20-F 1 zk96493.htm 20-F

SECURITIES AND EXCHANGE COMMISSION
Washington 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 1934
Date 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 o No x

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

Yes o No x

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

Yes x No 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 o Item 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 o No 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   2005   2006   2007   2008  
 
 
 
 
 
 
  (U.S. dollars in thousands, except share and per share data)  
     
Statements of Income Data:                              
Revenues:                              
  Software licensing $ 5,191   $ 9,645   $ 8,286   $ 10,656   $ 10,238  
  Maintenance   1,615     2,169     2,841     3,241     5,234  
 
 
 
 
 
 
  Total product revenues   6,806     11,814     11,127     13,897     15,472  
  Services   2,826     4,400     8,638     9,878     9,770  
 
 
 
 
 
 
Total revenues   9,632     16,214     19,765     23,775     25,242  
Cost of Revenues:                              
  Cost of products   92     120     31     374     409  
  Cost of services   1,928     3,306     5,557     8,095     9,137  
 
 
 
 
 
 
Total cost of revenues   2,020     3,426     5,588     8,469     9,546  
 
 
 
 
 
 
Gross profit   7,612     12,788     14,177     15,306     15,696  
Research and development expenses   806     1,373     1,866     2,872     3,408  
Selling and marketing expenses   3,087     4,099     4,741     5,792     6,299  
General and administrative expenses   1,280     1,992     2,634     2,799     3,573  
 
 
 
 
 
 
Operating income   2,439     5,324     4,936     3,843     2,416  
Financial income, net   494     271     610     1,551     1,050  
Income tax expense   846     1,969     1,762     885     589  
 
 
 
 
 
 
Net income $ 2,087   $ 3,626   $ 3,784   $ 4,509   $ 2,877  
 
 
 
 
 
 
Basic earnings per share $ 0.33   $ 0.57   $ 0.59   $ 0.58   $ 0.33  
 
 
 
 
 
 
Weighted average number of ordinary shares
    used in computing basic earnings per share
  6,352,922     6,380,774     6,459,030     7,799,583     8,591,614  
                               
Diluted earnings per share $ 0.33   $ 0.56   $ 0.58   $ 0.57   $ 0.33  
 
 
 
 
 
 
Weighted average number of ordinary shares
    used in computing diluted earnings per share
  6,376,276     6,506,904     6,559,985     7,897,036     8,713,394  
Dividends paid* $ 1,064   $ 1,456   $ 1,389   $ 1,914   $ 2,918  

_____________
* 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.

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  2004   2005   2006   2007   2008  
 
 
 
 
 
 
  (U.S. dollars in thousands)  
     
Balance Sheets Data:                              
Cash and cash equivalents $ 2,422   $ 3,397   $ 2,539   $ 31,704   $ 21,942  
Total assets   11,237     15,641     19,661     49,527     48,802  
Working capital   6,630     7,928     9,460     39,025     36,351  
Total shareholders’ equity $ 7,442   $ 9,736   $ 13,969   $ 43,798   $ 42,011  

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 adversely impacted 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.

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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.

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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;
 

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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.

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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.

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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.

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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.

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                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.

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                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.

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                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.

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                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.

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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. 

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                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.

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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.

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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.

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                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.

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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.

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                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 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.

                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   % of
Total
Revenues
  Revenues   % of
Total
Revenues
 
     
 
 
 
 
 
 
      (U.S. dollars in thousands)  
         
Software licensing     $ 8,286     42 % $ 10,656     45 % $ 10,238     40 %
Maintenance       2,841     14 %   3,241     13 %   5,234     21 %
     
 
 
 
 
 
 
  Total product revenues     $ 11,127     56 %   13,897     58 %   15,472     61 %
Services       8,638     44 %   9,878     42 %   9,770     39 %
     
 
 
 
 
 
 
  Total revenues     $ 19,765     100 % $ 23,775     100 % $ 25,242     100 %

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                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   % of
Total
Revenues
  Revenues   % of
Total
Revenues
 
     
 
 
 
 
 
 
      (U.S. dollars in thousands)  
         
North America     $ 14,689     74 % $ 16,094     68 %   17,203     68 %
Europe       2,870     14 %   3,584     15 %   3,283     13 %
Latin America       1,690     9 %   1,987     8 %   956     4 %
Asia       516     3 %   2,110     9 %   3,800     15 %
     
 
 
 
 
 
 
  Total     $ 19,765     100 % $ 23,775     100 %   25,242     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).

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                 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.

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                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.

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                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.

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                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   2007   2008  
   
 
 
 
               
Revenues:              
  Software licensing   41.9 % 44.8 % 40.6 %
  Maintenance   14.4   13.6   20.7  
  Services   43.7   41.6   38.7  
   
 
 
 
Total revenues   100.0 % 100.0 % 100.0 %
Cost of revenues   28.3   35.6   37.8  
   
 
 
 
Gross profit   71.7   64.4   62.2  
Operating expenses:              
  Research and development   9.4   12.0   13.5  
  Selling and marketing   24.0   24.4   25.0  
  General and administrative   13.3   11.8   14.1  
   
 
 
 
Total operating expenses   46.7   48.2   52.6  
   
 
 
 
Operating income   25.0   16.2   9.6  
Financial income, net   3.1   6.5   4.1  
Income tax expense   8.9   3.7   2.3  
   
 
 
 
Net income   19.2 % 19.0 % 11.4 %
   
 
 
 

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.

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                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).

                General and Administrative Expenses.  General and administrative expenses increased from $2.8 million for the year ended December 31, 2007 to $3.6 million for the year ended December 31, 2008, an increase of 27.7%. The increase is primarily attributable to costs associated with us being a U.S. public company and our compliance with the requirements of the Sarbanes-Oxley Act. General and administrative expenses as a percentage of revenues increased from approximately 12% for the year ended December 31, 2007 to approximately 14% for the year ended December 31, 2008. General and administrative expenses for the years ended December 31, 2007 and 2008 include $9,000 and $25,000, 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.

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                 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).

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                 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
  June 30,
2007
  Sept. 30,
2007
  Dec. 31,
2007
  Mar. 31,
2008
  June 30,
2008
  Sept. 30,
2008
  Dec. 31,
2008
 
   
 
 
 
 
 
 
 
 
    (Unaudited)
(U.S. dollars in thousands)
 
       
Statement of Income Data:                                                  
Revenues                                                  
  Software licensing   $ 2,679   $ 2,032   $ 2,816   $ 3,129   $ 3,655   $ 2,393   $ 1,518   $ 2,672  
  Maintenance     727     790     814     910     1,005     1,318     1,445     1,466  
  Services     2,001     2,699     2,526     2,652     2,309     2,435     2,173     2,853  
   
 
 
 
 
 
 
 
 
Total Revenues     5,407     5,521     6,156     6,691     6,969     6,146     5,136     6,991  
Cost of Revenues     1,826     2,010     1,981     2,652     2,453     2,211     2,316     2,566  
   
 
 
 
 
 
 
 
 
Gross Profit     3,581     3,511     4,175     4,039     4,516     3,935     2,820     4,425  
Research and development
   expenses
    676     669     705     822     833     856     901     818  
Selling and marketing
   expenses
    1,165     1,332     1,481     1,814     1,681     1,598     1,215     1,805  
General and administrative
   expenses
    573     671     757     798     904     832     783     1,054  
   
 
 
 
 
 
 
 
 
Operating income     1,167     839     1,232     605     1,098     649     (79 )   748  
Financial income, net     131     222     569     629     550     316     122     62  
   
 
 
 
 
 
 
 
 
Income before income tax     1,298     1,061     1,801     1,234     1,648     965     43     810  
Income tax expense     187     196     249     253     278     170     4     137  
   
 
 
 
 
 
 
 
 
Net income   $ 1,111   $ 865   $ 1,552   $ 981   $ 1,370   $ 795   $ 39   $ 673  
   
 
 
 
 
 
 
 
 

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       For the Three Month Periods Ended  
   
 
    Mar. 31,
2007
  June 30,
2007
  Sept. 30,
2007
  Dec. 31,
2007
  Mar. 31,
2008
  June 30,
2008
  Sept. 30,
2008
  Dec. 31,
2008
 
   
 
 
 
 
 
 
 
 
     (Unaudited)  
       
As a percentage of total
   revenues:
                                                 
Revenues                                                  
  Software licensing     49.5 %   36.8 %   45.8 %   46.8 %   52.4 %   38.9 %   29.6 %   38.2 %
  Maintenance     13.5     14.3     13.2     13.6     14.4     21.4     28.1     21.0  
  Services     37.0     48.9     41.0     39.6     33.2     39.7     42.3     40.8  
   
 
 
 
 
 
 
 
 
Total Revenues     100 %   100 %   100     100 %   100 %   100 %   100 %   100 %
Cost of Revenues     33.8     36.4     32.2     39.6     35.2     36.0     45.1     36.7  
   
 
 
 
 
 
 
 
 
Gross Profit     66.2     63.6     67.8     60.4     64.8     64.0     54.9     63.3  
Research and development
   expenses
    12.5     12.1     11.5     12.3     12.0     13.9     17.5     11.7  
Selling and marketing
   expenses
    21.5     24.1     24.1     27.1     24.1     26.0     23.7     25.8  
General and administrative
   expenses
    10.6     12.2     12.3     11.9     12.9     13.5     15.2     15.1  
   
 
 
 
 
 
 
 
 
Operating income     21.6     15.2     20     9.0     15.8     10.6     (1.5 )   10.7  
Financial income, net     2.4     4.0     9.2     9.4     7.8     5.1     2.3     0.9  
   
 
 
 
 
 
 
 
 
Income before income tax     24.0     19.2     29.3     18.4     23.6     15.7     0.8     11.6  
Income tax expense     3.5     3.6     4.0     3.8     3.9     2.8     0.0     2.0  
   
 
 
 
 
 
 
 
 
Net income     20.5 %   15.7 %   25.2 %   14.7 %   19.7 %   12.9 %   0.8 %   9.6 %
   
 
 
 
 
 
 
 
 

                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.  

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                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.

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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   2008  
     
 
 
      ($ in thousands)  
         
  Net cash provided by operating activities   $ 4,131   $ 2,210  
  Net cash provided by (used in) investing activities     124     (6,934 )
  Net cash provided by (used in) financing activities     24,795     (4,838 )
  The effect of exchange rate changes on cash and cash equivalents     115     (200 )
     
 
 
  Net increase (decrease) in cash and cash equivalents     29,165     (9,762 )
  Cash and cash equivalents at beginning of year     2,539     31,704  
     
 
 
  Cash and cash equivalents at end of year   $ 31,704   $ 21,942  
     
 
 

                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.

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                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.

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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
  1-3 years   3-5 years   More than
5 years
 
   
 
 
 
 
 
    (U.S. dollars in thousands)  
       
Operating lease obligations   $ 1,211   $ 613   $ 428   $ 170      
Other long-term liabilities reflected on
    the balance sheet
                     
   
 
 
 
 
 
Total   $ 1,211   $ 613   $ 428   $ 170      

                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
 

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                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 Baron has 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 Markowitz has 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.

Salaries, fees,
commissions and
bonuses*
  Pension,
retirement and
similar benefits
       
 
 
  
  All directors and executive officers as a group (12 persons)     $ 1,458,000   $ 61,000  
  
  ____________
  *              Excludes business travel expenses, relocation expenses, professional and business association dues and expenses reimbursed to directors and executive officers, and other benefits commonly reimbursed or paid by companies in Israel.
 

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.  

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                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.

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                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.

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                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.

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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.

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                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.

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                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.

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                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     *  
  
__________
* Less than 1%.
   
(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.

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(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).

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                 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.

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                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 %

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___________
(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.
 
(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) Based solely upon, and qualified in its entirety with reference to, a Schedule 13G filed with the Securities and Exchange Commission on May 5, 2008. Under the Schedule 13G,Harel Insurance Investments and Financial Services Ltd. disclaims beneficial ownership of 810,596 of the ordinary shares.
 
(5) Includes half of the 64,703 ordinary shares held by Sivanir Ltd., an Israeli company jointly owned by Messrs. Chaim Friedman and Eyal Guterman.
 
(6) Based solely upon, and qualified in its entirety with reference to, a Schedule 13G/A filed with the Securities and Exchange Commission on February 18, 2009. Based on the Schedule 13G/A, Gagnon Securities LLC is a registered investment adviser and furnishes investment advice to several funds, and Mr. Neil Gagnon is the managing member and the principal owner of Gagnon Securities LLC. Each of Mr. Neil Gagnon and Gagnon Securities LLC disclaims beneficial ownership of all securities held in such funds’ accounts.
 
(7) Based solely upon, and qualified in its entirety with reference to, a Schedule 13G/A filed with the Securities and Exchange Commission on February 13, 2009. Under the Schedule 13G/A, Clal Insurance Enterprises Holdings Ltd., or Clal, and Clal Finance Ltd., a majority-owned subsidiary of Clal, disclaim beneficial ownership of the ordinary shares. In addition, the Schedule 13G/A states that by reason of the ownership interest of IDB Development Corporation Ltd. and IDB Holding Corporation (“IDB Holding”) in Clal, and by reason of the interests in, and relationships among them, with respect to IDB Holding, of Mr. Nochi Dankner, Mrs. Shelly Bergman, Mrs. Ruth Manor and Mr. Avraham Livnat, such entities and persons may each be deemed a beneficial owner of the 559,756 ordinary shares deemed beneficially owned by Clal; however such persons and entities disclaim beneficial ownership of the 559,756 ordinary shares beneficially owned by Clal.

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.

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                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.

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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   High   Low  

 
 
 
 
 
  
2004           $ 4.00   $ 1.69  
2005           $ 10.36   $  3.52  
2006           $ 10.94   $ 7.35  
2007*   $ 13.78   $ 10.60   $ 14.20   $ 10.03  
2008   $ 10.99   $ 3.15   $ 10.74   $ 3.29  

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

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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   High   Low  
   
 
 
 
 
  
2007                          
First Quarter           $ 12.43   $ 10.03  
Second Quarter*   $ 13.78   $ 12.45   $ 14.20   $ 11.84  
Third Quarter   $ 13.07   $ 10.77   $ 12.67   $ 10.37  
Fourth Quarter   $ 12.50   $ 10.60   $ 12.63   $ 10.36  
                           
2008                          
First Quarter   $ 10.99   $ 6.25   $ 10.74   $ 6.15  
Second Quarter   $ 8.39   $ 6.52   $   8.26   $ 6.28  
Third Quarter   $   8.09   $ 6.02   $ 7.64   $ 5.94  
Fourth Quarter   $   6.77   $ 3.15   $   6.36   $ 3.29  

__________
*  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   High   Low  
   
 
 
 
 
  
October 2008   $ 6.77   $ 3.36   $ 6.36   $ 3.48  
November 2008   $ 4.00   $ 3.23   $ 3.83   $ 3.35  
December 2008   $ 4.36   $ 3.15   $ 4.09   $ 3.29  
January 2009   $ 4.80   $ 4.24   $ 4.74   $ 4.10  
February 2009   $ 4.99   $ 4.30   $ 4.97   $ 4.25  
March 2009 (until March 23)   $ 4.76   $ 3.72   $ 4.95   $ 3.88  

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.

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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.

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                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.

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                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:

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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.

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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.

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                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

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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.

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                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.

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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.

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                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.

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                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.

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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.

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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.

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                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.

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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.

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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   $ 111,000    
  Audit-related            
  Tax (2)     56,000     33,000    
  Other (3)     171,000        
     
 
   
  Total   $ 327,000   $ 144,000    
______________
(1) Audit fees relate to audit services provided for each of the years shown in the table, including fees associated with the annual audit and reviews of our interim financial results submitted to the Securities and Exchange Commission on Form 6-K, consultations on various accounting issues and audit services provided in connection with other statutory or regulatory filings.
 
(2) Tax fees relate to services provided by tax experts of our independent registered public accounting firm in connection with transfer pricing and Israeli tax matters.
 
(3) Other fees in 2007 primarily relate to services provided in connection with our initial public offering in the United States in May 2007.

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.

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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.

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                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)

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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.
 

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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 Technologies Ltd. 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 Technologies Ltd. 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, Israel
March 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,
Note
2 0 0 7
2 0 0 8
 
        ASSETS                  
 Current Assets   
 Cash and cash equivalents       $ 31,704   $ 21,942  
 Short-term deposits        -    1,191  
 Restricted short-term deposits        195    338  
 Marketable securities   4   1,012    5,686  
 Trade receivables (net of allowance  
    for doubtful accounts of $192 and $238, respectively)   5   9,215    10,341  
 Other current assets   6   1,667    2,891  


     Total current assets         43,793    42,389  


   
 Long-Term Assets   
 Marketable securities - held-to-maturity   4   2,206    1,608  
 Other long-term assets   7   564    949  
 Fixed assets, net   8   1,601    1,416  
 Goodwill   3   1,326    2,227  
 Other intangible assets, net   9   37    213  


    Total long-term assets         5,734    6,413  


   
         Total assets        $ 49,527   $ 48,802  


   
LIABILITIES AND SHAREHOLDERS' EQUITY   
   
 Current Liabilities   
 Trade accounts payable       $ 201   $ 934  
 Deferred revenues        2,276    2,876  
 Other current liabilities and accrued expenses   10   2,291    2,228  


     Total current liabilities         4,768    6,038  


   
 Long-Term Liabilities   
 Long-term deferred revenues        68    251  
 Accrued severance pay   11   52    19  
 Deferred taxes   16   841    483  


     Total long-term liabilities         961    753  


   
 Commitments and Contingencies    12     
   
 Shareholders' Equity    13   
 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        3,151    3,152  
 Additional paid-in capital        30,893    31,355  
 Accumulated other comprehensive income        260    (27 )
 Retained earnings        12,267    12,198  
 Treasury stock, at cost - 1,269,869 and 1,590,177 ordinary shares, respectively        (2,773 )  (4,667 )


     Total shareholders' equity         43,798    42,011  


   
         Total liabilities and shareholders' equity        $ 49,527   $ 48,802  



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,
Note
2 0 0 6
2 0 0 7
2 0 0 8
 
Revenues      19                 
   Software licensing        $ 8,286   $ 10,656   $ 10,238  
   Maintenance         2,841    3,241    5,234  



      Total product revenues         11,127    13,897    15,472  
   Services         8,638    9,878    9,770  



      Total revenues          19,765    23,775    25,242  



   
Cost of revenues   
   Cost of products         31    374    409  
   Cost of services         5,557    8,095    9,137  



      Total cost of revenues          5,588    8,469    9,546  



   
      Gross profit          14,177    15,306    15,696  



   
Operating expenses   
   Research and development         1,866    2,872    3,408  
   Selling and marketing         4,741    5,792    6,299  
   General and administrative         2,634    2,799    3,573  



      Total operating expenses          9,241    11,463    13,280  



   
      Operating income          4,936    3,843    2,416  
   
 Financial income, net    15    610    1,551    1,050  



   
      Income before income taxes          5,546    5,394    3,466  
   
Income tax expense    16    1,762    885    589  



   
    Net income         $ 3,784   $ 4,509   $ 2,877  



   
Basic earnings per share         $ 0.59   $ 0.58   $ 0.33  



Weighted average number of ordinary shares used in   
computing basic earnings per share     17    6,459,030    7,799,583    8,591,614  



   
Diluted earnings per share         $ 0.58   $ 0.57   $ 0.33  



Weighted average number of ordinary shares used in   
computing diluted earnings per share     17    6,559,985    7,897,036    8,713,394  




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 (*)
Number
of shares

Amount
Additional
paid-in
capital

Accumulated
other
comprehensive
income

Retained
earnings

Treasury
Stock,
at cost

Total
 
Balance as of January 1, 2006       7,765   $ 2,600   $ 4,468   $ 12   $ 5,888   $ (3,232 ) $ 9,736  
Comprehensive income:    
Net income                        3,784         3,784  
Translation adjustment of financial  
  statements of subsidiaries                   (24 )            (24 )
Gains (losses) on marketable  
  securities available-for-sale, net  
  of tax:  
Realized gains included in net income                   (103 )            (103 )
Unrealized gains                   219              219  

Total comprehensive income                                  3,876  

Issuance of treasury stock against  
  exercise of options              (284 )            500    216  
Stock-based compensation              141                   141  







Balance as of December 31, 2006       7,765     2,600     4,325     104     9,672     (2,732 )   13,969  
Comprehensive income:    
 Net income                        4,509         4,509  
 Translation adjustment of financial  
  statements of subsidiaries                   232              232  
 Gains (losses) on marketable  
  securities available-for-sale, net  
  of tax:  
Realized gains included in net income                   (90 )            (90 )
Unrealized gains                   14              14  

Total comprehensive income                                  4,665  

Proceeds from issuance of shares, net    2,226    551    26,426                   26,977  
Dividend declared                        (1,914 )       (1,914 )
Purchase of treasury stock                             (93 )  (93 )
Issuance of treasury stock against  
  exercise of options    3         (35 )            52    17  
Stock-based compensation              177                   177  







Balance as of December 31, 2007       9,994     3,151     30,893     260     12,267     (2,773 )   43,798  
Comprehensive income:    
Net income                        2,877         2,877  
Translation adjustments of  
financial statements of subsidiaries                   (259 )            (259 )
Accumulate effect of first-time  
  adoption of SFAS 159                   14    (28 )       (14 )
 Gains (losses) on marketable  
  securities, net of tax:  
Realized gains included in net income                   (42 )            (42 )

Total comprehensive income                                  2,562  

Issuance of shares against exercise of  
  options         1                        1  
Dividend declared                        (2,918 )       (2,918 )
Issuance of treasury stock against  
  exercise of options    3         (26 )            49    23  
Purchase of treasury stock                             (1,943 )  (1,943 )
Stock-based compensation              488                   488  







Balance as of December 31, 2008     $ 9,997   $ 3,152   $ 31,355   $ (27 ) $ 12,198   $ (4,667 ) $ 42,011  








(*) 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,
2 0 0 6
2 0 0 7
2 0 0 8
 
CASH FLOWS - OPERATING ACTIVITIES                
   Net income   $ 3,784   $ 4,509   $ 2,877  
   Adjustments to reconcile net income to cash provided by operating activities:  
       Depreciation and amortization    378    510    593  
       Stock-based compensation    141    177    488  
       Gains related to marketable securities    (192 )  (326 )  (79 )
       Capital loss on sale of fixed assets    -    8    3  
       Increase (decrease) in accrued severance pay    -    20    (32 )
       Deferred income taxes    174    (732 )  (459 )
       The effect of exchange rate changes    (164 )  (241 )  54  
   Changes in assets and liabilities:  
       Increase in trade receivables    (1,406 )  (30 )  (834 )
       Increase (decrease) in allowance for doubtful accounts    80    (99 )  46  
       Decrease (increase) in other current assets    (460 )  75    (607 )
       Increase (decrease) in trade accounts payable    (15 )  (182 )  509  
       Increase in deferred revenues    408    395    783  
       Increase (decrease) in other current liabilities    (587 )  47    (1,132 )



          Net cash provided by operating activities     2,141    4,131    2,210  



CASH FLOWS - INVESTING ACTIVITIES   
   Investments in marketable securities    (1,982 )  (740 )  (4,761 )
   Proceeds from sale of marketable securities    2,380    1,563    703  
   Investment in held-to-maturity marketable securities    -    (1,706 )  (428 )
   Proceeds from redemption of held-to-maturity securities    -    1,685    466  
   Investments in deposits, net    (235 )  (101 )  (1,245 )
   Loans to employees, net    (164 )  (64 )  (281 )
   Purchase of fixed assets    (640 )  (523 )  (374 )
   Proceeds from sale of fixed assets    -    10    11  
   Purchase of other intangible assets    -    -    (75 )
   Acquisition of subsidiaries, net of cash acquired, and business operation (A)    (1,049 )  -    (950 )



          Net cash provided by (used in) investing activities     (1,690 )  124    (6,934 )



CASH FLOWS - FINANCING ACTIVITIES   
   Proceeds from issuance of shares, net of issuance costs    -    26,785    -  
   Deferred share issuance costs and issuance costs    (133 )  -    -  
   Proceeds from sale of treasury stock against exercise of options    216    17    23  
   Dividends paid    (1,389 )  (1,914 )  (2,918 )
   Purchase of treasury stock by the Company    -    (93 )  (1,943 )



          Net cash provided by (used in) financing activities     (1,306 )  24,795    (4,838 )



   THE EFFECT OF EXCHANGE RATE   
   CHANGES ON CASH AND CASH EQUIVALENTS     (3 )  115    (200 )



   
Increase (decrease) in cash and cash equivalents     (858 )  29,165    (9,762 )
Cash and cash equivalents at the beginning of the year     3,397    2,539    31,704  



          Cash and cash equivalents at the end of the year    $ 2,539   $ 31,704   $ 21,942  




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,
2 0 0 6
2 0 0 7
2 0 0 8
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES                
   
   Cash paid during the year for income taxes   $ 1,439   $ 1,995   $ 1,807  




APPENDIX A – ACQUISITION OF SUBSIDIARIES AND BUSINESS OPERATION

Year Ended December 31,
2 0 0 6
2 0 0 7
2 0 0 8
 
Current assets (excluding cash and cash equivalents)     $ (844 ) $ -   $ (566 )
Fixed assets, net    (120 )  -    (16 )
Current liabilities    1,164    -    707  
Goodwill and other intangible assets    (1,249 )  -    (1,075 )



    $ (1,049 ) $ -   $ (950 )




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
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 of Long-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.