users. In establishing a testing schedule,
STARLIMS considers factors such as availability of analysts and equipment, due date, other pending
tests and anticipated testing cycle times based on historical testing data.

17

---

---

During
sample testing, laboratory personnel introduce the sample into the instrument and upon completion
of the test, results are captured by STARLIMS (either via an electronic interface from the instrument
or entered manually). STARLIMS also captures ancillary data such as instrument settings, quality
control standards utilized during the testing, analyst qualifications and any irregularities. STARLIMS
then carries out pre-determined calculations of the data, validates the result and flags results
outside the expected range. STARLIMS then alerts the appropriate department personnel to review and
approve pending results. Such personnel determine whether the results may be included in the final
report or if further testing is required. When all related tests have been successfully completed
by the relevant departments, STARLIMS collates all results into one summary report and submits the
report to laboratory personnel with the authority for final approval. Based on the summary report
and supporting data generated by STARLIMS, such personnel may either issue final approval or use
STARLIMS to order additional testing. Upon final approval, STARLIMS generates an electronically signed
final report, which it routes and distributes in accordance with pre-determined rules.  STARLIMS
also generates a list of the required processes to dispose of the sample and any other waste, in
accordance with pre-configured safety and hazard policies.

To
assist the efficient and effective management of the laboratory process and resources, STARLIMS provides
up-to-the-minute information, such as completed and in process work orders, current or foreseen bottlenecks
and detailed trending analysis. This information is available to authorized personnel in the form
of on-line reports and through the STARLIMS dashboard (a graphical presentation of key performance
indicators presented according to the specific role and authorization of each user), accessible through
a standard web browser, which enables real-time decision-making.

In
a typical laboratory, LIMS interface with up to 25 different types of scientific measurement devices
and equipment, including chromatography data systems, spectrophotometers and analytical scales. STARLIMS
uses its built-in data capture utility to easily interface with such scientific measurement devices
and equipment. It also seamlessly interfaces with information systems, such as ELNs and SDMSs, and
is interoperable with other enterprise business systems, such as enterprise resource planning systems
and manufacturing execution systems.

In
addition to industry standard network and database security technologies, STARLIMS incorporates security
access control measures. To ensure the safety and privacy of data entered into STARLIMS by laboratory
personnel or any party who has been provided access to the system, STARLIMS enables system administrators
to restrict access to the systems data and functions. STARLIMS ensures that only authorized
users are provided access to the systems data and functions. For example, access can be restricted
to personnel in specified roles (such as technicians, analysts and laboratory managers), members
of a certain department, participants in a certain experiment or to a certain study team. Typically,
laboratory technicians who receive the sample would be limited to sample registration functions,
while analysts would be limited to result entry functions and interim result approval steps.

STARLIMS
has been implemented in more than 15 languages in addition to English and can be deployed without
client-side downloads, making it ideal for large, multinational organizations with laboratories in
multiple locations.

Product Architecture

STARLIMSs
flexible architecture allows for ongoing configuration and upgrades to newer software versions while
preserving existing data and the laboratorys business rules. In most legacy and first-generation
LIMS, the technology and business rules components are compiled together and cannot be separated.
 As a result, upgrading to new versions requires time-consuming re-configuration to reflect
the laboratorys specific business rules.  Our STARLIMS software overcomes this obstacle
by separating the database, business rules and technology into three independent layers.  Each
layer can be upgraded or modified without affecting the other two layers.  This architecture
simplifies upgrades to new versions by our customers.

18

---

---

Unlike
many traditional web-enabled solutions, Version 10 of STARLIMS, which we introduced in March 2006,
was developed as a true web-based LIMS solution. STARLIMS uses XML and other web-services to facilitate
data management and decision-making within the laboratory and throughout the customers network.
Our scalable, web-based STARLIMS software requires no desktop (client-side) installation or maintenance
and enables us to offer a solution with enhanced interoperability and user experience, presenting
real-time information on a global basis in an easy-to-use graphical format. Communications between
client and server are achieved through standard web service messaging over hypertext transfer protocol,
or HTTP, or a secure HTTP, or HTTPS. For increased security, client-side scripting code is run in
an isolated, sand-box environment, which is separated from the server-side.

With
the development of our SDMS functionality, which we introduced at the end of 2007, our technology
platform now has integrated capabilities to deal with unstructured data such as documents, and instrument
generated files. These capabilities include facilities for the file capture, content extraction and
routing of such content and files to predefined workflows carried out by STARLIMS or external systems.

Leveraging
our web-based LIMS and SDMS technologies, in March 2009 we released the STARLIMS Electronic Notebook,
another step in creating a unified platform for the paperless laboratory. STARLIMS Electronic Notebook
eliminates the need to maintain cumbersome and inefficient paper notebooks, enabling labs to record
data in electronic format from the first moment it is created. Lost data and transcription errors
are therefore minimized; data storage and retrieval are streamlined; and information is disseminated
as soon as it is created. STARLIMS Electronic Notebook maps each of the steps defined in a standard
operating procedure to an electronic worksheet, which ensures that all the required information is
recorded, validated and carried out in strict compliance with the prescribed method. The result is
a complete electronic record detailing each step in the analytical procedure, together with all the
required supporting information (such as the materials, personnel, instruments and calculations employed
in the process).

With
the release of STARLIMS Electronic Notebook, we are now able to offer an integrated solution that
includes LIMS, SDMS and ELN. As an entirely web-based application, STARLIMS provides immediate access
to data and supporting documentation to any authorized user enterprise-wide. There is no need to
maintain multiple computing platforms, applications or costly interfaces, nor to train users on the
configuration, synchronization and usage of multiple systems. Depending on its specific priorities,
each laboratory can select which components to implement first and add functions as needed.

Professional Services

We
have built a highly trained professional service network with a presence in 21 countries, which has
earned us a reputation for high-quality service. Our professional services team provides our customers
with training and technical support and assists them in implementation of our products. As of December
31, 2008, 84 full-time employees were engaged in implementation and support. This core team is augmented
by approximately 200 consultants employed by our global distribution and services network. The senior
members of our professional services team have between 12 to 20 years of experience in the LIMS industry.

During
our 20 years of experience configuring our solutions to the needs of our customers, our professional
services team has accumulated and continues to accumulate industry-specific best practices and know-how.
Our professional services team provides on-going feedback to our development team, which uses this
information to adapt our software to meet the requirements of various industries. In turn, the industry-specific
tools that we have developed over the years are available to our professional services team, which
allows for a more efficient implementation process. Our professional services team also supports
our sales force throughout the sales cycle by providing pre-sale technical demonstrations and supporting
information.

We
have established professional and technical training and certification programs for our employees,
distributors, partners and customers. The programs for employees of our company and our distributors
provide participants know-how to ensure the consistently high level of our implementation services.
Our customer training programs enable our customers to independently configure our software to their
specific emerging requirements. We also promote information sharing among our customers by hosting
international customer conferences and host an active intranet community, which facilitates such
sharing of information. Our intranet site allows customers to submit ideas for product enhancements,
which we may funnel into our research and development product pipeline.

19

---

---

Our Customers

Our
products are used in more than 500 laboratories in over 40 countries. Our strongest presence is in
North America. The adaptable nature of our software allows us to offer solutions to customers in
a wide range of industries, including pharmaceuticals, public health, food and beverage, oil and
gas, environmental, chemical, agriculture and cosmetics. STARLIMS is used by laboratories in multiple
disciplines, but primarily in quality assurance and control, testing and monitoring, and research
and development.

A significant
portion of our customers are government laboratories in industries such as public health, environmental
science, forensic science, agriculture and water quality. In 2006, 2007 and 2008, sales to such laboratories
accounted for 44%, 42% and 39% of our total revenues, respectively. Of total revenues in 2006, 2007
and 2008, 32%, 33% and 27%, respectively, were attributable to U.S. federal, state and local government
contracts.  Our government customers include the California Animal Health and Food Safety Laboratory
System, California Department of Health Services, Jamaican Ministry of Health, Singapore Health Services
Authority, U.K. National Health Service, U.S. Air Force, U.S. Centers of Disease Control and Federal
Bureau of Prisons.

In
2004, the GSA (the procurement arm of the federal government) awarded to us a GSA Schedule 70. GSA
Schedule 70 provides federal agencies with global access to information technology and telecommunications
hardware, software and professional services without the need to seek bids from suppliers who are
not GSA contract holders. Since there is no maximum order limitation under the multiple-award GSA
Schedule 70, customers can use GSA Schedule 70 for large-scale, multi-million dollar LIMS implementations.
Our GSA Schedule 70 award facilitates our participation in large scale U.S. government LIMS projects
in areas of public health, food and water supply and scientific investigations. Our GSA contract
is valid for five years, expiring in July 2009, and may be extended for three additional five-year
periods at the option of the GSA. We believe such contract will be extended.

In
the corporate and private sector, we primarily serve the life sciences and manufacturing markets.
Our life sciences customers include laboratories in industries such as pharmaceuticals, biopharmaceuticals,
medical devices, biotechnology and contract research organizations. In the last two years we have
focused on increasing our penetration into the life sciences sector. During 2008, we increased our
revenue from life sciences customers by 30% compared to 2007. Revenue from customers in the life
sciences represented 32% of total revenue for 2008 compared to 26% of total revenue for 2007.

Our
manufacturing customers include laboratories in industries such as oil and gas, chemical, food and
beverage, metals and mining, consumer goods and automotive. Revenue from our manufacturing customers
was 25% of total revenue in 2008 compared to 28% in 2007. The revenues from the manufacturing market
declined during 2008 primarily due to the economic challenges that we saw in the second half of the
year. Other customers in the private sector include contract laboratories that specialize in serving
various industries (primarily environmental and food safety). Revenues from these customers represented
approximately 4% of our total revenue in 2008.

We
do not believe we are dependent on any single customer. Amgen Inc., a leading U.S.-based biotechnology
company that entered into a contract with us in 2005, represented approximately 18%, 9% and 5% of
our total revenues for the years ended December 31, 2006, 2007 and 2008, respectively.

Sales and Marketing

Prior
to 1998, we developed LIMS software that was marketed, sold and supported exclusively by Varian Inc.,
a leading scientific instrument manufacturer. Since such time, we have been selling STARLIMS through
our direct sales force and network of distributors. As of December 31, 2008, we employed 21 persons
in sales and marketing as compared to 18 persons in sales and marketing as of December 31, 2007.
Our marketing efforts focus on raising awareness for our products and generating qualified sales
leads. Our direct sales force, which is the source of the majority of our revenues, is operated out
of four global field offices in Florida, Canada, Hong Kong and United Kingdom. In addition, follow-on
sales are accomplished by the efforts of our sales force and professional services team. As of December
31, 2008, our sales and marketing employees were located in the United States, Canada, Europe, Israel
and the Asia Pacific region. In 2006, 2007 and 2008, approximately 83%, 84% and 81% of our revenues,
respectively, were generated by our direct sales force and the remainder was generated by our distributors.
In 2006, 2007 and 2008, none of our distributors accounted for more than 10% of our total revenues.

20

---

---

We
utilize the services of distributors in approximately 40 countries.  As of December 31, 2008, we had 29 distributors. We generally enter into a standard
distribution agreement with each of our distributors, according to which the distributor is granted
either an exclusive or non-exclusive right to market and sell our product offerings in a certain
geographic area. Those agreements that grant exclusivity to certain geographic areas provide us the
right to sell directly to specified international customers under worldwide agreements.

Our
marketing strategy is to generate sales leads, continue to promote the market adoption of our web-based
LIMS, build our STARLIMS brand recognition and establish our company as a leading global provider
of commercial LIMS solutions. Our principal marketing initiatives target key executives and decision
makers within our existing and potential customer base, and include: participation in user conferences,
trade shows, workshops and industry events; publication of articles and opinion pieces in trade magazines
and journals; participation in industry standardization bodies; press and industry analyst relations;
advertising in internet search engines and electronic and printed professional publications; and
maintaining a multi-lingual website that generates potential customer leads (www.starlims.com).

Competition

The
LIMS market is highly competitive and gradually consolidating and is not dominated by any one LIMS provider.  However, we believe that the top five LIMS providers
currently account for more than half of the global LIMS market. Additionally, our market is subject
to shifting customer needs, periodic introductions of new products and changing technology.

Our
principal competitors are the LIMS divisions of multi-national laboratory equipment companies, such
as Thermo Fisher Scientific Inc. and Life Technologies, as well as independent LIMS companies. To
a lesser extent we also compete with system integrators and consulting firms specializing in software
for laboratory testing, quality control and clinical trials. Some of our competitors have greater
name recognition, longer operating histories and significantly greater resources than we have.

Our
ability to remain competitive will depend to a great extent upon our ongoing product development
and ability to provide a high level of professional services and customer support. We believe that
the principal competitive factors in our market include:

| |  | product functionality and breadth of integration across a wide range of laboratories;
| | - | -------------------------------------------------------------------------------------
| |   |                                                                                      
| |  | performance, security, scalability, flexibility and reliability of the software;     
| |   |                                                                                      
| |  | quality of professional services and customer support;                               
| |   |                                                                                      
| |  | reputation and financial stability;                                                  
| |   |                                                                                      
| |  | cost and demonstrable benefits for customers;                                        
| |   |                                                                                      
| |  | speed and ease of implementation and integration; and                                
| |   |                                                                                      
| |  | sales and marketing capabilities.                                                    

We
believe that we compete favorably with our competitors on the basis of these factors. There can be
no assurance that our current or prospective competitors will not offer or develop products or services
that are superior to, or that achieve greater market acceptance than, our products.

21

---

---

Intellectual Property

Our
success and ability to compete are dependent on our ability to develop and maintain the proprietary
aspects of our technology and operate without infringing the proprietary rights of others. We rely
upon a combination of trademark, trade secret, copyright and unfair competition laws, as well as
license agreements and other contractual provisions, to protect our intellectual property and other
proprietary rights. In addition, we attempt to protect our intellectual property and proprietary
information by requiring our employees and consultants to enter into confidentiality, non-competition
and assignment of inventions agreements. These legal protections afford only limited protection for
our technology. Despite our precautions, it may be possible for third parties to obtain and use our
intellectual property without authorization. We own the trademark and service mark STARLIMS, and
we own the registered trademarks in the United States, China and the European Union for STARLIMS
for computer software. As is typical to our industry, we do not own any registered patents or pending
patent applications. We currently hold several domain names, including the domain name starlims.com.
 Our agreements with employees, consultants and others who participate in development activities
could be breached. We may not have adequate remedies for any breach, and our trade secrets may otherwise
become known or independently developed by our competitors or other third parties. In addition, the
laws of some foreign countries do not protect proprietary rights to the same extent as the laws of
the United States, and effective copyright, trademark and trade secret protection may not be available in those jurisdictions.

Due
to rapid technological change, we believe that factors such as the technological and creative skills
of our personnel, new product developments and enhancements to existing products are more important
than the various legal protections of our technology to establishing and maintaining a technology
leadership position.

Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of
our software solutions or to obtain and use information that we regard as proprietary. Litigation
may be necessary in the future to enforce our intellectual property rights or to determine the validity
and scope of the proprietary rights of others. Any such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on our business, operating results
or financial condition. There can be no assurance that our means of protecting our proprietary rights
will be adequate or that our competitors will not independently develop similar technology. Any failure
to meaningfully protect our intellectual property and other proprietary rights could have a material
adverse effect on our business, operating results or financial condition.

In
addition, if any of our software is covered by third-party patents or other intellectual property
rights, we could be subject to infringement actions. Although we believe that our software does not
infringe on patents held by others, we cannot assure you that it does not or that it will not in
the future. Any infringement claims made against us could cause us to incur substantial costs defending
against the claim, even if the claim is without merit, and could distract our management from our
business. Moreover, any settlement of or adverse judgment resulting from such claims could require
us to pay substantial amounts or obtain a license to continue to use the technology that is the subject
of the claim, or otherwise restrict or prohibit our use of the technology. Any required licenses
may not be available to us on acceptable terms, if at all. If we do not obtain any required licenses,
we could encounter delays in product introductions if we attempt to design around the technology
at issue or to find another provider of suitable alternative technology to permit us to continue
offering the applicable software solution. In addition, we generally provide in our customer agreements,
that we will indemnify our customers against third-party infringement claims relating to our technology
provided to the customer, which could obligate us to fund significant amounts.

We
also integrate into our products certain technology licensed from third parties. We do not believe
that any technology licensed from third parties and integrated into our products is material to our
business. We may be required to license additional technology in the future for use in our products
or enhancements. We may not be able to license these technologies on commercially advantageous terms
or at all. Our inability to obtain any of these licenses could delay product development until alternative
technologies can be identified, licensed and integrated.

22

---

---

Standards and Regulations

Our
operations are not subject to any specific regulations or obligatory standards. There are, however,
voluntary guides published for sale to LIMS developers, notably those of ASTM International, previously
known as the American Society for Testing and Materials, or ASTM. We follow and keep current with
respect to the standards set out in the guides published by ASTM. We are also ISO (International
Organization for Standardization) 9001:2000 certified through June 2011. Additionally, we are members
of the American Society for Quality and the International Society for Pharmaceutical Engineering.

To
date, we have not been subject to direct regulation by the U.S. Food and Drug Administration, or
the FDA. However, to the extent one of our customers incorporates our software into a medical device
regulated by the FDA, the FDA may evaluate our software and consider its safety and effectiveness
when evaluating or approving the medical device. Moreover, it is possible that in the future the
FDA may impose different or more stringent regulations or requirements upon our customers or subject
us to regulations in a manner that may adversely impact our business.

Unlike
the LIMS industry, many of the industries in which our customers operate are regulated by various
federal and state agencies depending on the type of testing conducted at the laboratory, such as,
by way of example, the FDA, the Centers for Medicare and Medicaid Services, or the CMS, the U.S.
Environmental Protection Agency, or the EPA, the Occupational Safety and Health Administration, or
OSHA, and by their international counterparts. In addition, such industries seek to comply with industry-specific
quality standards, such as those of the International Organization for Standardization and Six Sigma,
and regulatory practices, such as GLPs, good clinical practices and good manufacturing practices, or GMPs.

If
our product offerings fail to allow our customers and potential customers to operate in a manner
that is compliant with applicable regulations and regulatory guidance, our current and potential
customers may be unwilling to use our software products. Accordingly, we have designed our products
to allow compliance with current regulations and standards applicable to the industries in which
our customers operate. We also expend considerable time and effort monitoring regulatory developments
that could affect the use of our products by our customers. However, we cannot assure you that our
software will continue to allow customers to maintain compliance with applicable regulations and
guidelines as they emerge.

ISO
17025, General Requirements for the Competence of Calibration and Testing Laboratories, is a prominent example of a quality standard affecting laboratories. This standard assists laboratories
which have implemented its requirements to achieve consistent production of competent results. To
be recognized as adhering to the standard, laboratories must be accredited and undergo periodic assessments
of their activities. The principles underlying the requirements of the standard include capacity,
exercise of responsibility, use of scientific method, objectivity of results, impartiality of conduct,
traceability of measurement, repeatability of test and transparency of process.

GMPs
are a set of regulations, codes and guidelines for the manufacture of drugs or drug substances and
products, medical devices, in vivo and in vitro diagnostic products and foods. An extremely important
part of GMPs is documenting every aspect of the process, activities and operations. If the documentation
cannot show the manner in which the product was made and tested and does not allow for traceability,
then the product does not meet the required specification and is considered contaminated. Additionally,
it is a GMP requirement that all manufacturing and testing equipment and utilities be qualified as
suitable for use and that all operational methodologies and procedures (such as manufacturing, cleaning,
and analytical testing) utilized in the drug process be validated to demonstrate that they can perform
the activities they purport to according to predetermined specifications.

Several
of our customers are engaged in clinical testing that is regulated by the FDA and other governmental
authorities world-wide. The use of software during the clinical trial process must adhere to regulations
such as GLPs and other FDA rules, the Consolidated Guidance for Industry from the International Conference
on Harmonization regarding GLP for Europe, Japan and the United States and other guidance documents.
In addition, the FDA has developed regulations and regulatory guidance concerning electronic records
and electronic signatures. The regulations, codified as 21 CFR Part 11, are interpreted for clinical
trials in a guidance document titled Computerized Systems Used in Clinical Trials. Other guidance
documents have been issued that also assist in the interpretation of 21 CFR Part 11. This regulatory
guidance provides that computerized systems used to capture or manage clinical trial data must meet
certain standards of attributability, accuracy, retrievability, traceability, inspectability, validity,
security and dependability.

23

---

---

Regulation
of the use and disclosure of personal medical information is complex and expanding. Federal legislation
in the United States, known as the Health Insurance Portability and Accountability Act of 1996, or
HIPAA, imposes a number of requirements on the use and disclosure of protected health
information, which is individually identifiable. Health care facilities and providers
who are involved in clinical trials may be subject to such requirements. HIPAA also imposes on these
healthcare facilities and providers standards to assure the confidentiality of health information
stored or processed electronically, including a series of administrative, technical and physical
security procedures. This may affect us in several ways. Many users of our product offerings are
directly regulated under HIPAA and, to the extent our products cannot be utilized in a manner that
is consistent with the users HIPAA compliance requirements, our products will likely not be
selected. In addition, we may be directly affected by HIPAA and similar state privacy laws. Under
HIPAA, to the extent we perform functions or activities on behalf of customers that are directly
regulated by such medical privacy laws, such customers may be required to obtain satisfactory assurance
from us, in the form of a written agreement, that we will comply with various HIPAA requirements,
including inspection by federal authorities. A breach of such an agreement may result in contractual
liability to our customer or other adverse consequences. Regulation of medical information generally
is increasing at the state and federal levels in the United States and elsewhere, and such regulations
may negatively affect our business.

C.            ORGANIZATIONAL STRUCTURE

Our
principal subsidiary, STARLIMS Corporation, is incorporated in Florida, the United States. In 2006,
we established three additional wholly-owned subsidiaries, STARLIMS Canada organized in Canada, STARLIMS
Asia Pacific organized in Hong Kong and STARLIMS Europe organized in the United Kingdom. In May 2008,
we acquired STARLIMS UK, which served as our professional services provider in the United Kingdom,
and we intend to merge the new subsidiary into STARLIMS Europe.

D.PROPERTY, PLANTS AND EQUIPMENT

Our
corporate headquarters are located at 32B Habarzel Street, Tel Aviv 69710, Israel, where we own and
occupy approximately 2,600 square feet of office space.We lease approximately 10,000 square feet
of office space in Hollywood, Florida for our U.S. subsidiary, STARLIMS Corporation, under a lease
that expires in October 2009. The aggregate annual rent for our office space in Florida was approximately
$318,000 in 2008. We lease approximately 7,500 square feet of space in Montreal, Canada for our Canadian
subsidiary under a lease that expires in June 2011, at an annual rent of approximately $157,000.
We lease approximately 3,000 square feet of space in Hong Kong for our Hong Kong subsidiary under
a lease that expires in January 2010, at an annual rent of approximately $80,000.We lease approximately
3,000 square feet of space in Ashkelon, Israel for our Israeli research and development center under
a lease that expires in December 2009, at an annual rent of approximately $33,000.  We lease
approximately 1,260 square feet of space in Bolton, England for STARLIMS UK under a month-to-month
lease, at an annual rent of approximately $65,500. From time to time we also lease, through
staffing service providers, small offices in various locations to accommodate field sales personnel.

ITEM 4A.         UNRESOLVED STAFF COMMENTS

Not













applicable.

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.            OPERATING RESULTS

The following discussion of our results of operations should be read together with our audited consolidated
financial statements and the related notes, which appear elsewhere in this annual report. The following
discussion contains forward-looking statements that reflect our current plans, estimates and beliefs
and involve risks and uncertainties. Our actual results may differ materially from those discussed
in the forward-looking statements. Factors that could cause or contribute to such differences include
those discussed below and elsewhere in this annual report.

24

---

---

Background

We
were incorporated under the laws of the State of Israel in May 1986. Our ordinary shares have traded
on the TASE since November 1993 and have also been listed on the NASDAQ Global Market (symbol: LIMS)
since our public offering in the United States in May 2007. We develop, market and sell a configurable
off-the-shelf LIMS software solution trade-named STARLIMS. Our principal
subsidiary, STARLIMS Corporation, is incorporated in Florida, the United States. In 2006, we established
three additional subsidiaries, STARLIMS Canada organized in Canada, STARLIMS Asia Pacific organized
in Hong Kong and STARLIMS Europe organized in the United Kingdom.In May 2008, we acquired STARLIMS
UK, which served as our professional services provider in the United Kingdom, and we intend to merge
the new subsidiary into STARLIMS Europe.

Our
consolidated financial statements are prepared in U.S. dollars and in accordance with generally accepted
accounting principles in the United States, or U.S. GAAP.

Overview

We
are a leading provider of LIMS and have over 20 years experience in the LIMS market. STARLIMS
manages the collection, processing, storage, retrieval and analysis of information generated in laboratories.
Our software improves the reliability of sampling processes, supports compliance with domestic and
international regulations and industry standards, and provides comprehensive reporting, monitoring
and analysis capabilities. In March 2006, we introduced a web-based LIMS solution, which enables
our customers to manage their globally distributed laboratories more efficiently and effectively.

Our
STARLIMS solution is used by more than 500 laboratories in over 40 countries around the world and
our strongest presence is in North America. The adaptable nature of our software allows us to offer
solutions to customers in a wide range of industries and in multiple disciplines, primarily quality
assurance and control, testing and monitoring, and research and development. The primary users of
STARLIMS are government, life sciences and manufacturing organizations.

We
released our web-based, configurable off-the-shelf STARLIMS Version 10 in March 2006. Unlike many
traditional LIMS that were augmented by web-enabled capabilities, STARLIMS Version 10 was developed
from inception as a true web-based product. STARLIMS Version 10 requires no client-side installation
or maintenance and enables us to offer a solution that facilitates global deployment and centralized
management. We were among the first in the LIMS industry to offer such capabilities and since its
release, we have experienced increased interest in STARLIMS Version 10, primarily from global organizations
with multiple, widely distributed laboratories.

Our
release of STARLIMS Version 10 did not represent a change in our basic business model and we continue
to offer our STARLIMS software under a perpetual license, which permits the installation of the software
on the customers servers. We currently do not offer hosting services on our or any third partys
hardware, which eliminates the risks associated with the provision of such services. Upon the introduction
of STARLIMS Version 10, we began to exclusively invest our marketing resources in creating increased
market familiarity for web-based LIMS and discontinued our promotion of the prior client-server version
of STARLIMS.

We
recently released what we believe is the first LIMS solution that provides SDMS and ELN functionalities.
We released our first SDMS during the fourth quarter of 2007, and in March 2009, we released our
STARLIMS Electronic Notebook, which provides the functionality of ELNs used in routine analysis laboratories.

In
January 2006, to increase our market share in the life sciences, we acquired all of the outstanding
stock of STARLIMS Canada, a Canadian company that served as a distributor of our software products
in Canada and as a subcontractor for implementation services in the United States. STARLIMS Canada
is focused exclusively on servicing our customers in the life sciences. As of December 31, 2008,
STARLIMS Canada employed a team of 23 engineers.

25

---

---

In
July 2006, we established a subsidiary in Hong Kong, STARLIMS Asia Pacific, which acquired certain
assets and liabilities of a company that served as our business development office in the Asia Pacific
region. As of December 31, 2008, STARLIMS Asia Pacific employed a team of 18 sales personnel and
engineers focused on supporting our expansion efforts into the fast growing LIMS markets in China
and South East Asia. In 2008, we expanded our reach within the more mature markets in the Asia Pacific
region including Japan, Australia and New Zealand.

In
November 2006, we established a research and development center in Ashkelon, Israel, which employed
17 programmers as of December 31, 2008.

On

May 23, 2007, we issued 2,100,000 ordinary shares in an initial public offering in the United States.

On June 27, 2007, the underwriters, Oppenheimer & Co. and JMP Securities LLC, exercised part

of their over allotment and purchased an additional 126,300 ordinary shares. We sold a total of
2,226,300
ordinary shares (including the over allotment option shares) at a price to the public
of $13.50 per
share resulting in net proceeds from the offering of approximately U.S. $27 million.

In
February 2008, we adopted a share repurchase program, allowing us to repurchase our ordinary shares
over a period of 18 months in the open market, at times and prices that management considers appropriate,
taking into account prevailing market conditions and other corporate considerations. The program
limits us to aggregate purchases of up to $2.0 million. As of December 31, 2008, we had repurchased326,308 ordinary shares under the program at a total purchase price of approximately $1.9 million, or an average
price of $5.95 per share.  In conjunction with our repurchase program, we have established a
Rule 10b5-1 trading plan, which provides for a scheduled repurchase mechanism that is managed by
our broker.

In
May 2008, we established a strategic informatics consulting unit by acquiring the assets of a U.S.-based
consultancy specializing in LIMS and laboratory informatics. The founder of that company, a veteran
of 24 years in LIMS consultancy, now heads the new unit.

In
May 2008, we acquired STARLIMS UK, which served as our professional services provider in the United
Kingdom, and hired a long-time LIMS veteran to serve as the general manager of the new subsidiary.
We intend to merge the new subsidiary into STARLIMS Europe, which we established in July 2006. As
of December 31, 2008,STARLIMS UK employed a team of 11 sales personnel and engineers, all focused
on enhancing STARLIMSs service capabilities in the United Kingdom and expanding our European
operations.

Sources of Revenues

We
generate revenues from the sale of perpetual licenses to use STARLIMS, software maintenance, and
related professional services. Our customers generally enter into a standard license and services
agreement with us, under which they are granted a perpetual, non-exclusive license to use the STARLIMS
software and are offered the right to purchase annual maintenance that provides updates and upgrades
to our software if and when made available. In North America, Latin America, Asia Pacific and Europe,
we offer our customers professional services, which include consulting services, implementation,
training and technical support for the software. In other regions, where we do not operate directly,
these services are provided by our network of distributors.

The
following table presents a breakdown of our revenues for each of the three years ended December 31,
2008:

|                       |  |  | **2006**                    |        | **2007**                             |  | **2008**     |  
|---------------------- |  |  | --------------------------- | ------ | ------------------------------------ |  | ------------ | -
|                       |  |  |                             |        |                                      |  |              |  
|                       |  |  | **Revenues**                |        | **% of 
      Total
      Revenues** |  | **Revenues** |  
|                       |  |  |                             |        |                                      |  |              |  
|                       |  |  | (U.S. dollars in thousands) |       
|                       |  |  |                             |       
|Software licensing     |  |  | $                           | 8,286  |                                      |  | 42           | %
|Maintenance            |  |  |                             | 2,841  |                                      |  | 14           | %
|                       |  |  |                             |        |                                      |  |              |  
|Total product revenues |  |  | $                           | 11,127 |                                      |  | 56           | %
|Services               |  |  |                             | 8,638  |                                      |  | 44           | %
|                       |  |  |                             |        |                                      |  |              |  
|Total revenues         |  |  | $                           | 19,765 |                                      |  | 100          | %

26

---

---

The
following table presents the geographic breakdown (based on information provided by our customers
as to the intended place of use) of our revenues for each of the three years ended December 31, 2008:

|              |  |  | **2006**                    |        | **2007**                             |  | **2008**     |  
|------------- |  |  | --------------------------- | ------ | ------------------------------------ |  | ------------ | -
|              |  |  |                             |        |                                      |  |              |  
|              |  |  | **Revenues**                |        | **% of 
      Total
      Revenues** |  | **Revenues** |  
|              |  |  |                             |        |                                      |  |              |  
|              |  |  | (U.S. dollars in thousands) |       
|              |  |  |                             |       
|North America |  |  | $                           | 14,689 |                                      |  | 74           | %
|Europe        |  |  |                             | 2,870  |                                      |  | 14           | %
|Latin America |  |  |                             | 1,690  |                                      |  | 9            | %
|Asia          |  |  |                             | 516    |                                      |  | 3            | %
|              |  |  |                             |        |                                      |  |              |  
|Total         |  |  | $                           | 19,765 |                                      |  | 100          | %

Cost of Revenues and Operating Expenses

Cost of Revenues.  Cost of products consists of purchases of third-party software components and other royalty
payments to third parties. Cost of services consists primarily of salaries of employees of our professional
services organization and subcontracting costs we incur when professional services are provided on
our behalf by third party system integrators and consulting firms. Our professional services teams
and subcontractors provide our customers with training and technical support and assist them in the
implementation of STARLIMS. Our professional services staff increased slightly from 82 employees
as of December 31, 2006 to 84 employees as of December 31, 2007 and 2008. In 2006, 2007
and 2008, salary and subcontracting costs represented 83%, 82% and 83% of our cost of services, respectively.

Research and Development Expenses.  Research and development expenses consist primarily of salaries of programmers engaged in on-going
research and development activities and other related expenses. We have historically focused our
research and development efforts on increasing the functionality, performance and integration of
STARLIMS with other business applications. Prior to November 2006, our research and development activities
were conducted solely at our Florida facility. In November 2006, we established an additional research
and development center in Ashkelon, Israel and had 17 programmers employed at that center as of December
31, 2008. Over the last three years we have completed major development cycles resulting in our web-based
LIMS platform as well as our SDMS and ELN modules. Our research and development staff grew from 32
to 34 to 36 employees as of December 31, 2006, 2007 and 2008, respectively.

Selling and Marketing Expenses.  Selling and marketing expenses consist primarily of salaries and related expenses for sales
and marketing personnel, sales commissions, marketing campaigns, website related expenses, public
relations, promotional materials, travel expenses and trade show exhibit expenses. We expect that
selling and marketing expenses will increase as we expand our geographical reach and we increase
our efforts to further establish the market adoption of our products. Our sales and marketing personnel
grew from 17 to 18 to 21 employees as of December 31, 2006, 2007, and 2008, respectively.

General and Administrative Expenses.  General and administrative expenses consist primarily of salaries and related expenses for
executive, accounting, human resources and administrative personnel, professional fees, provisions
for doubtful accounts and other general corporate expenses. We expect that general and administrative
expenses will increase in the future as we add personnel commensurate with the international growth
of our business. Our management and administrative personnel was steady at 17 employees as of December
31, 2006 and 2007 and grew to 21 employees as of December 31, 2008.

Financial Income, Net.  Financial income, net consists primarily of income on marketable securities, interest on bonds
and commercial paper, as well as interest on cash deposits and exchange rate gains (losses).

27

---

---

Income Tax Expense.  Our taxable income in Israel was subject to corporate tax at the statutory rate of 29% in 2007
and 27% in 2008.The applicable rate for 2009 is 26%; for 2010 and thereafter, it will be 25%.Our
Israeli research and development center, established in Israel in November 2006, was recognized under
the Israeli Law for the Encouragement of Capital Investments, 1959 as a Benefited Enterprise,
entitling us to various tax benefits. Our benefit under this program commenced in the 2006 tax year
and will be in effect for ten years ending in 2015. Any taxable income attributable to an increase
in our revenues subject to Israeli tax over $3.5 million will be tax exempt in such period. In the
event of distribution of cash dividends from income which was tax exempt, we would have to pay corporate
tax in respect of the amount distributed. The benefits under our Benefited Enterprise are subject
to our compliance with conditions under applicable law and the approval that we received from the
Israeli Tax Authority. As of December 31, 2008, we were in compliance with all applicable conditions.
The statutory tax rate applicable to our operations in the United States for 2008 was 36% and the
rates applicable to our other foreign subsidiaries ranged from 16.5% to 31% in the year ended December 31, 2008.
See Item 10E. Additional Information - Taxation - Israeli Tax Considerations.

Critical Accounting Policies and Estimates

Our
consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of the
financial statements requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues, costs and expenses and related disclosures. Though we evaluate
our estimates and assumptions on an ongoing basis, our actual results may differ from these estimates.

Certain
of our accounting policies that we believe are the most important to the portrayal of our financial
condition and results of operations and that require managements subjective judgments are described
below to facilitate better understanding of our business activities. We base our judgments on our
experience and assumptions that we believe are reasonable and applicable under the circumstances.

Revenue Recognition

Our
revenues are derived from licensing our software products, which include annual maintenance contracts,
and rendering services, which typically include consulting, implementation, training and technical
support. Our typical licensing transaction provides a perpetual non-exclusive license to use our
software products, which use is restricted in terms of either the number of users or the specified
locations of use (site license). We generally license our software products under multiple element
arrangements, in cases where the customer requires a combination of maintenance, consulting, implementation,
training or other services, in addition to the software license.

We
recognize revenues pursuant to the provisions of American Institute of Certified Public Accountants
Statement of Position, or SOP, 97-2, Software Revenue Recognition, or SOP 97-2, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions.

While
these statements of position govern the basis for recognition of revenues from our operations, judgment
and the use of estimates are required in connection with the determination of the amount of software
licensing and services revenues, as well as the amount of deferred revenues to be recognized in each
future accounting period. Our ability to identify the type of elements included in our multiple-element
software arrangements, to determine whether services are essential to the functionality of the software
and to establish the vendor specific objective evidence, or VSOE, of fair value for the identified
elements could materially impact the amount and timing of our recognized and deferred revenues.

Software Licensing and Maintenance Revenue Recognition. Revenues from software licensing are recognized when all the following criteria are met: (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our fee is fixed
or determinable, and (iv) collectibility is probable.

Revenues
from post-contract customer support arrangements, referred to as maintenance contracts, which are
initially bundled in the licensing fee, are separated from such licensing fee based on VSOE of fair
value and recognized ratably over the contractual period of the arrangement (typically one year).
Revenues from renewal of maintenance contracts, generally covering a period of one year, are recognized
ratably over the contractual period of the arrangement. Maintenance contracts provide the right to
unspecified software upgrades and updates on a when-and-if-available basis.

28

---

---

In
multiple-element arrangements that include software licensing and services that are not essential
to the functionality of the software, revenues allocated to the services are accounted for separately.
In such cases, revenues are recognized using the residual method when VSOE of fair value exists for
all of the undelivered elements under the arrangement. We allocate revenues to each undelivered element
based on its respective fair value which is the price charged when that element is sold separately
or, by reference to a renewal rate specified in the related arrangement. Revenues are recognized
for the delivered elements when (i) VSOE of the fair values of all undelivered elements exists, and
(ii) all revenue recognition criteria of SOP 97-2 are satisfied.

Revenues
for arrangements that include services deemed as essential to the functionality of the software or
involve significant production, modification, or customization of the software are recognized in
accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, based on the percentage of completion method of accounting. If such arrangements include
elements that do not qualify for contract accounting (such as bundled maintenance contracts), those
elements are accounted for separately provided that all other applicable revenue recognition criteria
are satisfied. Provisions for estimated losses attributable to uncompleted contracts are made in
the period in which such losses are initially determined, in an amount equal to the estimated loss
on the entire contract.

In
arrangements in which sales to end-customers are made by a distributor and we are the primary obligor
and bear the risks associated with the transaction, revenues are recorded upon the sale to the end-customer
in an amount equal to the end-customer purchase price, provided all other revenue recognition criteria
of SOP 97-2 are satisfied. In arrangements in which sales are made to the distributor under non-exchangeable,
non-refundable and non-returnable terms, the distributor is considered as the end-customer and revenues
are recorded upon the sale to the distributor in an amount equal to the distributors purchase
price, net of the commission to which the distributor is entitled provided all other revenue recognition
criteria of SOP 97-2 are satisfied.

Services Revenues Recognition.  Our professional services include training, technical support, consulting services and
implementation services. Revenues from professional services that are time-and-material based are
recognized as such services are provided based on time and materials invested. Revenues from professional
services that are milestone-based are recognized upon the completion of each respective milestone.
Revenues from training are recognized as the training is provided. Revenues from technical support
arrangements are recognized ratably over the contractual period of the arrangements (typically one year).

Goodwill

Our
long-term assets include goodwill resulting from business combinations, which are accounted for under
the purchase method. Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations accounted for as purchases. Goodwill is not amortized
to earnings, but rather is subject to periodic testing for impairment at least annually or more frequently
if certain events or indicators of impairment occur, at the reporting unit level. Impairment is the
condition that exists when the carrying amount of goodwill exceeds its implied fair value. Measurement
of an impairment loss is an estimate performed based on the following: if the fair value of the reporting
unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; if the
carrying amount of the reporting unit goodwill exceeds the implied fair value of the goodwill, an
impairment loss is recognized in an amount equal to that excess. We use the discounted cash flow
method to determine the fair value of the reporting unit. Our determination whether goodwill is to
be impaired involves assumptions and estimates relating to our potential future benefits of that
goodwill. If these estimates or related assumptions change in the future we may be required to record
impairment charges of our goodwill.

Functional Currency in U.S. Dollars

The
reporting currency of our company is the U.S. dollar. The majority of our revenues are generated
in U.S. dollars or linked to the U.S. dollar. In addition, a substantial portion of our costs are
incurred in U.S. dollars. We believe that the U.S. dollar is the primary currency of the economic
environment in which we operate. The functional currency of each of our non-Israeli subsidiaries
is the respective local currency.

29

---

---

Transactions
of our subsidiaries that are in currencies other than the subsidiarys functional currency are
translated into the respective functional currency based on the currency exchange rates at the date
of the transaction in accordance with the principles set forth in Statement of Financial Accounting
Standards, or SFAS, No. 52, Foreign Currency Translation, or SFAS 52.  All transaction gains and losses from the translation of monetary balance
sheet items resulting from transactions in currencies other than the functional currency are recorded
as financial income (expenses) as they arise.

The
financial statements of our subsidiaries with a functional currency other than the U.S. dollar are
translated into U.S. dollars prior to their inclusion in the consolidated financial statements, in
accordance with the provisions of SFAS 52, as follows: assets and liabilities are translated using
the year-end exchange rates; and statements of income transactions are translated at the date of
the transaction using the then current exchange rates. Translation adjustments are presented in shareholders equity as Other Comprehensive Income (Loss).

Allowance for Doubtful Accounts

An
allowance for doubtful accounts is determined as a percentage of the balance of the accounts receivable
based on our estimates and past experience. When and if there is specific evidence based on which,
in our estimation, collectibility is not assured, the allowance for doubtful accounts is computed
on the specific identification basis. Any change in our estimates may result in greater amounts recorded
as an allowance for doubtful accounts.

Research and Development

Software
research and development costs incurred prior to the establishment of technological feasibility are
charged to 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. Based on our software research and development process,
technological feasibility is established upon completion of a working model only when all planning,
designing, coding and testing have been completed in accordance with design specifications. To date,
software research and development costs associated with the establishment of technological feasibility
were uncertain until release, and we have expensed all software research and development costs accordingly.

Income Taxes

In
connection with the preparation of our financial statements, we estimate our income taxes in each
of the jurisdictions in which we operate. This process involves the assessment of our loss carryforwards,
credits and tax positions, as well as estimating the actual current tax liability together with assessing
temporary differences resulting from tax reporting on a cash basis and different treatment of certain
items, such as reserves and accrued liabilities, for tax and accounting purposes. We then assess
the likelihood that deferred tax assets will be recovered from future taxable income, and to the
extent we estimate that recovery is not likely, we establish a valuation allowance. Based on historical
results, we do not believe that it is more likely than not that we will realize the value of all
our deferred tax assets and therefore have provided the required valuation allowance against our
net deferred tax assets.

Stock-Based Compensation

We
account for stock-based compensation in accordance with the Financial Accounting Standards Board,
or FASB, SFAS No. 123 (Revised 2004), Share-Based Payment, or SFAS 123(R), applying the modified prospective method, and with Securities and Exchange
Commission Staff Accounting Bulletin, or SAB, No. 107, Share-Based Payment, or SAB 107, and SAB 110.  In accordance with SFAS 123(R), we measure the compensation
cost associated with share-based payment transactions based on the fair value on the respective grant
date. Such transactions include options and restricted stock units awarded to employees and a
liability award related to conditional adjustments to the salaries of certain officers (see Item
6.B Directors, Senior Management and Employees- Compensation).  The costs associated
with the awards are expensed over the vesting period of each grant, according to the straight-line
method.

30

---

---

For
employee option grants, the fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model. For restricted stock units awarded to employees and the
liability award, the fair value is estimated on the date of grant using the Monte-Carlo option-pricing
model.  When determining fair value based on those pricing models, we use weighted average assumptions
relating to the dividend yield, expected volatility, risk free interest rate, expected holding period
of the option by the employee and forfeiture rates, in accordance with SAB 107.  Changes in
our assumptions with respect to these components, or applying a different pricing model, may change
the compensation award costs and amounts expensed in each period and consequently the results of
our operations.  In 2006, 2007 and 2008, we incurred share-based compensation expense of $141,000,
$177,000 and $488,000, respectively, attributable to all our share-based payments.  We expect
that such expenses will increase in the future as we grant additional stock-based compensation awards
and recruit additional employees.

Results of Operations

The
following table presents certain financial data expressed as a percentage of total revenues for the
periods indicated:

|                           |  | **As of December 31,** |  
|-------------------------- |  | ---------------------- | -
|                           |  |                        |  
|                           |  | **2006**               |  
|                           |  |                        |  
|                           |  |                        |  
|Revenues:                  |  |                        |  
|Software licensing         |  | 41.9                   | %
|Maintenance                |  | 14.4                   |  
|Services                   |  | 43.7                   |  
|                           |  |                        |  
|Total revenues             |  | 100.0                  | %
|Cost of revenues           |  | 28.3                   |  
|                           |  |                        |  
|Gross profit               |  | 71.7                   |  
|Operating expenses:        |  |                        |  
|Research and development   |  | 9.4                    |  
|Selling and marketing      |  | 24.0                   |  
|General and administrative |  | 13.3                   |  
|                           |  |                        |  
|Total operating expenses   |  | 46.7                   |  
|                           |  |                        |  
|Operating income           |  | 25.0                   |  
|Financial income, net      |  | 3.1                    |  
|Income tax expense         |  | 8.9                    |  
|                           |  |                        |  
|Net income                 |  | 19.2                   | %
|                           |  |                        |  

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

Revenues. Revenues increased from $23.8 million for the year ended December 31, 2007 to $25.2 million for the
year ended December 31, 2008, an increase of 6.2%. Revenues from software licensing decreased from
$10.7 million for the year ended December 31, 2007 to $10.2 million for the year ended December 31,
2008, a decrease of approximately 3.9%. The decrease in software licensing revenues in the year ended
December 31, 2008 is primarily attributable to the general economic downturn, which has resulted
in longer sales cycles and customers altering their purchasing activity, including opting for phased
implementations.

Revenues
from maintenance increased from $3.2 million for the year ended December 31, 2007 to $5.2
million for the year ended December 31, 2008, an increase of 61.5%. The increase is primarily
attributable to the growth of our customer base and high renewal rates on maintenance contracts. We
expect our revenues from maintenance to grow in 2009 as a result of our larger installed base.

31

---

---

Revenues
from services decreased from $9.9 million for the year ended December 31, 2007 to $9.8 million for
the year ended December 31, 2008, a decrease of 1.1%. The decrease is primarily attributable to
the general economic downturn we encountered during the second half of 2008, which caused some of
our customers to adjust their implementation schedules. Since we recognize service revenue
based on pre-determined milestones or on a time-and-materials basis, the adjustment of implementation
schedules had a negative impact on our ability to recognize revenue.

Cost of Revenues. Cost of services increased from $8.1 million for the year ended December 31, 2007 to $9.1 million
for the year ended December 31, 2008, an increase of 12.9%. The increase is primarily attributable
to the additional service staff of STARLIMS UK which we acquired in May 2008, and to increased use
of specialized sub-contractors with credentials necessary for our government projects. Cost of products
increased from $374,000 for the year ended December 31, 2007 to $409,000 for the year ended December 31, 2008,
an increase of 9.4%, primarily due to payments to third party technology vendors.  Cost
of revenues for the years ended December 31, 2007 and 2008 includes $27,000 and $144,000, respectively,
of stock-based compensation recorded under SFAS 123(R).

Gross Profit.  Gross profit as a percentage of revenues decreased from 64% for the year ended December 31, 2007
to 62% for the year ended December 31, 2008. The decrease was primarily attributable to a
lower gross margin from services, which decreased from 18% in 2007 to 7% in 2008. Towards the end
of 2008, we better utilized our service resources, and we expect to significantly improve our service
gross margin in 2009.

Research and Development Expenses.  Research and development expenses increased from $2.9 million for the year ended December 31, 2007
to $3.4 million for the year ended December 31, 2008, an increase of 18.7%. The increase
is primarily attributable to the development of our SDMS and ELN products and our ongoing efforts
to build an integrated informatics platform. Research and development expenses as a percentage of
revenues increased from 12% for the year ended December 31, 2007 to 14% for the year ended
December 31, 2008. Research and development expenses for the years ended December 31, 2007 and 2008
include $16,000 and $59,000, respectively, of stock-based compensation recorded under SFAS 123(R).
With the release of our ELN functionality in March 2009, we have completed a significant development
cycle, and we therefore believe that our research and development expenses will not significantly
increase for 2009.

Selling and Marketing Expenses.  Selling and marketing expenses increased from $5.8 million for the year ended December 31, 2007
to $6.3 million for the year ended December 31, 2008, an increase of 8.8%. The increase
is primarily attributable to the increase in our direct sales force from nine persons as of December
31, 2007 to 12 persons as of December 31, 2008 and an increase in distributor commissions related
to the growth in our non-US sales. Selling and marketing expenses as a percentage of revenues increased
from 24% for the year ended December 31, 2007 to 25% for the year ended December 31, 2008. Selling
and marketing expenses for the years ended December 31, 2007 and 2008 include $125,000 and $260,000,
respectively, of stock-based compensation recorded under SFAS 123(R).

Financial Income, Net.  Financial income, net decreased from $1.6 million for the year ended December 31, 2007
to $1.0 million for the year ended December 31, 2008, a decrease of approximately 32.3%.
The decrease is primarily attributable to lower interest rates on our cash balances and marketable
securities and the depreciation of the Euro, Canadian dollar and British pound against the U.S. dollar,
which decreased the U.S. dollar value of our cash balances in those currencies. We expect our financial
income to decrease in 2009 as a result of the decrease in prevailing interest rates.

32

---

---

Income Tax Expense. Income tax expenses were $900,000 for the year ended December 31, 2007, or a 16% effective
tax rate, compared to $600,000, or a 17% effective tax rate, for the year ended December 31, 2008.
The increase in our effective tax rate in the year ended December 31, 2008 was primarily
attributable to a slight change in the mix of sales in local countries and jurisdictions where we
do business.

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

Revenues. Revenues increased from $19.8 million for the year ended December 31, 2006 to $23.8 million for the
year ended December 31, 2007, an increase of 20%. Revenues from software licensing increased from
$8.3 million for the year ended December 31, 2006 to $10.7 million for the year ended December 31,
2007, an increase of approximately 29%. The increase in software licensing revenues in the year ended
December 31, 2007 is as a result of the broader adoption of STARLIMS Version 10 and the increased
revenues derived from each transaction.

Revenues
from maintenance increased from $2.8 million for the year ended December 31, 2006
to $3.2 million for the year ended December 31, 2007, an increase of 14%. This increase
is attributable to the growth of our customer base.

Revenues
from services increased from $8.6 million for the year ended December 31, 2006 to $9.9 million
for the year ended December 31, 2007, an increase of 14%. This increase is primarily attributable
to the implementation of STARLIMS by larger customers with laboratories in multiple sites, with each
site requiring increased professional services.

Cost of Revenues. Cost of services increased from $5.6 million for the year ended December 31, 2006 to $8.1 million
for the year ended December 31, 2007, an increase of 46%. This increase is attributable to the
expansion of our professional services, including the expansion of our Canadian-based subsidiary
and the establishment of our Hong Kong subsidiary in July 2006, and an increased use of specialized
sub-contractors with security clearances necessary for our government projects. Cost of products
increased from $31,000 for the year ended December 31, 2006 to $374,000 for the year ended December 31, 2007,
primarily due to purchases of software components required for our offering to the LIS market, which
we recently entered. Cost of revenues for the years ended December 31, 2006 and 2007 includes $18,000
and $27,000, respectively, of stock-based compensation recorded under FASB SFAS 123(R).

Gross Profit.  Gross profit as a percentage of revenues decreased from 72% for the year ended December 31, 2006
to 64% for the year ended December 31, 2007. This decrease was primarily a result of an
increased use of specialized sub-contractors with security clearances necessary for our government
projects and increased cost of goods due to our entry into the LIS market.

Research and Development Expenses.  Research and development expenses increased from $1.9 million for the year ended December 31, 2006
to $2.9 million for the year ended December 31, 2007, an increase of 54%. Such increase
is primarily attributable to the establishment of our development center in Israel in November 2006.
Research and development expenses as a percentage of revenues increased from 9% for the year ended
December 31, 2006 to 12% for the year ended December 31, 2007. Research and development
expenses for each of the years ended December 31, 2006 and 2007 include $16,000 of stock-based compensation
recorded under SFAS 123(R).

Selling and Marketing Expenses.  Selling and marketing expenses increased from $4.7 million for the year ended December 31, 2006
to $5.8 million for the year ended December 31, 2007, an increase of 22%. Of such
increase, approximately $398,000 was attributable to our trade shows and expositions, primarily our
customer conference, which took place in December 2007. Selling and marketing expenses as a percentage
of revenues remained constant at approximately 24% for the years ended December 31, 2006
and 2007. Selling and marketing expenses for the years ended December 31, 2006 and 2007 include
$96,000 and $125,000, respectively, of stock-based compensation recorded under SFAS 123(R).

33

---

---

General and Administrative Expenses.  General and administrative expenses increased from $2.6 million for the year ended December 31, 2006
to $2.8 million for the year ended December 31, 2007, an increase of 6%. An increase of
approximately $271,000 was attributed to increased professional services fees and insurance expenses
due to our initial public offering in the United States in May 2007. General and administrative expenses
as a percentage of revenues decreased from approximately 13% for the year ended December 31, 2006
to approximately 12% for the year ended December 31, 2007. This decrease is due to the
increase in our revenues, while the majority of our general and administrative expenses are of a
fixed nature. General and administrative expenses for the years ended December 31, 2006 and 2007
include $11,000 and $9,000, respectively, of stock-based compensation recorded under SFAS 123(R).

Financial Income, Net.  Financial income, net increased from $600,000 for the year ended December 31, 2006
to $1.6 million for the year ended December 31, 2007, an increase of approximately 154%.
This increase is primarily attributable to interest income from bonds and commercial paper, which
we purchased with proceeds from our initial public offering in the United States. Such interest income
in 2007 was $903,000, compared to $168,000 in 2006. This increase is also attributable to a $326,000
gain on marketable securities in 2007, compared to a $192,000 gain on marketable securities in 2006.
Our financial income also increased due to the appreciation of the NIS against the U.S. dollar by
approximately 9% in 2007 compared to approximately 8% in 2006. As a result, we recorded a foreign
currency exchange gain of $241,000 in 2007 compared to a foreign currency exchange gain of $164,000 in 2006.

Income Tax Expense.  Income tax expenses were $1.8 million for the year ended December 31, 2006, or a 32% effective
tax rate, compared to $0.9 million, or a 16% effective tax rate, for the year ended December 31, 2007.
The decrease in our effective tax rate in the year ended December 31, 2007 was primarily
attributable to the establishment of our development center in Israel in November 2006, which
is regarded as a Benefited Enterprise entitling us to certain tax benefits under Israeli
law, including a tax exemption for income attributable to the Benefited Enterprise.

Quarterly Results of Operations

The
following tables set forth certain quarterly financial information for each of the eight fiscal quarters
ended December 31, 2008, in dollars and as a percentage of revenues. In managements opinion,
this data has been prepared on a basis consistent with our audited consolidated financial statements
included elsewhere in this annual report and include all adjustments, consisting only of normal recurring
adjustments that we consider necessary for a fair presentation of the information for the quarters
presented. The operating results for any quarter are not necessarily indicative of results that we
might achieve for any future periods.

|                                        |  | **For the Three Month Periods Ended**         |      
|--------------------------------------- |  | --------------------------------------------- | -----
|                                        |  |                                               |      
|                                        |  | **Mar. 31, 
      2007**                      |      
|                                        |  |                                               |      
|                                        |  | (Unaudited)
      (U.S. dollars in thousands) |      
|                                        |  |                                               |      
|**Statement of Income Data:**           |  |                                               |      
|Revenues                                |  |                                               |      
|Software licensing                      |  | $                                             | 2,679
|Maintenance                             |  |                                               | 727  
|Services                                |  |                                               | 2,001
|                                        |  |                                               |      
|Total Revenues                          |  |                                               | 5,407
|Cost of Revenues                        |  |                                               | 1,826
|                                        |  |                                               |      
|Gross Profit                            |  |                                               | 3,581
|Research and development 
   expenses   |  |                                               | 676  
|Selling and marketing 
   expenses      |  |                                               | 1,165
|General and administrative 
   expenses |  |                                               | 573  
|                                        |  |                                               |      
|Operating income                        |  |                                               | 1,167
|Financial income, net                   |  |                                               | 131  
|                                        |  |                                               |      
|Income before income tax                |  |                                               | 1,298
|Income tax expense                      |  |                                               | 187  
|                                        |  |                                               |      
|Net income                              |  | $                                             | 1,111
|                                        |  |                                               |      

34

---

---

|                                           |  |                                       |     
|------------------------------------------ |  | ------------------------------------- | ----
|                                           |  | **For the Three Month Periods Ended** |     
|                                           |  |                                       |     
|                                           |  | **Mar. 31, 
      2007**              |     
|                                           |  |                                       |     
|                                           |  | (Unaudited)                           |     
|                                           |  |                                       |     
|**As a percentage of total 
   revenues:** |  |                                       |     
|Revenues                                   |  |                                       |     
|Software licensing                         |  |                                       | 49.5
|Maintenance                                |  |                                       | 13.5
|Services                                   |  |                                       | 37.0
|                                           |  |                                       |     
|Total Revenues                             |  |                                       | 100 
|Cost of Revenues                           |  |                                       | 33.8
|                                           |  |                                       |     
|Gross Profit                               |  |                                       | 66.2
|Research and development 
   expenses      |  |                                       | 12.5
|Selling and marketing 
   expenses         |  |                                       | 21.5
|General and administrative 
   expenses    |  |                                       | 10.6
|                                           |  |                                       |     
|Operating income                           |  |                                       | 21.6
|Financial income, net                      |  |                                       | 2.4 
|                                           |  |                                       |     
|Income before income tax                   |  |                                       | 24.0
|Income tax expense                         |  |                                       | 3.5 
|                                           |  |                                       |     
|Net income                                 |  |                                       | 20.5
|                                           |  |                                       |     

We
expect our operating results to fluctuate significantly in the future from quarter to quarter as
a result of various factors, many of which are outside our control, including the timing of the closing
of our transactions. Consequently, we believe that period-to-period comparisons of our operating
results may not necessarily be meaningful and, as a result, you should not rely on them as an indication
of future performance.

Seasonality

We
experience seasonality in our revenues, with the third and fourth quarters typically having the highest
revenues for the year. We believe that this seasonality results primarily from our customers
budgeting cycles. The U.S. federal government budget year ends in the third calendar quarter of the
year and a majority of corporate budget years end in the fourth calendar quarter of the year. In
addition, our customers also tend to make software license purchases near the end of a particular
quarter, which tends to make our revenues for a particular period unpredictable for a significant
portion of the period in question until purchase decisions have been made and license agreements
have been entered into. We expect that this seasonality within a particular year and unpredictability
within a particular quarterly period will continue for the foreseeable future.

Impact of Currency Fluctuation

We
operate in the United States, Canada, Israel, Hong Kong and the United Kingdom. Our financial results,
which are reported in U.S. dollars, are affected by changes in foreign currency. In 2008, approximately
12% of our expenses were paid in Canadian dollars, 16% in NIS and 4% in British pounds, which are
primarily attributable to salary and salary-related expenses related to our operations in Canada,
Israel and the United Kingdom.  The U.S. dollar cost of our operations in these locations is
influenced by the exchange rate between the U.S. dollar and the foregoing currencies.  During
2008, the Canadian dollar depreciated against the U.S. dollar by approximately 24%; the NIS appreciated
against the U.S. dollar by approximately 1%, and the British pound depreciated against the U.S. dollar
by approximately 19%.  We cannot assure you that we will not be adversely affected in the future
if such currencies appreciate against the U.S. dollar.

35

---

---

In

addition, approximately 15% of our marketable securities ($1.1 million, as of December 31,
2008)
are NIS-denominated bonds. Consequently, our financial results are affected by fluctuations
in the
rates of exchange between the U.S. dollar and the NIS. In 2006, 2007 and 2008, the NIS appreciated

against the U.S. dollar by approximately 8%, 9% and 1%, respectively.

In

2006, 2007 and 2008, we recorded foreign currency exchange gains of $166,000, $241,000 and $79,000,

respectively.

Conditions in Israel

We
are incorporated under the laws of the State of Israel, and one of our research and development facilities
is located in Israel. Two members of our management who also serve as directors, four other directors
and approximately 14% of our staff is located in Israel. See Item 3D Key Information  Risk Factors  Risks Relating to Our Location in Israel
for a description of governmental, economic, fiscal, monetary or political polices or factors that
have materially affected or could materially affect our operations.

Effective Corporate Tax Rate

Israeli
companies are generally subject to corporate tax on their taxable income. The applicable rate for
2008 was 27%; for 2009, the applicable rate is 26%, and for 2010 and thereafter, it will be 25%.

In
June 2006, we received a pre-ruling from the Israeli Tax Authority according to which a development
center we established in November 2006 in Ashkelon, Israel will be regarded as a Benefited
Enterprise.  This entitles us to tax benefits under the Israeli Law for the
Encouragement of Capital Investments, 1959, referred to as the Investments Law. The benefits include
full exemption from corporate tax on undistributed taxable income attributable to the Benefited Enterprise,
reduced tax on dividends and accelerated depreciation for manufacturing assets. For a ten year period
ending December 31, 2015, any taxable income attributable to an increase in the revenues we account
for in Israel over the average annual revenues for the years 2003-2005 ($3.5 million) will be tax
exempt. The result of this tax benefit in 2008 was a reduction of our total tax liability by approximately
$300,000 and an increase of our effective tax rate from approximately 16% to approximately 17%. The
benefits are conditional on our compliance with certain conditions in the Investments Law and the
terms of the pre-ruling from the Israeli Tax Authority. See Item 10E. Additional Information
- Taxation - Israeli Tax Considerations  Tax Benefits under the Law for the Encouragement of
Capital Investments, 1959.

Our
taxes outside Israel are dependent on our operations in each jurisdiction as well as relevant laws
and treaties. Our company and its subsidiaries are each taxed individually and not on a consolidated
basis.

Recently Issued Accounting Standards

In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS 133, or SFAS 161.  SFAS 161 applies to all derivative instruments and non-derivative instruments
that are designated and qualify as hedging instruments and related hedged items accounted for under
SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, or SFAS 133.  The provisions of SFAS 161 require entities to provide greater transparency
through additional disclosures about (i) how and why an entity uses derivative instruments, (ii)
how derivative instruments and related hedged items are accounted for under SFAS 133 and its related
interpretations, and (iii) how derivative instruments and related hedged items affect an entitys
financial position, results of operations and cash flows. SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, namely January 1, 2009 for our company. The
adoption of SFAS 161 is not expected to have any effect on our financial position or results of operations.

In
April 2008, the FASB issued FASB Staff Position, or FSP, No. 142-3, Determination of the Useful Life of Intangible Assets, or FSP 142-3.  FSP 142-3 amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
FASB SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS 142.  The objective of FSP 142-3 is to improve the consistency between the useful
life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141(R), Business Combinations, and other U.S. generally accepted accounting principles. FSP 142-3 will be effective beginning
in fiscal year 2010. We are currently evaluating the impact that FSP 142-3 will have, if at all,
on our consolidated financial statements and disclosures.

36

---

---

B. Liquidity and Capital Resources

From
our inception until our initial public offering in Israel in November 1993, we financed our operations
through cash generated by operations and borrowings under lines of credit and shareholder loans.
Since our initial public offering in Israel, we have financed our operations through cash generated
by our operations.

On

May 23, 2007, we issued 2,100,000 ordinary shares in an initial public offering in the United States.

On June 27, 2007, the underwriters, Oppenheimer & Co. and JMP Securities LLC, exercised part

of their over allotment and purchased an additional 126,300 ordinary shares. We sold a total of
2,226,300
ordinary shares (including the over allotment option shares) at a price to the public
of $13.50 per
share resulting in net proceeds from the offering of approximately U.S. $27 million.

As
of December 31, 2007, we had approximately $31.7 million in cash and cash equivalents (which
consist primarily of commercial paper), $195,000 in restricted short-term deposits and $3.2 million
in marketable securities. As of December 31, 2008, we had approximately $21.9 million in
cash and cash equivalents, $1.2 million in short-term deposits, $338,000 in restricted short-term
deposits and $7.3 million in marketable securities.

Capital
expenditures for the years ended December 31, 2007 and 2008 were approximately $523,000 and
$1.7 million, respectively. The increase in capital expenditure in 2008 was primarily due to our
acquisition of STARLIMS UK. We currently have no significant capital spending or purchase commitments,
but expect to continue to engage in capital spending consistent with anticipated growth in our operations,
infrastructure and personnel.

Cash Flows

The
following table summarizes our cash flows for the periods presented:

| |                                                                  |  | Year ended December 31, |       
| | ---------------------------------------------------------------- |  | ----------------------- | ------
| |                                                                  |  |                         |       
| |                                                                  |  | 2007                    |       
| |                                                                  |  |                         |       
| |                                                                  |  | ($ in thousands)        |       
| |                                                                  |  |                         |       
| | Net cash provided by operating activities                        |  | $                       | 4,131 
| | Net cash provided by (used in) investing activities              |  |                         | 124   
| | Net cash provided by (used in) financing activities              |  |                         | 24,795
| | The effect of exchange rate changes on cash and cash equivalents |  |                         | 115   
| |                                                                  |  |                         |       
| | Net increase (decrease) in cash and cash equivalents             |  |                         | 29,165
| | Cash and cash equivalents at beginning of year                   |  |                         | 2,539 
| |                                                                  |  |                         |       
| | Cash and cash equivalents at end of year                         |  | $                       | 31,704
| |                                                                  |  |                         |       

Operating Activities. Net cash provided by operating activities was approximately $4.1 million for the year ended December
31, 2007. This amount was primarily attributable to net income of approximately $4.5 million.
Net cash provided by operating activities was approximately $2.2 million for the year ended December 31, 2008.
This amount was primarily attributable to net income of approximately $2.9 million.

37

---

---

Investing Activities. Net cash provided by investing activities was approximately $124,000 for the year ended December 31, 2007.
Of the cash provided by investing activities during the year ended December 31, 2007, approximately
$3.2 million was provided by proceeds from the sale of marketable securities, while approximately
$2.4 million was used for purchases of marketable securities and approximately $0.5 million
was used for purchases of property and equipment. Net cash used in investing activities was approximately
$6.9 million for the year ended December 31, 2008. Of the cash used in investing activities
in 2008, approximately $5.2 million was used for purchases of marketable securities and approximately
$1.2 million was invested in short-term deposits.

Financing Activities. Net cash provided by financing activities was $24.8 million for the year ended December 31, 2007,
primarily attributable to the $26.8 million proceeds from our initial public offering in the United
States in May 2007. In January 2007, we distributed a dividend of $1.9 million. Net cash used in
financing activities was $4.8 million for the year ended December 31, 2008, primarily attributable
to the payment of an annual dividend of an aggregate $2.9 million and the repurchase of our
shares for an aggregate $1.9 million under the repurchase plan that we adopted in February 2008.

Since
our initial public offering in Israel, we have repurchased our ordinary shares under four programs
authorized by our Board of Directors in 1995, 2000, 2004 and 2008, respectively. As of December 31, 2007,
we had repurchased an aggregate of 1,410,869 ordinary shares for approximately $3.5 million
under the first three of these programs. As of December 31, 2008, we had repurchased an aggregate
of 326,308 ordinary shares for approximately $1.9 million under the repurchase plan that we adopted
in February 2008. All of the repurchased shares are held by us as treasury stock other than 147,000
ordinary shares, which were sold upon exercise of employee share options.

We
believe that our existing cash and cash equivalents balances, and cash provided by operating activities
will be sufficient to meet our working capital, capital expenditure and other cash requirement needs
over at least the next 12 months. Our future capital requirements will depend on many factors, including
our rate of revenue growth, the expansion of our selling and marketing activities, the timing and
extent of research and development spending to support product development and enhancement efforts,
costs associated with expansion into new territories or markets, the timing of the introduction of
new products and services and the enhancement of existing products and the continuing market acceptance
of our products and services. To the extent that our existing cash and cash that will be generated
from operations is insufficient to finance our future activities and planned growth, we may need
to raise additional funds through public or private equity or debt financings.

In
the future, we may enter into arrangements to invest in or acquire complementary businesses, products
or technologies. Any such future acquisitions may require us to seek additional debt or equity financing,
which funds may not be available on terms favorable to us or at all.

C.            Research and Development

We
place considerable emphasis on research and development to expand the capabilities of our existing
products, to develop new products and to improve our existing technologies. We believe that our future
success will depend upon our ability to maintain our technological leadership, to enhance our existing
products and technology and to introduce on a timely basis new commercially viable products and technology
addressing the needs of our customers. Our investment in research and development for the years ended
December 31, 2006, 2007 and 2008, was $1.9 million, $2.9 million and $3.4 million, respectively.
The increase in research and development expenses in 2008 was mainly attributable to the development
of our SDMS and ELN products and our ongoing efforts to build an integrated informatics platform.As
part of our product development process, we seek to maintain close relationships with our customers
to identify market needs and to define appropriate product specifications.

As
of December 31, 2008, our research and development staff consisted of 36 employees, of whom 17 employees
were located in Florida, 17 were located in Israel, one was located in Canada and one was located
in the United Kingdom, compared to 34 employees as of December 31, 2007, of whom 16 employees were
located in Florida and 18 were located in Israel.

38

---

---

D.TREND INFORMATION

Trend
information is included in Items 5A and 5B of this annual report.

E.OFF-BALANCE SHEET ARRANGEMENTS

We
are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated
special purpose financing or partnership entities that are likely to create material contingent obligations.

F.TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The
following table summarizes our minimum contractual obligations and commercial commitments as of December
31, 2008 and the effect we expect them to have on our liquidity and cash flow in future periods.

|Contractual Obligations                                        |  |                             | Payments due by period |                       
|-------------------------------------------------------------- |  | --------------------------- | ---------------------- | ----------------------
|                                                               |  |                             |                        |                       
|                                                               |  | Total                       |                        | Less than
      1 year
|                                                               |  |                             |                        |                       
|                                                               |  | (U.S. dollars in thousands) |                       
|                                                               |  |                             |                       
|Operating lease obligations                                    |  | $                           | 1,211                  |                       
|Other long-term liabilities reflected on
    the balance sheet |  |                             |                       |                       
|                                                               |  |                             |                        |                       
|Total                                                          |  | $                           | 1,211                  |                       

As
of December 31, 2008, our principal commitments consisted of obligations outstanding under
operating leases. Our capital requirements are dependent on many factors, including market acceptance
of our software product offerings and the allocation of resources to our research and development
efforts, as well as our marketing and sales activities. In the last three years, we have experienced
substantial increases in our expenditures as a result of the growth in our operations and personnel.
We intend to increase our expenditures in the future consistent with our anticipated growth. We anticipate
that our cash resources will be used primarily to fund our operating activities, as well as for capital
expenditures.

ITEM 6.           DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.            Directors and Senior Management

Set
forth below are the name, age, principal position and a biographical description of each of our directors
and executive officers:

| | Name                 |  | Age |  | Position with the Company                                                                      
| | -------------------- |  | --- |  | -----------------------------------------------------------------------------------------------
| |                      |  |     |  |                                                                                                
| |                      |  |     |  |                                                                                                
| | Itschak Friedman     |  | 52  |  | Chairman of the Board of Directors and Chief Executive Officer                                 
| | Dinu Toiba           |  | 54  |  | Vice Chairman of the Board of Directors, Executive Vice President and Chief Information Officer
| | Chaim Friedman       |  | 48  |  | Director and Chief Financial Officer                                                           
| | Eyal Guterman        |  | 50  |  | Director, Treasurer and Risk Management Officer                                                
| | Jeff Ferguson        |  | 57  |  | Chief Operating Officer                                                                        
| | Clive Baron          |  | 55  |  | Chief Business Development Officer                                                             
| | Simon Wood           |  | 49  |  | Executive Director of Marketing and Education                                                  
| | Martin Bandel (1)    |  | 49  |  | Director                                                                                       
| | Dov Kleiman (1)      |  | 52  |  | Outside Director                                                                               
| | Eliane Markowitz (1) |  | 45  |  | Outside Director                                                                               
| | Ron Sandak (1)       |  | 52  |  | Director                                                                                       
| | Itzchak Zilberberg   |  | 53  |  | Director                                                                                       

| | ___________________               
| | ----------------------------------
| | (1)  Member of our Audit Committee
| |                                   

39

---

---

Messrs.
Itschak Friedman, Dinu Toiba, Chaim Friedman, Eyal Guterman, Martin Bandel, Ron Sandak and Itzchak
Zilberberg will serve as directors until our 2009 Annual General Meeting of Shareholders, and may
all stand for reelection at such meeting. Mr. Dov Kleiman and Ms. Eliane Markowitz will serve as
outside directors pursuant to the provisions of the Israeli Companies Law for a three-year term until
our 2010 annual general meeting of shareholders, following which their service as outside directors
may be renewed for additional three-year terms subject to certain conditions. See Item 6C. Directors
and Senior Management Board Practices - Outside and Independent Directors.

Itschak Friedman  has served as the chairman of our board of directors and chief executive officer of our company
since 1988. Mr. Friedman also serves as the president of our U.S. subsidiary, STARLIMS Corporation.
In addition, Mr. Friedman serves as a director of Gazit Inc. Mr. Friedman holds a bachelors
degree in geology from the Hebrew University of Jerusalem. Itschak Friedman is the brother of Chaim
Friedman.

Dinu Toiba  has served as the vice chairman of our board of directors since our initial public offering
in Israel in 1993 and currently also serves as vice president and chief information officer of our
company. Mr. Toiba has been responsible for the development of our software since 1990. Mr. Toiba
also serves as the vice president and a director of our U.S. subsidiary, STARLIMS Corporation. Mr.
Toiba holds B.Sc. and M.Sc. degrees in mathematics from the University of Bucharest.

Chaim Friedman  has served as a director of our company since 1989. Since 1989, Mr. Friedman has also served
as chief financial officer of our company, which services he provides to our company through Sivanir (Management Services) 1992 Ltd., or Sivanir Management.  Mr. Friedman devotes all of
his time to our company.  Mr. Friedman holds a B.Sc. degree in economics and management from
the Technion  Israel Institute of Technology.  Chaim Friedman is the brother of Itschak
Friedman.

Eyal Guterman  has served as a director of our company since our initial public offering in Israel. Since 1993,
Mr. Guterman has also served as our treasurer and risk management officer, which services he provides
to our company through Sivanir Management. Mr. Guterman devotes approximately 25% of his time to
our company. Mr. Guterman holds a B.A. degree in economics from Ben-Gurion University and an M.B.A.
degree from Bar Ilan University.

Jeff Ferguson  has served as our chief operating officer since 2003. From July 1995 until January 2003, Mr.
Ferguson served as the director of enterprise systems at Applied Biosystems, an Applera Corporation
subsidiary. Mr. Ferguson holds a bachelors degree in education from Eastern Michigan University.

Clive Baronhas served as our chief business development officer since July 2007. Prior to joining our company
and from July 1998, Mr. Baron served as the chief executive officer of Symmetry, a LIMS company based
in South African, which subsequently was acquired by LabWare Inc. In January 2001, Mr. Baron joined
LabWare Inc. as head of sales and marketing operations for North America. From 1985 to 1995, Mr.
Baron founded and managed two software companies that were subsequently sold to publicly traded companies.
Mr. Baron holds a B.Sc. degree in mechanical engineering from the University of Pretoria, South Africa.

Dr. Simon Wood  has been with our company since April 2006, initially as the head of our professional and technical
training and certification programs for our employees, distributors, partners and customers. Dr.
Wood was appointed as our executive director of marketing and education in January 2007. Prior to
joining our company and from February 2003, Dr. Wood served as senior consultant and head of consultancy
services of Labformatics Ltd. From September 1988 to September 2002, Dr. Wood held various positions
with the processor of Thermo Fisher Scientific Inc. and its subsidiaries, initially as an analyst
and implementation manager and thereafter as a customer services manager, operations director, global
services manager, customer relationship management project director, and lastly as a business systems
director of its informatics division.  Dr. Wood holds a B.Sc. degree in plant biology from The
University of Newcastle upon Tyne and a Ph.D. in Mycology from Sheffield University.

40

---

---

Martin Bandel  has served as a director of our company since January 2007 and is a member of our audit committee.
Mr. Bandel also serves as a director of STARLIMS Europe Ltd. Mr. Bandel is an independent consultant.
From July 2000 to February 2008, Mr. Bandel served as the chief financial officer of Manhattan Loft
Corporation. From May 1993 to July 2000, Mr. Bandel served as the chief financial officer of the
Cromwell Land Group at Charterhouse Plc (now part of HSBC). From January 1991 to September 1993,
Mr. Bandel served as an independent strategic and financial consultant for several businesses. Mr.
Bandel holds a diploma in accountancy from the City of London University and has been a member of
the Institute of Chartered Accountants in England and Wales since 1982 and of the Chartered Institute
of Tax since 1983.

Dov Kleiman has served as an outside director (within the meaning of the Israeli Companies Law) of our company
since 2004 and is the chairman of our Audit Committee. Mr. Kleiman has served as the chief cost accountant
of the Osem/Nestle group since 1987. Mr. Kleiman holds a B.A. degree in economics and an M.B.A. degree,
both from Bar-Ilan University.

Eliane Markowitzhas served as an outside director (within the meaning of the Israeli Companies Law) of our company
since January 2007 and is a member of our audit committee. From May 2001 until November 2003 and
again since January 2005, Ms. Markowitz has been with Medison Pharma Ltd., initially as the product
manager of the hematology field and currently as marketing manager of its diagnostic division. In
the interim period, from December 2003 until December 2004, Ms. Markovitz served as the business
development and marketing manager and was the owner of Rimipharm Medical Product Ltd. Ms. Markovitz
has approximately 20 years of experience in the pharmaceutical industry. Ms. Markowitz holds B.Sc.
and Msc. degrees in animal science, both from the Hebrew University of Jerusalem.

Ron Sandak  was appointed as a director of our company by our board of directors in May 2008 and is a member
of our audit committee. Mr. Sandak has been a self-employed certified public accountant in Israel
since 1986. Mr. Sandak has served as director or internal auditor of a number of companies traded
on the Tel Aviv Stock Exchange, and was a member of our board of directors and chairman of our audit
committee from 1993 to 1998. Mr. Sandak has been a member of the Institute of Chartered Accountants
in Israel and a certified public accountant since January 1985.

Itzchak Zilberberg  was appointed as a director of our company by our board of directors in May 2008. Mr. Zilberberg
has been a self-employed organizational consultant since 1995. Mr. Zilberberg served as vice president,
human resources at Mul-T-Lock, an Israeli publicly-traded company, from 1987 to 1995. From 1980 to
1987, Mr. Zilberberg served as a head of the organizational psychology department of the Israel Defense
Forces Engineering Corps. Mr. Zilberberg holds a bachelors degree in behavioral sciences
from Ben-Gurion University and a masters degree in sociology from the Hebrew University of
Jerusalem.

B.           COMPENSATION

The
following table sets forth all compensation we paid with respect to all of our directors and executive
officers as a group for the year ended December 31, 2008.

| |                                                              | 
| | ------------------------------------------------------------ | 
| |                                                              | 
|
| | All directors and executive officers as a group (12 persons) | 

|
|
|
|
|

41

---

---

All
our executive officers work full time for us other than Mr. Eyal Guterman, our treasurer and risk
management officer, who devotes approximately 25% of his time to our company.

Only
the non-executive members of our board directors receive compensation from us in connection with
their service as directors. Until May 27, 2008 (the date of the election of Ron Sandak and Itzchak
Zilberberg as directors), we paid each non-executive director an annual fee of NIS 26,800 (approximately
$6,600), a fee of NIS 1,090 (approximately $250) for each meeting of the board of directors or a
committee attended in person and a fee of NIS 545 (approximately $150) for each meeting of the board
of directors or committee attended by phone. Effective as of May 27, 2008, we increased the fees
of our three non-executive directors who are not outside directors (within the meaning of the Israeli
Companies Law) to an annual fee of NIS 44,220 (approximately $11,000), a fee of NIS 2,285 (approximately
$550) for each meeting of the board of directors or a committee attended in person and NIS 1,143
(approximately $350) for each meeting of the board of directors or committee attended by phone. Shareholder
approval for such increase was not required in accordance with the provisions of the Companies Regulations
(Relief from Related Party Transactions), 5760-2000, promulgated under the Israeli Companies Law.
However, according to such regulations, shareholders holding at least 1% of the voting rights in
our company can object to such fee increases and demand that the matter be subject to the approval
of our shareholders voting at a general meeting. Such objection must be delivered to us within 14
days following the filing date of this Form 20-F. The fees of our outside directors have not changed.

As
of December 31, 2008, one executive officer held options to purchase 132,000 ordinary shares. Of
such options, options to purchase 12,000 ordinary shares, exercisable at $2.40 per share, were granted
under our 2001 Stock Option Plan and expire in May 2009 and options to purchase 120,000 ordinary
shares, exercisable at $6.27 per share, were granted under our 2005 Stock Option Plan and expire
in March 2010. The exercise price of such options is the closing price of our ordinary shares on
the TASE on the day preceding the option grant date. In addition, as of December 31, 2008, three
executive officers held an aggregate of 50,500 restricted stock units, or RSUs, granted under our
2007 Restricted Stock Unit Plan. Of the outstanding RSUs, 75% will vest upon the completion of two
years of continuous employment following the grant date, and an additional 25% will vest upon the
completion of three years of continuous employment following the grant date. See Item 6.E., Directors,
Senior Management and Employees - Share Ownership  Stock Option Plans.

Mr.
Itschak Friedman, chairman of our board of directors and our chief executive officer, and Mr. Dinu
Toiba, vice chairman of our board of directors and our executive vice president and chief information
officer, both of whom are also principal shareholders of our company, are employed as officers of
our U.S. subsidiary, STARLIMS Corporation, under agreements entered into on November 1, 1993. During
the term of their employment, Messrs. Friedman and Toiba are required to provide services in the
software industry exclusively through our company. Under their respective employment agreements,
Messrs. Friedman and Toiba are entitled to monthly salaries of $12,250 and $9,600, respectively,
linked to the U.S. consumer price index ($18,131 and $14,209 per month, respectively, as of December
31, 2008). Both of the agreements will continue until terminated in accordance with their terms.
Each of the agreements with Messrs. Friedman and Toiba may be terminated by our company without cause
upon 180 days prior written notice. Messrs. Friedman and Toiba have agreed not to compete with the
business of our company for two years following termination of their employment and are subject to
confidentiality undertakings during and following the term of the agreement. Upon termination of
their agreements for any reason, Messrs. Friedman and Toiba are entitled to payment in an amount
equal to 150% of their last monthly salary, multiplied by the number of years of employment starting
from January 1, 1993. Since 1993, we have paid Messrs. Friedman and Toiba one and a half months salary
at the end of each year instead of them being entitled to receive the 150% of their last monthly
salary payment upon termination of their respective employment. In the years ended December 31, 2006,
2007 and 2008, such payments were $25,365, $25,865 and $27,196, respectively, for Mr. Friedman and
$19,878, $20,255 and $21,313, respectively, for Mr. Toiba. Under amendments to the employment agreements
of such officers of June 2007 and February 2009, they will be entitled to annual salaries of $360,000
and $260,000, respectively, once a period of 45 consecutive trading days has elapsed during which
the average closing price of our ordinary shares on The NASDAQ Global Market has been at least $15.50,
and subject to the approval, in its sole discretion, of our audit committee. Following such adjustments,
the cash severance payments would no longer be made and such officers would not be entitled to any
severance payment upon the termination of their employment. Such salary adjustments would be effective for a period of five years.

42

---

---

In
January 1993, we entered into a management and consulting agreement with Sivanir Management under
which Mr. Chaim Friedman serves as our chief financial officer on a full time basis and Mr. Eyal
Guterman serves as our treasurer and risk management officer on a part time (25%) basis. For these
services, we agreed to pay Sivanir Management $9,000 per month, linked to the U.S. consumer price
index. We paid Sivanir Management an aggregate $150,000, $153,000 and $159,000 in each of the years
ended December 31, 2006, 2007 and 2008, respectively. The agreement with Sivanir Management is renewed
automatically each year for an additional one year period, unless one party notifies the other of
its termination upon 180 days advanced written notice. Under amendments to our management and consulting
agreement with Sivanir Management of June 2007 and February 2009, Sivanir Management will be entitled
to an annual service fee of $260,000 once a period of 45 consecutive trading days has elapsed during
which the average closing price of our ordinary shares on The NASDAQ Global Market has been at least
$15.50, and subject to the approval, in its sole discretion, of our audit committee. Such fee adjustment
would be effective for a period of five years.

C.           BOARD PRACTICES

Election of Directors

According
to the Israeli Companies Law, the management of our business is vested in our board of directors.
Our board of directors may exercise all powers and may take all actions that are not specifically
granted to our shareholders.

Our
articles of association provide that we may have no less than two and no more than 12 directors or
such greater number as may be determined from time to time at a general meeting of shareholders.
Our current board of directors consists of nine directors. In accordance with our articles of association
and the Israeli Companies Law, all of our directors (other than our outside directors) are elected
at annual meetings of our shareholders, which are required to be held at least once during every
calendar year and not more than 15 months after the last preceding meeting. Except for our outside
directors, our directors are elected by a vote of the holders of a majority of the voting power represented
and voting at such meetings and hold office until the next annual meeting of shareholders following
the annual meeting at which they were elected. If the annual meeting of shareholders does not elect
directors, the directors elected in the preceding meeting will continue in office. Directors, other
than outside directors, may be removed earlier from office by resolution passed with the approval
of the majority of the voting rights represented and voting at a general meeting of our shareholders.
Our board of directors may temporarily fill vacancies on the board until the next annual meeting
of shareholders, provided that the total number of directors will not exceed the maximum number determined
by the general meeting of shareholders.

The
Israeli Companies Law requires the board of directors of a public company to determine a minimum
number of directors with accounting and financial expertise.  Our
board of directors determined, accordingly, that at least one director must have accounting
and financial expertise.

We
follow Israeli law and practice, instead of the requirements of the NASDAQ Marketplace Rules, with
regard to the nomination process of directors, in accordance with which our board of directors is
authorized to recommend to our shareholders director nominees for election, and our shareholders
may nominate candidates for election as directors by the general meeting of shareholders. See Item
16G. Corporate Governance.

Outside and Independent Directors

Outside Directors.  Under the Israeli Companies Law, public companies incorporated under the laws of the State
of Israel are required to appoint at least two outside directors. The Israeli Companies Law provides
that a person may not be appointed as an outside director if the person, or the persons relative,
partner, employer or an entity under that persons control, has or had during the two years
preceding the date of appointment any affiliation with the company, its controlling shareholder or
any entity controlled by the Company or its controlling shareholder. The term relative
means a spouse, sibling, parent, grandparent, child or child of spouse or spouse of any of the above.
In general, the term affiliation includes an employment relationship, a business
or professional relationship maintained on a regular basis, control and service as an office holder.
Under the Israeli Companies Law, the term office holder includes a director,
general manager, chief business manager, deputy general manager, vice general manager, or any person
filling any of these positions in a company even if he or she holds a different title, and also includes
any other manager directly subordinate to the general manager.

43

---

---

In
addition, no person may serve as an outside director if the persons position or other activities
create, or may create, a conflict of interest with the persons position as director or may
otherwise interfere with the persons ability to serve as director. If, at the time an outside
director is appointed all members of the board of directors are of the same gender, then that outside
director must be of the other gender. A director of one company may not be appointed as an outside
director of another company if a director of the other company is acting as an outside director of
the first company at such time.

At
least one of the outside directors elected must have accounting and financial expertise
and any other outside director must have accounting and financial expertise
or professional qualification as such terms are defined by regulations promulgated
under the Israeli Companies Law. However, Israeli companies listed on certain stock exchanges outside
Israel, including The NASDAQ Global Market, are not required to appoint an outside director with
such accounting and financial expertise if a director with accounting and financial expertise
who qualifies as an independent director for purposes of audit committee membership under the laws
of the foreign country in which the stock exchange is located serves on its board of directors. All
of the outside directors of such a company must have such professional qualification.

The
outside directors are elected by shareholders at a general meeting, provided that either:

| |  | the majority of shares voted at the meeting (not including abstentions), including at least one-third
of the shares of the non-controlling shareholders voted at the meeting, vote in favor of the outside
director; or                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                  
| |  | the majority of shares voted at the meeting (not including abstentions) vote in favor of the outside
director and the total number of shares held by non-controlling shareholders that voted against the
election of the outside director does not exceed one percent of all of the voting rights in the company.

In
general, outside directors serve for a three-year term and may be reelected to one additional three-year
term. However, Israeli companies that are listed on certain stock exchanges outside Israel, including
The NASDAQ Global Market, such as our company, may appoint an outside director for further terms
of not more than three years, each such reappointment being subject to certain conditions. Such conditions
include the determination by the audit committee and board of directors, that in view of the directors
professional expertise and special contribution to the companys board of directors and its
committees, the appointment of the outside director for a third term or more is in the best interest
of the company.

An
outside director may be removed from office at the initiative of the board of directors at a special
general meeting of shareholders, if the board resolves that the statutory requirements for that persons
appointment as outside director no longer exist, or that the outside director has violated his or
her duty of loyalty to the company. The resolution of the special general meeting of shareholders
regarding the termination of office of an outside director requires the same majority that is required
for the election of an outside director. The court may order the termination of the office of an
outside director on the same grounds, following a motion filed by a director or a shareholder.

Each
committee of the board of directors that is authorized to exercise powers vested in the board of
directors must include at least one outside director, and the audit committee must include all the
outside directors. An outside director is entitled to compensation as provided in regulations adopted
under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation,
directly or indirectly, in connection with such service.

Our
Board of Directors has two outside directors under Israeli law, Mr. Dov Kleiman, who has accounting
and financial expertise, and Ms. Eliane Markowitz, who has professional qualification,
as such terms are defined under the Israeli Companies Law.

44

---

---

Independent Directors. In general, NASDAQ Marketplace Rules require that the board of directors of a NASDAQ-listed company
have a majority of independent directors and that its audit committee consist solely of independent
directors, each of whom satisfies the respective independence requirements of NASDAQ
and the Securities and Exchange Commission. We currently comply with such requirements. Our Board
of Directors has determined that each of Mr. Martin Bandel, Mr. Dov Kleiman, Ms. Eliane Markowitz,
Mr. Ron Sandak and Mr. Itzchak Zilberberg qualifies as an independent director under the requirements
of the Securities and Exchange Commission and NASDAQ. Mr. Dov Kleiman and Ms. Eliane Markowitz are
also our outside directors within the meaning of the Israeli Companies Law.

In
addition, under a recent amendment to the Israeli Companies Law, Israeli public companies may determine
in their articles of association the number of independent directors, within the meaning of the Israeli
Companies Law, that must serve on their board of directors. Under the Israeli Companies Law, such
companies may further elect to adopt a provision in their articles of association whereby, in the
event that there is no controlling shareholder or a control block in the
company, the board of directors will have a majority of independent directors, and in the event that
a controlling shareholder or a control block does exist in the company, at
least one third of the board members will be independent directors. The term control
block means shares conferring 25% or more of the voting rights in the company. A director
who qualifies as an outside director within the meaning of the Israeli Companies Law and that the
audit committee has approved such qualification, and who has not served as a director of the company
for more than nine consecutive years, constitutes an independent director under
the Israeli Companies Law. We have not included such a provision in our articles of association since
our board of directors complies with the independent director requirements of the NASDAQ Marketplace Rules described above.

Audit Committee

Under
the Israeli Companies Law, the board of directors of any public company must establish an audit committee.
The audit committee must consist of at least three directors and must include all of the outside
directors. The audit committee may not include: the chairman of the board of directors; any director
employed by the company or providing services to the company on an ongoing basis; or a controlling
shareholder or any of the controlling shareholders relatives. Under the Israeli Companies Law,
the role of the audit committee is to identify faults in the business practices of the company, among
other things, by consulting with the companys independent registered public accounting firm
and internal auditor, and to make recommendations to the board for remedying such faults. In addition,
under the Israeli Companies Law, the approval of the audit committee is required for specified actions
and transactions with office holders and controlling shareholders.

In
addition, the NASDAQ Marketplace Rules require us to establish an audit committee comprised of at
least three members, all of whom must be independent directors, each of whom is financially literate
and satisfies the respective independence requirements of the Securities
and Exchange Commission and NASDAQ and one of whom has accounting or related financial management
expertise at senior levels within a company.

Our
audit committee consists of four members, Martin Bandel, Dov Kleiman, Eliane Markowitz and Ron Sandak,
all of whom satisfy the respective independence requirements of the Securities
and Exchange Commission and NASDAQ and are financially literate. Our board of directors has determined
that each of Martin Bandel, Dov Kleiman and Ron Sandak qualifies as an audit committee financial
expert, as defined by rules of the Securities and Exchange Commission. We believe that the composition
and function of the audit committee comply with the requirements of Israeli law, the Securities and
Exchange Commission and NASDAQ Marketplace Rules.

Internal Audit

Under
the Israeli Companies Law, the board of directors of a public company must appoint an internal auditor
nominated by the audit committee. The role of the internal auditor is, among other things, to examine
whether a companys actions comply with applicable law and proper business practice. Under the
Israeli Companies Law, the internal auditor may be an employee of the company but not an interested
party or an office holder, or a relative of an interested party or an office holder, nor may the
internal auditor be the companys independent registered public accounting firm or anyone acting
on its behalf. Mr. Yehuda Milberg, Certified Public Accountant (Israel), serves as our internal auditor.

45

---

---

Directors Service Contracts

Our
U.S. subsidiary, STARLIMS Corporation, has entered into employment agreements with each of Mr. Itschak
Friedman, our chief executive officer, who is also the chairman of our board of directors, and Mr.
Dinu Toiba, our executive vice president and chief information officer, who is also vice chairman
of our board of directors. See Item 6B. Directors, Senior Management and Employees - Compensation.

Other
than as described in Item 6B, there are no arrangements or understandings between us and any of our
subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits
upon termination of their employment or service as directors of our company or any of our subsidiaries.

Fiduciary Duties of Office Holders

The
Israeli Companies Law codifies the fiduciary duties that office holders, including directors
and executive officers, owe to a company. An office holder is defined in the Israeli
Companies Law as a director, general manager, chief business manager, deputy general manager, vice
general manager, other manager directly subordinate to the general manager or any other person assuming
the responsibilities of any of the foregoing positions without regard to such persons title.
An office holders fiduciary duties consist of a duty of care and a duty of loyalty. The duty
of care requires an office holder to act with the standard of proficiency with which a reasonable
office holder in the same position and in the same circumstances would act. This includes the duty
to utilize reasonable means to obtain (i) information regarding the business worthiness of a given
action brought for his approval or performed by him by virtue of his position and (ii) all other
information of importance pertaining to the foregoing actions. The duty of loyalty requires that
an office holder act in good faith and for the benefit of the company, including the duty to: (i)
avoid any conflict of interest between the office holders position in the company and any other
position he holds or his personal affairs, (iii) avoid any competition with the companys business,
(iii) avoid exploiting any business opportunity of the company in order to obtain benefit for the
office holder or any other person; and (iv) disclose to the company any information or documents
relating to the companys affairs that the office holder has received by virtue of his position as an office holder.

Approval of Related Party Transactions Under Israeli Law

Under
the Israeli Companies Law, transactions of a company with an office holder and transactions of a
company with another entity in which an office holder has a personal interest require special approvals,
and may only be approved if they are not adverse to the companys interest. Transactions which
are not extraordinary, must be approved by the board of directors or as otherwise provided for in
a companys articles of association. Extraordinary transactions with an office holder that is
not a director and transactions that involve the grant of an exemption, insurance, indemnification
or an undertaking to indemnify an office holder that is not a director must be approved by the audit
committee and the board of directors. Extraordinary transactions with a director and transactions
involving the conclusion of a contract by a company with a director as to the terms of his office,
including the grant of an exemption, insurance, indemnification or an undertaking to indemnify, or
the conclusion of a contract by a company with a director as to the terms of his employment in other
positions, must be approved by the audit committee, board of directors and general meeting of shareholders.
If the office holder is a controlling shareholder or a relative of a controlling shareholder, any
extraordinary transaction, compensation, exemption, indemnification and insurance of the office holder
must be approved by our audit committee, board of directors and general meeting of shareholders,
supported by the vote of at least one-third of the shares of the shareholders voting on the matter
that have no personal interest in the transaction, or provided that the total number of shares held
by shareholders that have no personal interest in the transaction that voted against the proposal
did not exceed one percent of all of the voting rights in the company.

The
Israeli Companies Law requires that an office holder and the controlling shareholder disclose any
personal interest that he or she may have and all related material information known to him or her
relating to any existing or proposed transaction by the company promptly and in any event no later
than the first meeting of the board of directors at which such transaction is considered. The requirement
does not apply with respect to a transaction with a relative that is not an extraordinary transaction.
An extraordinary transaction is a transaction other than in the ordinary course of business, other
than on market terms, or likely to have a material impact on the companys profitability, assets
or liabilities.

46

---

---

A director
who has a personal interest in a matter, which is considered at a meeting of the board of directors
or the audit committee, may not participate or vote on this matter in such meeting, unless the transaction
under consideration is not an extraordinary transaction or the majority of the members of the board
or the audit committee have a personal interest, as the case may be. In the event the majority of
the members of the board or the audit committee have a personal interest, then the approval of the
general meeting of shareholders is also required.

Board
of directors and shareholder approval is also required in the event a company issues its securities
in a private placement of securities that will cause a person to become a controlling shareholder,
or in the event a private placement in which 20% or more of the companys outstanding share
capital prior to the placement are offered, the payment for which (in whole or in part) is not in
cash or listed securities or not under market terms, and that issuance will (i) increase the relative
holdings of a shareholder that holds 5% or more of the companys outstanding share capital or
voting rights; or (ii) cause any person to become a holder of more than 5% of the companys
outstanding share capital or voting rights. For this purpose, convertible securities or securities
exercisable into shares held by such person are assumed to have been converted and exercised.

Exemption, Insurance and Indemnification of Directors and Officers

Exemption of Office Holders.  The Israeli Companies Law provides that an Israeli company cannot exempt an office holder
from liability with respect to a breach of his or her duty of loyalty. If permitted by its articles
of association, a company may exempt in advance an office holder from his or her liability to the
company, in whole or in part, with respect to a breach of his or her duty of care. However, a company
may not exempt in advance a director from his or her liability to the company with respect to a breach
of his duty of care with respect to distributions.

Our
articles of association permit us to exempt our office holders in accordance with the Israeli Companies
Law as currently in effect.

Insurance of Office Holders.  Israeli law provides that a company may, if permitted by its articles of association, enter
into a contract to insure its office holders for liabilities incurred by the office holder with respect
to an act or omission performed in his or her capacity as an office holder, as a result of: (i) a
breach of the office holders duty of care to the company or another person; (ii) a breach of office
holders duty of loyalty to the company, provided that the office holder acted in good faith and had
reasonable grounds to assume that the act would not prejudice the companys interests; and (iii)
a monetary liability imposed upon the office holder in favor of another person.

Our
articles of association permit us to purchase insurance covering the liability of our office holders
in accordance with the Israeli Companies Law as currently in effect. We currently maintain a directors
and officers liability insurance policy that provides coverage of up to $20 million per claim
and in the aggregate per year, and a public offering of securities insurance policy providing coverage
of up to $25 million per claim and in the aggregate for three years following our May 2007 initial
public offering in the United States.

Indemnification of Office Holders.  Under Israeli law a company may, if permitted by its articles of association, indemnify an
office holder for acts or omissions performed by the office holder in such capacity for (a) monetary
liability imposed upon the office holder in favor of another person pursuant to a court judgment,
including a settlement or an arbitration award approved by a court; (b) reasonable litigation expenses,
including attorneys fees, actually incurred by the office holder as a result of an investigation
or proceeding instituted against him or her by a competent authority, provided that such investigation
or proceeding concluded without the filing of an indictment against the office holder or the imposition
of any monetary liability in lieu of criminal proceedings, or concluded without the filing of an
indictment against the office holder and a monetary liability was imposed on him or her in lieu of
criminal proceedings with respect to a criminal offense that does not require proof of criminal intent;
and (c) reasonable litigation expenses, including attorneys fees, actually incurred by the
office holder or imposed upon the office holder by a court: (i) in an action, suit or proceeding
brought against the office holder by or on behalf of the company or another person, (ii) in connection
with a criminal charge from which the office holder was acquitted, or (iii) in connection with a
criminal proceeding in which the office holder was convicted of a criminal offense that does not require proof of criminal intent.

47

---

---

The
indemnification provisions in a companys articles of association may include:

| |  | a provision allowing the company to undertake in advance to indemnify an office holder, except that
with respect to a monetary liability imposed on the office holder by any judgment, settlement or
court-approved arbitration award, the undertaking must be limited to types of events which the companys
board of directors deems foreseeable considering the companys actual operations at the time
of the undertaking, and to an amount or standard that the board of directors has determined as reasonable
under the circumstances; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | a provision allowing the company to retroactively indemnify an office holder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Our
articles of association permit us to indemnify our office holders in accordance with the Israeli
Companies Law as currently in effect. We have provided each of our directors and officers, other
than our two recent director appointees, a letter of indemnification for liabilities or expenses
incurred as a result of their acts in their capacity as directors and officers of our company, in
an aggregate amount not to exceed $3.5 million, to the extent that their liability is not covered
under our directors and officers liability insurance policy.  The two new directors
also will receive such a letter if our shareholders approve the same at our upcoming annual general meeting.

*Limitations on Exemption, Insurance and Indemnification*. The Israeli Companies Law provides that neither a provision of the articles of association permitting
the company to enter into a contract to insure the liability of an office holder, nor a provision
in the articles of association or a resolution of the board of directors permitting the indemnification
of an office holder, nor a provision in the articles of association exempting an office holder from
duty to the company shall be valid, where such insurance, indemnification or exemption relates to
any of the following:

| |  | a breach by the office holder of his duty of loyalty, except with respect to insurance coverage or
indemnification if the office holder acted in good faith and had reasonable grounds to assume that
the act would not prejudice the company;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                               
| |  | a breach by the office holder of his duty of care if such breach was committed intentionally or recklessly,
unless the breach was committed only negligently;                                                                                 
| |   |                                                                                                                                                                                                                                               
| |  | any act or omission committed with intent to derive an unlawful personal gain; and                                                                                                                                                            
| |   |                                                                                                                                                                                                                                               
| |  | any fine or forfeiture imposed on the office holder.                                                                                                                                                                                          

In
addition, pursuant to the Israeli Companies Law, exemption of, procurement of insurance coverage
for, an undertaking to indemnify or indemnification of an office holder must be approved by the audit
committee and the board of directors and, if such office holder is a director or a controlling shareholder
or a relative of the controlling shareholder, also by the shareholders general meeting. If a controlling
shareholder is interested in such transaction as an office holder or as a relative of an office holder,
the resolution must be supported by the vote of at least one-third of the shares of the shareholders
voting on the matter that have no personal interest in the transaction, unless the total number of
shares held by shareholders that have no personal interest in the transaction that voted against
the proposal did not exceed one percent of all of the voting rights in the company.

D.            EMPLOYEES

At
December 31, 2008, we employed 162 full-time employees. Of these full-time employees, 21 employees
were engaged in management and administration, 21 employees were engaged in sales and marketing,
84 employees were engaged in implementation and support and 36 employees were engaged in research
and development. Of such employees, 105 were located in North America, 23 were located in the Asia
Pacific region and 34 were located in Europe and the Middle East.

At
December 31, 2007, we employed 153 full-time employees. Of these full-time employees, 17 employees
were engaged in management and administration, 18 employees were engaged in sales and marketing,
84 employees were engaged in implementation and support and 34 employees were engaged in research
and development. Of such employees, 107 were located in North America, 20 were located in the Asia
Pacific region and 26 were located in Europe and the Middle East.

48

---

---

At
December 31, 2006, we employed 148 full-time employees. Of these full-time employees, 17 employees
were engaged in management and administration, 17 employees were engaged in sales and marketing,
82 employees were engaged in implementation and support and 32 employees were engaged in research
and development. Of such employees, 113 were located in North America, 14 were located in the Asia
Pacific region and 21 were located in Europe and the Middle East.

The
foregoing includes Mr. Chaim Friedman, our chief financial officer, and Mr. Eyal Guterman, our treasurer
and risk management officer, both of whom provide these services to us through Sivanir Management,
an Israeli company jointly owned by Messrs. Friedman and Guterman. Mr. Friedman devotes all of his
time to our company and Mr. Guterman devotes approximately 25% of his time to our company.

At
the start of their employment, our employees generally sign written employment agreements that include
confidentiality, non-competition and assignment of invention agreement provisions.

We
are subject to the labor laws and regulations of jurisdictions in the world where we have employees.
With respect to our Israeli employees, Israeli labor laws differ materially from U.S. labor laws
and, in some cases, impose material obligations on us (such as severance pay and mandatory cost of
living increases). Our employees are not represented by any labor union. Since our inception, we
believe that our relations with our employees are satisfactory.

E.            SHARE OWNERSHIP

The
following table sets forth certain information as of March 23, 2009 regarding the beneficial ownership
of our ordinary shares by each of our directors and executive officers.

| | **Name**           | **** | **Number of
      Ordinary Shares
      Beneficially
      Owned(1)** |        |  | **Percentage of
      Outstanding
      Ordinary
      Shares(2)** |  
| | ------------------ | ---- | --------------------------------------------------------------------- | ------ |  | ------------------------------------------------------------------ | -
| |                    |      |                                                                       |        |  |                                                                    |  
|
| | Itschak Friedman   |      | 1,540,256                                                             | (3)    |  | 18.32                                                              | %
| | Dinu Toiba         |      | 750,000                                                               | (3)    |  | 8.92                                                               | %
| | Chaim Friedman     |      | 576,670                                                               | (3)(4) |  | 6.86                                                               | %
| | Eyal Guterman      |      | 379,852                                                               | (4)    |  | 4.52                                                               | %
| | Jeff Ferguson      |      | 134,970                                                               | (5)    |  | 1.57                                                               | %
| | Clive Baron        |      |                                                                      |        |  |                                                                   |  
| | Simon Wood         |      |                                                                      |        |  |                                                                   |  
| | Martin Bandel      |      |                                                                      |        |  |                                                                   |  
| | Dov Kleiman        |      |                                                                      |        |  |                                                                   |  
| | Eliane Markowitz   |      |                                                                      |        |  |                                                                   |  
| | Ron Sandak         |      |                                                                      |        |  |                                                                   |  
| | Itzchak Zilberberg |      | 1,165                                                                 |        |  | *                                                                  |  
|

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission

and generally includes voting or investment power with respect to securities. Ordinary shares relating

to options currently exercisable or exercisable within 60 days of the date of this table are deemed

outstanding for computing the percentage of the person holding such securities but are not deemed

outstanding for computing the percentage of any other person. Except as indicated by footnote,
and
subject to community property laws where applicable, the persons named in the table above have
sole
voting and investment power with respect to all shares shown as beneficially owned by them.

49

---

---

|    |                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The percentages shown are based on 8,407,742 ordinary shares issued and outstanding as of March 23, 2009 (excluding 1,590,177 ordinary shares held as treasury stock).                                                                                                  
|    |                                                                                                                                                                                                                                                                         
|(3) | Messrs. Itschak Friedman, Dinu Toiba and Chaim Friedman are parties to a voting agreement dated October 31, 1993, as amended on December 21, 2005. The voting agreement also grants the parties a right of first refusal on sales of each others shares of our company.
|    |                                                                                                                                                                                                                                                                         
|(4) | Includes half of the 64,703 ordinary shares held by Sivanir Ltd., an Israeli company jointly owned by Messrs. Chaim Friedman and Eyal Guterman.                                                                                                                         
|    |                                                                                                                                                                                                                                                                         
|(5) | Includes 132,000 shares that are subject to currently exercisable options.                                                                                                                                                                                              

Share Option Plans

Stock
options have from time to time been an important component of the compensation packages for many
of our mid-level and senior-level employees. We currently have three stock option plans and one restricted
stock unit plan, all of which are summarized below.

2001 Option Plan and 2005 Option Plan

In
March 2001, we adopted our 2001 Option Plan, or the 2001 Plan, under which we are authorized to issue
up to an aggregate 200,000 ordinary shares. Employees of our company and our U.S. subsidiary, STARLIMS
Corporation, are eligible to participate in the 2001 Plan.

In
March 2005, we adopted our 2005 Option Plan, or the 2005 Plan, under which we are authorized to issue
up to an aggregate 200,000 ordinary shares. Employees of our company and our U.S. subsidiary, STARLIMS
Corporation, are eligible to participate in the 2005 Plan.

The
terms of the 2001 Plan and 2005 Plan, collectively referred to as the Option Plans, are essentially
identical and are summarized together below.

Awards under the Option Plans.  Awards under the Option Plans are in the form of non-qualified stock options. Shares that are
forfeited under the terms of the Option Plans and shares that are the subject of options that expire
unexercised or which are otherwise surrendered by an optionee without receiving any payment or other
benefit for the option may again be subject to new awards under the Option Plans.

Administration of the Option Plans.  The Option Plans are administered by our Board of Directors and may also be administered by
a compensation committee of our Board of Directors, consisting of not fewer than two directors. In
general, each member of such a compensation committee will be a non-employee director within the
meaning of the Exchange Act, and an outside director within the meaning of the Internal Revenue Code
of 1986, as amended. Subject to the provisions of the applicable Option Plan and applicable law,
the compensation committee has the authority to establish those rules and regulations as they may
deem appropriate for the proper administration of the Option Plans. Subject to the provisions of
the applicable Option Plan, our Board of Directors and compensation committee have the authority
to grant awards under the Option Plans, to interpret the provisions of the Option Plans and, subject
to the requirements of applicable law, to prescribe, amend, and rescind rules and regulations relating
to the Option Plan or any award under the Option Plans as they may deem necessary or advisable. All
decisions made by our Board of Directors or the compensation committee pursuant to the provisions
of the Option Plans will be final, conclusive and binding on all persons. No member of our Board
of Director or compensation committee will be liable for any act performed or omitted to be performed
by such member or any other member of the Board of Directors or compensation committee in connection
with the Option Plans, except for the members own willful misconduct or as expressly provided by statute.

Option Price.  In general, except as otherwise provided by our Board of Directors or the compensation committee
in the optionees stock option agreement, the exercise price per each ordinary share will be
the closing price of an ordinary share on the TASE on the date of the option grant, translated into
U.S. dollars based on the U.S. dollar representative rate of exchange as published by the Bank of
Israel on such date.

Option and Exercise Period.  Options granted under the Option Plans expire on the fifth anniversary of their award and no
option may be exercised after the expiration of its term. Except as otherwise provided by our Board
of Directors or the compensation committee in the optionees stock option agreement, 50% of
the options granted under the Option Plans vest and become exercisable upon the completion of two
years of continuous employment service with our company or STARLIMS Corporation and 25% of the options
granted under the Option Plans vest and become exercisable upon the completion of each of the third
and fourth years of such continuous employment service. However, unless determined otherwise by our
Board of Directors, options will cease to vest and all unvested options will be null and void immediately
upon a reduction in the scope of duties that the optionee performs for our company or STARLIMS Corporation,
regardless of whether the optionees job title changes (medical, military, disability, including
pregnancy, and other leaves of absence approved by our company or STARLIMS Corporation are deemed
to be continuous employment to the extent required by law or determined by the Board of Directors
or the compensation committee).

50

---

---

Change of Control.  In the event of a change of control, as defined in the Option Plans, the expiration of all
options granted under the Option Plans may be accelerated or the terms of the options may be changed
by our Board of Directors.

Non-Transferability of Options.  Options granted under the Option Plans are not assignable or transferable by the optionee,
and may be exercised during the lifetime of the optionee only by the optionee.  However, during
the optionees lifetime, the optionee may, with the consent of the Board of Directors or the
compensation committee, transfer without consideration all or any part of his/her options to (i)
one or more members of the optionees immediate family (as defined in the Option Plans); (ii)
a trust established for the exclusive benefit of one or more members of the optionees immediate
family; or (iii) a limited liability company in which all members are members of the optionees
immediate family.

Amendment and Termination.  Our Board of Directors may, from time to time, alter, amend, suspend or terminate the Option
Plans with respect to options that have not been granted, subject to applicable law and any requirement
for shareholder approval imposed by any stock exchange or quotation system on which our ordinary
shares are listed or quoted. Subject to the provisions of the applicable Option Plan regarding a
change of control, our Board of Directors and the compensation committee may not, without the consent
of the optionee, alter or in any way impair the rights of an optionee under any award previously
granted. The termination of the Option Plans will not affect any option previously granted. The Option
Plans will terminate and no further options may be granted under the Option Plan after the fifth
anniversary of their effective date, unless terminated earlier by the Board of Directors.

Grants to Non-U.S. Persons.  Without amending the Option Plans, our Board of Directors or the compensation committee may
grant options to eligible individuals who are not U.S. nationals on such terms and conditions different
from those specified in the Option Plans, and the board of directors and compensation committee may
make such modifications, amendments and procedures to the Option Plans as may be necessary or advisable
to comply with the provisions of laws in other countries in which we operate or have employees.

As
of December 31, 2008, options to purchase 27,750 ordinary shares were outstanding under the 2001
Plan, exercisable at an average exercise price of $2.47 per share, and options to purchase 170,000
ordinary shares were outstanding under the 2005 Plan, exercisable at an average exercise price of
$6.45 per share. During 2008, our employees exercised options to purchase 9,375 ordinary shares under
the 2001 Plan. No options awarded under the 2005 Plan were exercised during 2008. As of December
31, 2008, there were no ordinary shares available for future option grants under the 2001 Plan and
25,000 ordinary shares remained available for future option grants under the 2005 Plan.

2006 Employee Option Plan

In
January 2006, we adopted our Employee Option Plan, or the 2006 Israeli Plan, under which we are authorized
to grant options to employees of our company and subsidiaries. The 2006 Israeli Plan is designed
to reflect the provisions of the Israeli Income Tax Ordinance [New Version] - 1961, as amended, or
the Israeli Tax Ordinance, which affords certain tax advantages to Israeli employees, officer and
directors that are granted options in accordance with its terms. Up to 40,500 ordinary shares may
be issued under the 2006 Israeli Plan; however, such number of ordinary shares is part of the aggregate
200,000 ordinary shares that may be issued under the 2005 Plan. In accordance with the Israeli Tax
Ordinance and the 2006 Israeli Plan, the option awards are deposited and held in escrow for a period
of at least 24 months from the date of grant.

51

---

---

The
2006 Israeli Plan may be administered by our Board of Directors or a committee appointed by our Board
of Directors, in which case, whenever appropriate, all references in the 2006 Israeli Plan and in
this description to the Board of Directors will be deemed to refer to such committee. Subject to
the provisions of the 2006 Israeli Plan and applicable law, our Board of Directors will determine
the exercise price of each option, the number of shares underlying the option, its vesting schedule
and the term of the option. No option may be exercised after the expiration of its term.

Under
the 2006 Israeli Plan, the optionee may not assign, transfer or waive the options for the benefit
of others, including other employees, other than by will or the laws of descent and distribution,
and may be exercised during the lifetime of the optionee only by the optionee or his or her legal
guardian.

As
of December 31, 2008, no options were outstanding under the 2006 Israel Plan. As of December 31,
2008, 25,000 ordinary shares were available for future option grants under the 2006 Israeli Plan;
however, such number of ordinary shares is part of the aggregate ordinary shares that are available
for future option grants under the 2005 Plan.

2007 Restricted Stock Unit Plan

In
November 2007, we adopted our Restricted Stock Unit Plan, or the 2007 Plan. The 2007 Plan is intended
to provide incentives to employees, non-employee directors and consultants of our company. Under
the 2007 Plan, our Board of Directors grants plan participants a contractual right to receive our
shares at the end of a vesting period, the amount of such shares and the vesting period to be determined
by our Board of Directors in each individual grant. The 2007 Plan provides for the issuance of up
to 240,000 of our ordinary shares. Prior to receiving such shares, if any, plan participants will
have no right to vote or receive dividends on their granted shares. Generally, a plan participants
grant will be forfeited upon termination of employment or services with our company prior to the
end of the vesting period, unless otherwise provided by our Board of Directors in the individual
grant. Unvested grants will also terminate in the event that the market price of our ordinary shares
falls below 50% of the grant price.

As
of August 13, 2008, we had awarded a total of 187,000 restricted stock units under the 2007 Plan.
All of such restricted stock units terminated during the month of November 2008, when the market
price of our ordinary shares fell below 50% of the grant price in each case. Concurrent with this
termination, our board of directors replaced the terminated award of each employee with a new award
for the same number of restricted stock units. As of December 31, 2008, we had awarded a total of
187,000 restricted stock units under the 2007 Plan, none of which is currently vested. As of December
31, 2008, 53,000 ordinary shares were available for future awards under the 2007 Plan.

ITEM 7.              MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.            MAJOR SHAREHOLDERS

The
following table sets forth certain information as of March 23, 2009 regarding the beneficial ownership
by all shareholders known to us to own beneficially 5.0% or more of our ordinary shares:

|**Name**                                                |  | **Number of
      Ordinary Shares
      Beneficially Owned(1)** |        |  | **Percentage of
      Outstanding
      Ordinary Shares(2)** |  
|------------------------------------------------------- |  | --------------------------------------------------------------- | ------ |  | ------------------------------------------------------------ | -
|                                                        |  |                                                                 |        |  |                                                              |  
|                                                       
|Itschak Friedman                                        |  | 1,540,256                                                       | (3)    |  | 18.32                                                        | %
|Harel Insurance Investments and Financial Services Ltd. |  | 852,353                                                         | (4)    |  | 10.14                                                        | %
|Dinu Toiba                                              |  | 750,000                                                         | (3)    |  | 8.92                                                         | %
|Chaim Friedman                                          |  | 576,670                                                         | (3)(5) |  | 6.86                                                         | %
|Neil Gagnon                                             |  | 572,019                                                         | (6)    |  | 6.80                                                         | %
|Clal Insurance Enterprises Holdings Ltd.                |  | 559,756                                                         | (7)    |  | 6.66                                                         | %

52

---

---

|___________
|-----------
|(1)        
|           
|(2)        
|           
|(3)        
|           
|(4)        
|           
|(5)        
|           
|(6)        
|           
|(7)        

Significant Changes in the Ownership of Major Shareholders

On
November 20, 2007, Mr. Neil Gagnon filed a Schedule 13G with the Securities and Exchange Commission
reflecting beneficial ownership of 439,693, or 5.04%, of our ordinary shares. On February 13, 2008,
Mr. Neil Gagnon filed a Schedule 13G/A with the Securities and Exchange Commission reflecting beneficial
ownership of 527,156, or 6.04%, of our ordinary shares as of December 31, 2007. On March 28, 2008,
Gagnon Securities LLC, or Gagnon Securities, filed a Schedule 13G with the Securities and Exchange
Commission reflecting beneficial ownership of 604,761, or 7.00%, of our ordinary shares as of March
30, 2008. The Schedule 13G filed by Gagnon Securities indicates that Gagnon Securities is an investment
adviser and that it disclaims beneficial ownership of all securities held by its clients funds.
In addition, such Schedule 13G indicates that prior filings were made on behalf of Gagnon Securities
under the name Neil Gagnon and all future filings will be under the name of Gagnon Securities, provided
that Mr. Gagnons personal ownership in our ordinary shares does not exceed 1% of our outstanding
shares. On February 18, 2009, Gagnon Securities filed a Schedule 13G/A with the Securities and Exchange
Commission reflecting beneficial ownership by it of 317,754, or 3.7%, of our ordinary shares as of
December 31, 2008, and reflecting beneficial ownership by Mr. Neil Gagnon of 572,019, or 6.7%, of
our ordinary shares as of such date. Each of Gagnon Securities and Mr. Neil Gagnon disclaims beneficial
ownership of all securities held by the client funds of Gagnon Securities.

53

---

---

Messrs.
Itschak Friedman, Dinu Toiba and Chaim Friedman are parties to a voting agreement dated October 31,
1993, as amended on December 21, 2005, with respect to our ordinary shares beneficially owned by
them. The voting agreement also grants the parties a right of first refusal on sales of each others
shares of our company. Accordingly, Messrs. Itschak Friedman, Dinu Toiba and Chaim Friedman may be
deemed to have shared voting power of the aggregate ordinary shares of our company beneficially owned
by them. On February 13, 2008, Messrs. Itschak Friedman, Dinu Toiba and Chaim Friedman filed a Schedule
13G with the Securities and Exchange Commission reflecting beneficial ownership, in the case of Mr.
Itschak Friedman, of 1,360,508 of our ordinary shares, in the case of Mr. Dinu Toiba, of 750,000
of our ordinary shares, and, in the case of Mr. Chaim Friedman, of 429,454 of our ordinary shares.
Accordingly, Messrs. Itschak Friedman, Dinu Toiba and Chaim Friedman may be deemed to have shared
voting power of a total of 2,539,782 of our ordinary shares beneficially owned by them as of such
date. On October 28, 2008, Messrs. Itschak Friedman, Dinu Toiba and Chaim Friedman filed a Schedule
13D with the Securities and Exchange Commission reflecting beneficial ownership, in the case of Mr.
Itschak Friedman, of 1,540,256, or 18.02%, of our ordinary shares, in the case of Mr. Dinu Toiba,
of 750,000, or 8.78 %, of our ordinary shares, and, in the case of Mr. Chaim Friedman, of 609,022,
or 7.13%, of our ordinary shares. Messrs. Itschak Friedman, Dinu Toiba and Chaim Friedman may be
deemed to have shared voting power of a total of 2,899,278 of our ordinary shares beneficially owned
by them as of such date. Each of Messrs. Itschak Friedman, Dinu Toiba and Chaim Friedman disclaims
beneficial ownership of the ordinary shares of our company that are not directly held by them or by entities controlled by them.

Other
than described above, we know of no significant changes in the percentage ownership held by any major
shareholders during the past three years, other than changes in the percentage ownership of our major
shareholders resulting from our initial public offering in the United States in May 2007.

Major Shareholders Voting Rights

Our
major shareholders do not have different voting rights

Record Holders

Based
on our register of ordinary shares and information provided to us by our transfer agent, as of March
23, 2009, Cede & Co., the nominee of The Depository Trust Company, was the only holder of record
of our ordinary shares in the United States, holding 2,469,641 of our ordinary shares representing
approximately 29% of our outstanding shares (excluding treasury stock).  The number of record
holders in the United States is not representative of the number of beneficial holders nor is it
representative of where such beneficial holders reside, since the record holders of a significant
majority of our ordinary shares are nominees or other brokers, including Israel Discount Bank Nominees
Company, which held ordinary shares representing approximately 71% of our outstanding shares as of
March 23, 2009 (excluding treasury stock).

B.           RELATED PARTY TRANSACTIONS

We
have entered into a management and consulting agreement with Sivanir Management, which is jointly
owned by Messrs. Chaim Friedman and Eyal Guterman, both of whom are directors of our company. Under
the agreement, Mr. Chaim Friedman serves as our chief financial officer on a full time basis and
Mr. Eyal Guterman serves as our treasurer and risk management officer on a part time basis, devoting
approximately 25% of his business time and attention to our company. We paid Sivanir Management an
aggregate of $150,000, $153,000 and $159,000 in each of the years ended December 31, 2006, 2007 and
2008, respectively. See Item 6B. Directors, Senior Management and Employees - Compensation.

C.INTERESTS OF EXPERTS AND COUNSEL

Not













applicable.

ITEM 8. FINANCIAL INFORMATION

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Financial Statements

See
the consolidated financial statements, including the notes thereto, and the exhibits listed in Item
19 hereof and incorporated herein by reference.

54

---

---

Legal Proceedings

We
are not presently involved in any legal proceedings. During the ordinary course of our business,
we are, from time to time, threatened with, or may become a party to, legal actions and other proceedings.

Dividend Distribution Policy

We
paid dividends of NIS 1.00 per ordinary share in January 2006, NIS 1.25 per ordinary share in January
2007, and NIS 1.15 per ordinary share in June 2008. Although we paid dividends on an annual basis
during the five years prior to our initial public offering in the United States in May 2007, and
once again in June 2008, we do not currently have a dividend distribution policy in place. Future
dividend distributions are subject to the discretion of our board of directors and will depend on
a number of factors, including our operating results, future capital resources available for distribution,
capital requirements, financial condition, the tax implications of dividend distributions on our
income, future prospects and any other factors our board of directors may deem relevant.

The
distribution of dividends also may be limited by Israeli law, which permits the distribution of dividends
only out of profits (as defined by the Israeli Companies Law) or otherwise upon the permission of
the court. Profits are defined in the Israeli Companies Law as the balance of surpluses,
or the surpluses accumulated over the past two years, whichever is the greater, in accordance with
the latest adjusted financial statements, audited or reviewed, prepared by the company, provided
that the date in respect of which the statements were prepared is no earlier than six months prior
to the date of distribution. Surplus means sums included in a companys
shareholders equity originating from the net profit of the company, as determined according
to generally accepted accounting principles, and sums other than share capital or premiums that are
included in shareholders equity under generally accepted accounting principles and the Minister
of Justice prescribed that they are to be considered surplus.

In
the event that we distribute cash dividends from tax exempt income attributable to any of our Approved
Enterprise or Benefited Enterprise, we would have to pay corporate tax in respect of the amount distributed.
See Item 10E. Additional Information - Taxation - Israeli Tax Considerations  Tax Benefits
under the Law for the Encouragement of Capital Investments, 1959.

B.           Significant Changes

Except
as otherwise disclosed in this annual report, no significant change has occurred since December 31,
2008.

ITEM 9. THE OFFER AND LISTING

A.            OFFER AND LISTING DETAILS

Annual Stock Information

The
    following table sets forth, for each of the years indicated, the high and low market prices of our
    ordinary shares on the NASDAQ Global Market and the Tel Aviv Stock Exchange:

|****     | **** | **NASDAQ Global Market** | ****  | **Tel Aviv Stock Exchange** |  
|-------- | ---- | ------------------------ | ----- | --------------------------- | -
|         |      |                          |       |                             |  
|**Year** |      | **High**                 |       | **Low**                     |  
|         |      |                          |       |                             |  
|        
|2004     |      |                          |      |                             |  
|2005     |      |                          |      |                             |  
|2006     |      |                          | **** |                             |  
|2007*    |      | $                        | 13.78 |                             | $
|2008     |      | $                        | 10.99 |                             | $

____________*  Prices of our ordinary shares on the NASDAQ Global Market for 2007 are from May 21, 2007 only.

55

---

---

Quarterly Stock Information

The
following table sets forth, for each of the full financial quarters in the years indicated, the high
and low market prices of our ordinary shares on the NASDAQ Global Market and the Tel Aviv Stock Exchange:

|****            | **** | **NASDAQ Global Market** | ****  | **Tel Aviv Stock Exchange** |  
|--------------- | ---- | ------------------------ | ----- | --------------------------- | -
|                |      |                          |       |                             |  
|****            |      | **High**                 |       | **Low**                     |  
|                |      |                          |       |                             |  
|               
|**2007**        |      |                          | ****  |                             |  
|First Quarter   |      |                          |      |                             |  
|Second Quarter* |      | $                        | 13.78 |                             | $
|Third Quarter   |      | $                        | 13.07 |                             | $
|Fourth Quarter  |      | $                        | 12.50 |                             | $
|                |      |                          |       |                             |  
|**2008**        |      |                          |       |                             |  
|First Quarter   |      | $                        | 10.99 |                             | $
|Second Quarter  |      | $                        | 8.39  |                             | $
|Third Quarter   |      | $                        | 8.09  |                             | $
|Fourth Quarter  |      | $                        | 6.77  |                             | $

__________*  Prices of our ordinary shares on the NASDAQ Global Market are from May 21, 2007.

Monthly Stock Information

The
following table sets forth, for the most recent six months, the high and low market prices of our
ordinary shares on the NASDAQ Global Market and the Tel Aviv Stock Exchange:

|****                        | **** | **NASDAQ Global Market** | **** | **Tel Aviv Stock Exchange** |  
|--------------------------- | ---- | ------------------------ | ---- | --------------------------- | -
|                            |      |                          |      |                             |  
|****                        |      | **High**                 |      | **Low**                     |  
|                            |      |                          |      |                             |  
|                           
|October 2008                |      | $                        | 6.77 |                             | $
|November 2008               |      | $                        | 4.00 |                             | $
|December 2008               |      | $                        | 4.36 |                             | $
|January 2009                |      | $                        | 4.80 |                             | $
|February 2009               |      | $                        | 4.99 |                             | $
|March 2009 (until March 23) |      | $                        | 4.76 |                             | $

B.           PLAN OF DISTRIBUTION

Not













applicable.

C.MARKETS

In
November 1993, we completed an initial public offering of our ordinary shares in Israel and our ordinary
shares have traded on the Tel Aviv Stock Exchange since such time. Since our public offering in the
United States in May 2007, our ordinary shares have also been listed on the NASDAQ Global Market
(symbol: LIMS).

D.SELLING SHAREHOLDERS

Not
applicable.

E.DILUTION

Not













applicable.

56

---

---

F.            EXPENSE OF THE ISSUE

Not













applicable.

ITEM 10.ADDITIONAL INFORMATION

A.SHARE CAPITAL

Not













applicable.

B.MEMORANDUM AND ARTICLES OF ASSOCIATION

Set out below is a description of certain provisions of our Articles of Association and of the Israeli
Companies Law related to such provisions. This description is only a summary and does not purport
to be complete and is qualified by reference to the full text of the Articles of Association, which
are incorporated by reference as exhibits to this annual report, and to Israeli law.

Purposes and Objects of the Company

We
are a public company registered under the Israel Companies Law as STARLIMS Technologies Ltd. Our
registration number with the Israeli Companies Registrar is 520040247. Pursuant to our memorandum
of association, we were formed for the purpose of, among other things, trading, marketing, distribution
and export of computers and peripheral computer equipment, software products and measuring equipment
for laboratories.

The Powers of the Directors

Under
the provisions of the Israel Companies Law and our articles of association, a director cannot participate
in a meeting nor vote on a proposal, arrangement or contract in which he or she is materially interested.
In addition, our directors cannot vote compensation to themselves or any members of their body without
the approval of our audit committee and our shareholders at a general meeting. See Item 6B.
Directors, Senior Management and Employees  Compensation.

Directors
may not enter into borrowing arrangements on our behalf except in the manner approved by the Company.

Under
our articles of association, retirement of directors from office is not subject to any age limitation
and our directors are not required to own shares in our company in order to qualify to serve as directors.

Rights Attached to Shares

Our
authorized share capital consists of 15,000,000 ordinary shares, each with a par value of NIS 1.0
per share. All of our issued and outstanding ordinary shares are duly authorized, validly issued,
fully paid and non-assessable.

The
rights attached to the ordinary shares are as follows:

Dividend and Liquidation Rights. The holders of our ordinary shares are entitled to their proportionate share of any cash dividend,
share dividend or dividend in kind subsequently declared with respect to our ordinary shares. Dividends
are paid to the holders of ordinary shares proportionate to the amounts that were paid up or were
treated as having been paid up on the par value of the shares that they hold. Under the Israeli Companies
Law a company may effect a distribution out of its profits (as defined by the Israeli Companies Law)
provided that there is no reasonable concern that such distribution might deprive the company of
its ability to meet its existing and anticipated liabilities as they become due. Profits
are defined in the Israeli Companies Law as the balance of surpluses, or the surpluses accumulated
over the past two years, whichever is the greater, in accordance with the latest adjusted financial
statements, audited or reviewed, prepared by the company, provided that the date in respect of which
the statements were prepared is no earlier than six months prior to the date of distribution. Surplus
means sums included in a companys shareholders equity originating from the net profit
of the company, as determined according to generally accepted accounting principles, and sums other
than share capital or premiums that are included in shareholders equity under generally accepted
accounting principles and the Minister of Justice prescribed that they are to be considered surplus.

57

---

---

A company
that does not have profits (within the meaning of the Israeli Companies Law) and wishes to make a
distribution must obtain court permission, which will be granted if the court is convinced that there
is no reasonable concern that such distribution might deprive the company of its ability to meet
its existing and anticipated liabilities as they become due.

Under
the Israeli Companies Law, dividend distributions are determined by the board of directors and do
not require the approval of the shareholders of a company unless the companys articles of association
provide otherwise. Our articles of association do not require shareholder approval of a dividend
distribution.

In
the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be
distributed to the holders of ordinary shares proportionate to the amounts that were paid up or were
treated as having been paid up on the par value of the shares that they hold.

Voting Rights. Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote of shareholders. Such voting rights may be affected by the grant of any special voting rights
to the holders of a class of shares with preferential rights that may be authorized in the future.

The
quorum required for a general meeting of shareholders consists of at least two shareholders present
in person or by proxy or by written ballot who hold or represent, in the aggregate, at least one
third of the voting rights of the company. A meeting adjourned for lack of a quorum shall be adjourned
to the same day in the following week at the same time and place or to any time and place as the
board of directors designates in a notice to the shareholders. At the adjourned meeting, the required
quorum consists of at least two shareholders present in person or by proxy or by written ballot.

Under
the Israeli Companies Law, unless otherwise provided in the articles of association or applicable
law, all resolutions of the shareholders require a simple majority of the voting rights represented
at the meeting, in person, by proxy or by written ballot, and voting on the resolution. Under the
Israeli Companies Ordinance, a resolution for the voluntary winding up of the company requires approval
by holders of 75% of the voting rights represented and voting at the general meeting.

Pursuant
to our articles of association, our directors (except the outside directors) are elected at our annual
general meeting of shareholders by a vote of the holders of a majority of the voting power represented
and voting at such meeting and hold office until the next annual general meeting of shareholders.
If directors have not been elected at the general meeting, the directors who were elected at the
previous meeting will continue in office. All the members of our Board of Directors (except the outside
directors) may be reelected upon completion of their term of office. For information regarding the
election of outside directors, see Item 6C. Directors and Senior Management Board
Practices - Outside and Independent Directors.

Rights to Share in our Companys Profits.  Our shareholders have the right to share in our profits distributed as a dividend and any other
permitted distribution. See this Item 10B. Additional Information  Memorandum and Articles
of Association  Rights Attached to Shares  Dividend and Liquidation Rights.

Rights to Share in Surplus in the Event of Liquidation.  In the event of our liquidation, after satisfaction of liabilities to creditors, our assets
will be distributed to the holders of ordinary shares proportionate to the amounts that were
paid up or were treated as having been paid up on the par value of the shares they hold. This right
may be affected by the grant of preferential dividend or distribution rights to the holders of a
class of shares with preferential rights that may be authorized in the future.

Liability to capital calls by our company.  Under our memorandum of association and the Israeli Companies Law, the liability of our shareholders
is limited to the par value of the shares held by them.

58

---

---

Limitations on any existing or prospective major shareholder.  See Item 6C. Directors and Senior Management Board Practices - Approval of Related
Party Transactions Under Israeli Law.

Modification of Rights Attached to Shares

The
Israeli Companies Law provides that, unless otherwise provided by the articles of association, the
rights of a particular class of shares may not be adversely modified without the approval of a separate
class meeting of the affected class.

Annual and Special Meetings

Under
the Israeli Companies Law a company must convene an annual meeting of shareholders at least once
every calendar year and within 15 months of the last annual meeting. Depending on the matter to be
voted upon, in general notice of at least 14 days or 35 days prior to the date of the meeting is
required. Our board of directors may, in its discretion, convene additional meetings as special
general meetings.  In addition, the board must convene a special general meeting
upon the demand of two of the directors, 25% of the nominated directors, one or more shareholders
having at least 5% of the outstanding share capital and at least 1% of the voting power in the company,
or one or more shareholders having at least 5% of the voting power in the company. The chairman of
the board of directors presides at each of our general meetings. If there is no chairman or he or
she is absent from the meeting within 15 minutes from the time set for the meeting or if he or she
refuses to take the chair at the meeting, the members that are present may elect one of the directors
as chairman of the meeting or where no director is present or if all the directors who are present
refuse to take the chair  one of the members present may be elected to chair the meeting. The
chairman of the board of directors is not entitled to a vote at a general meeting in his or her capacity as chairman.

Limitations on the Rights to Own Our Ordinary Shares

Neither
our memorandum of association, 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, except that shares held by
citizens of countries which are in a state of war with Israel will not confer any rights to their
holders unless the Minister of Finance consents otherwise.

Anti-Takeover Provisions; Mergers and Acquisitions

Tender Offer .A person wishing to acquire shares, or any class of shares, of a publicly traded Israeli company and
who would as a result hold over 90% of the companys issued and outstanding share capital, or
a class of shares, is required by the Israeli Companies Law to make a tender offer to all of the
companys shareholders for the purchase of all of the remaining issued and outstanding shares
of the company, or the class of shares, as the case may be. If the shareholders who do not respond
to the offer hold less than 5% of the issued share capital of the company, or of the relevant class
of shares, all of the shares that the acquirer offered to purchase will be transferred to the acquirer
by operation of law. However, the shareholders may petition the court to determine that the consideration
for the acquired shares is less than the shares fair value and that the acquiring party should
pay the shares fair value. If the dissenting shareholders hold more than 5% of the issued and
outstanding share capital of the company, or of the relevant class of shares, as the case may be,
the acquirer may not acquire additional shares of the company from shareholders who accepted the
tender offer if following such acquisition the acquirer would own over 90% of the companys
issued and outstanding share capital, or of the relevant class of shares.

The
Israeli Companies Law provides that an acquisition of shares of a public company be made by means
of a tender offer if as a result of the acquisition the purchaser would become the holder of a control
block.  Under the Israeli Companies Law shares conferring 25% or more of the voting
rights in the company constitute a control block.  The requirement for
a tender offer does not apply if there is already another holder of a control block. Similarly, the
Israeli Companies Law provides that an acquisition of shares in a public company must be made by
means of a tender offer if as a result of the acquisition the acquirer would hold more than 45% of
the voting rights in the company, unless there is another person holding more than 45% of the voting
rights in the company. These requirements do not apply if:

59

---

---

| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the acquisition was made in a private placement the object of which was to confer to the acquiring
party a control block where there is no holder of a control block,
or to confer to the acquiring party 45% of the voting rights in the company where there is no holder
of 45% of the voting rights in the company, and the private placement received the general meetings
approval; or
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | the acquisition was from the holder of a control block and resulted in a person
becoming the holder of a control block; or                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | the acquisition was from a shareholder holding more than 45% of the voting rights in the company and
resulted in a person becoming a holder of more than 45% of the voting rights in the company.                                                                                                                                                                                                   

Merger .   The Israeli Companies Law permits merger transactions if approved by each partys
board of directors and, except under certain circumstances specified below, by the majority of each
partys shares voted on the proposed merger at a shareholders meeting convened upon prior notice
of at least 35 days (which may be shortened to 14 days in certain circumstances). A merger is defined
as the transfer of all assets and liabilities, including conditional, future, known and unknown debts
of the target company to the surviving company, as a result of which the target company is liquidated,
and stricken out of the Companies Register.

Under
the Israeli Companies Law, if the approval of a general meeting of the shareholders is required,
merger transactions may be approved by holders of a simple majority of the shares present and voting,
in person or by proxy or by written ballot, at the general meeting convened to approve the transaction.
If one of the merging companies, or a shareholder that holds 25% or more of the means of control
of one of the merging companies, or a 25% shareholder, holds shares of the other merging company,
then a dissenting vote of holders of the majority of the shares of the other merging company present
and voting, excluding shares held by the merging company or a 25% shareholder thereof, or by anyone
acting on behalf of either of them, their relatives and corporations controlled thereby, is sufficient
to reject the merger transaction. Means of control are defined as any of the following: (i) the right
to vote at a general meeting of a company; and (ii) the right to appoint a director of a company.
If the transaction would have been approved but for the exclusion of the votes as previously indicated,
a court may still approve the merger upon the request of holders of at least 25% of the voting rights
of the company. The court will not approve a merger unless it is convinced that the merger is fair
and reasonable, taking into account the values of the merging companies and the consideration offered
to the shareholders. Upon the request of a creditor of either party to the proposed merger, the court
may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a
result of the merger, the surviving company will be unable to satisfy the obligations of the merged
company. In addition, a merger may not be completed unless at least 50 days have passed from the
date that a proposal for approval of the merger was filed with the Israeli Registrar of Companies
and 30 days from the date that shareholder approval of both merging companies was obtained.

| |  | Notwithstanding the foregoing, a merger is not subject to the approval of the shareholders of the target
company if the target company is a wholly-owned subsidiary of the surviving company. A merger is
not subject to the approval of the shareholders of the surviving company if:    
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                           
| |  | the merger does not require the alteration of the memorandum or articles of association of the surviving
company;                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                           
| |  | the acquiring company would not issue more than 20% of the voting rights thereof to the shareholders
of the target company in the course of the merger and no person will become, as a result of the merger,
a controlling shareholder of the surviving company, on a fully diluted basis;
| |   |                                                                                                                                                                                                                                                                                           
| |  | neither the target company, nor any shareholder that holds 25% of the means of control of the target
company is a shareholder of the surviving company; and                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                           
| |  | there is no person that holds 25% or more of the means of control in both companies.                                                                                                                                                                                                      

60

---

---

Disclosure of Shareholders Ownership

The
Israeli Securities Law, 5728-1968 and regulations promulgated thereunder contain various provisions
regarding the ownership threshold above which shareholders must disclose their share ownership. However,
these provisions do not apply to companies, such as ours, whose shares are publicly traded in Israel
as well on the NASDAQ Global Market. We are required pursuant to the Israeli Securities Law and the
regulations promulgated thereunder to submit to the Israeli Companies Registrar, the Israeli Securities
Authority and the Tel Aviv Stock Exchange, among other things, all information that we receive from
our shareholders regarding their shareholdings in our company, provided that such information was
published or is required to be published under applicable foreign law.

Changes in Our Capital

Changes
in our capital are subject to the approval of the shareholders at a general meeting by a simple majority
of the votes of shareholders participating and voting in the general meeting.

C.            MATERIAL CONTRACTS

While
we have numerous contracts with customers and distributors we do not deem any such individual contract
to be material.

D.EXCHANGE CONTROLS

The
Israeli Currency Control Law, 5738-1978 provides that transactions in foreign currencies, and transactions
with foreign residents, require a permit. Since 1998, when a new general permit was issued
under the law, there have been 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 the shares,
except for the obligation of Israeli residents to file reports with the Bank of Israel regarding
certain transactions.

E.TAXATION

The
following is a discussion of Israeli and United States tax consequences material to our shareholders.
To the extent that the discussion is based on new tax legislation which has not been subject to judicial
or administrative interpretation, the views expressed in the discussion might not be accepted by
the tax authorities in question. The discussion is not intended, and should not be construed, as
legal or professional tax advice and does not exhaust all possible tax considerations.

Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli
or other tax consequences of the purchase, ownership and disposition of ordinary shares, including,
in particular, the effect of any foreign, state or local taxes.

ISRAELI TAX CONSIDERATIONS

The following is a general discussion only and is not exhaustive of all possible tax considerations.
It is not intended, and should not be construed, as legal or professional tax advice and should not
be relied upon for tax planning purposes. In addition, this discussion does not address all of the
tax consequences that may be relevant to purchasers of our ordinary shares in light of their particular
circumstances, or certain types of purchasers of our ordinary shares subject to special tax treatment.
Examples of these kinds of purchasers include residents of Israel and traders in securities who are
subject to special tax regimes not covered in this discussion. Each individual/entity should consult
its own tax or legal advisor as to the Israeli tax consequences of the purchase, ownership and disposition
of our ordinary shares.

To the extent that part of the discussion is based on new tax legislation, which has not been subject
to judicial or administrative interpretation, we cannot assure that the tax authorities or the courts
will accept the views expressed in this section.

61

---

---

The following summary describes the current tax structure applicable to companies in Israel, with special
reference to its effect on us. The following also contains a discussion of the material Israeli tax
consequences to holders of our ordinary shares.

General Corporate Tax Structure

Israeli
companies were subject to corporate tax at the rate of 27% on taxable income for the year 2008 and
were subject to capital gains tax at a rate of 25% on capital gains (other than gains derived from
the sale of listed securities that are taxed at the prevailing corporate tax rates) derived after
January 1, 2003. The applicable corporate tax for 2009 is 26%; for 2010 and thereafter,
the applicable tax rate will be 25%. However, the effective tax rate payable by a company that derives
income from a benefited enterprise as further discussed below may be lower.

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

Under
the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, Industrial
Companies (as defined below) are entitled to the following tax benefits:

| |  | amortization of the expenses incurred in the purchase of know-how and patents, over an eight-year period;                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                     
| |  | expenses related to a public offering are deductible over a three-year period;                                                                                                      
| |   |                                                                                                                                                                                     
| |  | the right to file, under specified conditions, a consolidated tax return with other Israeli Industrial
Companies under the same control that engage in the same economic sector; and
| |   |                                                                                                                                                                                     
| |  | accelerated depreciation rates on equipment and buildings.                                                                                                                          

Under
the Industry Encouragement Law, an Industrial Company is defined as a company
resident in Israel, at least 90% of the income of which, in any tax year, exclusive of income from
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.

We
believe that we currently qualify as an Industrial Company within the definition of the Industry
Encouragement Law. No assurance can be given that we will continue to qualify as an Industrial Company
or that the benefits described above will be available in the future.

Tax Benefits under the Law for the Encouragement of Capital Investments, 1959

The
Law for the Encouragement of Capital Investment, 1959, or the Investment Law, provides that certain
capital investments in production facilities that contribute to the economic independence of the
Israeli economy and are deemed competitive facilities that contribute to the Israeli gross domestic
product may, subject to the conditions specified in the law, be entitled to the status of an Approved
Enterprise.  A company having an Approved Enterprise is entitled to certain benefits,
including Israeli Government cash grants and tax benefits.

The
Investment Law specifies certain conditions that an Approved Enterprise has to comply with, including
compliance with the definition of an Industrial Enterprise as detailed in
the Investment Law and minimum capital investments. In addition, for the status of an Approved Enterprise
an entity must comply with at least one of the following conditions during the period of entitlement
in order to enjoy the benefits:

| |  | that the Approved Enterprise engage primarily in biotechnology or nanotechnology and receive the prior
approval of the Chairman of the Industrial Research and Technology Administration confirming this;
or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

62

---

---

| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | that the Approved Enterprises revenues from any single country do not exceed 75% of the Approved
Enterprises total revenues; or                            
| |   |                                                                                                                                                              
| |  | that 25% of the Approved Enterprises revenues during the benefits period derive from sales within
a single country with a population of at least 12 million.

We
monitor annually our compliance with the relevant conditions in order to ensure that we preserve
our status as an Approved Enterprise.

An
Approved Enterprise that complies with one of the foregoing conditions and other terms specified
in the Investment Law is a Benefited Enterprise.  A Benefited Enterprise
is entitled to accelerated depreciation for its manufacturing assets. In addition, a Benefited Enterprise
is entitled to full exemption from corporate tax on undistributed income for a period of two to ten
years, depending on the geographic location of the Benefited Enterprise within Israel, and a reduced
corporate tax rate of 10% to 25% on undistributed income for the remainder of the benefits period.
The duration of the remainder of the benefits period varies, depending on the level of foreign investment
in the enterprise in each year, and the location of the enterprise. The scope of the reduction in
the corporate tax rate is also dependant on the level of foreign investment in the enterprise. Foreign
investment is determined pursuant to the percentage of a companys share capital (conferring
rights to profits, voting and appointment of directors) and shareholders loans owned by non-Israeli
residents. The minimum amount of foreign investment for purposes of the Investment Law is NIS 5.0
million. A Benefited Enterprise located in Development Zone A, where we established a development
center in November 2006, is exempt from corporate tax on undistributed income for ten years.
A Benefited Enterprise located in Development Zone B is exempt from corporate tax on undistributed
income for six years, and subject to a reduced corporate tax rate of 25% in the seventh year. A Benefited
Enterprise located in an area other than Zone A or B is exempt from corporate tax on undistributed
income for two years and subject to a reduced corporate tax rate of 25% in the following four years.
However, if the enterprise has a foreign investment of 25% or more it will enjoy a reduced corporate
tax rate during the four years following the six years of full exemption if located in Zone B, or
if located in an area other than Zone A or B it will enjoy a reduced corporate tax rate during the
eight years following the two years of full exemption. The reduced corporate tax rate would be 25%,
unless the enterprise has a foreign investment of 49% or more. If the foreign investment is 49% or
more but less than 74%, the reduced corporate tax rate would be 20%, if the foreign investment is
74% or more but less than 90% the reduced corporate tax rate would be 15%, and if the foreign investment
is 90% or more the reduced corporate tax rate would be 10%. The lowest level of foreign investment
during the year will be used to determine the relevant tax rate for that year.

If
the company pays a dividend out of income derived from the Benefited Enterprise during the tax exemption
period, a portion of its income that is equivalent to the amount distributed as dividends will be
subject to corporate tax. Dividends paid to shareholders out of income derived from the Benefited
Enterprise are subject to income tax at a reduced rate of 15% subject to the relevant tax treaty
as detailed below.

A Benefited
Enterprise located in Zone A is entitled to substitute the full exemption from corporate tax on undistributed
income by a reduced corporate tax rate of 11.5%. In this case it would not be subject to additional
corporate tax in case of dividend distributions, dividends distributed from the income of the Benefited
Enterprise to Israeli residents will be subject to 15% income tax, and dividends distributed from
the income of the Benefited Enterprise to non-Israeli residents will be subject to 4% income tax.

The
period of benefits may in no event exceed 14 years from the year the company chooses as the year
of election, within the meaning of the Investment Law, for the Benefited Enterprise. The reduced
income tax on dividends distributed out of income derived from a Benefited Enterprise is applicable
only if the dividends are distributed within 12 years after the benefits period. Dividends distributed
by an enterprise that has a foreign investment of 25% or more are not subject to the 12-year limitation.

If
a company has more than one Approved Enterprise or if only a portion of its capital investments are
approved, its effective tax rate is the result of a weighted combination of the applicable rates.
The tax benefits relate only to taxable profits attributable to the specific Approved Enterprise.
Income derived from activity that is not integral to the activity of the Approved Enterprise does
not enjoy tax benefits.

63

---

---

In
June 2006, we received a pre-ruling from the Israeli Tax Authority confirming that a development
center which we established in November 2006 in the industrial zone of Ashkelon, Israel will
be regarded a Benefited Enterprise. Benefited Enterprises located in this area, which is qualified
as Zone A, may elect between a full exemption from corporate tax on undistributed profits or a reduced
corporate tax of 11.5%. We have elected the full exemption option, which will apply to taxable income
attributable to the Benefited Enterprise. In addition, we have retained earnings in the amount of
$355,000 from an investment that was recognized as an Approved Enterprise and whose benefit period
terminated in 1997, and retained earnings of approximately $3.2 million from an investment that was
recognized as a Benefited Enterprise and whose benefit period will terminate in 2015. If these earnings
were distributed as a dividend by the company, they would be subject to 25% corporate tax (or 33.33%
under certain conditions), in addition to the income tax that will apply with respect to the dividend
income paid to our shareholders.

The
benefits available to our Benefited Enterprise are conditional upon our fulfilling certain conditions
stipulated in the Investment Law and its regulations and the terms of the pre-ruling that we received
from the Israeli Tax Authority. The pre-ruling that we received is subject to several conditions
which include, among other things, that we remain controlled and managed from Israel throughout the
benefit period and that we not change our line of business or business model, or significantly reduce
the volume of our production or variety of our products. In addition, under the pre-ruling, during
the benefit period, a certain percentage of our employees who are engaged in core research and development
must be located in Israel, a certain percentage of our employees who are engaged in quality control
must be located in Israel and no fewer than 12 of the employees engaged in core research and development
must be recruited and employed in Israel. If we were to violate one or more of these conditions we
could be required to pay the monetary equivalent of the tax benefits, linked to the Israeli consumer
price index, plus interest and penalties. As of the date of this annual report, we were in compliance
with all applicable conditions.

Special Provisions Relating to Taxation under Inflationary Conditions

The
Israeli tax ordinance and regulations promulgated thereunder allow Foreign-Invested Companies,
as defined in the Investments Law, that maintain their accounts in U.S. dollars in compliance with
regulations published by the Israeli Minister of Finance, referred to as the Dollar Regulations,
to base their tax returns on their operating results as reflected in their U.S. dollar financial
statements. For these purposes, a Foreign-Invested Company is a company (i) more than 25% of whose
share capital, in terms of rights to profits, voting and appointment of directors, are held by persons
who are not residents of Israel; and (ii) more than 25% of whose combined share and loan capital
is held by persons who are not residents of Israel. A company that elects to measure its results
for tax purposes based on the U.S. dollar exchange rate cannot change such election for a period
of three years following the election. We qualify as a Foreign-Invested Company
and elected to measure our results for tax purposes in the years 2008-2011 based on the U.S. dollar
exchange rate. Our Israeli subsidiaries are taxed under the Dollar Regulations for the years 2008 to 2010.

Through
tax year 2007, our company was taxed under the provisions of The Income Tax Law (Inflationary Adjustments),
1985, generally referred to as the Inflationary Adjustments Law, pursuant to which, results for tax
purposes were measured in real terms, based on changes in the Israeli consumer price index. On February
26, 2008, the Israeli Parliament (the Knesset) enacted an amendment to the Inflationary Adjustments
Law according to which the effective period of the Inflationary Adjustments Law ceased at the end
of the 2007 tax year and as of the 2008 tax year, the provisions of the law no longer apply, other
than the transitional provisions intended at preventing distortions in the tax calculations. In accordance
with the amendment, commencing the 2008 tax year, income for tax purposes will no longer be adjusted
to a real (net of inflation) measurement basis. Furthermore, the depreciation of inflation immune
assets and carried forward tax losses will no longer be linked to the Israeli consumer price index.
However, the provisions regarding Foreign-Invested Companies remain in force.

64

---

---

Taxation of our Shareholders

Taxation of Non-Israeli Shareholders

Taxation of Non-Israeli Shareholders on Receipt of Dividends.  According to Israeli tax law, non-Israeli residents are subject to income tax on income accrued
or derived from sources in Israel. Dividends distributed by a company resident in Israel are deemed
income accrued or derived from sources in Israel.

Unless
a lower rate is provided in a treaty between Israel and the shareholders country of residence,
dividends from income attributed to our Approved Enterprise will be subject
to income tax in Israel at the rate of 15%, and dividends from income which is not attributed to
an Approved Enterprise will be subject to income tax in Israel at the rate
of 20%, except for dividend distributed to a substantial shareholder which
will be subject to tax at the rate of 25%. A substantial shareholder is a
shareholder holding, either directly or indirectly, alone or together with another, at least 10%
of any means of control in a company. The term together with another means
together with a relative, or together with someone who is not a relative with whom the individual,
either directly or indirectly, usually cooperates, pursuant to an agreement, with respect to the
material affairs of the company. The relevant holdings for the purpose of determining whether a shareholder
is a substantial shareholder are the shareholders holdings at the time of the distribution
and at any time during the 12 months preceding the distribution. These taxes will be withheld at
source from the amounts distributed as dividends. The withholding tax from dividends derived from
traded securities by a substantial shareholders is limited to 25%.

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

Under
the Convention between the U.S. Government and the Government of Israel with Respect to Taxes on
Income, or the U.S.-Israel Tax Treaty, the maximum rate of tax chargeable in Israel on dividends
paid to a U.S. resident, within the meaning of the U.S.-Israel Tax Treaty, is 25%. Furthermore, the
maximum rate of tax chargeable on dividends that are paid to a U.S. corporation holding at least
10% of the outstanding shares of the voting stock of the paying company during the part of the tax
year of the paying company that precedes the date of the payment of the dividend and during the whole
of its prior tax year, is 12.5%. This reduced rate will not apply if more than 25% of the paying
companys gross income consists of interest or dividends (other than dividends or interest received
from subsidiary corporations, 50% or more of the outstanding shares of the voting shares of which
are owned by the paying company at the time such dividends or interest is received). These provisions
of the U.S.-Israel Tax Treaty will not apply to dividends constituting industrial or commercial profits
attributable to a permanent establishment which the recipient has in Israel, that are subject to
the specific provisions of the treaty relating to industrial or commercial profits.

Investors
should consult their own tax advisors to determine if they are eligible for benefits under the U.S.
Israel Tax Treaty.

Capital Gains Taxes Applicable to Non-Israeli Shareholders.  In general, Israel imposes a capital gains tax on the sale of capital assets located in Israel,
including shares of Israeli resident companies, by both Israeli and non-Israeli resident shareholders,
unless a specific exemption is available, or unless a tax treaty between Israel and the shareholders
country of residence provides otherwise.

Shareholders
that are not Israeli residents are exempt from Israeli capital gains tax on any gains derived from
the sale of shares that are traded on an Israeli stock exchange, unless such gains are derived from
a permanent establishment of such shareholders in Israel, and provided that the shares were purchased
after the listing of the shares on the stock exchange. Our shares have been traded on the TASE since
1993. Therefore, the exemption will apply to capital gains derived by eligible non-Israeli residents.

Non-Israeli
residents are also exempt from Israeli capital gains tax on any gains derived from the sale of shares
of Israeli companies publicly traded on a recognized stock market outside of Israel, provided such
shareholders did not acquire their shares prior to the issuers initial public offering and
that the gains did not derive from a permanent establishment of such shareholders in Israel, and
that such shareholders are not subject to the Inflationary Adjustments Law or the Income Tax Ordinances
provisions concerning bookkeeping in a foreign currency.

65

---

---

However,
a non-Israeli corporation will not be entitled to the foregoing exemptions if (i) it is controlled
by Israeli residents; or (ii) Israeli residents are the beneficiaries of or entitled to 25% or more
of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

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

In
addition, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S.
resident (within the meaning of the U.S.-Israel Tax Treaty) holding the ordinary shares as a capital
asset will be also exempt from Israeli capital gains tax under the U.S.-Israel Tax Treaty, unless
(i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting
capital during any part of the 12-month period preceding such sale, exchange or disposition; or (ii)
the capital gains arising from such sale, exchange or disposition are attributable to a permanent
establishment of the shareholder located in Israel; or (iii) an individual shareholder is present
in Israel for a period or periods aggregating 183 days or more during the taxable year. In such case
the U.S. resident would be subject to Israeli capital gain tax, to the extent applicable, as mentioned
above. However, under the U.S.-Israel Tax Treaty, the U.S. resident would be permitted to claim a
credit for such taxes against the U.S. federal income tax imposed on the sale, exchange or disposition,
subject to the limitation in U.S. law applicable to foreign tax credits. The U.S.-Israel Tax Treaty
does not relate to U.S. state or local taxes.

Taxation of Israeli Shareholders

Israeli
resident individuals are generally subject to Israeli income tax on the receipt of dividends paid
on our ordinary shares, other than bonus shares (share dividends) or stock dividends, at the rate
of 20%, or 25% for a shareholder that is considered a material shareholder (within the meaning of
the Israeli Income Tax Ordinance) at any time during the 12-month period preceding such distribution.
Dividends paid on our ordinary shares to Israeli companies are exempt from such tax, except for dividends
distributed from income derived outside of Israel, which are subject to the 25% tax rate.

Dividends
paid from income derived from any of our approved enterprises or benefited enterprises
are subject to tax, which is withheld at the source, at the rate of 15%. We cannot assure you that
we will designate the profits that are being distributed in a way that will reduce shareholders
tax liability to this tax rate.

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following discussion summarizes the material U.S. federal income tax considerations applicable
to the purchase, ownership and disposition of our ordinary shares. Unless otherwise stated, this
summary deals only with shareholders that are U.S. Holders (as defined below) who hold their ordinary
shares as capital assets.

As
used in this section, the term U.S. Holder means a beneficial owner of an ordinary share
who is:

| |  | an individual citizen or resident of the United States or an individual treated as a U.S. citizen or
resident for U.S. federal income tax purposes;                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                             
| |  | a corporation or other entity taxable as a corporation for U.S. federal income tax purposes created
or organized in or under the laws of the United States, any State or the District of Columbia;                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                             
| |  | an estate, the income of which is subject to U.S. federal income taxation regardless of its source;
or                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                             
| |  | any trust if (A)(i) a court within the United States is able to exercise primary supervision over the
administration of the trust and (ii) one or more United States persons have the authority to control
all substantial decisions of the trust, or (B) such trust validly elects to be treated as a United
States person.

66

---

---

The
term Non-U.S. Holder means a beneficial owner of an ordinary share that is an individual,
corporation, estate or trust and is not a U.S. Holder. The tax consequences to a Non-U.S. Holder
may differ substantially from the tax consequences to a U.S. Holder. Certain aspects of U.S. federal
income tax relevant to a Non-U.S. Holder are discussed below.

This
description is based on provisions of the U.S. Internal Revenue Code of 1986, as amended (the Code),
existing and proposed U.S. Treasury regulations promulgated thereunder, administrative and judicial
interpretations thereof, and the US-Israel Tax Treaty, each as in effect as of the date of this annual
report. These sources may change, possibly with retroactive effect, and are open to differing interpretations.
This description does not discuss all aspects of U.S. federal income taxation that may be applicable
to investors in light of their particular circumstances or to investors who are subject to special
treatment under U.S. federal income tax law, including:

| |  | insurance companies;                                                                                                                                         
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                              
| |  | dealers in stocks, securities or currencies;                                                                                                                 
| |   |                                                                                                                                                              
| |  | financial institutions and financial services entities;                                                                                                      
| |   |                                                                                                                                                              
| |  | real estate investment trusts;                                                                                                                               
| |   |                                                                                                                                                              
| |  | regulated investment companies;                                                                                                                              
| |   |                                                                                                                                                              
| |  | persons that receive ordinary shares in connection with the performance of services;                                                                         
| |   |                                                                                                                                                              
| |  | tax-exempt organizations;                                                                                                                                    
| |   |                                                                                                                                                              
| |  | persons that hold ordinary shares as part of a straddle or appreciated financial position or as part
of a hedging, conversion or other integrated instrument;
| |   |                                                                                                                                                              
| |  | persons who acquire their ordinary shares through the exercise or cancellation of employee stock options
or otherwise as consideration for their services;   
| |   |                                                                                                                                                              
| |  | individual retirement and other tax-deferred accounts;                                                                                                       
| |   |                                                                                                                                                              
| |  | expatriates of the United States and certain former long-term residents of the United States;                                                                
| |   |                                                                                                                                                              
| |  | persons liable for the alternative minimum tax;                                                                                                              
| |   |                                                                                                                                                              
| |  | persons having a functional currency other than the U.S. dollar; and                                                                                       
| |   |                                                                                                                                                              
| |  | direct, indirect or constructive owners of 10% or more, by voting power or value, of our company.                                                            

If
a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns ordinary
shares, the U.S. federal income tax treatment of a partner in such a partnership will generally depend
upon the status of the partner and the activities of the partnership. A partnership that owns ordinary
shares and the partners in such partnership should consult their tax own advisors about the U.S.
federal income tax consequences of holding and disposing of ordinary shares.

This
discussion does not consider the possible application of U.S. federal gift or estate tax or alternative
minimum tax.

All investors are urged to consult their own tax advisors as to the particular tax consequences to
them of an investment in our ordinary shares, including the effect and applicability of United States
federal, state, local and foreign income and other tax laws (including estate and gift tax laws)
and tax treaties.

67

---

---

Distributions Paid on the Ordinary Shares

Subject
to the discussion below under Passive Foreign Investment Company Considerations, a U.S.
Holder generally will be required to include in his or her gross income as ordinary dividend income
the amount of any distributions paid on the ordinary shares, including the amount of any Israeli
taxes withheld, to the extent that those distributions are paid out of our current or accumulated
earnings and profits, as determined for U.S. federal income tax purposes. Subject to the discussion
below under Passive Foreign Investment Company Considerations, distributions in excess
of our earnings and profits will be applied against and will reduce the U.S. Holders tax basis
in its ordinary shares and, to the extent they exceed that tax basis, will be treated as gain from
a sale or exchange of those ordinary shares. Our dividends will not qualify for the dividends-received
deduction applicable in some cases to U.S. corporations.

Dividends
that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included
in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on
the day such dividends are received, regardless of whether the payment is in fact converted into
U.S. dollars. A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an
exchange rate other than the rate in effect on such day will have a foreign currency exchange gain
or loss that would be treated as ordinary income or loss. U.S. Holders should consult their own tax
advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.

Subject
to certain limitations, qualified dividend income received by a noncorporate U.S. Holder
in tax years beginning on or before December 31, 2010 will be subject to tax at a reduced maximum
tax rate of 15%. Distributions taxable as dividends paid on the ordinary shares should qualify for
the 15% rate provided that we are not a passive foreign investment company (as described below) for
U.S. tax purposes and that either: (i) we are entitled to benefits under the income tax treaty between
the United States and Israel (the U.S.-Israel Tax Treaty) or (ii) the ordinary shares
are readily tradable on an established securities market in the United States and certain other requirements
are met. We believe that we are entitled  to benefits under the U.S.-Israel Tax Treaty
and that the ordinary shares currently will be readily tradable on an established securities market
in the United States. However, no assurance can be given that the ordinary shares will remain readily
tradable. The rate reduction does not apply unless certain holding period requirements are satisfied.
With respect to the ordinary shares, the U.S. Holder must have held such shares for at least 61 days
during the 121-day period beginning 60 days before the ex-dividend date. The rate reduction also
does not apply to dividends received from passive foreign investment companies, see discussion below,
or in respect of certain hedged positions or in certain other situations. The legislation enacting
the reduced tax rate contains special rules for computing the foreign tax credit limitation of a
taxpayer who receives dividends subject to the reduced tax rate. U.S. Holders of ordinary shares
should consult their own tax advisors regarding the effect of these rules in their particular circumstances.

Subject
to the discussion below under Information Reporting and Back-up Withholding, a Non-U.S.
Holder generally will not be subject to U.S. federal income or withholding tax on dividends received
on ordinary shares unless that income is effectively connected with the conduct by that Non-U.S.
Holder of a trade or business in the United States, in which case a corporate Non-U.S. Holder may
also be subject to the U.S. branch profits tax.

68

---

---

Foreign Tax Credit

Any
dividend income resulting from distributions we pay to a U.S. Holder with respect to the ordinary
shares generally will be treated as foreign source income for U.S. foreign tax credit limitation
purposes. Subject to certain conditions and limitations, Israeli tax withheld on dividends may be
deducted from taxable income or credited against a U.S. Holders U.S. federal income tax liability.
The limitation on foreign taxes eligible for credit is calculated separately with respect to specific
classes of income. For this purpose, any dividend that we distribute generally will constitute passive
category income, or, in the case of certain U.S. Holders, general category income.
 The rules relating to the determination of foreign source income and the foreign tax credit
are complex, and the availability of a foreign tax credit depends on numerous factors. Each investor
who is a U.S. Holder should consult with its own tax advisor to determine whether its income with
respect to the ordinary shares would be foreign source income and whether and to what extent that
investor would be entitled to a foreign tax credit.

Disposition of Ordinary Shares

Upon
the sale or other disposition of ordinary shares, subject to the discussion below under Passive
Foreign Investment Company Considerations, a U.S. Holder generally will recognize capital gain
or loss equal to the difference between the amount realized on the disposition and the holders
adjusted tax basis in the ordinary shares. U.S. Holders should consult their own advisors with respect
to the tax consequences of the receipt of a currency other than U.S. dollars upon such sale or other
disposition.

Gain
or loss upon the disposition of the ordinary shares will be treated as long-term if, at the time
of the sale or disposition, the ordinary shares were held for more than one year. The deductibility
of capital losses by a U.S. Holder is subject to limitations. In general, any gain or loss recognized
by a U.S. Holder on the sale or other disposition of ordinary shares will be U.S. source income or
loss for U.S. foreign tax credit purposes. U.S. Holders should consult their own tax advisors concerning
the source of income for U.S. foreign tax credit purposes and the effect of the U.S.-Israel Tax Treaty
on the source of income.

Subject
to the discussion below under Information Reporting and Back-up Withholding, a Non-U.S.
Holder generally will not be subject to U.S. federal income or withholding tax on any gain realized
on the sale or exchange of ordinary shares unless:

| |  | that gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in
the United States, and, if a tax treaty applies, is attributable to a permanent establishment or
fixed base of the Non-U.S. Holder in the United States; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                 
| |  | in the case of any gain realized by an individual Non-U.S. Holder, that holder is present in the United
States for 183 days or more in the taxable year of the sale or exchange, and other conditions are
met.                                                  

Passive Foreign Investment Company Considerations

Special
U.S. federal income tax rules apply to U.S. Holders owning shares of a passive foreign investment
company. A non-U.S. corporation will be considered a passive foreign investment company for any taxable
year in which, after applying certain look-through rules, 75% or more of its gross income consists
of specified types of passive income, or 50% or more of the average value of its assets consists
of assets that produce, or are held for the production of, passive income. For this purpose, passive
income includes generally dividends, interest, royalties, rents, annuities and the excess of gains
over losses from the disposition of assets which produce passive income.

If
we were classified as a passive foreign investment company, a U.S. Holder could be subject to increased
tax liability upon the sale or other disposition of ordinary shares or upon the receipt of amounts
treated as excess distributions. Under these rules, the excess distribution and any gain
would be allocated ratably over the U.S. Holders holding period for the ordinary shares, and
the amount allocated to the current taxable year and any taxable year prior to the first taxable
year in which we were a passive foreign investment company would be taxed as ordinary income. The
amount allocated to each of the other taxable years would be subject to tax at the highest marginal
tax rate in effect for the applicable class of taxpayer for that year, and an interest charge for
the deemed deferral benefit would be imposed on the resulting tax allocated to such other taxable
years. The tax liability with respect to the amount allocated to years prior to the year of the disposition,
or excess distribution, cannot be offset by any net operating losses. In addition, holders
of stock in a passive foreign investment company may not receive a step-up in basis on
shares acquired from a decedent. If we are a passive foreign investment company in any year, a U.S.
Holder would be required to file an annual return on IRS Form 8621 regarding distributions received
with respect to ordinary shares and any gain realized on the disposition of ordinary shares.

69

---

---

Based
on our current and projected income, assets and activities, we do not believe that we will be a passive
foreign investment company for our current taxable year. However, because the determination of whether
we are a passive foreign investment company is based upon the composition of our income and assets
from time to time, we cannot be certain that we will not be considered a passive foreign investment
company for the current taxable year or any future taxable year.

The
passive foreign investment company tax consequences described above will not apply to a U.S. Holder
if the U.S. Holder makes an election to treat us as a qualified electing fund, or QEF. If a U.S.
Holder makes a timely QEF election, the U.S. Holder would be required to include in income for each
taxable year its pro rata share of our ordinary earnings as ordinary income and its pro rata share
of our net capital gain as long-term capital gain, whether or not such amounts are actually distributed
to the U.S. Holder. However, a U.S. Holder would not be eligible to make a QEF election unless we
comply with certain applicable information reporting requirements. We will determine whether or not
we are willing to provide U.S. Holders with the information needed to report income and gain under
a QEF election should we become a passive foreign investment company.

As
an alternative to making a QEF election, a U.S. Holder of passive foreign investment company stock
which is publicly traded may in certain circumstances avoid certain of the tax consequences generally
applicable to holders of a passive foreign investment company by electing to mark the stock to market
annually and recognizing as ordinary income or loss each year an amount equal to the difference as
of the close of the taxable year between the fair market value of the passive foreign investment
company stock and the U.S. Holders adjusted tax basis in the passive foreign investment company
stock. Losses would be allowed only to the extent of net mark-to-market gain previously included
by the U.S. Holder under the election for prior taxable years. Income recognized and deductions allowed
under the mark-to-market provisions, as well as any gain or loss on the disposition of ordinary shares
with respect to which the mark to market election is made, is generally treated as ordinary income
or loss (except that loss is treated as capital loss to the extent the loss exceeds the net mark-to-market
gains, if any, that a U.S. Holder included in its income with respect to such ordinary shares in
prior years). However, gain or loss from the disposition of ordinary shares (as to which a mark-to-market
election was made) in a year in which we are no longer a passive foreign investment company, will
be capital gain or loss. The mark-to-market election is available for so long as our ordinary shares
constitute marketable stock, which includes stock of a passive foreign investment company
that is regularly traded on a qualified exchange or other market.  Generally,
a qualified exchange or other market includes a national securities exchange that is
registered with the Securities and Exchange Commission or the national market system established
pursuant to Section 11A of the Exchange Act. A class of stock that is traded on one or more qualified
exchanges or other markets is regularly traded on an exchange or market for any calendar
year during which that class of stock is traded, other than in de minimis quantities, on at least
15 days during each calendar quarter. We believe that The NASDAQ Global Market will constitute a
qualified exchange or other market for this purpose. However, we can not be certain that our ordinary
shares will continue to trade on The NASDAQ Global Market or that the ordinary shares will be regularly traded for this purpose.

The
rules applicable to owning shares of a passive foreign investment company are complex, and each holder
who is a U.S. Holder should consult with its own tax advisor regarding the consequences of investing
in a passive foreign investment company.

Information Reporting and Backup Withholding

Payments
in respect of ordinary shares may be subject to information reporting to the U.S. Internal Revenue
Service and to U.S. backup withholding tax at a rate equal to the fourth lowest income tax rate applicable
to individuals (which, under current law, is 28%). Backup withholding will not apply, however, if
you (i) are a corporation or come within certain exempt categories, and demonstrate the fact when
so required, or (ii) furnish a correct taxpayer identification number and make any other required
certification. U.S. Holders who are required to establish their exempt status generally must provide
such certification on IRS Form W-9.

70

---

---

Backup
withholding is not an additional tax.  Amounts withheld under the backup withholding rules may
be credited against a U.S. Holders U.S. tax liability, and a U.S. Holder may obtain a refund
of any excess amounts withheld under the backup withholding rules by filing the appropriate claim
for refund with the IRS.

Any
U.S. holder who holds 10% or more in vote or value of our ordinary shares will be subject to certain
additional United States information reporting requirements.

U.S. Gift and Estate Tax

An
individual U.S. Holder of ordinary shares will generally be subject to U.S. gift and estate taxes
with respect to ordinary shares in the same manner and to the same extent as with respect to other
types of personal property.

F.             DIVIDEND AND PAYING AGENTS

Not
applicable.

G.STATEMENT BY EXPERTS

Not
applicable.

H.            DOCUMENTS ON DISPLAY

We
are subject to the reporting requirements of the Exchange Act, as applicable to foreign private
issuers as defined in Rule 3b-4 under the Exchange Act, and in accordance therewith, we file
annual and interim reports and other information with the Securities and Exchange Commission.

As
a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly,
our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation
14A under the Exchange Act and transactions in our equity securities by our officers and directors
are exempt from reporting and the short-swing profit recovery provisions contained in
Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic
reports and financial statements as frequently or as promptly as U.S. companies whose securities
are registered under the Exchange Act. However, we file with the Securities and Exchange Commission
an annual report on Form 20-F containing financial statements that have been audited by an independent
registered public accounting firm, and we file reports with the Securities and Exchange Commission
on Form 6-K containing (among other things) unaudited condensed interim financial information for
the first three quarters of each fiscal year and press releases. We post our annual report on Form
20-F and Form 6-Ks on our website (www.starlims.com) promptly following their filing with the Securities and Exchange Commission.  The information
on our website is not incorporated by reference into this annual report.

This
annual report and the exhibits thereto and any other document we file pursuant to the Exchange Act
may be inspected without charge and copied at prescribed rates at the following Securities and Exchange
Commission public reference rooms: 100 F Street, N.E., Room 1580, Washington, D.C. 20549; and on
the Securities and Exchange Commission Internet site (http://www.sec.gov). You may obtain information
on the operation of the Securities and Exchange Commissions public reference room in Washington,
D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by visiting the Securities
and Exchange Commissions website at http://www.sec.gov.  The Exchange Act file number for our Securities and Exchange Commission filings is 001-33487.

The
Securities and Exchange Commission maintains a website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding registrants that make electronic
filings with the Securities and Exchange Commission using its EDGAR (Electronic Data Gathering, Analysis,
and Retrieval) system.

71

---

---

The
documents concerning our company referred to in this annual report may also be inspected at our offices
located at32B Habarzel Street, Tel Aviv 69710, Israel.

I.             SUBSIDIARY INFORMATION

Not













applicable.

|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|-------- | -----------------------------------------------------------

Interest Rate Risk

We
do not believe that we have any material exposure to interest rate risk other than sensitivity to
prevailing interest rates that may affect income from our cash deposits, commercial paper and marketable
securities.

Foreign Currency Exchange Risk

We
operate in the United States, Canada, Israel, Hong Kong and the United Kingdom. Our financial results,
which are reported in U.S. dollars, are affected by changes in foreign currency. In 2008, approximately
12% of our expenses were paid in Canadian dollars, 16% in NIS and 4% in British pounds, which are
primarily attributable to salary and salary-related expenses related to our operations in Canada,
Israel and the United Kingdom.  The U.S. dollar cost of our operations in these locations is
influenced by the exchange rate between the U.S. dollar and the foregoing currencies.  During
2008, the Canadian dollar depreciated against the U.S. dollar by approximately 24%; the NIS appreciated
against the U.S. dollar by approximately 1%, and the British pound depreciated against the U.S. dollar
by approximately 19%.  We cannot assure you that we will not be adversely affected in the future
if the such currencies appreciate against the U.S. dollar.

In

addition, approximately 15% of our marketable securities ($1.1 million, as of December 31,
2008)
are NIS-denominated bonds. Consequently, our financial results are affected by fluctuations
in the
rates of exchange between the U.S. dollar and the NIS. In 2006, 2007 and 2008, the NIS appreciated

against the U.S. dollar by approximately 8%, 9% and 1%, respectively.

In

2006, 2007 and 2008, we recorded foreign currency exchange gains of $166,000, $241,000 and $79,000,

respectively.

|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | ------------------------------------------------------

Not













applicable.

PART II

|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- | -----------------------------------------------

None.

|ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|-------- | ----------------------------------------------------------------------------

Material Modifications to the Rights of Security Holders

None.

Use of Proceeds

We
sold an aggregate of 2,226,300 ordinary shares (including over allotment option shares) in our initial
public offering on May 23, 2007. The aggregate offering price was approximately $30.1 million. The
amount of underwriting discount paid by us in the offering was $2.1 million and the costs of the
offering, not including the underwriting discount, were approximately $1.3 million. The net proceeds
that we received as a result of the offering were approximately $27 million. None of the net proceeds
of the offering was paid directly or indirectly to any director, officer, general partner of ours
or to their associates, persons owning 10% or more of any class of our equity securities, or to any
of our affiliates. As of December 31, 2008, all of our net proceeds were in cash and cash equivalents
and marketable securities. We intend to use such net proceeds for general corporate purposes, including
working capital and capital expenditures.

72

---

---

|         |                        
|-------- | -----------------------
|ITEM 15. | CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We
maintain disclosure controls and procedures that are designed to ensure that information required
to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commissions rules and forms, and
that such information is accumulated and communicated to our chief executive officer and chief financial
officer to allow timely decisions regarding required disclosure. Our management, including our chief
executive officer and chief financial officer, conducted an evaluation of our disclosure controls
and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period covered
by this annual report on Form 20-F. Based upon that evaluation, our chief executive officer and chief
financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.

Managements Annual Report on Internal Control over Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal control over our financial
reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated
under the Securities Exchange Act as a process designed by, or under the supervision of, the companys
principal executive and principal financial officers and effected by the companys board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and procedures that:

| |  | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction
and dispositions of the assets of the company;                                                                                                                                                                               
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                            
| |  | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors
of the company; and
| |   |                                                                                                                                                                                                                                                                                                                                            
| |  | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the companys assets that could have a material effect on the financial
statements.                                                                                                                               

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

Our
management assessed the effectiveness of our internal control over financial reporting as of December
31, 2008. In making this assessment, our management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on that assessment, our management concluded that as of December 31, 2008, our internal control
over financial reporting is effective.

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

73

---

---

Changes in Internal Control over Financial Reporting

There
was no change in our internal control over financial reporting that occurred during the period covered
by this annual report that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.

|ITEM 16.  | [RESERVED]                      
|--------- | --------------------------------
|          |                                 
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT

Our
board of directors has determined that each of Dov Kleiman, Martin Bandel and Ron Sandak, each of
whom is an independent director, qualifies as an audit committee financial expert as defined by rules
of the Securities and Exchange Commission.

|ITEM 16B. | CODE OF ETHICS
|--------- | --------------

We
have adopted a code of ethics that applies to our chief executive officer and all senior financial
officers of our company, including the chief financial officer, chief accounting officer or controller,
or persons performing similar functions. Our code of ethics is available on our website at http://www.starlims.com/company/STARLIMS_Ethics.htm.
 If we make any substantive amendment to the code of ethics or grant any waivers, including
any implicit waiver, from a provision of the codes of ethics, we will disclose the nature of such
amendment or waiver on our website.

|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- | --------------------------------------

Fees Paid to Independent Public Accountants

The
following table sets forth, for each of the years indicated, the fees billed by our principal independent
registered public accounting firm. Since the listing of our ordinary shares on the NASDAQ Global
Market in May 2007, all of such fees were pre-approved in advance by our Audit Committee.

| |                       |  | **Year Ended December 31,** |         |         
| | --------------------- |  | --------------------------- | ------- | --------
| |                       |  |                             |         |         
| | **Services Rendered** |  | **2007**                    |         | **2008**
| |                       |  |                             |         |         
|
| | Audit (1)             |  | $                           | 100,000 |         
| | Audit-related         |  |                             |        |         
| | Tax (2)               |  |                             | 56,000  |         
| | Other (3)             |  |                             | 171,000 |         
| |                       |  |                             |         |         
| | Total                 |  | $                           | 327,000 |         

| | ______________
| | --------------
| | (1)           
| |               
| | (2)           
| |               
| | (3)           

Pre-Approval Policies and Procedures

Our
audit committee has adopted a policy and procedures for the pre-approval of audit and non-audit services
rendered by our independent registered public accounting firm, Brightman Almagor & Co., Certified
Public Accountants, a member firm of Deloitte Touche Tohmatsu. Pre-approval of an audit or non-audit
service may be given as a general pre-approval, as part of the audit committees approval of
the scope of the engagement of our independent registered public accounting firm, or on an individual
basis. Any proposed services exceeding general pre-approved levels also require specific pre-approval
by our audit committee. The policy prohibits retention of the independent registered public accounting
firm to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act
or the rules of the Securities and Exchange Committee, and also requires the audit committee to consider
whether proposed services are compatible with the independence of the independent registered public
accounting firm.

74

---

---

|          |                                                          
|--------- | ---------------------------------------------------------
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE

Not













applicable.

|          |                                                                       
|--------- | ----------------------------------------------------------------------
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Issuer Purchase of Equity Securities

In
February 2008, we adopted a share repurchase program, allowing us to repurchase our ordinary shares
over a period of 18 months in the open market, at times and prices that management considers appropriate,
taking into account prevailing market conditions and other corporate considerations. The program
limits us to aggregate purchases of up to $2.0 million. As of December 31, 2008, we had repurchased
326,308 ordinary shares under the program at a total purchase price of approximately $1.9 million,
or an average price of $5.95 per share. In conjunction with our repurchase program, we have established
a Rule 10b5-1 trading plan, which provides for a scheduled repurchase mechanism that is managed by
our broker.

The
following table sets forth, for each of the months indicated, the total number of shares purchased
by us, the average price paid per share, the number of shares purchased as part of our publicly announced
repurchase programs and the approximate dollar value of shares that may yet be purchased under the
programs.

|**Period in 2008** |  | **Total Number 
      of Shares 
      Purchased** |  | **Average Price 
      Paid per Share** |  | **Total Number of 
      Shares Purchased 
      as Part of Publicly 
      Announced Plans
      or Programs** |  | **Approximate 
      Dollar Value of 
      Shares that May 
      Yet Be Purchased 
      Under the Plans or 
      Programs** | 
|------------------ |  | -------------------------------------------------- |  | --------------------------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------- | 
|
|
|February           |  | 3,000                                              |  | 7.73                                    |  | 3,000                                                                                                           |  | 1,976,000                                                                                                                       | 
|March              |  | 87,727                                             |  | 7.47                                    |  | 87,727                                                                                                          |  | 1,321,000                                                                                                                       | 
|April              |  | 27,800                                             |  | 7.05                                    |  | 27,800                                                                                                          |  | 1,126,000                                                                                                                       | 
|May                |  | 8,300                                              |  | 7.06                                    |  | 8,300                                                                                                           |  | 1,066,500                                                                                                                       | 
|June               |  | 55,420                                             |  | 6.76                                    |  | 55,420                                                                                                          |  | 692,000                                                                                                                         | 
|July               |  | 3,500                                              |  | 6.24                                    |  | 3,500                                                                                                           |  | 670,500                                                                                                                         | 
|August             |  | 15,900                                             |  | 7.46                                    |  | 15,900                                                                                                          |  | 552,000                                                                                                                         | 
|September          |  | 14,024                                             |  | 7.21                                    |  | 14,024                                                                                                          |  | 451,000                                                                                                                         | 
|November           |  | 106,932                                            |  | 3.57                                    |  | 106,932                                                                                                         |  | 70,000                                                                                                                          | 
|December           |  | 3,705                                              |  | 3.35                                    |  | 3,705                                                                                                           |  | 57,000                                                                                                                          | 

|          |                                              
|--------- | ---------------------------------------------
|ITEM 16F. | CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT

Not













applicable.

|ITEM 16G. | CORPORATE GOVERNANCE
|--------- | --------------------

Under
NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as our company, 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.

75

---

---

In
connection with our initial public offering in the United States in May 2007, we provided NASDAQ
with a notice of non-compliance with Rule 4350 with respect to the requirements regarding the directors
nominations process. Instead, we follow Israeli law and practice in accordance with which our board
of directors is authorized to recommend to our shareholders director nominees for election, and our
shareholders may nominate candidates for election as directors by the general meeting of shareholders.
See Item 6C. Directors, Senior Management and Employees - Board Practices - Election of Directors.

PART III

|ITEM 17. | FINANCIAL STATEMENTS
|-------- | --------------------

We
have elected to furnish financial statements and related information specified in Item 18.

|ITEM 18. | FINANCIAL STATEMENTS
|-------- | --------------------

Consolidated Financial Statements of STARLIMS Technologies Ltd.

| | Index to Consolidated Financial Statements                                   |  | F-1        | 
| | ---------------------------------------------------------------------------- |  | ---------- | 
| |                                                                              |  |            | 
| | Report of Independent Registered Public Accounting Firm                      |  | F-2        | 
| |                                                                              |  |            | 
| | Consolidated Balance Sheets                                                  |  | F-3        | 
| |                                                                              |  |            | 
| | Consolidated Statements of Income                                            |  | F-4        | 
| |                                                                              |  |            | 
| | Statements of Changes in Shareholders’ Equity and Other Comprehensive Income |  | F-5        | 
| |                                                                              |  |            | 
| | Consolidated Statements of Cash Flows                                        |  | F-6- F-7   | 
| |                                                                              |  |            | 
| | Notes to Consolidated Financial Statements                                   |  | F-8 - F-44 | 

|         |         
|-------- | --------
|ITEM 19. | EXHIBITS

Index
to Exhibits

| | Exhibit | Description                                                                                                                                                             
| | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |         |                                                                                                                                                                         
| | 1.1     | English Translation of Memorandum of Association of the Registrant (1)                                                                                                  
| |         |                                                                                                                                                                         
| | 1.2     | English Translation of Articles of Association of the Registrant (2)                                                                                                    
| |         |                                                                                                                                                                         
| | 1.3     | English Translation of Certificate of Name Change (3)                                                                                                                   
| |         |                                                                                                                                                                         
| | 2.1     | Specimen of Ordinary Share Certificate (4)                                                                                                                              
| |         |                                                                                                                                                                         
| | 3.1     | English Translation of Voting Agreement dated October 31, 1993 by and among Messrs. Itschak Friedman,
Dinu Toiba and Chaim Friedman, as amended on December 21, 2005 (5)
| |         |                                                                                                                                                                         
| | 4.1     | English Translation of Management and Consulting Agreement dated November 1, 1993 with Sivanir (Management
Services) 1992 Ltd. (6)                                      
| |         |                                                                                                                                                                         
| | 4.2     | 2001 Option Plan (7)                                                                                                                                                    

76

---

---

| |      |                                                                                                                                                  
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.3  | 2005 Option Plan (8)                                                                                                                             
| |      |                                                                                                                                                  
| | 4.4  | English Translation of 2006 Employee Option Plan (9)                                                                                             
| |      |                                                                                                                                                  
| | 4.5  | 2007 Restricted Stock Unit Plan (10)                                                                                                             
| |      |                                                                                                                                                  
| | 8.1  | List of Subsidiaries of the Registrant                                                                                                           
| |      |                                                                                                                                                  
| | 12.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act,
as amended                                
| |      |                                                                                                                                                  
| | 12.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act,
as amended                                
| |      |                                                                                                                                                  
| | 13.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
| |      |                                                                                                                                                  
| | 13.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
| |      |                                                                                                                                                  
| | 15.1 | Consent of Brightman Almagor & Co., a member firm of Deloitte Touche Tohmatsu                                                                    
| |      |                                                                                                                                                  

| | _________________
| | -----------------
| |                  

| | (1)  | Filed as Exhibit 3.1 to the Registrants Registration Statement on Form F-1/A, registration
number 333-142605, filed with the Securities and Exchange Commission, and incorporated herein by
reference.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                        
| | (2)  | Filed as Exhibit 3.2 to the Registrants Registration Statement on Form F-1/A, registration
number 333-142605, filed with the Securities and Exchange Commission, and incorporated herein by
reference.
| |      |                                                                                                                                                                                                        
| | (3)  | Filed as Exhibit 3.3 to the Registrants Registration Statement on Form F-1, registration
number 333-142605, filed with the Securities and Exchange Commission, and incorporated herein by
reference.  
| |      |                                                                                                                                                                                                        
| | (4)  | Filed as Exhibit 4.1 to the Registrants Registration Statement on Form F-1/A, registration
number 333-142605, filed with the Securities and Exchange Commission, and incorporated herein by
reference.
| |      |                                                                                                                                                                                                        
| | (5)  | Filed as Exhibit 10.7 to the Registrants Registration Statement on Form F-1, registration
number 333-142605, filed with the Securities and Exchange Commission, and incorporated herein by
reference. 
| |      |                                                                                                                                                                                                        
| | (6)  | Filed as Exhibit 10.3 to the Registrants Registration Statement on Form F-1, registration
number 333-142605, filed with the Securities and Exchange Commission, and incorporated herein by
reference. 
| |      |                                                                                                                                                                                                        
| | (7)  | Filed as Exhibit 10.4 to the Registrants Registration Statement on Form F-1, registration
number 333-142605, filed with the Securities and Exchange Commission, and incorporated herein by
reference. 
| |      |                                                                                                                                                                                                        
| | (8)  | Filed as Exhibit 10.5 to the Registrants Registration Statement on Form F-1, registration
number 333-142605, filed with the Securities and Exchange Commission, and incorporated herein by
reference. 
| |      |                                                                                                                                                                                                        
| | (9)  | Filed as Exhibit 10.6 to the Registrants Registration Statement on Form F-1, registration
number 333-142605, filed with the Securities and Exchange Commission, and incorporated herein by
reference. 
| |      |                                                                                                                                                                                                        
| | (10) | Filed as Exhibit 4.5 to the Registrants  Annual Report for the year ended December 31, 2007, and incorporated herein by reference.                                                                    
| |      |                                                                                                                                                                                                        

77

---

---

# STARLIMS TECHNOLOGIES
LTD.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS

|                                                        | Page          
|------------------------------------------------------- | --------------
|
|
|
|
|Report of Independent Registered Public Accounting Firm | F - 2         
|                                                       
|Consolidated Balance Sheets                             | F - 3         
|                                                       
|Consolidated Statements of Income                       | F - 4         
|                                                       
|Statements of Changes in Shareholders' Equity          
|and Other Comprehensive Income                          | F - 5         
|                                                       
|Consolidated Statements of Cash Flows                   | F - 6 - F - 7 
|                                                       
|Notes to Consolidated Financial Statements              | F - 8 - F - 44

F - 1

---

---

| | Brightman Almagor Zohar
1 Azrieli Center
Tel Aviv 67021
P.O.B. 16593, Tel Aviv 61164
Israel
Tel: +972 (3) 608 5555
Fax: +972 (3) 609 4022
info@deloitte.co.il
www.deloitte.co.il
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Board of
Directors and Stockholders of STARLIMS Technologies Ltd.

We have audited the accompanying consolidated
balance sheets of STARLIMS TechnologiesLtd. and its subsidiaries (the
Company) as of December 31, 2007 and 2008, and the related consolidated
statements of income, changes in shareholders equity and other comprehensive income,
and cash flows for each of the three years in the period ended December 31, 2008. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits 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 audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of STARLIMS TechnologiesLtd. and its subsidiaries as of
December 31, 2007 and 2008, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.

# /s/ Brightman Almagor & Co.Brightman Almagor & Co.Certified Public Accountants A Member Firm of
Deloitte Touche Tohmatsu

Tel Aviv, IsraelMarch
24, 2009

F - 2

---

---

# STARLIMS TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS(U.S. dollars in thousands, except share data and per share data)

|                                                                                |  | As of December 31,
|------------------------------------------------------------------------------- |  | ------------------
|
|
|
|
|ASSETS                                                                          |  |                   
|Current Assets                                                                  |  |                   
|Cash and cash equivalents                                                       |  |                   
|Short-term deposits                                                             |  |                   
|Restricted short-term deposits                                                  |  |                   
|Marketable securities                                                           |  |                   
|Trade receivables (net of allowance                                             |  |                   
|for doubtful accounts of $192 and $238, respectively)                           |  |                   
|Other current assets                                                            |  |                   
|                                                                                |  |                   
|Total current assets                                                            |  |                   
|                                                                                |  |                   
|                                                                                |  |                   
|Long-Term Assets                                                                |  |                   
|Marketable securities - held-to-maturity                                        |  |                   
|Other long-term assets                                                          |  |                   
|Fixed assets, net                                                               |  |                   
|Goodwill                                                                        |  |                   
|Other intangible assets, net                                                    |  |                   
|                                                                                |  |                   
|Total long-term assets                                                          |  |                   
|                                                                                |  |                   
|                                                                                |  |                   
|Total assets                                                                    |  |                   
|                                                                                |  |                   
|                                                                                |  |                   
|LIABILITIES AND SHAREHOLDERS' EQUITY                                            |  |                   
|                                                                                |  |                   
|Current Liabilities                                                             |  |                   
|Trade accounts payable                                                          |  |                   
|Deferred revenues                                                               |  |                   
|Other current liabilities and accrued expenses                                  |  |                   
|                                                                                |  |                   
|Total current liabilities                                                       |  |                   
|                                                                                |  |                   
|                                                                                |  |                   
|Long-Term Liabilities                                                           |  |                   
|Long-term deferred revenues                                                     |  |                   
|Accrued severance pay                                                           |  |                   
|Deferred taxes                                                                  |  |                   
|                                                                                |  |                   
|Total long-term liabilities                                                     |  |                   
|                                                                                |  |                   
|                                                                                |  |                   
|Commitments and Contingencies                                                   |  |                   
|                                                                                |  |                   
|Shareholders' Equity                                                            |  |                   
|Ordinary shares, NIS 1.00 par value;                                            |  |                   
|authorized 15,000,000 shares as of December 31, 2007 and 2008;                  |  |                   
|issued 9,994,544 and 9,997,919 shares as of December 31, 2007 and 2008          |  |                   
|respectively; outstanding 8,724,675, and 8,407,742 shares as of December 31,    |  |                   
|2007 and 2008, respectively                                                     |  |                   
|Additional paid-in capital                                                      |  |                   
|Accumulated other comprehensive income                                          |  |                   
|Retained earnings                                                               |  |                   
|Treasury stock, at cost - 1,269,869 and 1,590,177 ordinary shares, respectively |  |                   
|                                                                                |  |                   
|Total shareholders' equity                                                      |  |                   
|                                                                                |  |                   
|                                                                                |  |                   
|Total liabilities and shareholders' equity                                      |  |                   
|                                                                                |  |                   

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

F - 3

---

---

# STARLIMS TECHNOLOGIES
LTD.CONSOLIDATED STATEMENTS OF INCOME
(U.S. dollars in thousands, except share data and per share data)

|                                                   |  | Year Ended December 31,
|-------------------------------------------------- |  | -----------------------
|
|
|
|
|Revenues                                           |  |                        
|Software licensing                                 |  |                        
|Maintenance                                        |  |                        
|                                                   |  |                        
|Total product revenues                             |  |                        
|Services                                           |  |                        
|                                                   |  |                        
|Total revenues                                     |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Cost of revenues                                   |  |                        
|Cost of products                                   |  |                        
|Cost of services                                   |  |                        
|                                                   |  |                        
|Total cost of revenues                             |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Gross profit                                       |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Operating expenses                                 |  |                        
|Research and development                           |  |                        
|Selling and marketing                              |  |                        
|General and administrative                         |  |                        
|                                                   |  |                        
|Total operating expenses                           |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Operating income                                   |  |                        
|                                                   |  |                        
|Financial income, net                              |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Income before income taxes                         |  |                        
|                                                   |  |                        
|Income tax expense                                 |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Net income                                         |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Basic earnings per share                           |  |                        
|                                                   |  |                        
|Weighted average number of ordinary shares used in |  |                        
|computing basic earnings per share                 |  |                        
|                                                   |  |                        
|                                                   |  |                        
|Diluted earnings per share                         |  |                        
|                                                   |  |                        
|Weighted average number of ordinary shares used in |  |                        
|computing diluted earnings per share               |  |                        
|                                                   |  |                        

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

F - 4

---

---

STARLIMS TECHNOLOGIES LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND OTHER COMPREHENSIVE INCOME
(U.S. dollars in thousands, except share data)

|                                       | Ordinary shares (*) |  |   |       |  |  
|-------------------------------------- | ------------------- |  | - | ----- |  | -
|
|
|
|
|Balance as of January 1, 2006          |                     |  |   | 7,765 |  | $
|Comprehensive income:                  |                     | 
|Net income                             |                     |  |   |       |  |  
|Translation adjustment of  financial   |                     | 
|statements of subsidiaries             |                     |  |   |       |  |  
|Gains (losses) on marketable           |                     | 
|securities available-for-sale, net     |                     | 
|of tax:                                |                     | 
|Realized gains included in net income  |                     |  |   |       |  |  
|Unrealized gains                       |                     |  |   |       |  |  
|                                       |                     |  |   |       |  |  
|Total comprehensive income             |                     |  |   |       |  |  
|                                       |                     |  |   |       |  |  
|Issuance of treasury stock against     |                     | 
|exercise of options                    |                     |  |   |       |  |  
|Stock-based compensation               |                     |  |   |       |  |  
|                                       |                     |  |   |       |  |  
|Balance as of December 31, 2006        |                     |  |   | 7,765 |  |  
|Comprehensive income:                  |                     | 
|Net income                             |                     |  |   |       |  |  
|Translation adjustment of  financial   |                     | 
|statements of subsidiaries             |                     |  |   |       |  |  
|Gains (losses) on marketable           |                     | 
|securities available-for-sale, net     |                     | 
|of tax:                                |                     | 
|Realized gains included in net income  |                     |  |   |       |  |  
|Unrealized gains                       |                     |  |   |       |  |  
|                                       |                     |  |   |       |  |  
|Total comprehensive income             |                     |  |   |       |  |  
|                                       |                     |  |   |       |  |  
|Proceeds from issuance of shares, net  |                     |  |   | 2,226 |  |  
|Dividend declared                      |                     |  |   |       |  |  
|Purchase of treasury stock             |                     |  |   |       |  |  
|Issuance of treasury stock against     |                     | 
|exercise of options                    |                     |  |   | 3     |  |  
|Stock-based compensation               |                     |  |   |       |  |  
|                                       |                     |  |   |       |  |  
|Balance as of December 31, 2007        |                     |  |   | 9,994 |  |  
|Comprehensive income:                  |                     | 
|Net income                             |                     |  |   |       |  |  
|Translation adjustments of             |                     | 
|financial statements of subsidiaries   |                     |  |   |       |  |  
|Accumulate effect of first-time        |                     | 
|adoption of SFAS 159                   |                     |  |   |       |  |  
|Gains (losses) on marketable           |                     | 
|securities, net of tax:                |                     | 
|Realized gains included in net income  |                     |  |   |       |  |  
|                                       |                     |  |   |       |  |  
|Total comprehensive income             |                     |  |   |       |  |  
|                                       |                     |  |   |       |  |  
|Issuance of shares against exercise of |                     | 
|options                                |                     |  |   |       |  |  
|Dividend declared                      |                     |  |   |       |  |  
|Issuance of treasury stock against     |                     | 
|exercise of options                    |                     |  |   | 3     |  |  
|Purchase of treasury stock             |                     |  |   |       |  |  
|Stock-based compensation               |                     |  |   |       |  |  
|                                       |                     |  |   |       |  |  
|Balance as of December 31, 2008        |                     |  | $ | 9,997 |  | $
|                                       |                     |  |   |       |  |  

|(*) | Number
of shares is presented in thousands.
|--- | -------------------------------------------

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

F - 5

---

---

STARLIMS TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. dollars in thousands)

|                                                                              | Year Ended December 31,
|----------------------------------------------------------------------------- | -----------------------
|
|
|
|
|CASH FLOWS - OPERATING ACTIVITIES                                             |                        
|Net income                                                                    |                        
|Adjustments to reconcile net income to cash provided by operating activities: |                        
|Depreciation and amortization                                                 |                        
|Stock-based compensation                                                      |                        
|Gains related to marketable securities                                        |                        
|Capital loss on sale of fixed assets                                          |                        
|Increase (decrease) in accrued severance pay                                  |                        
|Deferred income taxes                                                         |                        
|The effect of exchange rate changes                                           |                        
|Changes in assets and liabilities:                                            |                        
|Increase in trade receivables                                                 |                        
|Increase (decrease) in allowance for doubtful accounts                        |                        
|Decrease (increase) in other current assets                                   |                        
|Increase (decrease) in trade accounts payable                                 |                        
|Increase in deferred revenues                                                 |                        
|Increase (decrease) in other current liabilities                              |                        
|                                                                              |                        
|Net cash provided by operating activities                                     |                        
|                                                                              |                        
|CASH FLOWS - INVESTING ACTIVITIES                                             |                        
|Investments in marketable securities                                          |                        
|Proceeds from sale of marketable securities                                   |                        
|Investment in held-to-maturity marketable securities                          |                        
|Proceeds from redemption of held-to-maturity securities                       |                        
|Investments in deposits, net                                                  |                        
|Loans to employees, net                                                       |                        
|Purchase of fixed assets                                                      |                        
|Proceeds from sale of fixed assets                                            |                        
|Purchase of other intangible assets                                           |                        
|Acquisition of subsidiaries, net of cash acquired, and business operation (A) |                        
|                                                                              |                        
|Net cash provided by (used in) investing activities                           |                        
|                                                                              |                        
|CASH FLOWS - FINANCING ACTIVITIES                                             |                        
|Proceeds from issuance of shares, net of issuance costs                       |                        
|Deferred share issuance costs and issuance costs                              |                        
|Proceeds from sale of treasury stock against exercise of options              |                        
|Dividends paid                                                                |                        
|Purchase of treasury stock by the Company                                     |                        
|                                                                              |                        
|Net cash provided by (used in) financing activities                           |                        
|                                                                              |                        
|THE EFFECT OF EXCHANGE RATE                                                   |                        
|CHANGES ON CASH AND CASH EQUIVALENTS                                          |                        
|                                                                              |                        
|                                                                              |                        
|Increase (decrease) in cash and cash equivalents                              |                        
|Cash and cash equivalents at the beginning of the year                        |                        
|                                                                              |                        
|Cash and cash equivalents at the end of the year                              |                        
|                                                                              |                        

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

F - 6

---

---

STARLIMS TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (cont.)
(U.S. dollars in thousands)

|                                                 | Year Ended December 31,
|------------------------------------------------ | -----------------------
|
|
|
|
|SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES |                        
|                                                 |                        
|Cash paid during the year for income taxes       |                        
|                                                 |                        

# APPENDIX A 
ACQUISITION OF SUBSIDIARIES AND BUSINESS OPERATION

|                                                     | Year Ended December 31,
|---------------------------------------------------- | -----------------------
|
|
|
|
|Current assets (excluding cash and cash equivalents) |                        
|Fixed assets, net                                    |                        
|Current liabilities                                  |                        
|Goodwill and other intangible assets                 |                        
|                                                     |                        
|                                                     |                        
|                                                     |                        

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

F - 7

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 1 |  | DESCRIPTION OF BUSINESS AND GENERAL
|------ | - | -----------------------------------

| | STARLIMSTechnologiesLtd.
(the Company), an Israeli company whose shares are traded on the Tel-Aviv
Stock Exchange and the NASDAQ Global Market (separately and together with its
subsidiaries, the Group), develops, markets and sells configurable
off-the-shelf laboratory information management system (LIMS) software
solutions trade-named STARLIMS.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | STARLIMS
manages the collection, processing, storage, retrieval and analysis of information
generated in laboratories. The STARLIMS software improves the reliability of sampling
processes, supports compliance with domestic and international regulations and industry
standards, and provides comprehensive reporting, monitoring and analysis capabilities.
STARLIMS software is installed in numerous laboratories in many countries around the
world. The configurable nature of the software allows the Group to offer solutions to
customers in a wide range of industries and in multiple disciplines, primarily quality
assurance and control, testing and monitoring, and research and development. The primary
users of STARLIMS are government, manufacturing and life sciences organizations. The
Group generates the majority of its revenues from customers based in North America.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Group includes the following foreign wholly-owned subsidiaries:
| | --------------------------------------------------------------------------------------------

| |  | STARLIMS
Corp. is incorporated and based in Florida, the United States. This subsidiary
sells directly to customers in the United States and engages
distributors in other regions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | STARLIMS
Canada is incorporated in Canada and based in Montreal. This subsidiary mainly
provides professional services on behalf of STARLIMS Corp. to customers in the life
sciences, and also manages direct sales in Canada.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | STARLIMS
Asia Pacific is incorporated and based in Hong Kong. This subsidiary manages the Groups
operations in Asia.
| | - | ---------------------------------------------------------------------------------------------------------------------

| |  | STARLIMS
Europe, which was established in July 2006, is incorporated in the United Kingdom and
based in London.
| | - | ---------------------------------------------------------------------------------------------------------------

| |  | STARLIMS
United Kingdom is incorporated in the United Kingdom and based in Bolton. This
subsidiary is responsible for the Groups operations in the United Kingdom. The
Company intends to merge this subsidiary with STARLIMS Europe.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 8

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES
|------ | - | -------------------------------

| | A. | Basis
of Presentation
| | -- | ---------------------

| | The
Companys consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) in the United States of
America.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Principles
of Consolidation
| | -- | ---------------------------

| | The
consolidated financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly-owned by the Company. Inter-company balances and
transactions have been eliminated. For goodwill and other intangible assets as a result
of business combinations, see Note 3.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Functional
Currency and Financial Statements in U.S. Dollars
| | -- | ------------------------------------------------------------

| | The
reporting currency of the Group is the U.S. dollar. The majority of the Groups
revenues are generated in U.S. dollars (U.S. dollars, or $) or
linked to the U.S. dollar. In addition, a substantial portion of the Groups costs
are incurred in U.S. dollars. The Companys management determined that the U.S.
dollar is the primary currency of the economic environment in which the Group operates.
The functional currency of the Company, its Israeli subsidiaries and STARLIMS Europe is
the U.S. dollar. The functional currency of each of the Companys other subsidiaries
is the respective local currency.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transactions
in currencies other than each Group-entitys functional currency are translated into
the respective functional currency based on the currency exchange rates at the date of
the transaction, in accordance with the principles set forth in Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency  Translation.
All gains and losses from translation of monetary balance sheet items and transactions
denominated in currencies other than the functional currency are recorded in the
statements of income as financial income, net as they arise. Financial income, net in
2006, 2007 and 2008 includes net foreign currency transaction gains (losses) of $164, $241
and ($54), respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial statements of STARLIMS Canada, STARLIMS Asia Pacific and STARLIMS United
Kingdom, whose functional currency is other than the U.S. dollar, are translated into
U.S. dollars prior to their inclusion in the consolidated financial statements, in
accordance with the provisions of SFAS 52, as follows: assets and liabilities are
translated using the year-end exchange rates; and statements of income transactions are
translated at the date of the transaction using the current exchange rates. Translation
adjustments gains (losses) for 2006, 2007 and 2008 in the amount of $(24), $232 and
$(259), respectively, are presented in shareholders equity as Accumulated
Other Comprehensive Income (OCI).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | D. | Use
of Estimates
| | -- | ----------------

| | The
preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, and
the disclosure of contingent assets and liabilities as of the date of the financial
statements, as well as the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Cash
and Cash Equivalents
| | -- | -------------------------

| | The
Group considers as cash equivalents all highly liquid investments, which include high
rated short-term commercial paper and short-term bank deposits with an original maturity
date of three months or less that are not restricted as to withdrawal or use.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Marketable
Securities
| | -- | ---------------------

| | Commencing
January 1, 2008, the Group applies FASB Statement No. 159, The Fair  Value
Option for Financial Assets and Financial Liabilities, according to which the
Groups investments in marketable securities are presented at fair value, with
changes in fair value recognized in financial income, net. All investments in marketable
securities, other than those classified as held-to-maturity, are presented at fair value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2007, the Group accounted for investments in marketable securities in
accordance with FASB Statement No. 115, Accounting for Certain  Investments
in Debt and Equity Securities as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | Marketable
securities available-for-sale  Investments in marketable           securities that
are not classified as held-to-maturity securities are           classified as
available-for-sale securities. Marketable securities           available-for-sale
include debt and equity securities and are measured at their           fair value as of
the balance sheet date. Gains and losses derived from fair           value adjustments,
net of tax, are presented in shareholders equity under           OCI. Upon
realization of these securities, gains (losses) presented in the OCI           are
classified to financial income, net. Costs attributable to realized           securities
and amounts reclassified out of OCI are determined based on the           specific
identification method.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Marketable
securities held-to-maturity  Investments in marketable           securitie  that the Group has the positive intention and ability to hold           until maturity
are classified as held-to-maturity securities. Such investments           are presented
at amortized cost with the addition of interest accrued to balance           sheet date
(such interest represents the computed yield on cost from acquisition           to
maturity). Interest and amortization of premium related to these securities           are
included in financial income, net.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | G. | Allowance
for Doubtful Accounts
| | -- | -------------------------------

| | The
allowance for doubtful accounts is determined as a percentage of the balance of the trade
receivables based on management estimates and past experience. When and if there is a
specific evidence based on which, in managements estimation, collectibility is not
assured, the allowance for doubtful accounts is computed on the specific identification
basis.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | H. | Fixed
Assets
| | -- | ------------

| | Fixed
assets are stated at cost, net of accumulated depreciation and amortization. Depreciation
is calculated based on the straight-line method, over the estimated economic useful lives
of the assets, as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 | Years
| | ----------------------------------------------- | -----
|
|
|
|
| | Long-term land lease and buildings              | 25   
| | Computers and peripheral equipment              | 3    
| | Office furniture and equipment (mainly 7 years) | 5, 7 

| | Leasehold
improvements are amortized by the straight-line method over the shorter of the term of
the lease or the estimated useful life of the improvements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I. | Other
Intangible Assets
| | -- | -----------------------

| | Intangible
assets are amortized over their useful lives using a method of amortization that reflects
the pattern in which the economic benefits of the intangible assets are consumed or
otherwise used up, in accordance with FASB Standard No. 142, Goodwill and Other
Intangible Assets (SFAS 142). Other acquired intangible assets,
comprised of service and distribution rights, that are not deemed to have indefinite
lives, are amortized on a straight-line method over a period of up to three years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | Impairment
of long-lived assets
| | -- | -------------------------------

| | Impairment
examinations and recognition are performed and determined based on the provisions of FASB
Standard No. 144, Accounting for the Impairment or Disposal ofLong-Lived
Assets (SFAS 144). SFAS 144 requires long-lived assets and certain
identifiable assets that are held for use be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of an asset to be held and used is determined by a comparison
of the carrying amount of the asset and the amount of undiscounted future net cash flows
to be generated by the asset. In the event that an asset is considered to be impaired, an
impairment charge is recorded in the amount by which the carrying amount of the asset
exceeds its estimated fair value. During 2006, 2007 and 2008, no impairment losses have
been identified.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | K. | Goodwill
| | -- | --------

| | Goodwill
is the excess of the purchase price over the fair value of identifiable net assets
acquired in business combinations accounted for as purchases. Under SFAS 142, goodwill is
not amortized to earnings, but rather is subject to periodic testing for impairment, at
the reporting unit level, at least annually or more frequently if certain events or
indicators of impairment occur. Impairment is the condition that exists when the carrying
amount of goodwill exceeds its implied fair value. Measurement of an impairment loss is
an estimate, performed based on the following: If the fair value of the reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not impaired.
If the carrying amount of the reporting unit goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized in an amount equal to that excess. The
Group uses the discounted cash flow method to determine the fair value of the reporting
unit. During 2006, 2007 and 2008, no impairment losses have been identified.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | L. | Provision
for Warranty
| | -- | ----------------------

| | The
Group generally provides limited product and services related warranties for a period up
to one year, pursuant to which the Group generally warrants that all licensed products
will perform their stated functions substantially error free and uninterrupted. The Group
also warrants that the software does not include or contain any disabling hardware
device, code, design, or routine that causes the software to be erased or become
inoperable. Accruals for known matters are recorded if a loss is probable and can be
reasonably estimated. Accruals for estimated incurred unidentified matters are recorded
based on managements estimate and past experience. Based on historical experience,
accruals for the periods presented were not recorded due to immateriality.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | M. | Accrued
Severance Pay
| | -- | ---------------------

| | The
liability for severance pay benefits to Israeli employees, which according to Israeli law
is not contingent on future service, is accounted for based on the provisions of EITF
88-1 Determination of Vested Benefit Obligation for a Defined  Benefit Pension
Plan. According to this guidance, the obligation is recorded as if it was
payable at each balance sheet date (the so called shut-down method). The
obligation is generally based upon length of service and the employees last monthly
salary and is recognized on an undiscounted basis. See also Note 11A.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amounts
contributedwith respect to the Groups non-Israeli employees, all of which
are under defined contribution plans, are accounted for in accordance with the provisions
of FASB Statement No. 87 Employers Accounting for Pensions. Such
contributions are expensed as incurred.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | N. | Income
Taxes
| | -- | ------------

| | (1) | The
Group accounts for income taxes in accordance with FASB Statement No. 109,
               Accounting for  Income Taxes (SFAS 109)
               and interpretation related thereto, that is FIN 48 Accounting for
               Uncertainty in Income Taxes (FIN 48).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Deferred
income taxes are determined by the asset and liability method based on           the
estimated future tax effects attributable to temporary differences between
          income tax bases of assets and liabilities and their reported amounts in the
          financial statements, and to carryforwards for tax losses and deductions.
          Deferred tax balances are computed using the enacted tax rates to be in effect
          at the time when these differences are expected to reverse, as they are known
at           the balance sheet date.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
tax assets and liabilities are classified as current or non-current according to the
classification of the respective asset or liability, or the expected reversal date of the
specific temporary difference, if not related to a specific asset or liability.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Valuation
allowances in respect of deferred tax assets are established when it is more likely than
not that all or a portion of the deferred income tax assets will not be realized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Tax
positions taken or expected to be taken are accounted for in accordance           with
the provisions of FIN 48. The term tax position refers to a
          position in a previously filed tax return or a position expected to be taken in
          a future tax return that is reflected in measuring current or deferred income
          tax assets and liabilities for interim or annual periods. A tax position can
          result in a permanent reduction of income tax payable, a deferral of income
          taxes otherwise currently payable to future years, or a change in the expected
          realization of deferred tax assets.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial statements effects of a tax position is initially recorded when it is
more-likely-than-not, based on the technical merits, the facts, circumstances and
information available as of the balance sheet date, that the position will be sustained
upon examination by the relevant taxing position. Management evaluates each tax position
without consideration of the possibility of offset or aggregation with other positions.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
tax position that meets the more-likely-than-not threshold measured as the largest amount
of tax benefit that is greater than 50% likely of being realized upon ultimate settlement
with a taxing authority that has full knowledge of all relevant information. A previously
recognized tax position is derecognized in the first period in which it is no longer
more-likely-than-not that the tax position would be sustained upon examination by an
appropriate taxing authority.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
paid or to be paid on an underpayment of income taxes is included in income tax expense.
Penalties are provided for when a tax position does not meet the minimum statutory
threshold to avoid payment of penalties, and are included in income tax expense.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | N. | Income
Taxes (cont.)
| | -- | --------------------

| | (4) | Taxes
which would apply in the event of disposal of investments in foreign
          subsidiaries have not been taken into account in determining deferred income
          taxes, as it is the Companys policy to hold these investments for
          long-term rather than realizing them in the foreseeable future.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | O. | Derivative
Financial Instruments
| | -- | --------------------------------

| | The
Group, from time to time, enters into foreign exchange transactions, mainly traded
options. The results of these transactions, which do not qualify for hedge accounting,
are reflected in the statements of income in financial income, net. Gains from such
transactions for each of the years ended December 31, 2006, 2007 and 2008 were determined
based on fair value, and amounted to $2, $0 and $133, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | Fair
Value of Financial Instruments
| | -- | -----------------------------------

| | The
financial instruments of the Group consist primarily of cash and cash equivalents,
short-term deposits, restricted short-term deposits, marketable securities, trade
receivables, trade accounts payable and other receivables and payables. In view of their
nature, the fair value of financial instruments included in the working capital are
usually identical or close to their carrying amounts as of the balance sheet date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Q. | Treasury
Stock
| | -- | --------------

| | The
ordinary shares of the Company held by the Group (treasury stock) are
presented at cost and deducted from the Companys shareholders equity. The
results of realization of the ordinary shares accounted for as treasury stock are
reflected in the statements of changes in shareholders equity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | R. | Revenue
Recognition
| | -- | -------------------

| | The
Groups revenues are derived from licensing its STARLIMS software products, which
include annual maintenance contracts, and rendering services which typically include
consulting, implementation, training and technical support. The Groups typical
licensing transaction provides a perpetual non-exclusive license to use STARLIMS software
products, which use is restricted in terms of either the number of users or the specified
locations of use. The Group generally licenses its software products under multiple
element arrangements, in cases where the customer requires a combination of maintenance,
consulting, implementation, training, or other services, in addition to the software
license.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | R. | Revenue
Recognition (cont.)
| | -- | ---------------------------

| | The
Group recognizes revenues pursuant to the provisions of American Institute of Certified
Public Accountants Statement of Position 97-2, Software Revenue  Recognition (SOP
97-2), as amended by SOP 98-9, Modification of SOP 97-2,  Software
Revenue Recognition With Respect to Certain Transactions. While these
Statements govern the basis for recognition of revenues from the operations of the Group,
judgment and the use of estimates are required in connection with the determination of
the amount of software licensing and services revenues, as well as the amount of deferred
revenues, to be recognized in each accounting period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | Product
revenues  software licensing and maintenance
| | --- | -----------------------------------------------------

| | Revenues
from software licensing are recognized when all the criteria under SOP 97-2 are met, as
follows: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred,
(iii) the fee is fixed or determinable, and (iv) collectibility is probable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from post-contract customer support arrangements (Maintenance Contracts),
which are bundled in the initial license, are separated from the initial licensing fee
based on Vendor Specific Objective Evidence (VSOE) of fair value and
recognized ratably over the contractual period of the arrangement (typically one year).
Revenues from renewal of Maintenance Contracts, generally covering a period of one year,
are recognized ratably over the contractual period of the arrangement. Maintenance
Contracts provide the right to unspecified software upgrades and updates on a
when-and-if-available basis.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
multiple-element arrangements that include software licensing and services that are not
essential to the functionality of the software, revenues allocated to the services are
accounted for separately. In such cases, revenues are recognized using the residual
method when VSOE of fair value exists for all of the undelivered elements under the
arrangement. The Group allocates revenues to each undelivered element based on its
respective fair value which is the price charged when that element is sold separately, or
by reference to a renewal rate specified in the related arrangement. Revenues are
recognized for the delivered elements when (i) VSOE of the fair values of all undelivered
elements exist, and (ii) all revenue recognition criteria of SOP 97-2 are satisfied.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
for arrangements that include services deemed as essential to the functionality of the
software, or involve significant production, modification, or customization of the
software, are recognized in accordance with SOP 81-1, Accounting for Performance
of Construction-Type and Certain  Production-Type Contracts. Accordingly,
these revenues are recognized based on the percentage of completion method. If such
arrangements include elements that do not qualify for contract accounting (generally
bundled Maintenance Contracts), such elements are accounted for separately provided that
all applicable revenue recognition criteria are satisfied. Provisions for estimated
losses attributable to uncompleted contracts are made in the period in which such losses
are initially determined, in an amount equal to the estimated loss on the entire contract.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | R. | Revenue
Recognition (cont.)
| | -- | ---------------------------

| | (1) | Product
revenues  software licensing and maintenance (cont.)
| | --- | -------------------------------------------------------------

| | In
arrangements in which sales to end customers are made by a distributor and the Group is
the primary obligor and bears the risks associated with the transaction, revenues are
recorded upon the sale to the end-customer in an amount equal to the end customer
purchase price, provided all other revenue recognition criteria of SOP 97-2 are
satisfied. In arrangements in which sales are made to the distributor under
non-exchangeable, non-refundable and non-returnable terms, the distributor is considered
as the end-customer and revenues are recorded upon the sale to the distributor in an
amount equal to distributor purchase price, provided all other revenue recognition
criteria of SOP 97-2 are satisfied.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Services
| | --- | --------

| | Services
include professional services, training and technical support.
| | -----------------------------------------------------------------------

| |  | Professional
services  Professional services include consulting services and implementation
services. Revenues from professional services that are time-and-material-based are
recognized as such services are provided based on time and materials invested. Revenues
from professional services that are milestone-based are recognized upon the completion of
each respective milestone.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Training  Revenues from training are recognized as the training is provided.
| | - | -----------------------------------------------------------------------------

| |  | Technical
support  Revenues from technical support arrangements are recognized ratably over the
contractual period of the arrangements (typically one year).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Out-of-pocket
expenses  Reimbursement of out-of-pocket expenses that are billed to customers
are included in revenues from services as such expenses are incurred.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Deferred
revenues
| | --- | -----------------

| | Payments
for Maintenance Contracts attributable to periods subsequent to the balance sheet date,
as well as payments received from customers for software licensing, for which revenue
recognition criteria have not been met as of the balance sheet date, or payments for
services that have not yet been provided as of such date, are deferred to subsequent
periods.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | S. | Cost
of Revenues
| | -- | ----------------

| |  | Cost
of products  Cost of products include purchases and royalties for third party
software components, which are directly related to the sale of products.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Cost
of services  Cost of services include payroll costs of professional service
employees, sub-contracting costs related to providing services, and other direct and
indirect costs related to the provision of professional services, training and technical
support.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | T. | Research
and Development Costs
| | -- | ------------------------------

| | Software
research and development costs incurred prior to the establishment of technological
feasibility are charged to 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,
subject to materiality, in accordance with the provisions set forth in FASB Statement No.
86, Accounting for the Costs of Computer Software  to be Sold, Leased or
Otherwise Marketed. Based on the Groups product research and development
process, technological feasibility is established upon completion of a working model only
when all planning, designing, coding and testing have been completed in accordance with
design specifications. To date, software research and development costs associated with
the establishment of technological feasibility were uncertain until release and
accordingly the Group has expensed all software research and development costs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | U. | Selling
and Marketing Costs
| | -- | ---------------------------

| |  | Advertising
and sales promotion costs  Advertising and sales promotion costs are charged to
selling and marketing expenses as incurred. Such expenses totaled $752, $1,164 and $782
in the years ended December 31, 2006, 2007 and 2008, respectively.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Commissions
to distributors  In transactions in which the Group is the primary obligor,
entitled commissions to distributors are included in selling and marketing expenses. Such
commissions are accrued for in the period in which the related revenues are recorded.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
arrangements in which sales are made to the distributor under non-exchangeable,
non-refundable and non-returnable terms and the distributor is considered as the
end-customer, entitled commissions to distributors are characterized as a reduction from
revenues. Such commissions are accrued for in the period in which the related revenues
are recorded.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES (cont.)
|------ | - | ---------------------------------------

| | V. | Other
Comprehensive Income
| | -- | --------------------------

| | Other
comprehensive income, presented in shareholders equity, includes the effect of
translation adjustments of financial statements of subsidiaries whose functional currency
is not the U.S. dollar. The accumulated other comprehensive income as of December 31,
2007 and 2008 amounted to $260 and $(27), respectively. Such amounts are comprised
primarily of the effect of translation adjustments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | W. | Stock-Based
Compensation
| | -- | ------------------------

| | The
Group accounts for stock-based compensation to employees and officers in accordance with
FASB Statement No. 123 (Revised 2004), Share-Based Payment (SFAS
123(R)), applying the modified prospective application method, and Securities and
Exchange Commission Staff Accounting Bulletin (SAB) No. 107 (SAB
107) and SAB 110.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with SFAS 123(R), the Group measures the compensation costs associated with
share-based payment transactions, which include grants of options and restricted stock
units (RSUs) to employees, including modifications associated with RSUs, based
on the fair value at the grant date. The costs associated with the awards to employees
are expensed over the vesting period of each grant, according to the straight-line
method. The fair value of each option granted to employees is estimated on the date of
grant using the Black-Scholes option-pricing model; the fair value of each RSU granted to
employees is estimated on the date of grant using the Monte Carlo option-pricing model;
all with the weighted average assumptions detailed in Note 13E(7).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Share-based
payment transactions also include liability award related to conditional adjustments to
the salaries of certain officers related to potential increased compensation to officers
based on the Companys share price appreciation. The costs associated with the
liability award are expensed over the estimated period over which the liability would
become effective, according to the straight-line method. The fair value of the liability
award is estimated on the date of grant and at each balance sheet date using the Monte
Carlo option-pricing model with the weighted average assumptions detailed in Note 12A.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | X. | Earnings
per Share
| | -- | ------------------

| | Basic
earnings per ordinary share are presented in accordance with SFAS 128 Earnings
per Share (SFAS 128). Accordingly, the basic earnings per ordinary
share are computed by dividing net income by the weighted-average number of ordinary
shares issued and outstanding during the year. Such number of ordinary shares excludes
treasury stock on a weighted-average basis.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Diluted
earnings per ordinary share are computed by dividing net income by the weighted-average
number of ordinary shares issued and outstanding during the year with the addition of
potentially dilutive ordinary shares. Such number of ordinary shares excludes treasury
stock on a weighted-average basis. Potentially dilutive ordinary shares reflect the
ordinary shares that would result from the assumed exercise of employee options, computed
using the treasury stock method in accordance with SFAS 128.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

STARLIMS TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share data)

|NOTE 2 |  | SIGNIFICANT ACCOUNTING POLICIES  (cont.)
|------ | - | ----------------------------------------

| | Y. | Recent
Accounting Pronouncements
| | -- | --------------------------------

| | (1) | SFAS
No. 161
| | --- | ------------

| | In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities, an amendment of SFAS 133 (SFAS 161). SFAS 161
applies to all derivative instruments and non-derivative instruments that are designated
and qualify as hedging instruments and related hedged items accounted for under SFAS No.
133 Accounting for Derivative Instruments and Hedging Activities (SFAS
133). The provisions of SFAS 161 require entities to provide greater transparency
through additional disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for
under SFAS 133 and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entitys financial position, results of operations
and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning
after November 15, 2008, namely January 1, 2009 for the Group. The adoption of SFAS 161
in not expected to have any effect on the Companys, financial position or results
of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | FSP
142-3
| | --- | ---------

| | In
April 2008, the FASB issued FASB Staff Position 142-3, Determination of the Useful
Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets (SFAS 142). The objective of
FSP 142-3 is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141(R), Business Combinations, and other
U.S. generally accepted accounting principles. FSP 142-3 will be effective beginning in
fiscal year 2010. The Company is currently evaluating the impact that FSP 142-3 will
have, if any, on its consolidated financial statements and disclosures.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Z. | Reclassification
| | -- | ----------------

| | Certain
financial statement data for prior years have been reclassified to conform to current
year financial statement presentation. The reclassification did not impact net income,
working capital or cash flows from operations as previously reported.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 3   | SIGNIFICANT ACQUISITION
|--------- | -----------------------
|          |                        
|          | A.                     
|          |                        

| | The total purchase price has been allocated to identifiable assets acquired and liabilities assumed
based on their estimated fair value. Fair value for backlog acquired was determined based on signed
arrangements with customers prevailing as of the date of the acquisition. Fair value for distribution
rights was determined based on the discounted forecasted net profits for the period in which such
distribution rights were expected to prevail.  The excess of the purchase price over the fair
value of the net assets acquired has been assigned primarily to goodwill.  The following table
presents the estimated fair value of the net assets acquired as of the acquisition date:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                                  | 
| | ------------------------------------------------ | 
| | Tangible assets acquired and liabilities assumed | 
| | Cash and cash equivalents                        | 
| | Accounts receivable                              | 
| | Other current assets                             | 
| | Fixed assets                                     | 
| | Current liabilities                              | 
| |                                                  | 
| |                                                  | 
| |                                                  | 
| | Identified intangible assets                     | 
| | Backlog acquired                                 | 
| | Distribution rights                              | 
| | Goodwill (*)                                     | 
| |                                                  | 
| |                                                  | 
| |                                                  | 

| |     |                                                                                                                                                                                                                                                                                                                                                          
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (*) | With the acquisition of STARLIMS Canada, the Groups abilities in providing services to customers
in the life sciences were significantly enhanced attributable to STARLIMS Canadas experience
and expertise in this field. The goodwill is to be expensed for tax purposes according to the straight-line
method over a ten-year period ending in 2016.

F - 20

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 3   | SIGNIFICANT ACQUISITION (cont.)
|--------- | -------------------------------
|          |                                
|          | B.                             
|          |                                

| |                                  | 
| | -------------------------------- | 
| | Current assets                   | 
| | Fixed assets, net                | 
| | Goodwill arising on acquisitions | 
| | Identified intangible assets     | 
| | Current liabilities              | 
| |                                  | 
| |                                  | 
| |                                  | 

| |    |                         
| | -- | ------------------------
| | C. | Pro forma financial data
| |    |                         

| | The following unaudited pro forma summary presents results of operations data for 2005 as though the
acquisition of STARLIMS Canada has been completed at the beginning of that year:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                      

| |                        | 
| | ---------------------- | 
| | Revenues               | 
| | Software licensing     | 
| | Maintenance            | 
| |                        | 
| | Total product revenues | 
| | Services               | 
| |                        | 
| | Total revenues         | 
| |                        | 
| | Gross profit           | 
| |                        | 
| | Operating income       | 
| |                        | 
| | Net income             | 
| |                        | 
| | Earnings per share     | 
| | Basic                  | 
| |                        | 
| | Diluted                | 
| |                        | 

F - 21

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 4   | MARKETABLE SECURITIES
|--------- | ---------------------
|          |                      
|          | A.                   
|          |                      

| |                    | Cost |  | Gross
      unrealized
      gains |       | Gross
      unrealized
      losses |   | Aggregate
      fair value | 
| | ------------------ | ---- |  | ---------------------------------- | ----- | ----------------------------------- | - | -------------------------- | 
|
|
| | As of December 31, |      |  |                                    |       |                                     |   |                            | 
| | 2007               |      |  | $                                  | 1,008 |                                     | $ | 18                         | 
| |                    |      |  |                                    |       |                                     |   |                            | 
| | 2008               |      |  | $                                  | 5,640 |                                     | $ | 170                        | 
| |                    |      |  |                                    |       |                                     |   |                            | 
| |                    |      |  |                                    |       |                                     |   |                            | 

| | Composition              | As of December 31, 2007 |  | As of December 31, 2008 |      
| | ------------------------ | ----------------------- |  | ----------------------- | -----
|
|
|
|
| | USD and USD linked bonds |                         |  | $                       | 997  
| | Other                    |                         |  | $                       | 11   
| |                          |                         |  |                         |      
| |                          |                         |  | $                       | 1,008
| |                          |                         |  |                         |      
| |                          |                         |  |                         |      

| | The bonds held as of December 31, 2008 will mature between 2009 and 2030.
| | -------------------------------------------------------------------------
| |                                                                          

| | B. | Marketable securities held-to-maturity
| | -- | --------------------------------------
| |    |                                       

| |                    | Amortized
      cost |  | Aggregate
      fair value |      
| | ------------------ | -------------------- |  | -------------------------- | -----
|
|
| | As of December 31, |                      |  |                            |      
| | 2007 (2)           |                      |  | $                          | 2,206
| |                    |                      |  |                            |      
| | 2008 (1) (2)       |                      |  | $                          | 1,608
| |                    |                      |  |                            |      
| |                    |                      |  |                            |      

| | Composition              | As of December 31, 2007 |  | As of December 31, 2008 |      
| | ------------------------ | ----------------------- |  | ----------------------- | -----
|
|
|
|
| | USD and USD linked bonds |                         |  | $                       | 1,099
| | Other                    |                         |  | $                       | 1,107
| |                          |                         |  |                         |      
| |                          |                         |  | $                       | 2,206
| |                          |                         |  |                         |      
| |                          |                         |  |                         |      

| | All bonds held as of December 31, 2007 and December 31, 2008 will mature between 2010 and 2014, primarily
in 2014.
| | ------------------------------------------------------------------------------------------------------------------
| |                                                                                                                   

F - 22

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 5   | TRADE RECEIVABLES
|--------- | -----------------
|          |                  
|          | A.               
|          |                  

| |                            | As of December 31, | 
| | -------------------------- | ------------------ | 
|
|
|
|
| | Billed trade receivables   |                    | 
| | Unbilled trade receivables |                    | 
| |                            |                    | 
| |                            |                    | 
| |                            |                    | 

| |    |                                            
| | -- | -------------------------------------------
| | B. | Changes in allowance for doubtful accounts:
| |    |                                            

| |                                                     | Year Ended December 31, | 
| | --------------------------------------------------- | ----------------------- | 
|
|
|
|
| | Allowance for doubtful accounts - beginning of year |                         | 
| | Provisions for the year                             |                         | 
| | (included in general and administrative expenses)   |                         | 
| | Write off of bad debts                              |                         | 
| |                                                     |                         | 
| | Allowance for doubtful accounts - end of year       |                         | 
| |                                                     |                         | 

|          |                                               
|--------- | ----------------------------------------------
|NOTE 6   | OTHER CURRENT ASSETS                          
|          |                                               
|          | Other current assets consist of the following:
|          |                                               

| |                                           | As of December 31, | 
| | ----------------------------------------- | ------------------ | 
|
|
|
|
| | Prepaid expenses                          |                    | 
| | Deferred tax assets                       |                    | 
| | Tax advances, net                         |                    | 
| | Advances to suppliers and sub-contractors |                    | 
| | Government authorities                    |                    | 
| | Others                                    |                    | 
| |                                           |                    | 
| |                                           |                    | 
| |                                           |                    | 

|          |                                                 
|--------- | ------------------------------------------------
|NOTE 7   | OTHER LONG-TERM ASSETS                          
|          |                                                 
|          | Other long-term assets consist of the following:

| |                               | 
| | ----------------------------- | 
|
|
|
|
|
| | Deposits                      | 
| | Loans and grants to employees | 
| | Deferred cost                 | 
| | Deferred tax assets           | 
| |                               | 
| |                               | 
| |                               | 

F - 23

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 8   | FIXED ASSETS, NET
|--------- | -----------------
|          |                  
|          | A.               
|          |                  

| |                                                 | As of December 31, | 
| | ----------------------------------------------- | ------------------ | 
|
|
|
|
| | Cost:                                           |                    | 
| | Long-term land lease and buildings (D below)    |                    | 
| | Computers and peripheral equipment              |                    | 
| | Office furniture and equipment                  |                    | 
| | Leasehold improvements                          |                    | 
| |                                                 |                    | 
| |                                                 |                    | 
| | Less: accumulated depreciation and amortization |                    | 
| |                                                 |                    | 
| |                                                 |                    | 
| |                                                 |                    | 
| |                                                 |                    | 

| | B. | For the geographical location of the Groups fixed assets, see Note 19C.                                                                                                                                                                                                    
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                             
| | C. | Depreciation and amortization expenses for the years ended December 31, 2006, 2007 and 2008 were $252,
$434 and $510, respectively.                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                             
| | D. | The majority of the perpetual land lease and buildings as of December 31, 2008 consists of the Companys
offices in Israel. These premises are currently occupied under a long-term lease from the Israel
Lands Authority. The Company has no obligation for lease payments.
| |    |                                                                                                                                                                                                                                                                             

|NOTE 9   | OTHER INTANGIBLE ASSETS, NET               
|--------- | -------------------------------------------
|          |                                            
|          | Other assets, net consist of the following:
|          |                                            

| |                                           | As of December 31, | 
| | ----------------------------------------- | ------------------ | 
|
|
|
|
| | Identified intangible assets (see Note 3) |                    | 
| | Cost                                      |                    | 
| | Less: accumulated amortization            |                    | 
| |                                           |                    | 
| |                                           |                    | 
| |                                           |                    | 
| |                                           |                    | 

| |                                           | As of December 31, | 
| | ----------------------------------------- | ------------------ | 
|
|
|
|
| | Identified intangible assets (see Note 3) |                    | 
| | Cost                                      |                    | 
| | Less: accumulated amortization            |                    | 
| |                                           |                    | 
| |                                           |                    | 
| |                                           |                    | 

F - 24

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 10  | OTHER CURRENT LIABILITIES AND ACCRUED EXPENSES                          
|--------- | ------------------------------------------------------------------------
|          |                                                                         
|          | Other current liabilities and accrued expenses consist of the following:
|          |                                                                         

| |                                         | As of December 31, | 
| | --------------------------------------- | ------------------ | 
|
|
|
|
| | Employees                               |                    | 
| | Government authorities                  |                    | 
| | Advances from customers                 |                    | 
| | Creditors due to purchase of subsidiary |                    | 
| | Commissions to distributors             |                    | 
| | Accrued expenses                        |                    | 
| | Deferred taxes                          |                    | 
| | Others                                  |                    | 
| |                                         |                    | 
| |                                         |                    | 
| |                                         |                    | 
| |                                         |                    | 

|NOTE 11  | ACCRUED SEVERANCE PAY
|--------- | ---------------------
|          |                      
|          | A.                   
|          |                      
|          | B.                   
|          |                      
|          | C.                   
|          |                      

F - 25

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 12  | COMMITMENTS AND CONTINGENCIES
|--------- | -----------------------------
|          |                              
|          | A.                           
|          |                              

| | (1) | Under agreements entered into in November 1993, two executive officers who are also principal shareholders
(Officers) are entitled to an annual salary of $147 and $115, respectively, linked to
the U.S. consumer price index (as of December 31, 2008 - $218 and $171, respectively). Both of the
agreements will continue until terminated in accordance with their terms. Each of the agreements
with these Officers may be terminated by the Company without cause upon 180 days prior written notice.
Upon termination of their agreements for any reason, the Officers are entitled to payment in an amount
equal to 150% of their last monthly salary, multiplied by the number of years of employment starting
from January 1, 1993, which has already been paid.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | In June 2007, the Companys shareholders approved an amendment to the Officers employment
agreements, according to which the Officers will be entitled to an annual salary of $350 and $260,
respectively, subject to and commencing after a period of 45 consecutive trading days during which
the average closing price of the Companys ordinary shares on the NASDAQ Stock Market has been
at least $15.50. Under the approved amendments, the Officers will not be entitled to any cash severance
payments and they will not be entitled to any severance payments upon the termination of their employment.
The amendments will be in force for a period of five years following its effective date. In February
2009, the Company accepted notice from the Officers consenting that in addition to the fulfillment
of the above conditions the amendments will be contingent upon the discretionary approval of the
Companys Audit Committee.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| | (2) | In January 1993, the Company entered into a management and consulting agreement with Sivanir (Management
Services) 1992 Ltd. (Sivanir), a company jointly owned by two other executive officers
who are also principal shareholders of the Company. According to the agreement with Sivanir as of
December 31, 2008, Sivanir is entitled to an annual service fee of $108, linked to the U.S. consumer
price index (as of December 31, 2008 - $160). The agreement with Sivanir is renewed automatically
each year for an additional one year period, unless one party notifies the other of its termination
upon 180 days advanced written notice.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | In June 2007, the Companys shareholders approved an amendment to the agreement with Sivanir,
according to which Sivanir will be entitled to an annual service fee of $260 subject to and commencing
after a period of 45 consecutive trading days during which the average closing price of the Companys
ordinary shares on the NASDAQ Stock Market has been at least $15.50. The amendment will be in force
for a period of five years following its effective date. In February 2009, the Company accepted a
notice from Sivanir consenting that in addition to the fulfillment of the above conditions the amendments
will be contingent upon the discretionary approval of the Companys Audit Committee.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| | (3) | As of December 31, 2007 and 2008, the additional compensation described above which is based on the
Companys share price, qualifies as a liability award under SFAS 123(R). The total compensation
related thereto as of December 31, 2007 and 2008 amounted to $396 and $62, respectively, determined
based on the Monte Carlo option-pricing model.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                       

F - 26

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 12  | COMMITMENTS AND CONTINGENCIES(cont.)
|--------- | ------------------------------------
|          |                                     
|          | B.                                  
|          |                                     

| | The Group has entered into operating lease agreements for the premises it uses, which have expiration
dates through 2012. The minimum projected charges under the above leases, which are denominated mainly
in U.S. dollars, are as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                              

| | Year Ending December 31, |  |  |   |       |  | 
| | ------------------------ |  |  | - | ----- |  | 
|
|
| | 2009                     |  |  | $ | 613   |  | 
| | 2010                     |  |  |   | 251   |  | 
| | 2011                     |  |  |   | 177   |  | 
| | 2012                     |  |  |   | 104   |  | 
| | 2013                     |  |  |   | 66    |  | 
| |                          |  |  |  
| |                          |  |  | $ | 1,211 |  | 
| |                          |  |  |  
| |                          |  |  |  

| | Office lease expenses totaled $378, $668 and $738 for the years ended December 31, 2006, 2007 and 2008,
respectively. The increase in 2008 and 2007 in comparison to 2006 is attributable mainly to the lease
of office space in Canada and Hong Kong for the first time.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | C. | Royalties                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The Group is committed to pay royalties on revenue derived from the sale of certain software products. Royalties totaled $162 in 2008. Through December 31, 2007, no material transactions requiring the payments of royalties were recorded.                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | D. | The Company provided letters of indemnification to each of its directors and officers, and to Sivanir.
Such letters bind the Company to indemnify such officers for liabilities or expenses they incur as
a result of their acts in their capacity as directors and officers of the Company, in an aggregate
amount not to exceed $3,500, to the extent that their liability is not covered under the Companys
directors and officers liability insurance policy.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F - 27

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 13  | SHAREHOLDERS EQUITY
|--------- | --------------------
|          |                     
|          | A.                  
|          |                     

| | As of December 31, 2007 and 2008, the Company had 15,000,000 authorized ordinary shares, par value
New Israeli Shekel (NIS) 1.00 each, of which 8,724,675 and 8,407,742 ordinary shares,  respectively,
were issued and outstanding as of such dates (net of 1,269,869 and 1,590,177 ordinary shares held
by the Group, respectively).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                         
| | Holders of ordinary shares are entitled to participate equally in the payment of cash dividends and
bonus share (stock dividend) distributions and, in the event of the liquidation of the Company, in
the distribution of assets after satisfaction of liabilities to creditors.                                                       
| |                                                                                                                                                                                                                                                                                                                                         
| | Each ordinary share is entitled to one vote on all matters to be voted on by shareholders.                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                         

| | B. | Public offering
| | -- | ---------------
| |    |                

| | In May 2007, the Company completed an initial public offering of its ordinary shares in the United
States, at a price of $13.50 per share. Following the offering, and including the partial exercise
in June 2007 of an over-allotment option the Company granted the underwriters, the Company issued
an aggregate 2,226,300 ordinary shares, in consideration of gross proceeds of $30,055 (net of related
costs - $26,652).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                

| | C. | Treasury stock
| | -- | --------------
| |    |               

| | In February 2008, the Company adopted a share repurchase program, allowing it to repurchase up to $2,000
of the Companys ordinary shares over a period of 18 months in the open market, at times and
prices that management considers appropriate, taking into account prevailing market conditions and
other corporate considerations. As of December 31, 2008, the Company had repurchased 326,308 of its
ordinary shares under the program at a total purchase price of $1,943, or an average price per share
of $5.95.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | As of December 31, 2007 and 2008, the Company held 1,269,869 and 1,590,177 ordinary shares, respectively,
constituting 12.7% and 15.9% of the Companys outstanding ordinary shares as of such dates.
An amount equal to the cost of the treasury stock ($4,667 as of December 31, 2008) may not be distributed
as cash dividends. The treasury stock may be used in connection with exercise of options granted
under the Companys option plans.                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F - 28

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 13  | SHAREHOLDERS EQUITY(cont.)
|--------- | ---------------------------
|          |                            
|          | D.                         
|          |                            

| | The Company has not adopted a dividend distribution policy. However, in each of the five years between
2003 and 2007, the Company paid dividends on an annual basis. In January 2006 and 2007 and in May
2008, the Company paid annual dividends in respect of previous year of NIS 1.00 ($0.22), NIS 1.25
($0.29) and NIS 1.15 ($0.33) per ordinary share, or a total of $1,389, $1,914 and $2,918, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | On March 24, 2009, the Companys board of directors approved the payment of a dividend of NIS
1.34 ($0.33) per ordinary share, or a total of $2,774.                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Any future dividend distributions are subject to the discretion of the Companys Board of Directors,
dependent on factors deemed relevant by the Board.                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The distribution of dividends also may be limited by the Israeli Companies Law, which permits the distribution
of dividends only out of retained earnings or otherwise upon the permission of the Court.                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                   

| |  | With respect to taxation of dividends distributed out of the Companys Approved and Benefited
Enterprises, see Note 16C.
| |  | ------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                         

| | E. | Employee option plans
| | -- | ---------------------
| |    |                      

| | (1) | 2001 option plan  - In March 2001, a committee of the Board of Directors adopted the 2001 option plan, under which
the Company is authorized to grant options to employees to purchase up to an aggregate of 200,000
ordinary shares of the Company. All options under this plan were granted as of the balance sheet
date. As of December 31, 2008, options to purchase 27,625 ordinary shares were exercisable under
this plan at an average exercise price of $2.45. A total of options to purchase 162,125 ordinary
shares that were granted under this plan were exercised through December 31, 2008.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (2) | 2005 option plan  - In March 2005, a committee of the Board of Directors adopted the 2005 option plan, under which the Company is authorized to grant
options to employees to purchase up to an aggregate of 200,000 ordinary shares of the Company. All
options under this plan were granted as of the balance sheet date. As of December 31, 2008, options
to purchase 125,625 ordinary shares under this plan are exercisable at an average exercise price
of $6.40.  A total of options to purchase 1,250 ordinary shares that were granted under this plan were exercised
through December 31, 2008. 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F - 29

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 13  | SHAREHOLDERS EQUITY(cont.)
|--------- | ---------------------------
|          |                            
|          | E.                         
|          |                            

| | (3) | General terms of 2001 and 2005 option plans  - The terms of the option plans are essentially identical, and stipulate that the exercise price per
ordinary share will be the market price of the Companys ordinary share on the Tel-Aviv Stock
Exchange on the date of grant. Except as otherwise provided, 50% of the options granted under the
plans vest and become exercisable upon the completion of two years of continuous employment with
the Group with an additional amount of 25% of the options granted under the plans vesting and becoming
exercisable upon the completion of each of the third and fourth years of such continuous employment.
Options granted are exercisable for five years from the date of grant.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | The ordinary shares underlying the options may be issued either from the treasury stock or by issuing
new ordinary shares.
| | --------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                           

| | (4) | 2007 Restricted Stock Units Plan
| | --- | --------------------------------
| |     |                                 

| | In August 2007, the Companys Board of Directors approved the grant of up to 240,000 restricted
stock units (RSUs) under the 2007 Restricted Stock Units Plan (2007 RSU Plan)
to employees of the Group and non-employee directors and consultants of the Company. According to
this plan, an RSU is a unit whose value is equal to an ordinary share of the Company at the date
of grant (no shares will be actually awarded to a grantee of RSUs). As of August 13, 2008, the Company
awarded a total of 187,000 RSUs under the 2007 Plan. All of such RSUs terminated during the month
of November 2008, when the market price of the Companys ordinary shares fell below 50% of the
grant price in each case. Concurrently with this termination, the Board of Directors replaced the
terminated award of each employee with a new award for the same number of RSUs. As of December 31,
2008, the Company awarded a total of 187,000 RSUs under the 2007 Plan, none of which is currently vested.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Seventy five percent (75%) of the RSUs will vest and become exercisable upon the completion of two
years of continuous employment with the Group with an additional amount of 25% of the RSUs granted
under the plan vesting and becoming exercisable upon the completion of the third year of such
continuous employment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | According to the 2007 RSU Plan, if the average closing price of the Companys ordinary shares
over any 30-day period is 50% less than the closing price of the ordinary share on the date of award
of the RSUs, the granted RSUs will be automatically cancelled with respect to unvested units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | At each anniversary vesting date, the vested RSUs shall be settled by delivery of ordinary shares of
the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The total cost of the RSUs granted as of December 31, 2008, determined based on the fair value as of
the grant dates, amounted to a total of $1,317 .The Company utilized the Monte Carlo Model to estimate
fair value, in accordance with SFAS 123(R), utilizing the assumptions presented in section (7) below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F - 30

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 13  | SHAREHOLDERS EQUITY(cont.)
|--------- | ---------------------------
|          |                            
|          | E.                         

| |     |                                                           
| | --- | ----------------------------------------------------------
| | (5) | Summary of the status of all employee option and RSU plans
| |     |                                                           

| | A summary of the status of  the Companys three employee option and RSU plans as of
December 31, 2006, 2007 and 2008, as well as changes during each of the years then ended, is presented
below:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                  

| |                       | 2 0 0 6 |  | 2 0 0 7 |         | 2 0 0 8 |  
| | --------------------- | ------- |  | ------- | ------- | ------- | -
|
|
|
|
| | Outstanding -         |         |  |         |         |         |  
| | beginning of the year |         |  |         | 330,000 |         | $
| |                       |         | 
| | Granted               |         |  |         | 7,500   |         |  
| |                       |         | 
| | Exercised             |         |  |         | (99,000 | )       |  
| |                       |         | 
| | Forfeited             |         |  |         | (9,250  | )       |  
| |                       |         |  |         |         |         |  
| | Outstanding -         |         | 
| | end of the year       |         |  |         | 229,250 |         |  
| |                       |         |  |         |         |         |  
| |                       |         | 
| | Options exercisable - |         | 
| | end of the year       |         |  |         | 24,750  |         |  
| |                       |         |  |         |         |         |  
| |                       |         |  |         |         |         |  

| | (*) | Comprised of RSUs granted  See Note 13E(4).
| | --- | --------------------------------------------
| |     |                                             

| | (6) | Summary of information about employee share options and RSUs outstanding
| | --- | ------------------------------------------------------------------------
| |     |                                                                         

| | The following table summarizes information about options and RSUs under the Companys three option
and RSU plans that were outstanding as of December 31, 2008:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                

| | Exercise
      price |      | Number of options
      outstanding as of
      December 31, 2008 |  | Weighted average
      remaining contractual
      life (in years) |  | Number of options
      exercisable as of
      December 31, 2008 |      | 
| | -------------------- | ---- | ----------------------------------------------------------------- |  | ------------------------------------------------------------------ |  | ----------------------------------------------------------------- | ---- | 
|
|
| |                      | 2.40 |                                                                   |  | 27,250                                                             |  |                                                                   | 0.38 | 
| |                      | 6.27 |                                                                   |  | 150,500                                                            |  |                                                                   | 1.23 | 
| |                      | 6.70 |                                                                   |  | 12,500                                                             |  |                                                                   | 1.35 | 
| |                      | 9.52 |                                                                   |  | 7,500                                                              |  |                                                                   | 2.63 | 
| |                      |     |                                                                   |  | 187,000                                                            |  |                                                                   | 2.88 | 
| |                      |      |                                                                   |  |                                                                    |  |                                                                   |     
| |                      |      |                                                                   |  | 384,750                                                            |  |                                                                   | 2.00 | 
| |                      |      |                                                                   |  |                                                                    |  |                                                                   |     

F - 31

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 13  | SHAREHOLDERS EQUITY (cont.)
|--------- | ----------------------------
|          |                             
|          | E.                          
|          |                             

| | (7) | Weighted Average grant-date fair value of options and RSUs granted to employees                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     | The weighted average grant-date fair value of the options and RSUs granted during 2006, 2007 and 2008
to employees amounted to $3.89, $5.82 and $1.53 per option/RSU, respectively. The Company utilized
the Black-Scholes (options) and Monte Carlo (RSUs) option-pricing models to estimate fair value utilizing
the following assumptions, based on the requirements of SFAS 123(R), SAB 107 and SAB 110, for the
years 2006, 2007 and 2008 (all in weighted averages):
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |                                    | Year Ended December 31, | 
| | ---------------------------------- | ----------------------- | 
|
|
|
|
| | Dividend yield                     | 5.5%                    | 
| | Expected volatility                | 48%                     | 
| | Risk free interest rate            | 4.8%                    | 
| | Expected holding period (in years) | 3.5 - 4.5               | 
| |                                    |                         | 

| | Dividend yield  - Management used an expected dividend yield based primarily on past experience and managements
forecasts applicable as of the grant date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Expected volatility  - Management estimated volatility based on the historical volatility of the Companys ordinary
shares, being the only traded financial instrument of the Company, using in most cases daily observations
of the Companys price share to determine the standard deviation. Following the initial public
offering in the United States described in section B above and with respect to the RSUs, management
estimated volatility on a blended rate consisting of historical volatility data of the Companys
ordinary shares, along with volatility data of similar companies traded on the NASDAQ.                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Risk free interest rate  - The risk-free interest rate is based on the implied yield in effect at the time of each option/RSU
grant, based on U.S. Treasury zero-coupon bond issued with equivalent remaining terms.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Expected holding period  (expected term)  Management believes that as of the balance sheet date, the Companys historical share
option exercises do not provide a supportable and reasonable basis upon which to estimate expected
term, because its current historical data lacks sufficient experience and is not indicative to make
reasonable expectations regarding the future. Accordingly, and because the Companys employee
option plans have the characteristics of standard option plans (plain vanilla), the expected term is determined based
on the simplified method illustrated by SAB 107 and SAB 110; and with respect to RSUs, the expected
term is identical to the vesting period.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Management estimates forfeiture rates at the date of grant, which are adjusted in subsequent periods.
Management uses historical data to estimate pre-vesting option forfeiture rates and records share-based
compensation expense only for those awards that are expected to vest.                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F - 32

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 13  | SHAREHOLDERS EQUITY (cont.)
|--------- | ----------------------------
|          |                             
|          | E.                          
|          |                             

| | (8) | Total compensation cost for share-based payment arrangements
| | --- | ------------------------------------------------------------
| |     |                                                             

| | The following table summarizes the effects of share-based compensation on statements of income line
items:
| | ----------------------------------------------------------------------------------------------------------
| |                                                                                                           

| |                            | Year Ended December 31, | 
| | -------------------------- | ----------------------- | 
|
|
|
|
| | Cost of services           |                         | 
| | Research and development   |                         | 
| | Selling and marketing      |                         | 
| | General and administrative |                         | 
| |                            |                         | 
| |                            |                         | 
| |                            |                         | 
| |                            |                         | 
| | Tax benefits               |                         | 
| |                            |                         | 
| |                            |                         | 

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 14  | FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          | A financial instrument is defined as cash, evidence of an ownership interest in an entity, or a contract
that imposes on one entity a contractual obligation either to deliver or receive cash or another
financial instrument to or from a second entity. Examples of financial instruments include cash and
cash equivalents, deposits, trade receivables, loans, investments (bonds and equity securities),
trade accounts payable, accrued expenses, options and forward contracts.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          | The Company provides certain disclosures with regard to financial instruments, including derivatives.
These disclosures include, among other matters, the nature and terms of derivative transactions,
information about significant concentrations of credit risk, and the fair value of financial assets
and liabilities.                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| | A. | Concentrations of credit risks
| | -- | ------------------------------
| |    |                               

| | All of the Groups cash and cash equivalents as of December 31, 2007 and 2008, and marketable
securities as of such dates, were deposited with major financial institutions in Israel, the United
States, the United Kingdom, Hong Kong and Canada. The Group is of the opinion that the credit risk
with respect to these balances is remote since the financial institutions with which these transactions
are entered into are solid and well-established.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Exposure to credit risks relating to trade receivables is also limited, since the majority of the Companys
customers are governmental agencies and large and solid corporations.  The Group performs ongoing credit evaluations of its customers and generally does
not require collateral. An appropriate allowance for doubtful accounts is included in trade receivables
(see Notes 2G and 5B).                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F - 33

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 14  | FINANCIAL INSTRUMENTS (cont.)
|--------- | -----------------------------
|          |                              
|          | B.                           
|          |                              

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

| | (1) | The fair value of cash and cash equivalents, short-term deposits, trade receivables and trade accounts
payable approximates their carrying amounts due to the short-term maturities of these financial instruments.                 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                     
| | (2) | The fair value of marketable securities held-to-maturity is similar to their carrying amounts since
the addition of interest accrued to balance sheet date approximately reflects the changes in the
fair value of these securities.
| |     |                                                                                                                                                                                                                                     
| | (3) | Cash deposits and marketable securities are presented according to their fair value based on the closing
market prices of the securities at the balance sheet date.                                                                 
| |     |                                                                                                                                                                                                                                     

| | C. | Derivative financial instruments
| | -- | --------------------------------
| |    |                                 

| | The Group has only limited involvement with derivative financial instruments, which mainly include
foreign exchange transactions (options contracts). These transactions do not qualify for hedge accounting
under SFAS 133, Accounting for Derivative Instruments and Hedging Activities.  As of December 31, 2007 and 2008, the Group did not hold any derivative financial instruments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                             

|NOTE 15  | FINANCIAL INCOME, NET
|--------- | ---------------------
|          |                      
|          | A.                   
|          |                      

| |                                                            | Year Ended December 31, | 
| | ---------------------------------------------------------- | ----------------------- | 
|
|
|
|
| | Gains related to marketable securities                     |                         | 
| | Interest from bonds (including commercial paper)           |                         | 
| | Exchange rate gains (losses) and forward transactions, net |                         | 
| | Interest on cash deposits                                  |                         | 
| | Other                                                      |                         | 
| |                                                            |                         | 
| |                                                            |                         | 
| |                                                            |                         | 

F - 34

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 16  | INCOME TAXES
|--------- | ------------
|          |             
|          | A.          
|          |             
|          |             
|          |             
|          | B.          

| | 
| | 

| | The Company is an Industrial Company, as defined by this law, and as such is entitled to
certain tax benefits, consisting mainly of accelerated depreciation, the right to deduct for tax
purposes costs in connection with issuance of its shares to the public and amortization of goodwill.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                 

| | C. | Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the Investments
Law)
| | -- | -------------------------------------------------------------------------------------------------------------
| |    |                                                                                                              

| |  | According to the Investments Law, as amended in April 2005, eligible investments program will qualify
for tax benefits as a Benefited Enterprise (rather than the previous terminology of Approved
Enterprise) if it is a competitive industrial facility (as defined in the Investments Law)
that will contribute to the independence of the Israeli economy and to Israels gross domestic
product. In addition, a Benefited Enterprise should comply with minimum capital investments as provided
in the Investment Law.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| | The Companys research and development center, established in Israel in November 2006, was recognized
under the Investments Law as a Benefited Enterprise, entitling the Company to the following primary
tax benefits:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                        

| |  | Tax exemption   Through December 31, 2015, any income tax attributable to increase in the Companys
revenues on a stand alone basis over its average revenues for the years 2003-2005 ($3,456), will
be tax exempt.  In the event of a distribution of a cash dividend from such tax exempt income, the Company would be
required to pay corporate income taxes in respect of the amount distributed.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Accelerated depreciation   Fixed assets used by the Benefited Enterprise are entitled to accelerated depreciation
rates during the first five tax years of the use of these assets.                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                       

F - 35

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 16  | INCOME TAXES (cont.)
|--------- | --------------------
|          |                     
|          | C.                  
|          |                     

| | Entitlement to the above tax benefits is subject to the Companys compliance with the conditions
stipulated by the Investments Law, the regulations promulgated thereunder and a pre-ruling from the Israeli Tax Authority with respect to the Benefited Enterprise.
 The major conditions under the pre-ruling relate to the number of research and development employees based in Israel
and to the continuation of the Companys current operations and activities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In the event the Company fails to comply with such conditions, the benefits may be cancelled and the
Company may be required to refund all or part of the amounts saved as a result of such tax benefits
with interest and inflation adjustments based on the Israeli consumer price index. As of December
31, 2008, the Company was in compliance with all applicable conditions.                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| | Due to the classification of part of the Companys enterprise as an Approved Enterprise and Benefited
Enterprise under the Investments Law, the Company had accumulated undistributed retained earnings
attributable to the Approved and Benefited Enterprise amounting to $3,544 as of December 31, 2008.
In the event the Company distributes such amount, in whole or in part, as a cash dividend, amounts
distributed out of $355 will be then subject to tax at the rate of 25% (or 33.33% under certain conditions),
and amounts distributed out of $3,189 will be subject to tax at the rate of 20% (in case of foreign
shareholders percentage is over 50%), or 25% (in case of foreign shareholders percentage is less
than 50%).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| | D. | Corporate tax rates
| | -- | -------------------
| |    |                    

| |  | Israeli companies  - Taxable income of the Company and its Israeli subsidiaries which is not attributable to an
eligible program under the Investments Law is subject to corporate statutory tax at rates of 27%
in 2008, 26% in 2009 and 25% in 2010 and thereafter. For each of the years ended December 31, 2006
and 2007, the corporate tax rate was 31% and 29%, respectively.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Foreign subsidiaries  - The enacted statutory tax rates applicable to non-Israeli subsidiaries as of December 31, 2008
are as follows:                                                                                                                                                                                                                                             

| | Company incorporated in the United States  tax rate of approximately 36%.
| | --------------------------------------------------------------------------
| | Company incorporated in Canada  tax rate of approximately 31%.           
| | Company incorporated in Hong Kong  tax rate of 16.5%.                    
| | Company incorporated in the United Kingdom  tax rate of 21%.             

F - 36

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 16  | INCOME TAXES (cont.)
|--------- | --------------------
|          |                     
|          | E.                  
|          |                     

| | Carryforward tax losses and capital tax losses of certain subsidiaries as of December 31, 2008 amounted
to approximately $267 and $639, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                      

| | F. | Final tax assessments
| | -- | ---------------------
| |    |                      

| | The Company and its Israeli subsidiaries possess tax assessments which are deemed final through the
year ended December 31, 2004. STARLIMS Corp. has received final assessments through the year ended
December 31, 2006. STARLIMS Canada has received final assessments through the year ended December
31, 2005. STARLIMS UK has received final assessments through the year ended December 31, 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                        
| | The other subsidiaries have not been assessed for tax purposes since their incorporation                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                        

| | G. | Deferred income taxes
| | -- | ---------------------
| |    |                      

| | (1) | The following is a summary of the components of the deferred tax benefits and liabilities reflected
on the balance sheets:
| | --- | --------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                           

| |                                                | As of December 31, | 
| | ---------------------------------------------- | ------------------ | 
|
|
|
|
| | Net deferred tax liabilities - current         |                    | 
| | Differences due to tax reporting on cash basis |                    | 
| | Available-for-sale marketable securities       |                    | 
| | Carryforward tax losses                        |                    | 
| | Allowance for doubtful accounts                |                    | 
| | Depreciation and amortization                  |                    | 
| | Options                                        |                    | 
| | Deferred revenues                              |                    | 
| | Reserves and accruals                          |                    | 
| |                                                |                    | 
| |                                                |                    | 
| | Valuation allowance                            |                    | 
| |                                                |                    | 
| | Total current deferred tax liabilities, net    |                    | 
| |                                                |                    | 
| |                                                |                    | 
| | Net deferred tax liabilities - long-term       |                    | 
| | Differences due to tax reporting on cash basis |                    | 
| | Depreciation and amortization                  |                    | 
| | Options                                        |                    | 
| | Reserves and accruals                          |                    | 
| |                                                |                    | 
| | Total long-term deferred tax liabilities, net  |                    | 
| |                                                |                    | 

| |     |                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (*) | Balances include short-term and long-term deferred tax assets at an aggregate amount of $325 regarding
share issuance costs charged directly to shareholders equity.
| |     |                                                                                                                                                                      

F - 37

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 16  | INCOME TAXES (cont.)
|--------- | --------------------
|          |                     
|          | G.                  
|          |                     

| | (2) | The deferred taxes are presented in the balance sheets as follows:
| | --- | ------------------------------------------------------------------
| |     |                                                                   

| |                        | As of December 31, | 
| | ---------------------- | ------------------ | 
|
|
|
|
| | Short –term assets     |                    | 
| | Short-term liabilities |                    | 
| | Long-term assets       |                    | 
| | Long-term liabilities  |                    | 
| |                        |                    | 
| |                        |                    | 
| |                        |                    | 
| |                        |                    | 

| |     |                                                              
| | --- | -------------------------------------------------------------
| | (3) | The deferred taxes were computed at tax rates of 16.5%-39.5%.
| |     |                                                              

| | H. | Effective income tax rates
| | -- | --------------------------
| |    |                           

| | Following is a reconciliation of the theoretical tax expenses assuming all income before tax is taxed
at the regular tax rates applicable to Israeli companies (2006-31%, 2007-29%, 2008-27%) and the actual
tax expenses:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                           

| |                                                         | Year Ended December 31, | 
| | ------------------------------------------------------- | ----------------------- | 
|
|
|
|
| | Income before income taxes as reported in the           |                         | 
| | consolidated statements of income                       |                         | 
| |                                                         |                         | 
| | Theoretical tax expense                                 |                         | 
| |                                                         |                         | 
| |                                                         |                         | 
| | Non-deductible expenses                                 |                         | 
| | Tax exempt income                                       |                         | 
| | Differences due to statutory tax rates                  |                         | 
| | Tax exemption applicable to Approved Enterprises      |                         | 
| | and exempted income                                     |                         | 
| | Differences arising from the                            |                         | 
| | basis of measurement for tax purposes                   |                         | 
| | Differences attributable to utilization of carryforward |                         | 
| | tax losses for which no deferred tax assets were        |                         | 
| | recorded                                                |                         | 
| | Tax income in respect of previous years                 |                         | 
| | Tax expense in respect of FIN 48                        |                         | 
| | Other                                                   |                         | 
| |                                                         |                         | 
| |                                                         |                         | 
| |                                                         |                         | 
| | Effective tax rate                                      |                         | 
| |                                                         |                         | 

F - 38

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 16  | INCOME TAXES (cont.)
|--------- | --------------------
|          |                     

| | I. | Components of tax expenses
| | -- | --------------------------
| |    |                           

| | (1) | Income before income taxes included in the statements of
income:
| | --- | ----------------------------------------------------------------
| |     |                                                                 

| |             | Year Ended December 31, | 
| | ----------- | ----------------------- | 
|
|
|
|
| | Israeli     |                         | 
| | Non-Israeli |                         | 
| |             |                         | 
| |             |                         | 
| |             |                         | 

| |     |                                                   
| | --- | --------------------------------------------------
| | (2) | Income taxes included in the statements of income:
| |     |                                                   

| |                                  | Year Ended December 31, | 
| | -------------------------------- | ----------------------- | 
|
|
|
|
| | Current                          |                         | 
| | Israeli                          |                         | 
| | Non-Israeli                      |                         | 
| |                                  |                         | 
| |                                  |                         | 
| |                                  |                         | 
| |                                  |                         | 
| | Deferred                         |                         | 
| | Israeli                          |                         | 
| | Non-Israeli                      |                         | 
| |                                  |                         | 
| |                                  |                         | 
| |                                  |                         | 
| |                                  |                         | 
| | **In respect of previous years** |                         | 
| | Israeli                          |                         | 
| | Non-Israeli                      |                         | 
| |                                  |                         | 
| |                                  |                         | 
| |                                  |                         | 
| |                                  |                         | 
| |                                  |                         | 
| |                                  |                         | 
| |                                  |                         | 

| | J. | Tax positions
| | -- | -------------
| |    |              

| | Each of the Companys foreign subsidiaries files its income tax returns in the jurisdiction of
its home country. The Company adopted the provisions of FASB International No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) on January 1, 2007.  The initial implementation of FIN 48 resulted
in immaterial amounts to be recorded as liability for unrecognized tax benefits as of January 1,
2007.  A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                             |  |  |       |        
| | ----------------------------------------------------------- |  |  | ----- | -------
| | Balance as of January 1, 2007                               |  |  | $     |       
| | Additions based on tax position related to the current year |  |  |       | 69     
| | Additions for tax positions of prior years                  |  |  |       | 22     
| |                                                             |  |  |      
| | **Balance as of December 31, 2007**                         |  |  |       | **91** 
| | Additions based on tax position related to the current year |  |  |       | 234    
| | Additions for tax positions of prior years                  |  |  |       | 41     
| |                                                             |  |  |      
| | **Balance as of December 31, 2008**                         |  |  | **$** | **366**
| |                                                             |  |  |      
| |                                                             |  |  |      

F - 39

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 17  | EARNINGS PER SHARE                                                                                                                
|--------- | ----------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                   
|          | The following table provides a reconciliation of the ordinary shares used in computations of basic
and diluted earnings per share:
|          |                                                                                                                                   

| |                                                                | Year Ended December 31, | 
| | -------------------------------------------------------------- | ----------------------- | 
|
|
|
|
|
|
| | Weighted average number of issued ordinary shares              |                         | 
| | Less - weighted average number of shares                       |                         | 
| | held as treasury stock                                         |                         | 
| |                                                                |                         | 
| |                                                                |                         | 
| | Weighted average number of outstanding ordinary shares used in |                         | 
| | computation of basic earnings per share                        |                         | 
| |                                                                |                         | 
| | Plus - incremental ordinary shares                             |                         | 
| | from assumed exercise of options                               |                         | 
| |                                                                |                         | 
| | Weighted average number of ordinary shares used in             |                         | 
| | computation of diluted earnings per share                      |                         | 
| |                                                                |                         | 

|          |                                                                                                                                                                                                                                               
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          | Options to purchase 7,500, 176,200 and 20,000 ordinary shares were outstanding as of December 31, 2006,
2007 and 2008, respectively, but were not included in the computation of diluted earnings per share
due to their anti-dilutive effect.
|          |                                                                                                                                                                                                                                               
|NOTE 18  | RELATED PARTIES BALANCES AND TRANSACTIONS                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                               

| | A. | Balances  Balances with related parties as of December 31, 2007 and 2008 were insignificant.
| | -- | ---------------------------------------------------------------------------------------------
| |    |                                                                                              
| | B. | Transactions                                                                                 
| |    |                                                                                              

| |                                        | Year Ended December 31, | 
| | -------------------------------------- | ----------------------- | 
|
|
|
|
| | Compensation of officers and directors |                         | 
| |                                        |                         | 
| | Expenses related to directors          |                         | 
| |                                        |                         | 

F - 40

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 19  | SEGMENTAL DISCLOSURE
|--------- | --------------------
|          |                     
|          | A.                  
|          |                     

| | The Company makes segmental disclosure in accordance with the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131), which requires segmentation based on the Groups internal organization
and reporting of revenue and other performance measures. The Companys segments are designed
to allocate resources internally and provide a framework to determine management responsibility.
According to SFAS No. 131, operating segments are defined as components of an enterprise with respect
to which discrete financial information is available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to allocate resources and in assessing
performance. Accordingly, the Group has three reportable operating segments evaluated regularly by
the Companys Chief Executive Officer. The types of products and services provided by these
segments are: (i) software licensing, (ii) maintenance, and (iii) services which include professional
services, training and technical support. For additional information regarding these activities, see Note 2R.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Currently, the Company does not separately allocate operating expenses (that is, research and development,
selling and marketing and general and administrative expenses) nor does it allocate specific assets
to these segments, other than goodwill associated with the acquisition of STARLIMS Canada that is
assigned in its entirety to the services operating segment. Goodwill associated with the acquisition
of STARLIMS UK is assigned to all of the Companys operating segments. Accordingly, the segment information
disclosed includes only revenues, cost of revenues and gross profit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F - 41

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 19  | SEGMENTAL DISCLOSURE(cont.)
|--------- | ---------------------------
|          |                            
|          | A.                         
|          |                            

| | The following presents revenues and gross profit by each operating segment:
| | ---------------------------------------------------------------------------
| |                                                                            

| | Year Ended December 31, 2006 |   | Year Ended December 31, 2007 | 
| | ---------------------------- | - | ---------------------------- | 
|
|
|
| | Revenues                     | $ | 8,286                        | 
| | Cost of revenues (*)         |   | 31                           | 
| |                              |   |                              | 
| | Gross profit                 | $ | 8,255                        | 
| |                              |   |                              | 
| |                             
| | Operating expenses          
| | Research and development     |   |                              | 
| | Selling and marketing        |   |                              | 
| | General and administrative   |   |                              | 
| |                              |   |                              | 
| |                              |   |                              | 
| |                              |   |                              | 
| |                              |   |                              | 
| | Operating income             |   |                              | 
| | Financial income, net        |   |                              | 
| |                              |   |                              | 
| | Income before income taxes   |   |                              | 
| | Income tax expense           |   |                              | 
| |                              |   |                              | 
| | Net income                   |   |                              | 
| |                              |   |                              | 
| |                              |   |                              | 

F - 42

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 19  | SEGMENTAL DISCLOSURE(cont.)
|--------- | ---------------------------
|          |                            
|          | A.                         

| | 
| | 

| | Year Ended December 31, 2008 | 
| | ---------------------------- | 
|
|
|
| | Revenues                     | 
| | Cost of revenues (*)         | 
| |                              | 
| | Gross profit                 | 
| |                              | 
| |                              | 
| | Operating expenses           | 
| | Research and development     | 
| | Selling and marketing        | 
| | General and administrative   | 
| |                              | 
| |                              | 
| |                              | 
| |                              | 
| | Operating income             | 
| | Financial income, net        | 
| |                              | 
| | Income before income taxes   | 
| | Income tax expense           | 
| |                              | 
| | Net income                   | 
| |                              | 

F - 43

---

---

STARLIMS TECHNOLOGIES LTD.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands, except share data)

|NOTE 19  | SEGMENTAL DISCLOSURE(cont.)
|--------- | ---------------------------
|          |                            
|          | B.                         
|          |                            

| |               | Year Ended December 31, | 
| | ------------- | ----------------------- | 
|
|
|
|
| | North America |                         | 
| | Latin America |                         | 
| | Europe        |                         | 
| | Asia          |                         | 
| | Israel        |                         | 
| |               |                         | 
| |               |                         | 
| |               |                         | 
| |               |                         | 

| | C. | Non current assets by geographical areas
| | -- | ----------------------------------------
| |    |                                         

| | The composition of the Groups fixed assets, net according to their physical location is as follows:
| | ----------------------------------------------------------------------------------------------------
| |                                                                                                     

| |                          | As of December 31, |  |  
| | ------------------------ | ------------------ |  | -
|
|
|
|
| | North America            |                    |  | $
| | Asia (Hong Kong)         |                    |  |  
| | Europe ( United Kingdom) |                    |  |  
| | Israel                   |                    |  |  
| |                          |                    |  |  
| |                          |                    |  | $
| |                          |                    |  |  

| |    |                                                  
| | -- | -------------------------------------------------
| | D. | Major customers (as percentage of total revenues)
| |    |                                                  

| |            | Year Ended December 31, | 
| | ---------- | ----------------------- | 
|
|
|
|
| | Customer A |                         | 

F - 44

---

---

# S I G N A T U R E S

The
registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.

| |  | STARLIMS Technologies Ltd.By: /s/ Itschak Friedman
Itschak FriedmanChief Executive Officer
| |  | --------------------------------------------------------------------------------------------------------

| |  | By: /s/ Chaim Friedman
Chaim FriedmanChief Financial Officer
| |  | --------------------------------------------------------------------------

Dated: March 25, 2009

78

---

---