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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, 2002;                                                   
|  |                                                                                                  
|  | OR                                                                                               
|o | TRANSITION REPORT PURSUANT TO
  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934       
|  | For the transition period from ____________ to ____________                                      

Commission
File Number: N.A.

FORMULA SYSTEMS (1985)
LTD.

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Israel

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3 Hagalim Boulevard, Herzlia 46725, Israel

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|Securities
registered or to be registered pursuant to Section 12(b) of the Act:
|-------------------------------------------------------------------------------
|None                                                                           
|                                                                               

|Securities
registered or to be registered pursuant to Section 12(g) of the Act:
|-------------------------------------------------------------------------------
|American Depositary Shares
  Ordinary Shares, NIS 1 par value                  
|                                                                               
|(Title of class)                                                               

|Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:
|------------------------------------------------------------------------------------------
|American Depositary Shares
  Ordinary Shares, NIS 1 par value                             
|                                                                                          
|(Title of Class)                                                                          

As of December
31, 2002, the registrant had 10,000,000 outstanding ordinary shares, NIS 1 par
value, of which 536,984_were represented by American depositary shares as of
such date.

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.

| | Yesx | No o
| | ---- | ----

Indicate by
check mark which financial statement item the registrant has elected to follow:

| | Item 17o | Item 18x
| | -------- | --------

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P
A R T   I

Some
of the statements in this annual report, including those in the Risk Factors,
Operating and Financial Review and Prospects and Business Overview sections,
are forward-looking statements that involve risks and uncertainties. These forward-looking
statements include statements about our plans, objectives, strategies,
expectations, intentions, future financial performance and other statements
that are not historical facts. We use words like anticipates, believes,
expects, future and intends, and similar expressions to mean that the statement
is forward-looking. You should not unduly rely on these forward-looking
statements, which apply only as of the date of this annual report. Our actual
results could differ materially from those anticipated in the forward-looking
statements for many reasons, including the risks described under Risk Factors.

Beginning
with the fiscal year ended December 31, 2002, we prepare our
consolidated financial statements in accordance with accounting principles
generally accepted inthe United States, commonly
referred to asU.S.GAAP.Prior
to 2002, we prepared ourconsolidated financial statements in accordance with
accounting principles generally acceptedin Israel, referred to as Israeli GAAP.
Israeli GAAPand U.S. GAAP vary in certainrespects.
As a result,we have restated certain figures
in our financial statementsrelating to prior periods. In
accordance with U.S GAAP, we use the United States dollar as our reporting
currency. Prior to 2002, we presented our consolidated
financial statements in New Israeli Shekels, or NIS, that have been adjusted to
reflect changes in the Israeli consumer price index, or CPI.

As used in this annual report, references todollar refer to the United States dollar and
references to NIS refer toNew Israeli Shekels.

As
used in this annual report, references towe,our,oursandusrefer to Formula Systems
(1985) Ltd. and its subsidiaries, unless otherwise indicated.References to Formula refer to Formula Systems
(1985) Ltd.

All
trademarks appearing in this annual report are the property of their respective
holders.

1

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ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER
STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY
INFORMATION

A.Selected Financial Data

The
following tables present our consolidated statement of operations and balance
sheet data for the periods and as of the dates indicated.  We derive the consolidated statement of
operations data for the years ended December 31, 2000, 2001 and 2002, and
the balance sheet data as at December 31, 2001 and 2002 from our consolidated
financial statements included elsewhere in this annual report.  Our consolidated financial statements have
been audited by BDO Ziv Haft, a member of BDO International, certified public
accountants in Israel. The consolidated income statement data for the years ended December 31, 1998 and 1999  and the consolidated balance sheet data for the years ended December 31, 1998,
1999 and 2000 is derived from our audited financial statements not included in
this annual report. You should read the selected consolidated financial data
together with our consolidated financial statements included elsewhere in this
annual report. See Item 5. Operating and Financial Review and Prospects and
the consolidated financial statements and notes thereto and other financial
information included elsewhere in this annual report.

2

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|                                                  |  | Year Ended December 31,              
|------------------------------------------------- |  | -------------------------------------
|                                                  |  |                                      
|                                                  |  | 2002                                 
|                                                  |  |                                      
|                                                  |  | $                                    
|                                                  |  | (In thousands, except per share data)
|Consolidated
  Statement of Operations 
  Data:   |  |                                      
|                                                 
|Revenues                                          |  | $                                    
|Cost of revenues                                  |  |                                      
|                                                  |  |                                      
|Gross profit                                      |  |                                      
|Research and development
  costs, net             |  |                                      
|Selling, general and administrative expenses      |  |                                      
|Restructuring and non-recuring costs              |  |                                      
|                                                  |  |                                      
|Operating income (loss)                           |  |                                      
|Financial income, net                             |  |                                      
|Gain on realization of
  shareholdings,net        |  |                                      
|Other expenses, net                               |  |                                      
|                                                  |  |                                      
|Income (loss) before taxes
  on income            |  |                                      
|Taxes on income                                   |  |                                      
|Equity in losses of
  affiliated companies, net   |  |                                      
|Minority interest in losses (profit), net         |  |                                      
|                                                  |  |                                      
|Net income (loss)                                 |  |                                      
|Earnings
  (loss) per share:                      |  |                                      
|Basic earnings (loss)                             |  |                                      
|Diluted earnings (2)                              |  |                                      
|                                                 
|Weighted average number of shares 
  outstanding: |  |                                      
|Basic                                             |  |                                      
|Diluted                                           |  |                                      
|                                                  |  |                                      
|                                                  |  | As of December 31,                   
|                                                  |  |                                      
|                                                  |  | 2002                                 
|                                                  |  |                                      
|                                                  |  | $                                    
|                                                  |  | (In thousands)                       
|Consolidated
  Balance Sheet Data:                |  |                                      
|Total assets                                      |  |                                      
|Total liabilities                                 |  |                                      
|Shareholders equity                              |  |                                      

B.Capitalization and Indebtedness

Not applicable.

3

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C.Reasons for the Offer and Use of Proceeds

Not applicable.

D.Risk Factors

Our
business, operating results and financial condition could be seriously harmed
due to any of the following risks. The trading price of our ordinary shares
could decline due to any of these risks.

We may experience
significant fluctuations in our annual and quarterly results, which makes it
difficult for investors to make reliable period-to-period comparisons and may
contribute to volatility in the market price for our ordinary shares and
AmericanDepositaryShares.

Our
quarterly and annual revenues, gross profits and results of operations have
fluctuated significantly in the past and we expect them to continue to
fluctuate significantly in the future. The following events may cause
fluctuations:

| |  | acquisitions and dispositions of companies and consolidation of our
  subsidiaries;                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                               
| |  | the
  size, time and recognition of revenue from significant contracts;                                                       
| |   |                                                                                                                               
| |  | timing
  of product releases;                                                                                                 
| |   |                                                                                                                               
| |  | foreign currencies value and
  timing of contracts;                                                                           
| |   |                                                                                                                               
| |  | delays
  in implementation;                                                                                                   
| |   |                                                                                                                               
| |  | changes
  in the proportion of service and license revenues;                                                                  
| |   |                                                                                                                               
| |  | price
  and product competition;                                                                                              
| |   |                                                                                                                               
| |  | increases
  in selling and marketing expenses, as well as other operating expenses;                                           
| |   |                                                                                                                               
| |  | technological
  changes;                                                                                                      
| |   |                                                                                                                               
| |  | adverse
  economic conditions and currency fluctuations;                                                                      
| |   |                                                                                                                               
| |  | the global business slow-down and the the recent sharp decline in capital
  spending in the information technology sector; and
| |   |                                                                                                                               
| |  | consolidation
  of our customers.                                                                                             

4

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A
substantial portion of our expenses, including most product development and
selling and marketing expenses, must be incurred in advance of when revenue is
generated. If our projected revenue does not meet our expectations, we are
likely to experience an even larger shortfall in our operating profit relative
to our expectations. The gross margins of our subsidiaries also will vary both
among themselves and over time. As a result, changes in the revenue mix from
these subsidiaries may affect quarterly operating results. In addition, we may
derive a significant portion of our net income from transactions which involve
equity issuances by our subsidiaries, the sale of equity securities of our
subsidiaries or the sale of proprietary software technology. These events do
not occur on a regular basis and their timing is
difficult to predict. As a result, we believe that period-to-period comparisons
of our historical results of operations are not necessarily meaningful and that
you should not rely on them as an indication for future performance. Also, it
is possible that our quarterly and annual results of operations may be below
the expectations of public market analysts and investors. If this happens, the
price of our ordinary shares will likely decrease.

We have been influenced by
the recent global economic changes, and, in particular, the decline in
information technology spending. If this trend continues, our business may be
harmed.

We have
been affected by global economic changes, in particular the recent sharp
decline in capital spending in the information technology, or IT, sector and
the overall business slow-down in North America and Europe, as well as in Israel. As a result of these global trends, in 2001, certain of our subsidiaries posted
restructuring charges of approximately $11 million, related primarily to
severance costs for employees, relocation expenses and expenses related to
closing of branches. In addition, in 2001, certain of our subsidiaries wrote off goodwill and certain investments
of $37 million in the aggregate, as a result of the effect of the global
slow-down. We cannot assure you that this trend will not continue.
Uncertainties in the North American and European market have influenced the purchasing
patterns of leading software developers who delayed their planned orders and
caused developers to reduce the amount of their planned license commitments.
These changes in purchasing patterns in the IT industry directly affected the
operating results of some of our subsidiaries which in turn affected our
consolidated operating results. If this trend continues, our business could be
seriously harmed.

If Formula
Vision fails to repay its debt to us under the debentures,our
business, financial condition and results of operations wouldbe materially adversely affected.

One
of our major assets is comprised of debentures issued to us by Formula Vision
Technologies (F.V.T.) Ltd., or Formula Vision, in
December 2001 and March 2002, in connection with the sale of private
companies held by us to Formula Vision. The aggregate amount of the debentures, as of
December 31, 2002 is $76 million. We evaluate, periodically, the quality of the indebtedness, the
financial strength of Formula Vision and its ability to meet the repayment
schedule of the loan. However, in the event that Formula Vision fails to repay the loan under
the terms of the debentures, our business, financial condition and results of
operations would be materially adversely affected.

5

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Our success depends upon
the development and maintenance of strategic alliances.

We
established relationships with strategic partners to provide international
marketing presence and name recognition, as well as the resources necessary to
implement many of our IT services. We are dependent upon
our strategic partners for the marketing and selling of certain of our
proprietary software solutions. Recently, due to
the global business slow-down, we have encountered difficulties in entering into new partnerships. If we cannot maintain
our existing relationships with these
partners or if we fail to establish
effective, long-term relationships with additional partners, or if our partners
enter into relationships with our competitors, our ability to market our
proprietary software solutions in international markets may be limited. If this
happens, our growth, if any, might be delayed or slowed-down.As a result our business, financial
condition, and results of operations could be seriously harmed.

If our products fail to compete successfully with those of our
competitors,we may have to reduce the prices of our products,
which in turn, may adversely affect our business.

We face competition, both in Israel
and internationally, from a variety of companies, including companies with
significantly greater resources than us who are likely to enjoy substantial
competitive advantages, including:

| |  | longer
  operating histories;                                               
| | - | ----------------------------------------------------------------------------
| |   |                                                                             
| |  | greater
  financial, technical, marketing and other resources;              
| |   |                                                                             
| |  | greater
  name recognition;                                                 
| |   |                                                                             
| |  | well-established
  relationships with our current and potential clients; and
| |   |                                                                             
| |  | a
  broader range of products and services.                                 

As
a result, they may be able to respond more quickly to new or emerging
technologies or changes in customer requirements. They may also benefit from
greater purchasing economies, offer more aggressive product and service pricing
or devote greater resources to the promotion of their products and services. In
addition, in the future, we may face further competition from new market
entrants and possible alliances between existing competitors. We also face
additional competition as we continue to penetrate international markets. As a
result, we cannot assure you that the products and solutions we offer will
compete successfully with those of our competitors. Furthermore, several
software development centers worldwide, like in India, offer software
development services at much lower prices than we do. Due to the intense
competition in the markets in which we operate, software products prices may
fluctuate significantly. As a result, we may have to reduce the prices of our
products, which in turn, may adversely affect our
business.

6

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If we fail to compete for
acquisitions and investments, we may be unable to grow.

As part of our strategy, we intend to pursue acquisitions of, and
investments in, other companies.  If and when
acquisition or investment opportunities occur, we expect to compete for these opportunities with other established and well-capitalized
entities.  We cannot assure you that we
will be able to locate potential acquisition or investment opportunities in
Israel or internationally on terms which are favorable to us. If we fail to
consummate further acquisitions or investments in the future our ability to
grow may be harmed.

Any future acquisitions of
companies or technologiesand
our restructuring processmay distract our management
and disrupt our business.

Our
strategy includes selective acquisitions of, and investments in, companies
offering products and services suitable for integration into our business. We
may acquire or make investments in complementary businesses, technologies,
services or products if appropriate opportunities arise. We may engage in
discussions and negotiations with companies about our acquiring or investing in those companies businesses,
products, services or technologies. We cannot assure you that we will be able
to identify future suitable acquisition or investment candidates, or if we do
identify suitable candidates, that we will be able to make the acquisitions or
investments on commercially acceptable terms or at all. In addition, we have begun in 1999, a restructuring process of the
Formula Group. This process involved acquisitions of interest in certain of our
subsidiaries and affiliates by other subsidiaries and integration of businesses
of certain subsidiaries within the businesses of other subsidiaries. If we
acquire or invest in another company, or if any of our
subsidiaries acquires control in another subsidiary or affiliate, the acquirer could
have difficulty assimilating that companys personnel, operations, technology
or products and service offerings into its own. The
key personnel of the acquired company may decide not to work for the acquirer. These difficulties could disrupt our ongoing
business, distract our management and employees, increase our expenses and
adversely affect our results of operations. We may incur indebtedness or issue
equity securities to pay for any future acquisitions.
The issuance of equity securities could be dilutive to our existing
shareholders.

We
intend to pursue acquisitions outside of Israel as part of our expansion
strategy.  These acquisitions, as well
as any future acquisitions of companies located outside of Israel, would pose
additional risks, including monitoring a management team from a great distance
and integrating a potentially different business culture.  Our failure to successfully integrate these
new businesses could harm our business. 
In addition, the investigation of acquisition candidates outside of
Israel involves higher costs than those associated with pursuing domestic
acquisitions, and we cannot assure you that these investigations will result in
transactions.

If we fail to raise capital
for our subsidiaries, we may be required to borrow money on unfavorable terms.

Our
business strategy involves raising capital for our subsidiaries through public
or private offerings. Our ability to raise capital for our subsidiaries depends
upon market and other conditions which are beyond our control. If we fail to
raise capital for our subsidiaries, it may hinder their growth. We may
therefore be required to seek alternative capital raising methods, including
borrowing money on terms which are not favorable to us. Due to difficulties we encountered in 2002 in raising capital for our
subsidiaries, we were required to borrow increased amouts from banks.  Our short-term bank debt increased to $87.8
million as of December 31, 2002 compared to $53.3 million as of Decemebr 31,
2001. Difficulties in raising capital on favorable terms, may materially and
adversely affect our business, operating results and financial condition.

7

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The
terms of our credit facilities contain a number of
restrictive covenants which, if breached, could result in acceleration of our
obligation to repay our debt.

Our
loan agreements contain a number of conditions and limitations on the way in
which we can operate our business, including limitations on our ability to
raise debt and sell or acquire assets. 
Our loan agreements also contain various covenants which require us to
maintain certain financial ratios related to shareholders equity and operating
results that are customary for companies of comparable size.  These limitations and covenants may force us
to pursue less than optimal business strategies or forego business arrangements
which could have been financially advantageous to us or our shareholders.

A
substantial portion of our assets is pledged to banks. If we are unable to repay the debt, the lenders could foreclose on our
assets that are subject to liens and sell our assets to satisfy the debt.

Marketing our products and
services in international markets may require increased expenses and greater
exposure to risks that we may not be able to successfully address.

We
intend to continue to focus our efforts on selling proprietary software
solutions in international markets. We expect to continue devoting significant
resources to these efforts. If we are unable to continue achieving market
acceptance for our solutions or otherwise continue to successfully penetrate
international markets, our business will be harmed. In 2001 and 2002, we received
approximately 43% and 45% of our total revenues from customers located outside of Israel. The
expansion of our existing operations and entry into additional international
markets will require significant management attention and financial resources.
We are subject to a number of risks customary for international operations,
including:

| |  | changing
  product and service requirements in response to the formation of economic and
  marketing unions, including the European Economic Union;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                    
| |  | economic
  or political changes in international markets;                                                                                          
| |   |                                                                                                                                                    
| |  | greater
  difficulty in accounts receivable collection and longer collection periods;                                                              
| |   |                                                                                                                                                    
| |  | unexpected
  changes in regulatory requirements;                                                                                                   
| |   |                                                                                                                                                    
| |  | difficulties
  and costs of staffing and managing foreign operations;                                                                              

8

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| |  | the
  uncertainty of protection for intellectual property rights in some countries;
| | - | -----------------------------------------------------------------------------------
| |   |                                                                                    
| |  | multiple
  and possibly overlapping tax structures; and                            
| |   |                                                                                    
| |  | currency
  and exchange rate fluctuations.                                         

If we grow and fail to address the strain on our resources
caused by our growth, we will be unable to effectively manage our business.

Our
business has grown in complexity over the past few years. The
growth of our business, as well as the corporate organizational changes, have
placed and will continue to place a strain on our personnel and resources. Our
ability to manage any future growth, if any, depends on our ability to continue
to implement and improve our operational, financial and management information
control and reporting systems on a timely basis and to expand, train, motivate
and manage our work force. If we do not manage our growth, if any, effectively,
our business, financial condition and results of operations could be materially
adversely affected.

If we are unable to attract,
train and retain qualified personnel, we may not be able to achieve our
objectives and our business could be harmed.

In
order to achieve our objectives, we may need to hire additional qualified
software, administrative, operational, sales and technical support personnel.
The process of attracting, training and
successfully integrating qualified personnel into our operations can be lengthy
and expensive. We may not be able to compete effectively for the personnel we
need. Our future success depends on our ability to absorb and retain senior
employees and to attract, motivate and retain highly qualified professional
employees. We expect to recruit most of our software and systems personnel in
Israel.  In addition, our operations are
dependent on the efforts of certain key management. Any loss of members of
senior management or key technical personnel, or any failure to attract or
retain highly qualified employees as needed, could materially adversely affect
our business.

If we are unable to accurately
predict and respond to market developments or demands, our business will be
adversely affected.

The
IT business is characterized by rapidly evolving technology and methodologies.
This makes it difficult to predict demand and market acceptance for our
services and products. In order to succeed, we need to adapt the products and
services we offer to technological developments and changes in customer
needs.  We cannot guarantee that we will
succeed in  enhancing our products and services or developing or acquiring new products and services that adequately address changing technologies and customer requirements. We
also cannot assure you that the products and services we offer will be accepted
by customers. If our products and services are not accepted by customers, our
future revenues and profitability will be adversely affected. Changes in
technologies, industry standards, the regulatory environment, customer
requirements and new product introductions by existing or future competitors
could render our existing products and services obsolete and unmarketable, or
require us to enhance our current products or develop new products. This may
require us to expend significant amounts of money, time and other resources to
meet the demand. This could strain our personnel and financial resources.

9

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If we are unable to retain
control in our subsidiaries, we would cease to consolidate them and our
operating results may fluctuate significantly.

We
currently hold a controlling interest in our subsidiaries through our direct
equity holdings. From time to time, if and when required, we enter into voting
agreements with other shareholders of the companies, in order to retain control
of our subsidiaries.  As a result of our
controlling interests in the subsidiaries, we consolidate their operating
results with ours. If we are unable to maintain a controlling interest in our
subsidiaries, as a result of equity issuances by subsidiaries, failure to reach
voting agreements or otherwise, we would cease to consolidate the operating
results of these subsidiaries. This may result in significant fluctuations of
our consolidated operating results.

We are exposed to
significant claims for damage caused to our customers information systems.

Some of
the products and services we provide involve key aspects of clients information systems.  These
systems are frequently critical to our clients operations. As a result, our
clients have a greater sensitivity to failures in these systems than do clients
of other software products generally. We have never been the subject of a
material damages claim related to our products and services. However, if a
clients system fails during or following the provision of products or services
by us, or if we fail to provide customers with proper support for our software
products, we are exposed to the risk of filing a claim for substantial damages
against us, regardless of our responsibility for the failure.  We have signed agreements with our customers
for the provision of various software services. When possible, we limit our
liability under our product and service contracts. We cannot guarantee that
these limitations of liability, if any, would be sufficient to protect us
against legal claims. We maintain general liability and professional liability
insurance coverage. However, we cannot assure you that our insurance coverage
will be sufficient to cover one or more large claims, or that the insurer will
not disclaim coverage as to any future claim. If we lose one or more, large
claims against us that exceed available insurance coverage, our business,
operating results and financial condition may be materially adversely affected.
In addition, the filing of legal
claims against us in connection with contract liability may cause us negative
publicity and damage to our reputation.

If third
parties assert claims of infringement against us, we may suffer substantial
costs and diversion of managements attention.

Substantial
litigation over intellectual property rights exists in the software industry.
We expect that software products may be increasingly subject to third-party
infringement claims as the functionality of products in different industry
segments overlaps. We believe that many industry participants have filed or
intend to file patent and trademark applications covering aspects of their
technology. Although our products and services have never been the subject of
an infringement proceeding, we cannot predict whether third parties will assert
claims of infringement against us. Any claims, with or without merit, could:

10

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| |  | be
  expensive and time-consuming to defend;                                                                             
| | - | -------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                          
| |  | divert
  managements attention and resources; or                                                                        
| |   |                                                                                                                          
| |  | require
  us to enter into royalty or licensing agreements to obtain the right to use a
  necessary product or component.

Royalty
or licensing agreements, if required, may not be available on acceptable terms,
if at all. A successful claim of product infringement against us and our
failure or inability to license the infringed or similar technology could have
a material adverse effect on our business, financial condition and results of
operations.

We may be unable to
adequately protect our proprietary rights, which may limit our ability to
compete effectively.

Our
success and ability to compete are substantially dependent upon our internally
developed technology. Substantially all of our intellectual property consists
of proprietary or confidential information that is not subject to patent or
similar protection. In general, we have relied on a combination of technical
leadership, trade secret, copyright and trademark law and nondisclosure
agreements to protect our proprietary know-how. Unauthorized third parties may
attempt to copy or obtain and use the technology protected by those rights. Any
infringement of our intellectual property could have a material adverse effect
on our business, financial condition and results of operations. Policing
unauthorized use of our products is difficult and costly, particularly in
countries where the laws may not protect our proprietary rights as fully as in
the United States.  We have placed, and
in the future may place, certain of our software in escrow. The software may,
under specified circumstances, be made available to our customers. We have
provided our software directly to customers. This may increase the likelihood
of misappropriation or other misuse of our software.

Two shareholders control a
significant portion of our ordinary shares and influence the outcome of matters
that require shareholder approval.

Dan
Goldstein, our chairman of the board, and his brother, Gad Goldstein, our
president and a member of our board, own, in the aggregate, 23.3% of our outstanding ordinary shares. 
As a result, Dan Goldstein and Gad Goldstein are able to influence
significantly the outcome of those matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. This share ownership may have the effect of delaying or preventing
a change in control. In addition, potential conflicts of interest may arise in
the event that we enter into agreements or transactions with these persons.
Although Israeli law imposes certain procedures (including shareholder
approval) for approval of certain related party transactions, we cannot assure
you that these procedures will eliminate the possible detrimental effects of
these conflicts of interest. If certain transactions are not approved in
accordance with required procedures under applicable Israeli law, these
transactions may be void or voidable.

11

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For
information about a binding memorandum entered in February 2002, between Dan
and Gad Goldstein and Iscal Holdings Ltd., see Item 7. Major shareholders and Related Party
Transactions.

The market price of our
ordinary shares and AmericanDepositaryShares may be volatile and you may not be able to resell your shares at or
above the price you paid, or at all.

The
stock market in general has recently experienced extreme price and volume
fluctuations. The market prices of securities of technology companies have been
extremely volatile, and have experienced fluctuations that have often been
unrelated or disproportionate to the operating performance of those companies.
These broad market fluctuations could adversely affect the market price of our
ordinary shares and American Depositary Shares, or ADSs. The market price of our
ordinary shares, for example, fluctuated between NIS 151.30 and NIS 48.11
during 2001. In this period, the market price of our ADSs fluctuated between
$38.00 and $11.25. In 2002, the market price of our ordinary shares fluctuated
between NIS 75.80 and NIS 40.12. In this period, the market price of our ADSs
fluctuated between $16.92 and $8.16. The market price of the ordinary shares and
the ADSs may fluctuate substantially due to a variety of factors, including:

| |  | any
  actual or anticipated fluctuations in our or our competitors quarterly
  revenues and operating results;
| | - | ---------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                
| |  | shortfalls in our operating results from levels
  forecast by securities analysts;                             
| |   |                                                                                                                
| |  | public
  announcements concerning us or our competitors;                                                       
| |   |                                                                                                                
| |  | the
  introduction or market acceptance of new service offerings by us or our
  competitors;                   
| |   |                                                                                                                
| |  | changes
  in product pricing policies by us or our competitors;                                                
| |   |                                                                                                                
| |  | changes
  in security analysts financial estimates;                                                           
| |   |                                                                                                                
| |  | changes
  in accounting principles;                                                                            
| |   |                                                                                                                
| |  | sales
  of our shares by existing shareholders; and                                                            
| |   |                                                                                                                
| |  | the
  loss of any of our key personnel.                                                                        

In
addition, economic, political and market conditions and military conflicts and
in particular, those specifically related to the State of Israel, may affect
the market price of our shares.

We may be
adversely affected if the market prices of our publicly traded subsidiaries and
affiliates decrease.

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A
significant portion of our assets is comprised of equity securities of publicly and
non-publicly traded companies. Our publicly traded subsidiaries are Crystal
Systems Solutions Ltd., Magic Software
Enterprises Ltd., Matrix IT Ltd. and Sapiens International
Corporation N.V. The stock prices of these publicly traded companies have been
extremely volatile, and have experienced fluctuations due to market conditions
and other factors which are beyond our control. Fluctuations in the market
price and valuations of our holdings in these companies may affect the value of
our assets.  In addition, the stock
prices of many technology companies fluctuate significantly for reasons that may
be unrelated to operating results. If the value of our assets decreases
significantly as a result of the above, our business, operating results and
financial condition, may be materially and adversely affected.

Future sales of our shares
in the public market or issuances of additional securities could cause the
market price for our ordinary shares and ADSs to fall.

As
of June 1, 2003, we had 10,000,000 ordinary shares outstanding, of which 490,662 were represented by ADSs. Of the 10,000,000 shares outstanding, 2,330,534 shares are held by
affiliates. In addition, we have reserved 564,500 ordinary shares for issuance under
our option plans and options granted to Shandol Ltd.  We intend to register for resale these reserved ordinary shares
upon issuance. If a large number of our ordinary shares are sold in a short
period, the price of our ordinary shares would likely decrease.

We do not intend to pay
dividends.

In
August 2001, Formula distributed to its shareholders a dividend in kind of
Formula Visions (formerly known as Mashov Computers Ltd.) shares
held by Formula, which was distributed in the form of cash to holders of our
ADRs. Other than this distribution, Formula has never declared or paid cash
dividends on its ordinary shares. We currently intend to retain any future earnings
to finance operations and to expand our business and, therefore, do not expect
to pay any cash dividends in the foreseeable future.

Our United States investors
could suffer adverse tax consequences if we are characterized as a passive
foreign investment company.

Although
we do not believe that we were a passive foreign investment company for U.S.
federal income tax purposes during 2002, we
cannot assure you that we will not be treated as a passive foreign investment
company in 2003 or in future years. We would be a passive
foreign investment company if 75% or more of our gross income in a taxable year
is passive income. We would also be a passive foreign investment company if at
least 50% of the average value, or possibly the adjusted bases of our assets in
particular circumstances, of our assets in a taxable year produce, or are held
for the production of, passive income. Passive income includes interest,
dividends, royalties, rents and annuities. If we are or become a passive
foreign investment company, many of you will be subject to adverse tax
consequences, including:

| |  | taxation
  at the highest ordinary income tax rates in effect during your holding period
  on some distributions on our ordinary shares or ADSs, and on gain from the
  sale or other disposition of our ordinary shares;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | paying
  interest on taxes allocable to prior periods; and                                             
| | - | -------------------------------------------------------------------------------------------------------
| |   |                                                                                                        
| |  | no
  increase in the tax basis of our ordinary shares to fair market value at the
  date of your death.

Our operating profit may decreaseif the rate of inflation in Israel exceeds the rate of devaluation of
the new Israeli shekel against the dollar.

Most
of our revenues from sale of our products
and services are in dollars or are linked to the dollar, while a substantial portion
of our expenses, principally salaries and related personnel expenses, are in
new Israeli shekels, or NIS. As a result, we are exposed to the risk that the
rate of inflation in Israel exceeds the rate of
devaluation of the NIS in relation to the dollar or that the timing of this
devaluation lags behind inflation in Israel. This would have the effect of
increasing the dollar cost of our operations and decreasing our
operating profit. In recent years, the rate of devaluation of the
NIS against the dollar has exceeded the rate of inflation, a reversal from
prior years.We cannot predict any future trends in the rate of inflation in
Israel or the rate of devaluation of the NIS against the dollar. If the dollar
cost of our operations in Israel increases, our operating profit will be
adversely affected. To date, we have not engaged in significant hedging
transactions. In the future, we may enter into currency hedging transactions to
decrease the risk of financial exposure from fluctuations in the exchange rate
of the dollar against the NIS. However, we cannot assure you that these
measures will adequately protect us from adverse effects arising from the
impact of inflation in Israel.

Risks Relating to Operations in
Israel

Political, economic, and
military conditions in Israel could negatively impact our business.

Our headquarters and principal
research and development facilities are located in Israel.  Although we generate approximately 45% of our
revenues from international markets, we are, nonetheless, directly influenced by the political, economic
and military conditions affecting Israel. Since September 2000, the violence between Israel and the Palestinians
has intensified and a material escalation in the violence has occurred. The
future of the peace efforts between Israel and its Arab neighbors is uncertain.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, operating results and financial condition. Furthermore, several
countries restrict business with Israeli companies. In addition, all nonexempt
male adult citizens of Israel, including some of our officers and employees,
are obligated to perform military reserve duty and are subject to being called
for active duty under emergency circumstances. While we have operated
effectively under these requirements since our incorporation, we cannot predict
the full impact of such conditions on us in the future, particularly if
emergency circumstances occur. If many of our employees are called for active
duty, our operations in Israel and our business may be adversely affected.

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

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Certain
of our subsidiaries received grants in the past and receive tax benefits under
Israeli government programs. To maintain the eligibility for these programs and
benefits, we must continue to meet specified conditions, including making
specified investments in fixed assets. Some of these programs restrict our
ability to manufacture particular products or transfer particular technology
outside of Israel. If we fail to comply with these conditions in the future, the
benefits received could be canceled and we could be required to refund any
payments previously received under these programs or pay increased taxes. If
these tax benefits and programs are terminated or reduced, we could pay
increased taxes in the future, which could decrease our profits.

It may be difficult to
serve process and enforce judgments against our directors and officers in
Israel.

We
are organized under the laws of the State of Israel. All of our executive
officers and directors are nonresidents of the United States, and a substantial
portion of our assets and the assets of these persons are located outside the
United States. Therefore, it may be difficult to enforce a judgment obtained in
the United States against us or any of those persons. It may also be difficult
to enforce civil liabilities under United States federal securities laws in
actions instituted in Israel.

ITEM 4.
INFORMATION ON THE COMPANY

A.History and Development of the Company

We
were incorporated in Israel on April 2, 1985. We maintain our principal
executive offices at 3 Hagalim Boulevard, Herzlia 46725, Israel and our
telephone number is 011-972-9-959-8800. Our agent in the United States is
Corporation Service Company and its address is 2711 Centerville Road, Suite 400, Wilmington,
DE 19808. In 1991, we completed our initial public offering of ordinary shares
on the Tel Aviv Stock Exchange, or the TASE. 
In October 1997, we completed the listing of our ADSs on the Nasdaq
National Market.

Since
our inception, we have acquired controlling interest
and have invested in companies which are engaged in the IT solutions and
services business. We, together with our subsidiaries and affiliates, are known
as the Formula Group.

We
have adopted a strategy of seeking opportunities to realize gains through the
selective sale of investments and minority interest in our subsidiaries and
affiliates, to outside investors. We believe that this strategy provides us
with capital to support the growth of our subsidiaries, as well as increasing
shareholder value. We expect to continue to develop and enhance the products,
services and solutions of our subsidiaries, and to continue to pursue
additional acquisitions of, or investments in, companies that provide IT
services and proprietary software solutions.

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Capital
Expenditures and Divestitures

Acquisitions by Subsidiaries

Acquisition
of Mainsoft by Crystal.During the
fourth quarter of 1999, Crystal Systems
Solutions Ltd., or Crystal, acquired a 52% controlling
interest in Mainsoft Corporation, for consideration of $10 million. During 2001, Crystal purchased
additional shares of Mainsoft in a series of transactions, for aggregate
consideration of approximately $6.7 million. In May 2003, Crystal exercised a warrant to purchase additional shares of Mainsoft for an aggregate
of $378,000.  As a result, Crystal
currently holds 57% of the
outstanding share capital of Mainsoft. Mainsoft is a
provider of cross-platform
software solutions.

Acquisitions
by ForSoft.In the fourth quarter of 1999, ForSoft Ltd. (currently Matrixs
subsidiary) acquired a 19.96% interest in F.T.S. - Formula Telecom Solutions
Ltd. (formerly IMCS International Management and Control Systems Ltd.), which
develops and markets an operating support system for Internet Protocol (IP) and
wireless and wireline telecommunication operators. During the second quarter of
1999, nextSource Inc., a former subsidiary of ForSoft in the United States,
acquired the IT consulting activities of Mentortech Inc. In April 2000, ForSoft
completed an acquisition of a 51% interest in Formula Travel Ltd. (formerly
Shaked Computer Systems (1982) Ltd.), which specializes in software solutions
for the travel industry. In addition, in April 2000, ForSoft acquired a 51.2%
interest in F.I.S. Software Ltd. (formerly A.H. Data Processing Systems Ltd.)
which specializes in insurance software systems. The aggregate consideration
ForSoft paid for these acquisitions was approximately $9.9 million.

Acquisitions
by Magic.During 1999 and 2000, Magic acquired certain Magic solutions providers,
which specialize in developing strategic Magic applications, in North America,
Germany, Holland, India and Israel. In addition, during the same period, Magic
acquired several of its distributors in Canada, Hungary, India, Thailand and Japan. The
aggregate consideration paid by Magic for these acquisitions amounted to
approximately $16.1 million in cash and an additional $3.0 million in Magic
shares.  Of this amount, $4.3 million
was paid for the acquisition of I.T.M. Engineering Systems Ltd., an Israeli
Magic solutions provider, $2.6 million was paid for the acquisition of Sintec Call Centers Ltd.,
an Israeli Magic solutions provider,and $6.6 million was paid for the acquisition of Magics distributor in
Japan. In the third
quarter of 2000, Magic acquired the entire share capital of CorTech Consulting
Group Inc., a U.S. company engaged in IT services and e-business solutions, for
consideration of $6.8 million.

Investments by
Formula

In
March 2001, we completed a $10 million investment in convertible preferred
shares of Sapiens International Corporation N.V., or Sapiens, a publicly held
company traded on the Nasdaq National Market, representing approximately 24% of
the outstanding share capital of Sapiens on an as converted basis. Under the
agreement with Sapiens, we were also granted an option to invest up to an additional $10 million on the
same terms as our initial investment, subject to certain adjustments. In December 2002, we
exercised the option and invested $10 million in Sapiens in exchange for a
discount conversion price of $0.83 per common share. As part of the
transaction, we converted all of our preferred shares into common shares at the
discount price. During 2002 and 2003, we purchased an additional 3,385,600
shares of Sapiens in the open market for aggregate consideration of $3.4
million. As a result, we currently hold 50% of Sapiens outstanding share
capital.

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In
September 2001, we purchased 37.3% of the outstanding share capital of Liraz
Systems Ltd., or Liraz, an international software and services company publicly
traded on the TASE. The aggregate consideration we paid for this transaction
was $5.6 million. In October 2001, we published a special public tender offer
pursuant to which we purchased an additional 6.0% of the outstanding share
capital of Liraz for aggregate consideration of $589,000. Following these
transactions, we held 50.7% of Lirazs
outstanding share capital.

Agreements with Shamrock, FIMI and IDB

In
September 1999, we entered into an agreement with Shamrock Holdings of
California Inc., or Shamrock, pursuant to which we granted to Shamrock an
option, until March 2000, to invest in companies in which we hold, directly or
indirectly, at least 25% of the outstanding equity. In addition, we granted to
Shamrock an option to exchange the securities it purchased under the above
option for Formulas ordinary shares, exercisable within a 45 day period, beginning
upon the elapse of 27 months from the date of purchase of the securities or
from the date
of the agreement, such period to vary based on the securities involved.  The exchange ratio was to be based upon
the original price paid for the securities subject to the exchange and the
market price on the TASE of Formulas ordinary shares at the time of the
exchange, subject to certain requisite adjustments. Notwithstanding the above,
we had the discretion to purchase the securities to be exchanged for cash
instead of exchanging them for Formulas ordinary shares.

In
October 1999, we entered into agreements with the First Israel Mezzanine
Investors Ltd., or FIMI, and Israel Discount Bank, or IDB, each on the same
terms in all material respects as the agreement with Shamrock.

In
September 1999, an extraordinary general meeting of Formulas shareholders
approved the issuance to Shandol Ltd., one of our former subsidiaries and
currently a subsidiary of Formula Vision, of options to purchase 1 million
ordinary shares, in order to ensure the availability of ordinary shares, if the
above exchange options are exercised. For information regarding the terms of the
options, see Item 6.E. Share
Ownership.

In
August 2000, an extraordinary general meeting of shareholders approved the
grant of additional options to Shandol to purchase 500,000 ordinary shares, to
ensure the availibility of ordinary shares for different purposes while
conducting various transactions, including the availability of ordinary shares,
if the above exchange options are exercised. For information
regarding the terms of the options, see Item 6.E. Share
Ownership.

In
November 2001 and January 2002, Shamrock exercised the exchange option with respect to its investment in
certain companies of the Formula Group.
In consideration for the securities held by Shamrock, Shandol transferred to
Shamrock 1,000,000 of our ordinary shares and an aggregate of approximately
$1.6 million. In January 2002, Shamrock sold these shares to Dan and Gad
Goldstein. See Item 7. Major Shareholders
and Related Party Transactions.

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In April 2002, FIMI and IDB exercised the exchange option with respect
to their investment in certain companies of the Formula Group in an aggregate amount of
$4.7 million (including accrued interest). In connection therewith, we entered
into an agreement with FIMI and IDB, pursuant to which we exchanged the amount
of $4.7 million with a convertible debenture issued by Formula. The convertible debenture may be
converted into Formulas ordinary shares during a 4-year period. The conversion
price shall be $19 per share, subject to adjustments, but in no event less than
a minimum price agreed to between the
parties. The principal of the convertible debenture shall be payable in
semi-annual installments beginning 30 months from the date of issuance of the
debenture, unless FIMI and IDB request to postpone this date until the end of
the 4-year period. The principal bears interest at an annual rate of 5% to be
paid quarterly.

In
connection with the exercise of the option by Shamrock, we agreed to extend the
term of the option to exchange the securities held by Shamrock in ESI  Expert Systems Industries
Ltd., or ESI, and Sintec Advanced Technologies Ltd., or Sintec, for Formulas
ordinary shares. We also agreed to extend the term of the
option granted to FIMI and IDB to exchange the securities held by them in ESI, Transtech Control Ltd. and
Sintec, for Formulas ordinary shares. The options granted to Shamrock, FIMI and
IDB with respect to Sintecs shares have been replaced in November 2002 by
options relating to Matrix shares, as described under Restructuring of Our
Corporate Structure - Sale of New Applicom, Sintec and Sivan to Matrix, below.

As
part of the agreement between us and Formula Vision described below, we
transferred to Formula Vision our rights and obligations with respect to the
transferred companies under our agreements with each of Shamrock, FIMI and IDB. These companies
are ESI and Transtech. If Shamrock, FIMI or IDB exercises the option to
exchange these securities in the transferred companies for Formulas shares and
to the extent exercised, Formula Vision assumed all the rights and undertakings
in connection with the exercise of the option.

Restructuring
of Our Corporate Structure

In
1999, we commenced a restructuring process, which continued through 2002, to simplify our corporate structure
and business environment by combining some smaller subsidiaries to create a
smaller number of larger subsidiaries with greater operating efficiencies. Prior to commencement of the restructuring process, we held, directly
and through holding companies, subsidiaries comprised of publicly traded
companies, as well as early-stage privately-held companies.  After completion of the restructuring
process, we hold a direct interest in five later-stage
publicly-traded companies with independent active management. The purpose of
the restructuring process was to enable us to focus on later-stage companies,
in which our management would be able to
contribute a high added value, which will enable
us to maximize these companies potential. As part of this process, we took the
following steps:

In November 2000, we completed a
public tender offer of the ordinary shares of ForSoft Ltd., or ForSoft, pursuant to which we purchased all
of the ordinary shares of ForSoft held by the public for an aggregate of $38.0
million. Following the completion of the tender offer, ForSofts shares ceased to be
traded on the Nasdaq National Market.

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In
December 2000 and July 2001, we acquired convertible notes of Thoughtbubble
Productions Inc. for aggregate consideration of $4.35 million. In December
2001, we transferred to New Applicom Ltd., our
rights under the convertible notes of Thoughtbubble.

In
January 2001, we completed a public tender offer to purchase the ordinary
shares of Formula Vision held by the public. The aggregate consideration we
paid for the tendered shares was $11.6 million. Following this tender offer we
increased our holdings in Formula Vision to 74.5% of Formula Visions
outstanding share capital.

In
January 2001, Formula Vision (at that time, a
subsidiary of Formula) completed a purchase of 84.6% of the outstanding
share capital of Sivan Training and Systems Ltd. (formerly Makor Haformaika
Ltd.), or Sivan, a public company traded on the TASE, for
aggregate consideration of $13.6 million. As part of this transaction, Formula
Vision sold its entire share ownership in Mentortech Inc.,
representing approximately 99.5% of the share capital of Mentortech, to Sivan, for aggregate consideration of $12 million.

In
March 2001, Formula Vision distributed to its shareholders a dividend in kind
of its major assets, consisting of securities of Magic Software Enterprises Ltd., or Magic,
and Sivan. As a result, we received 6,700,315 ordinary shares of Magic, representing a
22.7% interest in Magic, and 8,144,604 ordinary shares of Sivan, representing a
63.0% interest in Sivan.

During
May until July 2001, we purchased from ForSoft and from one of its subsidiaries
their entire interest in several providers of software solutions for niche
markets, Forsoft Export (1999) Ltd., nextSource Inc. (formerly known as Forsoft
Inc.), Formula Retail Solutions Ltd., F.T.S. Formula Telecom Solutions Ltd.,
F.I.S. Software Ltd. and N.I.P. Nikuv International Projects Ltd. We paid an
aggregate of $18.3 million for these
acquisitions.

In July
2001, Formula announced a distribution of a dividend in kind to its
shareholders, consisting of Formula Visions shares held by Formula, and
representing approximately 72% of the outstanding share capital of Formula
Vision. The distribution of Formula Visions shares was completed in August
2001.

In
July 2001, Formula granted to Formula Vision an option to purchase our
interests in certain privately-held companies that develop products and
services aimed primarily for sale in international markets. The spin-off of
Formula Visions shares and the grant of the option were aimed to simplify the
corporate structure of the Formula Group and
to enable Formulas shareholders to separately hold interests in
publicly-traded companies through the holding of Formula shares, and in
smaller, privately-held companies, through the holding of Formula Visions
shares.

Transactions with Formula Vision.In
November 2001, Formula Vision exercised the option granted by Formula in July
2001, to acquire the entire interest held by us in privately held companies.
Under this transaction, we transferred to Formula Vision our entire interest,
including related obligations, in the following companies: 50.1% interest in
F.I.S. Software Ltd., 78.0% interest in Formula Retail Solutions Ltd., 50.1%
interest in F.T.S.  Formula Telecom Solutions Ltd., 72.0% interest in N.I.P.
Nikuv International Projects Ltd., 36.0% interest in Enformia Software Ltd.,
1.0% interest in Babylon Ltd., 0.85% interest in Demantra Ltd., 100.0% interest
in Forsoft Export (1999) Ltd., 80.3% interest in Airport Systems Technologies
Ltd., 68.0% interest in Transtech Control Ltd., 50.0% interest in ESI  Expert
Systems Industries Ltd., 34.0% interest in GeoSim Systems Ltd., 100.0% interest
in Shandol Ltd., our interest in the first and second venture capital funds,
Formula Ventures and our 100.0% interest in the funds
management company, Formula Ventures Ltd. The aggregate consideration paid by
Formula Vision was $58.9 million, reflecting the book value of the transferred
companies as of June 30, 2001, plus amounts invested by Formula prior to the
closing of the transaction.

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Under
the agreement with Formula Vision, Formula Vision issued to us, in December
2001, a series of debentures of $58.9 million in the aggregate, linked to the
CPI and bearing interest at an annual rate of 5%.
Formula Vision is required to repay the debentures in five annual installments,
subject to adjustments based on the income of Formula Vision during each of the
five years.  The payments on account of the
debentures plus linkage differences will be no less than 30% and no more than
70% of the income arising from the sale of the transferred companies in any
calendar year. Income for these purposes is defined as the amounts received
by Formula Vision, if any, in consideration for a sale of any of the
transferred companies in any given calendar year, less selling expenses, as
well as amounts received by Formula Vision from distributions to be made by any
of the transferred companies in any given calendar year. Payments to be made on
account of the debentures, in any given calendar year, shall be no less than
20% of the annual profit as recorded in the financial statements of Formula
Vision. Any amounts which remain outstanding will be payable at the end of the
5-year period. In connection with this transaction, we lent to Formula Vision
on March 31, 2002 an additional $19.4 million and Formula Vision issued to us
an additional series of debentures for this amount, with similar terms as the
debentures issued in December 2001.

In
the event that during the term of the indebtedness, Formula Vision issues to a
third party convertible debentures, Formula is entitled to convert the
indebtedness into the same class of convertible debentures, having the same
terms of the convertible debentures issued to the third party.

In
addition, Formula is entitled, during a 3-year period, to repurchase from
Formula Vision up to 10% of the shares sold in each of the transferred
companies, at the same purchase price set out in the agreement between the
parties.

As
part of the agreement between us and Formula Vision, we also transferred to
Formula Vision our rights and obligations with respect to the transferred companies
under our agreements with each of Shamrock, FIMI and IDB. These companies
are ESI and Transtech. If either of Shamrock, FIMI or IDB exercises the option
to exchange the securities in these transferred companies for Formulas shares
and to the extent exercised, Formula Vision assumed all the rights and
undertakings in connection with the exercise of the option.

In
December 2001, we completed a purchase of 85% of the outstanding share capital
of Matrix IT Ltd., or Matrix, a company publicly traded on the TASE. As
consideration, Formula transferred to Matrix, Formulas entire share ownership in ForSoft. As part of this
transaction, Matrixs principal shareholders acquired substantially all of the
assets of Matrix, such that upon the closing of the transaction, Matrixs
assets consisted solely of cash and cash equivalents in the amount of $8
million. As a result, following the closing of the transaction, the activities
of ForSoft became the entire operations of Matrix. In connection with this transaction,
Formula agreed to guarantee a loan in the amount of $8.34 million extended by a
commercial bank to the principal shareholders of Matrix. In addition, the
borrowers pledged to the bank the shares they hold in Matrix. During the
three-year loan period, the borrowers are prohibited from selling Matrixs
shares to their affiliated parties. Formula undertook to pay to the bank at the
termination of the loan period, the difference, if any, between the loan amount
and the sale proceeds of the pledged Matrix shares.

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Sale of Liraz to Crystal.In November 2002, we sold to Crystal,in a share exchange
transaction, 3,912,999 ordinary shares of Liraz, representing our entire 57.9% interest in
Liraz. In
consideration, Crystal issued to us 2,343,113 Crystal ordinary
shares.
The number of shares issued to us by Crystal was calculated based on an exchange ratio of 1:1.67, such that Crystal issued to us
one Crystal share for every 1.67 shares of Liraz. As part of this transaction, Crystal purchased from certain additional
shareholders of Liraz an aggregate of 1,896,303 Liraz ordinary shares
for Crystal shares, based on the same exchange ratio as in the transaction
between Crystal and us. As a result, Crystal owned approximately 86.0% of the
outstanding share capital of Liraz. Following this transaction, Crystal purchased from the public all the remaining outstanding shares of Liraz through two public tender offerings. In March 2003, Liraz shares ceased to be traded on the TASE.

Sale
of New Applicom, Sintec and Sivan to Matrix.In November 2002, we completed a sale to Matrix IT Ltd. of our entire shareholdings in New Applicom, Sintec and Sivan, publicly-held
companies traded on the TASE, for aggregate consideration of $29.7 million. In
this transaction, we sold to Matrix 3,870,498 shares of New Applicom,
representing approximately 60.8% of New Applicoms outstanding share capital,
for an aggregate of $16.9 million, 15,330,309 shares of Sintec, representing
Sintecs entire outstanding share capital, for an aggregate of $12.5 million,
and 8,930,100 shares of Sivan, representing approximately 69.0% of Sivans
outstanding share capital, for an aggregate of $346,000. The shares we sold to
Matrix were comprised of (i) shares previously held by us; (ii) shares that we
purchased from third parties in October 2002; and (iii) shares that we bought
in tender offers we published in October 2002. The price per share paid to us
by Matrix for each of New Applicoms, Sintecs and Sivans shares previously held
by us and those we purchased from third parties was equal to the equity per
share of each of the companies.

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The
shares that we purchased from third parties in October 2002 and sold to Matrix
were bought in the following transactions:

(i)
552,789 shares of New Applicom that we purchased in exchange for 1,436,096
shares of Matrix. As part of this transaction, we granted to the selling
shareholders a put option to sell to us Matrix shares during the fourth
quarter of 2003 for cash at an exercise price based on the cost of New
Applicoms sold shares;

(ii) an aggregate of 4,200,000 shares of Sintec that we purchased in exchange
for 2,180,780 shares of Matrix. As part of this transaction, we granted to the
selling shareholders a put option to sell to us Matrix shares during the
fourth quarter of 2003 and the first quarter of 2004 at a cash price based on
the cost of Sintecs sold shares. Such option was previously granted to the
selling shareholders in 1999 with respect to Sintecs sold shares; and

(iii) an aggregate of 1,100,000 shares of Sintec that we purchased in exchange
for 608,080 shares of Matrix. As part of this transaction, we granted to the
selling shareholders a put option to sell to us Matrix shares during November
2003 for cash.

As part of the sale transaction, we published in October 2002, cash
tender offers for the shares of New Applicom, Sintec and Sivan not owned by us.
As a result, Sintecs shares ceased to be traded on the TASE. Following the
closing of the tender offers, we sold to Matrix the shares that we purchased in
the tender offers for the same purchase price we paid for the tendered shares;
$3.7 for each New Applicom share, $0.8 for each Sintec share and $0.15 for each Sivan share. In November 2002, Matrix published tender offers for
the shares of New Applicom and Sivan held by the public.
In June 2003, Matrix published an additional tender offer to purchase the shares of New Applicom, in
which Matrix purchased the remaining outstanding share capital of New Applicom held by the public.
Matrix currently holds the entire share capital of New Applicom and approximately 90%
interest in Sivan.

B.Business Overview

General

We
are a global information technology, or IT, solutions and services company
based in Israel.  We are principally
engaged in providing software consulting services, developing proprietary
software products and providing computer-based business solutions.  We currently deliver our solutions in over
50 countries worldwide to clients with complex IT services needs, including a
number of Fortune 1000 companies. We operate in two principal business areas,
IT services and proprietary software solutions. Following is a description of
our business areas:

IT
Services

We
design and implement IT solutions which improve the productivity of our
customers existing IT assets. In delivering our IT services, we at times use
proprietary software developed by members of the Formula Group. We provide our IT services across the full system development life
cycle, including definition of business requirements, system analysis,
technical specifications, coding, testing, training, implementation and
maintenance.  We perform our projects
on-site or at our own facilities.

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Proprietary Software Solutions

We
design, develop and market proprietary software solutions for sale in selected
niche markets worldwide.  We regularly
seek opportunities to invest in or acquire companies with attractive
proprietary software solutions under development which we believe to have
market potential. The majority of our investments and acquisitions in this area
have been in companies with products beyond the prototype stage.  In addition, we selectively invest in
companies with proven technology where we believe we can leverage our
experience to enhance product positioning and increase market penetration.  We provide our management and technical
expertise, marketing experience and financial resources to help bring these
products to market. We also assist the members of our group to form teaming
agreements with strategic partners to develop a presence in international
markets.

The Formula Group

Formula is the parent company of
subsidiaries and affiliates, referred to collectively as the Formula Group. We currently hold a
controlling interest in our subsidiaries through our equity holdings. From time
to time, if and when required, we enter into voting agreements with other
shareholders of the companies, in order to retain control of our subsidiaries.
We appoint a majority of the
boards of directors of our subsidiaries through our equity holdings and, if
required, through voting agreements with shareholders who are often members of
our management or of our subsidiaries management.   We provide our subsidiaries with our management, technical
expertise and marketing experience to help them to penetrate their respective
markets.

We
direct the overall strategy of our subsidiaries.  While the subsidiaries each have independent management, we
monitor the growth of our subsidiaries through the active involvement in the
following matters:

| |  | strategic
  planning;                                         
| | - | --------------------------------------------------------------
| |   |                                                               
| |  | marketing
  policies;                                         
| |   |                                                               
| |  | senior
  management recruitment;                              
| |   |                                                               
| |  | investment
  and budget policy;                               
| |   |                                                               
| |  | financing
  policies; and                                     
| |   |                                                               
| |  | overall
  ongoing monitoring of each subsidiarys performance.

We
promote the synergy and cooperation among our subsidiaries by encouraging the
following:

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| |  | transfer of technology and expertise;             
| | - | --------------------------------------------------
| |   |                                                   
| |  | leveling of human resources demand;               
| |   |                                                   
| |  | combining skills for specific projects;           
| |   |                                                   
| |  | formation of critical mass for large projects; and
| |   |                                                   
| |  | cross-selling to groups customer base.           

We,
through our subsidiaries, offer a wide range of integrated IT solutions and
services, and design, develop and market proprietary software solutions for
sale in selected niche markets, both in Israel and worldwide.

Our
Subsidiaries

Matrix

Matrix IT Ltd. is the largest IT company operating in Israel,
consolidating subsidiaries of leading reputable software houses, including
Matrix Systems Ltd., New Applicom, Sivan, John Bryce and Sintec.

Matrix
provides advanced IT services to approximately 500 large corporations and
organizations in Israel. Matrix offerings to the local IT market in Israel
include:

Software
development services, including:

| |  | Overall
  planning, analysis, design, development, maintenance and integration of
  large-scale IT projects;                                                                                                                                                                          |  
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -
| |   |                                                                                                                                                                                                                                                                                       |  
| |  | Development
  of customized information systems and turnkey solutions, addressing specific
  customers needs. Matrix performs renovation of customers legacy systems
  based on new technologies available in the market and new concepts arising
  from changing customers needs. |  
| |   |                                                                                                                                                                                                                                                                                       |  
| |  | Application
  development and systems integration of Matrix systems and of third parties systems
  in accordance with customers needs. These include:                                                                                                                              |  
| |   |                                                                                                                                                                                                                                                                                       |  
| |   |                                                                                                                                                                                                                                                                                       | -
| |   |                                                                                                                                                                                                                                                                                       |  

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| |   | In
  implementing ERP projects, Matrix mainly uses proprietary software products
  developed by companies like Oracle, Baan (Invensys) and System Software
  Associates, Inc. or proprietary software developed by Matrix itself (eTafnit
  or Tafnit).                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |   | In
  implementing SCM projects, Matrix mainly uses proprietary software products
  developed by companies like Manugistics Inc., or proprietary software
  developed by Matrix itself (Warehouse Management System).                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | CRM systems
   Matrix is the Israeli market leader in implementing and integrating
  customer relationship management (CRM) software solutions. In implementing
  CRM projects, Matrix mainly uses proprietary software products developed by
  PeopleSoft Inc. (formerly Vantive Inc.).                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | Customer
  care and billing (CC&B) systems  Matrix implements CC&B systems
  based on systems developed by third parties.                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | Implementing
  database, data warehouse, data mining and business intelligence solutions of
  a wide variety of software vendors. Matrix is a local distributor in Israel
  for IBM data management software, a leading solution of relational database
  management systems, for Unix and Windows environments. In connection with the
  sale of IBM data management products, Matrix provides extensive
  implementation, software development, consulting, training and support
  services.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | Dynamic
  Internet systems development and maintenance  Matrix provides development,
  setup and ongoing maintenance services for dynamic Internet web sites for governmental
  authorities, industrial enterprises and commercial business enterprises, such
  as banks.                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Migration of legacy systems -
  Matrix provides migration services for legacy systems, adapting them to new
  technologies, like Internet and e-commerce environments. Matrix performs downsizing of
  legacy information systems to Unix and Windows NT open environments, while
  adapting computerized processes to the customers business strategy.                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Consulting and professional services - in all areas of IT Services, including systems analysis and design,
  software development, testing, training and assimilation of software systems
  and software products, infrastructures, systems management and maintenance.                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | Outsourcing -Matrix is
  engaged in outsourcing contracts for performance of a defined portion of
  applications development, maintenance, operations and management of software
  and computer facilities for customers systems, which enable customers to
  focus on their core business.                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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SoftwareProductsDistribution

Matrix
is one of Israels largest distributors of software products. Matrix markets
and supports a large number of international software products designed to
enable large organizations to efficiently develop, operate and manage
large-scale software systems. Among these software products are:

| |  | Systems
  management software of BMC Software;                             
| | - | ---------------------------------------------------------------------------
| |  | Development
  and testing environments of Compuware Corp;                  
| |  | Content
  management and personalization software of Vignette Corp;        
| |  | Business
  Intelligence software of Business Objects SA;                   
| |  | Messaging
  and application integration software of IONA Technologies plc.;
| |  | CRM software
  of PeopleSoft Inc.;                                         
| |  | Enterprise
  application integration software of webMethods Inc.;          
| |  | Extract, transform
  and load software of Ascential Software;              
| |  | Knowledge
  management software of Verity Inc.; and                        
| |  | Data
  management software of IBM.                                         

Matrix
distributes these software products in Israel and provides maintenance, support
and training services for these products. In many cases Matrix also integrates
these software products into its own application development projects,
resulting in comprehensive software solutions.

ComputerHardware and ITInfrastructure

In
delivering integrated business solutions, Matrix markets and sells the
following:

| |  | IBM
  Mainframe systems and storage devices;                                                                                                      
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Computer
  hardware and IT infrastructure for UNIX/NT servers (mainly HP and IBM),
  personal computers, peripheral devices, LAN, WAN and storage;
| |  | Active and
  passive communication infrastructure;                                                                                                
| |  | Integrated
  business solutions based on the Unix platform of HP and IBM;                                                                         

In
many instances, Matrix markets the computer hardware as part of an integrated
hardware and software solution, under which Matrix designs the system and
provides consulting services and ongoing maintenance. In addition, Matrix
offers its computer-based business solutions as complete outsourcing projects,
in which Matrix installs the system and is solely responsible for its
operation.

ComputerTraining

Matrix
is the market leader of computer training in Israel, providing over 500 various
courses to the general population and hi-tech professionals in Israel. Matrix
has several training centers in Israel, including in Tel-Aviv and Jerusalem.Matrix also operates abroad via
its
subsidiaries in Germany, Turkey and Hungary. Matrix offers a wide array of
courses, from basics of computers and programming to the most advanced topics
for IT professionals. This unique position enables Matrix to provide its large
corporate and government clients with the wide spectrum of IT training coverage
they require.

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Matrix
is an official training center for software products distributed by Microsoft, Oracle, Sun Microsystems, Cisco, Checkpoint Systems Inc., Computer
Associates, RedHat Inc., Adobe Systems Inc., Autodesk  Inc., Interwise and Borland, as well as PeopleSoft CRM and
Business Objects. Special courses have been developed for students requiring
vocational training and end-users wishing to master the various applications
which have become part of every day life.

e-Learning - Matrix has established a virtual campus, through an innovative
Internet studying environment that enables people to study at home or at work,
needing nothing but their personal computer and a regular Internet connection.
The platform combines interactive, synchronous teaching (real-time teaching), with
asynchronous teaching (individual independent studying based on recorded
lessons).

Markets

Matrixs
turnkey solutions, professional services, software products, hardware solutions
and training services are provided primarily for the leading organizations and
enterprises in Israel, based on various computer environments (like Mainframe, Unix,
Linux and Windows operating systems). 
In delivering these solutions, Matrix has developed significant
expertise serving clients in the following vertical markets:

| |  | Banking and finance - Matrix
  is an Israeli leader of the banking computerization market. Matrix offers
  integrated systems and applications for the banking industry, as well as
  software products, hardware solutions and training services, including
  commercial banking, mortgages, credit card companies and insurance agencies.
  Matrixs systems and applications are aimed at improving the operating
  efficiency of banking entities.                                                                                                      
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Public and Defense sector Matrix
  is one of the largest suppliers of solutions and services to the public
  sector which includes governmental ministries, the Knesset (Israeli
  parliament), national authorities, IDF and defense organizations. Matrix has
  a long-standing reputation for the execution of successful projects for the
  public sector as well as software products and training services.
  Additionally, Matrix provides services and solutions to the national
  infrastructures sector, energy, transport and the health system.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Telecommunications - Matrix
  offers customer relationship management systems, billing and collection
  systems, dedicated systems and services for telecommunications companies as
  well as software products, hardware solutions and training services.                                                                                                                                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | Commerce and industry sector -
  Matrix is a market leader in computerization for industries like car imports,
  construction and real estate, import and marketing of consumer goods,
  financing and leasing. Matrix executes integration projects for the
  implementation of ERP and CRM solutions, as well as software products,
  hardware solutions and training services.                                                                                                                                                                           

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Customers

Matrixs
customers include Israel Electric Company, Social Security, Israeli Defence
Force, Mekorot, Amidar,
governmental ministries and the Knesset (the Israeli parliament), commercial
banks (such
as Bank Leumi, Bank Hapoalim, The First International Bank and
Discount Bank), loan and mortgage banks (such as Maritime Bank, Bank Tefahot, Jerusalem
Bank, Igud Bank), telecommunications services providers (Bezeq, Bezeq
International and Barak), credit card companies (Visa, Isracard and Leumicard), leasing companies,
insurance companies (such as Harel
Hamishmar, Fenix, Clal,
Migdal), security
agencies, cellular
operators (Cellcom, Orange and Pelephone), satellite operators (YES), hi-tech
companies (ECI Telecom, Motorola) and media and publishing (Yediot Ahronot).

Magic

Magic Software Enterprises Ltd.is a leading provider of rapid
application development and deployment, enterprise application integration
technology and business solutions to corporations worldwide. Magics customers include thousands of independent software
vendors, system
integrators and corporations worldwide, supported by an extensive global
services organization. In addition to
technology, Magic also provides
its customers with consulting and professional services, and training..

Magic Core
Technology

Magic develops, markets and supports its software development and
deployment technology, eDeveloper. eDeveloper enables enterprises to accelerate
the process of building and deploying business software applications that can
be rapidly customized to meet current and future needs. eDeveloper, is based on
a revolutionary programming paradigm that eliminates wasted time and repetition
from the development cycle. eDeveloper is built around the concept of a smart
application engine that provides unique platform and database independence for
both Web and client/server deployment. eDeveloper integrates with standard computing architectures,
including J2EE and .NET and can act as
a bridge between these and other
diverse standards like XML and Web services.

eDeveloper significantly reduces
maintenance time and costs. Magics
research and development department continues to develop and
integrate new technologies into eDeveloper to ensure that customers receive a
state-of-the-art, efficient, development environment.

In addition, Magic provides customers with an extensive
framework for business integration, called the iBOLT Integration Suite, which includes eDeveloper core technology
as the primary development component. Magic development and integration
products empower customers to significantly improve their business performance and return on investments by enabling the affordable and rapid
integration of diverse applications, systems and databases to streamline
business processes.

The iBOLT Integration Suite enables
companies to utilize their existing business processes and legacy investments,
and rapidly customize solutions to meet specific enterprise needs.

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The
iBOLT Integration Suite is an enterprise application integration environment
with a strong business rules engine underpinning that is designed to enable
mid-sized organizations to affordably and quickly integrate critical business
processes.  It is a multi-tiered
environment baed on the multi-tiered deployment environment of eDeveloper.  The solution consists of a user interface
layer, a business process layer, an application connectivity layer and a
messaging layer.  It is a component-based
environment, where developers define and combine large and small components to
automate business processes.

Magics technologies adhere to open
standards and deliver high levels of portability and scalability,  crucial for todays dynamic business environmentand operate as a uniform application paradigm
independent of architecture (Internet, Client/Server, Mobile, LAN/WAN), operating systems (Windows, Linux, UNIX, iSeries),
database (DB2, Oracle, Informix, MS SQLServer, Pervasive, etc.), or platform
(.NET, J2EE).

Enabling Business

Magic technology and solutions are particularly in demand when time-to-market is
critical, budgets are tight, integration with multiple platforms,
databases or existing systems and business processes is required, or a high degree of application
maintenance and customization is anticipated.

Magic
addresses customers critical business need to respond quickly to changing
market demands. Magic creates, deploys and maintains robust business solutions
with unrivaled productivity and time to results.  Magics unique development methodology enables developers to
create better solutions in less time and with fewer resources.

A
wide variety of developers use Magics products,
including in-house corporate development teams and software houses. Large and medium sized system
integrators use Magics products in large customized system integration projects and for
developing industry-specific vertical applications.

Professional
Services

Magic offers customers, together with
Magics partners, application integration and development
services that assist customers to maximize their development investments. These services include project
management, technical support, installation services, application development,
integration, consulting and training. All projects are subject to a rigorous
standard for project management and quality assurance.

Strategic Alliances

Magic forms strategic alliances to help deliver complete solutions to customers. These solutions encompass application
integration, development, vertical domain expertise and hardware
implementation. Magic maintains strategic alliances with leading vendors, like IBM and Software AG. In addition, Magic formed alliances with system integrators, software and hardware vendors and consulting
organizations. These partnerships enable Magic to better serve its customers
worldwide.

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Vertical Solutions

Magic develops, markets and supports vertical applications, including long-term care, criminal justice and
multi-facility vehicle-rental management solutions. These solutions include:

| |  | Care industry-Magic develops and
  markets application software targeted at the long-term care industry. Magic designed its
  comprehensive solution to meet the management information needs of retirement
  homes, nursing homes, assisted-living facilities, continuing-care retirement
  communities and home-health and rehabilitation agencies.                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Vehicle rental - Rentpro
  -  Magic
  develops, markets and sells Rentpro, a solution that includes more than 90%
  of the functions usually required by multi-facility car and truck-rental
  companies worldwide. Rentpro can manage varied functions like the purchase and sale
  of vehicles, reservations management, leasing and rental arrangements and
  fleet control and management.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Banking -Cheq Mate - Magic develops and markets Cheq Mate, a
  banking application that provides most of the functionality required to run a retail branch, including
  support for various deposit types, advances, time deposits, bank guarantees,
  letters of credit and portfolio management.                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                
| |  | Professionalservices-Magic offers flexible and creative solutions in
  the areas of infrastructure design and delivery, application development,
  technology planning and implementation services, and supplemental staffing.                                                                                                                                                                 

Customers

Tens of thousands of end-users run their business systems on Magic
technology. These include Allstate, McDonalds, Bank of France, Fiat, Nintendo, Club Med,
Financial Times, Gannet Media, Hitachi, Kodak, Matsushita, McKesson HBOC,
Minolta, Nestle Nespresso, Philip Morris, Steelcase, adidas-Solomon, State of
Washington, John Menzies, Athlon Group, Marconi Mobile, Compass Group PLC and
the United Nations.

Crystal

Crystal
Systems Solutions Ltd. provides end-to-end enterprise IT modernization
solutions. Crystals solutions offer an efficient and cost-effective process
for extension of the return on investment of existing enterprise IT investments
by understanding and leveraging current systems and applications and enabling
enterprises to effectively update their systems to adapt to new business rules and compete in todays environment.

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Companies
modernize their IT systems and applications in order to address changing
business needs while maintaining a competitive edge in the market.  Among the various alternatives of renewal of
the legacy systems, buying packaged software or rebuilding entire applications,
the most efficient and viable way for enterprises to protect their existing
investments is to use enterprise IT modernization solutions.

These
solutions enable enterprises IT departments to:

| |  | understand
  complex IT environments;      
| | - | -------------------------------------------
| |  | manage
  existing IT assets efficiently;   
| |  | consolidate
  IT infrastructure;           
| |  | reuse
  components and business rules;     
| |  | reduce
  mission critical project risk; and
| |  | adapt
  to regulatory changes.             

Crystals
understanding, migration, transformation and development solution portfolio
includes software products, software tools and support services that are aimed
to address the most pressing challenges organizations and companies face today.
Crystals comprehensive enterprise technologies span mainframe, midrange and
client/server computing platforms. Crystal has
enhanced its expertise through the successful completion of projects for many
large organizations, establishing credibility and achieving international
recognition and presence. Based on its technology and that of its affiliates
and investees, Crystal develops and markets software
tools and related methodologies. Crystal delivers its tools and methodologies
together with training and support in order to provide enterprises with comprehensive
modernization solutions.

Crystals
enterprise IT modernization solutions are divided
into the following categories:

Enterprise IT Understanding

Consolidated
warehousing of IT operational and development information, enabling companies
to better understand their IT environment, more efficiently manage IT systems,
integrate new software packages, re-use existing systems and build new
applications.The leading software tool in this group of
solutions is IT Discovery.

ITDiscovery provides an automated, accurate and immediate impact analysis for
centralized and distributed IT systems. The solution includes detailed reports
which map system-wide operational activity as well as interaction between all
applications and other software components, allowing companies to make informed
decisions about the future changes and usages of their IT environment.

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Enterprise IT Migration

Automated
migrations of legacy applications, platforms, languages and data, allowing
companies to operate their IT systems independently without relying on previous technology support providers. The
leading software tool in this group of solutions is DBMSMigrator.

DBMSMigrator offers automated
migration of applications from non-relational
databases like IDMS, ADABAS and VSAM to relational database like DB2 and
Oracle. DBMSMigrator performs automated conversions, leaving companies with no
residuals, emulation software or translation procedures. DBMSMigrator provides
companies with fully functional compliance for source and target applications,
minimal application, functional and logical program flow changes and minor
transition impact.

Enterprise IT Transformation

Enterprise-wide
application transformations required by regulatory changes and new business
requirements, allowing companies to extend the life of their IT
systems.The leading software tools in this group of solutions are:

EuroEnabler. EuroEnabler, is a highly automated, rules-based
tool that enables a step-by-step, comprehensive Euro conversion process.
EuroEnabler fully preserves system and data integrity and helps maintain the
usual level of system application development and maintenance throughout the
process. EuroEnabler has been used in successful conversions of approximately 1 billion lines of code.

UPCEnabler. UPCEnabler for universal product code, or UPC, is
based on the unique flexible technology developed for complex and large-scale
modifications to data field length, type and structure. UPCEnabler is available
for MVS and Unix systems written in most popular programming languages, using
various databases and file structures.

Enterprise IT Development

Enterprise
IT development is a technology independent environment, offering
companies a way to efficiently mine and re-write their existing applications.
With Crystals development solutions, companies can
incrementally re-develop their legacy systems and extend them to new
technologies.The leading software tools in this group of solutions are:

AppBuilder.AppBuilder, is a premier development environment.
AppBuilder software is
used for the management, maintenance and development of large and complicated
applications needed by large businesses.  It
provides the infrastructure for enterprises worldwide, across several
industries, with applications running millions of transactions daily.
Enterprises using AppBuilder can build, deploy and maintain large-scale
custom-built business applications for years without being dependent on any
particular technology.

MainWin. Crystal develops, markets, and supports the
MainWin products through its subsidiary, Mainsoft Corporation. MainWin is an
advanced application-porting platform that allows applications developed on
Windows to be rapidly ported to multiple Unix operating systems without the
investment usually associated with such an undertaking.  Most enterprise computing environments
require many critical applications to run on an installed base of one or more
Unix systems.

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Using
MainWin products, independent software vendors and enterprise IT professionals
can develop software applications using the powerful Windows development tools
and then quickly and efficiently deploy those Windows applications natively on
Unix systems.

Customers

Crystals
customers include Microsoft Corp., Synopsis,
Inc., Computer Associates International, Inc., Mentor Graphics Corporation,
Cadence Design Systems, Inc., Siebel Systems, Inc., Rational Software
Corporation, Crystal Decisions Corporation, Environmental Systems Research
Institute, Altera Corporation, Merrill Lynch, Shaw
Industries, Inc., Barmenia Versicherung(Germany), MCI
Worldcom Network Services, Inc., DIMIA- Department of Immigration & Multicultural &Indegenous Affairs
(Australia), Bank Leumi Le-Israel B.M. and Argus
Health Systems.

Recent Developments

In
November 2002, Crystal acquired Lirazs business which includes the
operations of BluePhoenix Solutions B.V. and BluePhoenix international
subsidiaries. Following Lirazs acquisition, Crystal and BluePhoenix are
combining their global operations, creating a leading force in the enterprise
IT modernization market. Crystal has currently local offices in the United
states, United Kingdom, The Netherlands, Denmark, Germany, Italy, Cyprus,
Romania and Israel.

Sapiens

Sapiens International Corporation N.V.is a global provider
of IT solutions that modernize business processes to enable insurance and other
companies to quickly adapt to changes in customers needs and technology and business changes. Sapiens
modular solutions align IT with business demands for speed, flexibility and
efficiency. Sapiens solutions consist primarily of Sapiens technology,
methodology and consulting services, all of which address the complex issues
related to the life-cycle of enterprise business applications.

Solutions
and Services

Since 2000, Sapiens
has been focusing on the insurance industry, delivering customizable solutions
for life and pension insurance, general insurance and the provision of loans
and mortgages. Sapiens aim is to help the insurance industry become more agile
in the face of new dynamics and quickly adapt to changes, while significantly
reducing the IT costs.  By partnering with leading insurance
companies, the company has developed the Sapiens INSIGHT insurance solutions
suite that is already helping enterprises adapt to the marketplaces time and
cost pressures.  Sapiens INSIGHT, designed for the general and life
insurance markets, can be customized to match specific legacy systems and
business requirements while providing pre-configured functionality. These solutions can be used
independently or collectively as follows:

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| |  | Policy
  INSIGHT: simplifies and accelerates the cycle of new-business, policy
  processing and administration through modular, web-enabled solutions, thus
  delivering increased responsiveness and system visibility.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                         
| |  | Claims
  INSIGHT: designed to manage and improve the information flow of claim
  handling, providing faster return on investment by reducing the total claims
  pay-out.                                                
| |   |                                                                                                                                                                                                                         
| |  | Closed Books
  INSIGHT: provides the insurer with significant time and cost savings by more
  effectively managing inefficient, time-consuming and resource-intensive
  management of closed books of business.         

Sapiens
has executed independent projects for the insurance market as well, providing
enhanced information access and visibility to empower the sales, agent and
broker community, thus accelerating transaction processing for improved
customer service and business efficiency.

Sapiens
solutions are based on its eMerge technology, a rules-based application
development suite which enables rapid solution development for complex
mission-critical enterprises. Sapiens eMerge covers rapid application
development, or RAD, and re-engineering, legacy-to-web integration and
application integration with other back-end and front-end systems and
processes.

Outsourcing
and IT Services. Sapiens is currently
servicing multi-year outsourcing contracts with blue-chip customers involving
mission-critical systems. Sapiens performs outsourcing projects either on or
off customers premises. Sapiens asset discovery solution contributes to the
maintenance and management of enterprises IT environment.In addition,Sapiens provides customers with specialized IT services including
project management and technical assistance. Sapiens uses its RAD methodology
to facilitate the development of projects and offers ongoing solution support
at customer premises, Sapiens premises or any combination thereof. Sapiens
offers both short-term and long-term support contracts.

Customers

Sapiens
global, blue-chip customer base is built on years of trust and on-time
delivery. Customers include AXA, Liverpool Victoria, Norwich Union, OneBeacon,
Principal Financial, Prudential, Occidental Fire & Casualty, Abbey
National, Panasonic UK, Six Continents Hotels (Bass Hotels - Holiday Inn),
Honda Motors, IBM, International Paper and other major organizations worldwide.

nextSource Inc.

nextSource
Inc. is the sole provider of a complete solution suite, named The People Blue
Book, or PBB, that addresses all businesses needs in the field of human
resources.  The PBB is a central hub
that provides users with a broad spectrum of information and services relating
to human resources, in a web-hosted and customer configurable environment.  nextSource developed the PBB with the objective
of creating a pre-eminent human capital resource tool. The PBB offers the
following solutions:

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| |  | A web-based
  vendor management solution for managing customers internal and external
  contingent workforce. nextSources Talent Acquisition Management
  Solution, also known as
  TAMS makes it easier for customers to find, engage and deploy talent
  personnel, faster and more effectively, while ensuring competitive labor
  costs. TAMS streamlines the hiring process, allowing for enhanced
  communication with candidates, more efficient distribution of open positions
  to vendors and a decrease in time spent on administrative tasks. | 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
| |  | Agency services through nextSources value-added
  reseller program. This solution provides staffing vendors with
  opportunities to increase revenue, bring added value to existing business
  relationships.  nextSource has also
  created The Multiple Listing Staffing Association, an industry-wide network
  of independent staffing suppliers working collectively to staff openings for
  customers with the best candidates in the shortest time intervals.                                                                                       | 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 
| |  | The People Ticker which provides businesses with real-time
  views of market rates for both contingent and full time workers, based upon
  skill-set, years of experience and geographic location.  This one-of-a-kind tool enables corporate
  customers to truly benchmark their contingent labor costs against the most
  current information available.  The
  database is updated on a real time basis several times per hour.                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | The nextSource Job Board
  utilizes an extensive resume database and comprehensive searching
  capabilities to provide an online marketplace that links qualified talent
  with progressive talent seekers. 
  nextSource also offers a unique reverse auction that allows potential
  candidates to bid on a posted opening thereby driving down the cost to the
  customer.                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Human resources, or HR, services, include services of a professional
  employer organization for payroll processing, benefits administration,
  recruiting, and other HR related services. 
  nextSource also offers payrolling services to minimize the
  co-employment risks and eliminate the administrative burdens associated with
  the employment of independent contractors, retirees, summer interns and other
  temporary workers.                                                                                                             
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | A wide range of procurement
  services and vendor management
  services to complement the implementation of nextSources TAMS
  solution.  Through its
  value-added procurement service, nextSource offers a fully outsourced
  procurement/vendor management solution to customers looking for a complete
  solution.                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 

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Sales and Marketing

Our
subsidiaries conduct sales and marketing efforts primarily through division or
product managers. In certain cases, the companies devote sales managers who,
aided by their staffs, are responsible for ongoing customer relationships, as
well as sales to new customers. In addition, the IT services companies
participate in competitive bidding processes, primarily for turnkey and
government projects, as well as large IT services contracts. Our subsidiaries
attend trade shows and exhibitions in the high technology markets, while
further supplementing their sales efforts with space advertising and products
and services listing in appropriate directories. In addition, our subsidiaries
organize user group meetings for their customers, where new products and
services are highlighted.  We typically
enter into strategic alliances and intend to pursue acquisitions in order to
penetrate various international markets and promote sales of our proprietary
software solutions in international markets.

The
following table summarizes our revenues by operating segments for the periods
indicated:

|                        |      | Software 
  Services |  | Proprietary 
  Software 
  Products |  | Total
|----------------------- | ---- | -------------------- |  | ----------------------------------- |  | -----
|                        |      |                      |  |                                     |  |      
|                        |      | $ thousands         
|                        |      |                     
|Year ended December 31, |      |                      |  |                                     |  |      
|                        | 2002 |                      |  | 171,342                             |  |      
|                        | 2001 |                      |  | 208,946                             |  |      
|                        | 2000 |                      |  | 213,704                             |  |      

The
following table summarizes the revenues from our IT products and services by
geographic regions for the periods indicated:

|               |                                                        | Year ended December 31,
|-------------- | ------------------------------------------------------ | -----------------------
|               |                                                        |                        
|               |                                                        | 2002                   
|               |                                                        |                        
|               |                                                        | $ thousands            
|               |                                                        |                        
|Israel         |                                                        |                        
|International: |                                                        |                        
|               | United
  States                                        |                        
|               | Other (includes various
  countries, mainly in Europe) |                        
|               |                                                        |                        
|               |                                                        |                        
|               | Total                                                  |                        
|               |                                                        |                        

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Competition

The markets
for the IT products and services we offer are rapidly evolving and highly
competitive. Our ability to compete successfully in IT services markets depends
on a number of factors, like breadth of service offerings, sales and marketing
efforts, service, pricing, and quality and reliability of services. The
principal competitive factors affecting the market for the proprietary software
solutions include product performance and reliability, product functionality,
availability of experienced personnel and price, ability to respond in a timely
manner to changing customer needs, ease of use, training and quality of
support. We face competition, both in Israel and internationally, from a
variety of companies, including companies with significantly greater resources
than us who are likely to enjoy substantial competitive advantages, including:

| |  | longer
  operating histories;                                               
| | - | ----------------------------------------------------------------------------
| |   |                                                                             
| |  | greater
  financial, technical, marketing and other resources;              
| |   |                                                                             
| |  | greater name
  recognition;                                                 
| |   |                                                                             
| |  | well-established
  relationships with our current and potential clients; and
| |   |                                                                             
| |  | a broader
  range of products and services.                                 

As
a result, they may be able to respond more quickly to new or emerging
technologies or changes in customer requirements. They may also benefit from
greater purchasing economies, offer more aggressive product and service pricing
or devote greater resources to the promotion of their products and services. In
addition, in the future, we may face further competition from new market
entrants and possible alliances between existing competitors. We also face
additional competition as we continue to penetrate international markets. As a
result, we cannot assure you that the products and solutions we offer will
compete successfully with those of our competitors. Furthermore, several
software development centers worldwide, like in India, offer software
development services at much lower prices than we do. Due to the intense
competition in the markets in which we operate, software products prices may
fluctuate significantly. As a result, we may have to reduce the prices of our
products.

Our
principal competitors in the domestic Israeli market are Israeli IT services
companies and systems integrators, the largest of which are Ness Technologies
Inc. and Zeevi Computers Group.  Our
international competitors in the Israeli marketplace include Compaq, EDS, IBM
and Microsoft.  These international
competitors often use local subcontractors to provide personnel for contracts
performed in Israel.

Our
competitors in international markets include the following:

Magics
principal competitors in the market of the eDeveloper technology are Visual
Basic (Microsoft), Progress, Delphi and Jbuilder (Borland), Oracle, Compuware,
Lansa and packaged applications like SAP, and PeopleSoft which could hinder
projects. The principal competitors in the market for the iBOLT Integration
Suite are Seeburger, Microsoft BizTalk, Axway and Mercator.

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Crystals principal
competitors include leading software developers, who enable customers to replace or
modernize their legacy systems, such as IBM, Micro Focus, Software
Technologies, and ASG (Allen Systems Group). In addition, Crystal faces
competition from companies operating in the four principal areas of the enterprise
IT modernization market: enterprise IT understanding,
enterprise IT migration, enterprise IT transformation and enterprise IT
development. Most of Crystals
principal competitors tend to offer solutions only for selected segments, while
Crystals solutions cover all four areas. Its principal competitors consist of
system integrators and tool vendors. System integrators include IBM, Cap Gemini
E&Y and EDS. Crystal cooperates with some of these system integrators in
providing certain solutions.Crystals
competitors for
the infrastructure modernization tools include DMR/Amdahl, Oracle Corporation and Sun Microsystems
Inc. The principal direct competitor for Crystals Windows to Unix
cross-platform products is Bristol Technology, Inc., which is a source code
licensee of an earlier version of Windows-NT. Citrix Systems Inc. is one of the
principal indirect competitors, and is also a Microsoft source code licensee.
Indirect competitors also include internal product development groups within
current and potential customers.

Sapiens
principal competitors in the application development and e-commerce
marketplaces include tool vendors and system integrators. RAD tool vendors
competing with Sapiens include Versata, Software AG, HNC (Blaze), ARTEch
(GeneXus), and Lansa.
Consultants and system integrators that offer competing solutions include IBM,
EDS, Cap Gemini, Computer Associates International, Andersen Consulting, and
KPMG. Sapiens competitors in the legacy evolution marketplaces include tool
vendors and system integrators. Tool vendors include SAGA Systems, Seagull,
Neon, Relativity, Merant, SEEC, Most, Intercomp and IBM. Web consultants and
system integrators that offer competing solutions include IBM, Cap Gemini,
Xpedior, Sapient, Cambridge Technology Partners, Computer Associates International,
Andersen Consulting, USWeb/CKS and EDS.

Software Development

The
software industry is characterized by rapid technological developments.  In order to maintain technological
leadership, we engage in ongoing software development activity through our
subsidiaries, aimed at both creating new proprietary software and services, as
well as enhancing and customizing existing products and services. This effort
includes introducing new supported programming languages and database management
systems; improving functionality and flexibility and enhancing ease of use. We
work closely with current and potential end-users, our strategic partners and
leaders in certain industry segments to identify market needs and define
appropriate product enhancements and specifications.

Intellectual
Property Rights

Neither we
nor our subsidiaries have any patents. However, certain of our subsidiaries
have patent applications pending.

We rely on
a combination of trade secret, copyright and trademark laws and non-disclosure
agreements, to protect our proprietary know-how. Our proprietary technology
incorporates processes, methods, algorithms and software that we believe are
not easily copied.  Despite these
precautions, it may be possible for unauthorized third parties to copy aspects
of our products or to obtain and use information that we regard as
proprietary.  We believe that, because
of the rapid pace of technological change in the industry, patent and copyright
protection are less significant to our competitive position than factors such
as the knowledge, ability and experience of our personnel, new product
development and ongoing product maintenance and support.

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C.          Organizational
Structure

Dan and Gad
Goldstein are co-founders, directors and shareholders of Formula. They are also
directors and shareholders of several other companies which, together with us
and the other subsidiaries, are known as the Formula Group. Formula is the
parent company of the Formula Group.

The
following table presents certain information regarding the control and
ownership of our significant subsidiaries, as of June 1, 2003.

| | Subsidiary                               |  | Country of Incorporation       |  | Percentage
  Of Ownership
| | ---------------------------------------- |  | ------------------------------ |  | -------------------------
| |                                          |  |                                |  |                          
| | Matrix IT Ltd.                           |  | Israel                         |  | 65.3%                    
| |                                          |  |                                |  |                          
| | Magic Software Enterprises
  Ltd.        |  | Israel                         |  | 55.2%                    
| |                                          |  |                                |  |                          
| | Crystal Systems Solutions
  Ltd.         |  | Israel                         |  | 58.8%                    
| |                                          |  |                                |  |                          
| | Sapiens International
  Corporation N.V. |  | Netherlands
  Antilles Islands |  | 50.0%                    
| |                                          |  |                                |  |                          
| | nextSource Inc.                          |  | United
  States                |  | 100.0%                   

The
ordinary shares of Crystal, Magic and Sapiens are traded on the Nasdaq National
Market and on the TASE, and the ordinary shares of Matrix are traded on the
TASE.

D.       Property,
Plants and Equipment

Our
corporate headquarters, as well as the research and development and sales and
marketing headquarters of a majority of our subsidiaries, are located in
Herzlia, Israel.  We lease approximately
70,000 square feet of office space in Herzlia, pursuant to a lease which will
expire on October 31, 2005 with an option to extend for an additional 36
months.

We lease an
additional aggregate 75,000 square feet of office space in another building in
Herzlia pursuant to leases ending between December 2003 and June 2004, with an
option to extend for an additional 30 to 35 months. We are currently
negotiating the extension of the lease.

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We
own a 34,000 square feet facility in Or-Yehuda, Israel.

Several of
our subsidiaries lease approximately 120,000 square feet of office space and
warehouses in several other locations in Israel. Several of our subsidiaries
also lease sales and support premises in the United States, Europe and Asia.

The
aggregate amount we paid pursuant to our lease agreements in 2002 was
approximately $7.4 million.

We believe
that our properties are adequate for our present uses. If in the future we will
require additional space to accommodate our growth, we believe that we will be
able to obtain this additional space without difficulty and at commercially
reasonable prices.

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ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

We
design, develop and implement innovative business-critical information
technology solutions. We also design, develop and market proprietary software
solutions for sale in selected niche markets worldwide.

We
recognize revenues in two categories: the delivery of software services and the
delivery of proprietary software solutions. All of our subsidiaries, including
IT services companies and proprietary software solutions companies, recognize
revenues from the delivery of software services, and most of them recognize
revenues in both revenue categories. We have separated our subsidiaries into
these categories in accordance with the category in which each subsidiary has earned most of its revenues. For
information with respect to the accounting principles we use in revenue
recognition, see Note 1K to our
consolidated financial statements.

We
recognize, in non-operating income, gains and losses arising from the sale of
previously un-issued capital stock by a subsidiary or an affiliate to outside
investors, if the sale changes our ownership percentage in this entity. We
measure the gain or loss by the difference between our share in the proceeds
from this stock offering and the carrying amount, on an equity basis, of the
proportionate reduction in our investment. Transactions of this nature do not
occur on a regular basis and it is difficult for us to predict their timing.

We
currently hold a controlling interest in our subsidiaries through our direct
equity holdings. From time to time, if and when required, we enter into voting
agreements with other shareholders of the companies, in order to retain control
of our subsidiaries.  As a result of our
controlling interests in the subsidiaries, we consolidate the operating results
of these subsidiaries.  If we are unable
to maintain a controlling interest in our subsidiaries, as a result of equity
issuances by subsidiaries or otherwise, we cease to consolidate their operating
results. This could cause significant fluctuations of our consolidated
operating results. As a result, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and you should not
rely on these comparisons as indications of our future performance.

On
December 31, 2001, we sold to Formula Vision our entire shareholdings in
several of our private companies. As a result, we have not consolidated these
companies in our balance sheet as of December 31, 2001. Beginning with the
first quarter of 2002, we ceased consolidating their result of operations. This has influenced
our results of operations in 2002, and amoung others, our revenues, cost of
revenues, software development costs and selling, general and administrative
expenses have been decreased.

Beginnng
with the fiscal year ended December 31, 2002, we prepare our consolidated financial statements
in conformity with accounting principles generally accepted in the United
States, referred to as U.S. GAAP. Under U.S.GAAP, we cannot use adjusted NIS reflecting changes in the Israeli
consumer price index, as we have used in the past. Instead, we use nominal values of the NIS translated into
dollars as described below. As a result, we have restated certain figures in our financial statements relating to prior periods.

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Our
functional and reportingcurrency

Formula and most of our subsidiaries operate
primarily in the economic environment of the New Israeli Shekel (NIS). The
functional currency of our other subsidiaries is the dollar. We use the dollar as our reporting currency.

We
translate our financial
statements into dollars, as
well as the financial statements of our subsidiaries whose functional currency is the NIS, under the principles described in
Financial Accounting Standards Board Statement No. 52. Assats and liabilities have been
translated at period-end exchange rates. 
Results
of operations have been translated at the exchange rate at the dates on which
those transactions accurred or at an average rate. We present material differences resulting from translation
under shareholders equity in the item accumulating other comprehensive income (loss).If gains and losses arising from these
translations are immaterial, we record them as financial
expenses included in the statements of income. In the consolidation, we present the financial
statements of
subsidiaries whose functional currency is the dollar, at the original amounts.

Critical Accounting Policies

In preparation of
our financial statements, we are required to make certain estimates, judgments and assumptions that
we believe are reasonable based upon the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The significant accounting policies
which we believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:

Revenue Recognition

The revenue recognition policy of each of our
significant subsidiaries is
material because our revenue is a key
component of our results of operations. Our revenue recognition determines the timing of certain expenses,
such as commissions and royalties. We follow very specific and detailed
guidelines in measuring revenue; however, certain judgments affect the
application of our revenue policy. Revenue results are difficult to predict and
any shortfall in revenue or delay in recognizing revenue could cause our
operating results to vary significantly from quarter to quarter and could
result in future operating losses.

Revenues derived from direct software license agreements are recognized
in accordance with Statement of Position (SOP) 97-2 Software Revenue
Recognition (as amended by SOP 98-4 and SOP 98-9), upon delivery of the
software when collection is probable, the license fee is otherwise fixed or determinable
and persuasive evidence of an arrangement exists. When a project involves
significant modification of software, revenue is generally recognized according
to the percentage of completion method. Under this method, estimated revenue is
generally accrued based on costs incurred to date as a percentage of total
updated estimated costs.

We recognize revenues from projects billed on a time and material basis, based on SOP 81-1 Accounting for
Performance of Construction - Type and Certain Production - Type Contracts,
using contract accounting on a percentage of completion method, based on the
relationship of actual costs incurred to total costs estimated to be incurred
over the duration of the contract. Provision for estimated losses on
uncompleted contracts is made in the period in which such losses are first determined, in the
amount of the estimated loss on the entire contract. As of December 31, 2002, no such estimated losses
were identified.

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We
recognize revenues from consulting fees with respect to fixed fee contracts,
based upon the percentage of completion method. We recognize contract losses, if any, in the period
in which they first become evident.

Revenues from contractual maintenance contract and training are
recognized rutably over the contract period.

Revenues from sales of hardware are recognized when the merchandise is
delivered to the customer, provided no significant vendor obligations remain.

Our
management believes that our revenue recognition
policies are in accordance with the Securities and Exchange Commission Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
(SAB 101).

Impairment
of Goodwill

We
periodically evaluate acquired businesses for potential impairment indicators.
Our judgments regarding the existence of impairment indicators are based on
legal factors, market conditions and operational performance of our acquired
businesses. Future events could cause us to conclude that impairment indicators
exist and that goodwill associated with our acquired businesses is impaired.
Any resulting impairment loss could have a material adverse effect on our
financial condition and results of operations.

Debentures

One
of our assets is comprised of debentures issued to us by Formula Vision in
connection with the sale of private companies held by us to Formula Vision. We evaluate, periodically, the quality of the indebtedness, the financial
strength of Formula Vision and its ability to meet the repayment schedule of
the loan.  However, in the event that Formula Vision
fails to repay the loan under the terms of the debentures, our business,
financial condition and results of operations would be materially adversely affected.

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A.      OperatingResults

Years
Ended December 31, 2002 and 2001

Revenues. 
Revenues decreased from $387.7 million in 2001 to $283.3
million in 2002. The decrease in revenues was mainly attributable to the sale
to Formula Vision of certain of our privately-held subsidiaries at the end of
2001. In addition, in 2002, we had a slight decrease in demand for our products
and services.  Revenues from the two categories of our
operation were as follows:  Revenues
from the delivery of software services decreased from $208.9 million in 2001 to $171.3 million in 2002. Revenues
from the sale of proprietary software solutions decreased from $178.7 million in 2001to $112.0 million in 2002.

Cost
of Revenues.  Cost of revenues consists
primarily of wages and related expenses and hardware and other materials
costs.  Cost of revenues deccreased 28% from $261.3 million in 2001 to
$186.9 million in 2002.  As a percentage
of revenues, cost of revenues remained relatively the same in 2002 and
2001. The decrease in cost of revenues was primarily due to the sale of certain of our privately-held
subsidiaries to Formula Vision at the end of 2001.

Software
Development Costs, net.  Software development costs consist primarily of wages and related
expenses and, to a lesser degree, consulting fees we pay to independent
contractors engaged in research and development.  Software development costs, net, consist of software development
costs, gross, less capitalized software costs. 
Software developments costs, gross, in 2002 and 2001 were $20.4 million
and $31.1million.  In 2002, we
capitalized software costs of $4.4 million compared to $9.8 million in
2001.  Software development costs, net,
decreased 25% from $21.3 million in 2001 to $16.0 million in 2002.  As a
percentage of revenues, software development costs, net were 5.5% in 2001 and 5.6% in 2002.  The decrease in software development costs was attributed primarily to the sale to Formula
Vision, at the end of
2001,
of certain of our privately-held subsidiaries characterized by
substantial research and development activities. Amortization of capitalized software costs
were $5.1 million in 2002 and $6.6 million in 2001, which amounts were included
in cost of revenues.

Selling,
General and Administrative Expenses. 
Selling, general and administrative expenses consist primarily of
severance and related expenses, travel expenses, selling expenses, rent,
utilities,
depreciation, amortization and professional fees.  Selling,
general and administrative expenses decreased from $151.3 million in 2001 to $85.3 million in 2002.  As a percentage of revenues, selling,
general and administrative expenses decreased from 39% in 2001 to 30% in 2002.  This decrease was primarily attributable to
the efforts of our subsidiaries
to reduce their operating expenses, the sale of
certain of our privately-held subsidiaries to Formula Vision and cessation of amortization of goodwill in
2002.

Restructuring
Costs. Restructuring costs consist primarily
of wages and relocation expenses, as well expenses related to closing of
branches. Restructuring costs were $11.0 million in 2001 and $1.8
million in 2002. Restructuring costs in 2002 reflect primarily Magics restructuring costs.

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Operating
Loss.  In 2002, we had operating loss of $6.7
million compared to operating loss of $57.3 million in 2001. The operating loss
in 2002 is attributable to the operating loss of certain of our subsidiaries which were harmed by the global and
local slow-down.The operating
loss in 2001 is attributable to the operating loss of certain of our subsidiaries, like Magic, Crystal and Sintec
which were harmed by the global and local slow-down, as well as to losses
incurred by some of our privately-held subsidiaries which concentrate in
research and development of products aimed for sale in the international
markets.
These privately-held subsidiaries were sold at the end of 2001 to Formula
Vision.

Financial
Income, net.  Financial income, net in 2002
was $3.6 million compared to $2.7 million in 2001.  Financial income (expenses), net, is
influenced by various factors, including our cash balance, changes in the
exchange rate of the NIS against the dollar, as well as changes in the consumer
price index, or CPI.

Other
Expenses, net.  Other expenses, net in 2002
and 2001 were $2.1 million and $36.7 million. 
Other
expenses, net in 2002 was caused primarily by a partial write off of an
investment by Crystal. Other
expenses, net in 2001 consist primarily of write off of goodwill by members of our group which include the write
off of goodwill of $22.0 million by Magic, $5.0 million by New Applicom and
$4.0 million by Crystal. In addition, Formula wrote off $4.8 million with respect to its
investment in Thoughtbubble.

Gain
on Realization of Shareholdings. 
Gain on realization of shareholdings in 2002 was $4.7 million compared to $773,000 in
2002.  Gain on realization of shareholdings in 2002 was attributable to the sale of
Level 8 shares by Crystal which resulted in gain of $5.5 million to
Crystal.   Gain
on realization of shareholdings in 2001 was attributable to gains recorded by our subsidiaries.

Taxes
on Income.  Taxes on income in 2002 were $2.0 million compared to $6.2 million in
2001.  Our effective tax rate relates to
a portion of our earnings that we derive from capital gains. These capital
gains are partly offset by other capital gains that are tax exempt, as well as by a portion of earnings derived from
operations that are tax exempt under the Law of Encouragement of Capital
Investments, 1959. Taxes on income are also attributable to certain of our subsidiaries
that had taxable income.

Companys
Equity in Results of Affiliates, net.  Our equity in losses of affiliates, net were $2.3 million in 2002 compared to $9.9 million in
2001.  This decrease stems from the sale
of subsidiaries affiliates and affiliates of Formula to Formula Vision as part of our restructuring process.

Minority
Interest, net.  Minority interest, net,
includes the minority interest in companies which are not wholly owned by the
Formula Group during each of the periods
indicated. Minority interest in losses of subsidiaries in 2002 was $2.4 million
compared to minority interest in losses of subsidiaries of $46.9 million in 2001. This decrease in
minority interest, net is attributable to the improvement of the results of
certain of the subsidiaries and the decrease in their losses and to the sale of
certain subsidiaries to Formula Vision.

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Years
Ended December 31,2000and 2001

Revenues. 
In 2001, revenues were $387.7 million compared to $402.5 million in
2000. In 2001, we had a slight decrease in our revenues as a result of a
decrease in demand for our products and services. This decrease was offset by
the consolidation of the results of operations of Liraz in the fourth quarter
of 2001.  Revenues from the two
categories of our operation were as follows: 
Revenues from the delivery of software services were$208.9 million in 2001 and $213.7
million in 2000. Revenues from the sale of proprietary software solutions were $178.7 million in 2001 and $188.8 million in 2000.

Cost
of Revenues.  Cost of revenues increased 9%
from $239.5 million in 2000 to $261.3 million in 2001.  As a percentage of revenues, cost of
revenues increased from 60% in 2000 to 67% in 2001. This increase was primarily
caused by the decrease in sales of our proprietary software solutions which are
generally characterized by a higher gross margin.

Software
Development Costs, net.  Software developments costs, gross, were  $33.5 million in
2000 and $31.2 million in 2001.  In 2000, we capitalized software costs of
$13.0 million compared to $9.9 million in 2001.  Software development costs, net, increased from $20.5 million in 2000 to $21.3 million in 2001.  As a percentage of revenues, software
development costs, net were 5% in 2000 and 5.5% in 2001.  The increase in software development costs
was attributed to the development activities conducted mainly by Crystal,
Magic, New Applicom, Liraz and the privately held subsidiaries which were sold
to Formula Vision at the end of 2001. Amortization of capitalized software
costs were $6.6 million in 2001 and $0.9 million in 2000, which amounts were
included in cost of revenues.

Selling,
General and Administrative Expenses. 
Selling, general and administrative expenses increased from $142.0
million in 2000 to $151.3 million in 2001. 
As a percentage of revenues, selling, general and administrative
expenses increased from 35% in 2000 to 39% in 2001.  This increase was primarily attributable to the efforts of
Crystal, Magic, New Applicom and certain other subsidiaries to penetrate into
international markets, in particular, the United States and Europe, and an increase in
depreciation and amortization.

Restructuring
Costs. Restructuring costs were $2.4 million
in 2000 and $11.0 million in 2001. Magic,
Crystal and New Applicom contributed $6.6 million, $2.8 million and $1.5
million to the restructuring costs in 2001. Restructuring costs in 2000 reflect
Magics restructuring costs.

Operating
Loss.  In 2001, we had operating loss of $57.3
million compared to operating loss of $2.0 million in 2000. The operating loss
in 2001 is attributable to the operating loss of certain members of the Formula
Group, like Magic, Crystal and Sintec
which were harmed by the global and local slow-down, as well as to losses
incurred by some of our privately-held subsidiaries which concentrate in
research and development of products aimed for sale in the international
markets.
These privately-held subsidiaries were sold at the end of 2001 to Formula
Vision.

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Financial
Income, net.  Financial income, net in 2000 was $8.5
million compared
to $2.7 million in
2001.  Financial income (expenses), net,
is influenced by various factors, including our cash balance, changes in the
exchange rate of the NIS against the dollar, as well as changes in the  consumer price index.

Other
Expenses, net.  Other expenses, net were $300,000 in 2000 and $36.7 million in 2001.  The increase in 2001 in other expenses, net was caused primarily
by the write off of goodwill by members of our group which include the write off
of goodwill of $22.0 million by Magic, $5.0 million by New Applicom and $4.0 million by Crystal. In addition,
Formula wrote off $4.8 million with
respect to its investment in Thoughtbubble.

Gain
on Realization of Shareholdings. 
Gain on realization of shareholdings in 2000 was $66.7 million compared
to $773,000 in 2001.  Gain on
realization of shareholdings in 2001 was attributable to gains recognized by
our subsidiaries.Gain on
realization of shareholdings in 2000 was primarily attributable to the sale of
Magic shares by us in the public offering of Magic and the decrease in our
shareholdings in Magic. This sale resulted in gain to us of $25.8 million, as
well as other gains incurred by our subsidiaries, particularly by Formula
Vision, which recognized approximately $26.9 million of capital gains in 2000.
Of these capital gains, Formula Vision derived $21.5 million from the decrease
in its shareholdings in Magic and $6.4 million from the decrease in its
shareholdings in Walla.

Taxes
on Income.  Taxes on income in 2001 were
$6.2 million compared to $13.1 million in 2000.  Our effective tax rate relates to a portion of our earnings that
we derive from capital gains. These capital gains are partly offset by other
capital gains that are tax exempt as well as by portion of earnings derived
from operations that are tax exempt under the Law of Encouragement of Capital
Investments, 1959.

Companys
Equity in Results of Affiliates, net. 
Our equity in losses of affiliates, net in 2001 were $9.9 million
compared to $5.6 million in 2000.  This
increase stems from the
consolidation of new companies, as well as from an increase in losses of
certain of our subsidiaries affiliates and affiliates of Formula which
concentrate primarily in research and development of products aimed for sale in
international markets.

Minority
Interest, net.  Minority interest, net,
includes the minority interest in companies which are not wholly owned by the
Formula Group during each of the periods indicated.
Minority interest in losses of subsidiaries, in 2001 was $46.8 million compared
to minority interest in gain of subsidiaries of $16.1 million in 2000. Minority
interest in losses in 2001 are attributable to the deterioration in the
financial results of certain subsidiaries.

Impact
of Inflation and Currency Fluctuations on Results of Operations

Most
of our revenues from sale of our products and services are in dollars or are linked to the
dollar, while a substantial portion of our expenses, principally salaries and
related personnel expenses, are in new Israeli shekels, or NIS. As a result, we
are exposed to the risk that the rate of inflation in Israel exceeds the rate of devaluation of the NIS
in relation to the dollar or that the timing of this devaluation lags behind
inflation in Israel. This would have the effect of increasing the dollar cost
of our operations and decreasing our operating profit. In recent years, the rate of devaluation
of the NIS against the dollar has exceeded the rate of inflation, a reversal
from prior years.We cannot predict any future trends in the rate of inflation
in Israel or the rate of devaluation of the NIS against the dollar. If the
dollar cost of our operations in Israel increases, our operating profit will be adversely affected. To
date, we have not engaged in significant hedging transactions. In the future,
we may enter into currency hedging transactions to decrease the risk of
financial exposure from fluctuations in the exchange rate of the dollar against
the NIS. However, we cannot assure you that these measures will adequately
protect us from adverse effects arising from the impact of inflation in Israel.

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Political,
Economic and Military Conditions in Israel

Our
headquarters and principal research and development facilities are located in
Israel.  Although we generate approximately 45% of our revenues from
international markets, we are, nonetheless, directly influenced by the political, economic and military conditions
affecting Israel. Since September
2000, the violence between Israel and the Palestinians has intensified and a
material escalation in the violence has occurred. The future of the peace
efforts between Israel and its Arab neighbors is uncertain.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, operating results and financial condition. Furthermore, several
countries restrict business with Israeli companies. In addition, all nonexempt
male adult citizens of Israel, including some of our officers and employees,
are obligated to perform military reserve duty and are subject to being called
for active duty under emergency circumstances. While we have operated
effectively under these requirements since our incorporation, we cannot predict
the full impact of such conditions on us in the future, particularly if
emergency circumstances occur. If many of our employees are called for active
duty, our operations in Israel and our business may be adversely affected.

B.Liquidity and
Capital Resources

Since
inception, we have financed our growth and business primarily through cash
provided by operations and through public offerings, as well as through private
and public equity offerings of our subsidiaries.  In addition, we finance our business through short-term loans and
borrowings available under our credit facilities, and have recently consummated
a debt offering.

Cash

At
December 31, 2002, we had cash and cash equivalents and short-term investments
of $102.7 million
and at December 31, 2001 we had cash and cash equivalents and short-term
investments of $94.8 million.

As
of the date of this annual report, Formula has entered into
credit facilities with several banks, pursuant to which Formula may borrow from time to time, on a
short-term basis, up to an aggregate of
$48.0 million. A substantial
portion of our assets is pledged to banks.

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Indebtedness
to banks of Formula and our subsidiaries, on a consolidated basis, at
December 31, 2002 was $95.3 million which includes $87.7 million of current liabilities and
$7.6 million of long-term liabilities.
Indebtedness to banks, of Formila and our subsidiares, on a consolidated basis, at December 31, 2001 was $61.4 million which includes $53.3 million of current liabilities and $8.1 million of long-term
liabilities.

Cash
flow provided by operating activities in 2002 was $5.0 compared to cash flow provided by
operating activities of $1.0 million in 2001.

Financing
activities

Cash
flow provided by financing activities in 2002 was $64.8 million compared to cash flow
provided by financing activities of $57.0 million in 2001. This was mainly the
result of the following transactions:

In
2001, Crystal, through its subsidiaries, repurchased 206,100 of its shares for an aggregate
of $1.3 million. In 2002, Crystal through its subsidiaries, repurchased 104,465 of its
shares for an aggregate of $238,000.

In
December 2001, we completed a purchase of 85% of the outstanding share capital
of Matrix. As consideration, we transferred to Matrix our entire share
ownership in ForSoft. We recognized this acquisition as a financing activity
because as a result of it
ForSoft became publicly traded on the TASE.

In November 2001, in connection with
the exercise of the option by Shamrock, we issued 1 million ordinary shares of
Formula to our subsidiary Shandol for consideration of $12.3 million. For more information, see Item 4.A. History and Development of the
Company - Capital
Expenditures and Divestitures  Agreements with Shamrock, FIMI and IDB.

In
May 2002, we completed a public offering pursuant to a prospectus in Israel of
$14.8 million of debentures. Options to purchase an aggregate of 2 million of
our ordinary shares were attached to the debentures. The debentures are payable
in a lump sum in three years, but can be redeemed earlier by the holders at a
predetermined redemption price. The nominal interest rate for the entire
three-year term is approximately 17%. Principal and interest on the debentures
are linked to the Israeli consumer price index. The associated options had a term of one year and were exercisable at a
price of $15.8 per ordinary share, linked to the Israeli consumer price index. On May 31, 2003 the options expired. None of
these options had been exercised.

In
August 2002, Matrix completed a public offering of $19.6 million of convertible
debentures. Options to purchase 10 million of Matrixs ordinary shares were
attached to the debentures.

During
2002, we repurchased 324,780 of Formulas ordinary shares in the open market
for aggegate consideration of $3.4 million.

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Investment
activities

Net
cash used in investing activities in 2002 were $60.2 million and were comprised of the following transactions:

During
2002, we purchased shares of several of our subsidiaries in the open market, as
follows: 629,467 shares of Crystal for aggregate of
$2.9 million, 1,015,500 shares of Magic for aggregate of $1.5 million, 514,832
shares of Liraz for aggregate of $864,000, 1,984,211 shares of Sapiens for
aggregate of $1.6 million, 1,438,045 shares of Matrix for aggregate of $2.1
million, options to purchase 6,381,800 shares of Matrix for aggregate of $1.0
million, 695,347 shares of New Applicom for aggregate of $2.7 million,
7,944,630 shares of Sintec for aggregate of $6.5 million, 347,307 shares of
Sivan for aggregate of $55,000.

In
December 2002, we exercised the option granted to us by Sapiens and invested
$10 million in Sapiens in exchange for a discount conversion price of $0.83 per
common share. As part of the transaction, we converted all of our preferred
shares into common shares at the discount price.

In
connection with the sale to Formula Vision of our entire interest in certain of our privately-held subsidiaries, we
lent to Formula Vision an additional $19.4 million for a second series of
debentures issued on March 31, 2002.

In
November 2002, we completed a sale to Matrix of our entire
shareholdings in New Applicom, Sintec and Sivan, for an aggregate consideration
of $29.7 million. Under this transaction, we sold to Matrix 3,870,498 shares of
New Applicom, representing approximately 60.8% of New Applicoms outstanding
share capital, for an aggregate of $16.9 million, 15,330,309 shares of Sintec,
representing Sintecs entire outstanding share capital, for an aggregate of
$12.5 million, and 8,930,100 shares of Sivan, representing approximately 69.0%
of Sivans outstanding share capital, for an aggregate of $346,000. The shares
we sold to Matrix were comprised of (i) shares previously held by us; (ii) shares
that we purchased from third parties in October 2002; and (iii) shares that we
bought in tender offers we published in October 2002. The price per share paid
to us by Matrix for each of New Applicoms, Sintecs and Sivans shares
previously held by us and those we purchased from third parties was equal to
the equity per share of each of the companies. The shares that we purchased in
October 2002 from third parties were as follows: (i) 552,789 shares of New Applicom that we
purchased in exchange for 1,436,096 shares of Matrix; (ii) an aggregate of
4,200,000 shares of Sintec that we purchased in exchange for 2,180,780 shares
of Matrix; and (iii) an aggregate of 1,100,000 shares of Sintec that we
purchased in exchange for 608,080 shares of Matrix. As part of the
transaction, we published in October 2002, cash tender offers for the shares of
New Applicom, Sintec and Sivan not owned by us. Following the closing of the
tender offers, we sold to Matrix the shares that we purchased in the tender
offers for the same purchase price we paid for the shares; $3.7 for each New
Applicom share, $0.8  for each Sintec
share and $0.15 for each Sivan share.

In November 2002, we sold to Crystal,in a share exchange
transaction, 3,912,999 ordinary shares of Liraz, representing our
entire 57.9% interest
in Liraz. In
consideration, Crystal issued to us 2,343,113 Crystal ordinary shares. The number of shares issued to us by Crystal
was calculated based on an exchange ratio of 1:1.67, such that Crystal issued to us one Crystal share for 1.67 shares of Liraz.

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Net cash used in investing
activities in 2001 were $114.4 million and were comprised
of the following transactions:

During 2001, we purchased shares of several of
our subsidiaries in the open market, as follows: 2,315,200 shares of Magic for aggregate of $4.5 million, 322,300 shares
of Crystal for aggregate of $1.1 million and 170,010 shares of Sintec for a
consideration of $147,000.

During
2000 and the first quarter of 2001, ForSoft invested in certain of its
subsidiaries an aggregate of $4 million.

During
2001, Crystal purchased additional shares of Mainsoft for aggregate
consideration of $6.7 million.

In
January 2001, Formula Vision completed a purchase of 84.6% of the outstanding
share capital of Sivan. The aggregate consideration paid by Formula Vision was
$13.8 million. In addition, as part of this transaction, Formula Vision sold to
Sivan Formula Visions entire share ownership in Mentortech Inc., representing
approximately 99.5% of the share capital of Mentortech, for aggregate
consideration of $12 million.

In
March 2001, Formula Vision distributed to its shareholders a dividend in kind
of its major assets. As a result, we received 6,700,315 ordinary shares of
Magic and 8,144,604 ordinary shares of Sivan which were held by Formula Vision,
representing a 23% interest in Magic and a 63% interest in Sivan.

In
December 2000 and July 2001, we acquired convertible notes of Thoughtbubble
Productions Inc. for aggregate consideration of $4.35 million. In December
2001, we transferred to New Applicom, our rights under the convertible notes of
Thoughtbubble.

In 2001, we invested $5.7 million in
Formula Ventures, our former venture
capital fund.

In
January 2001, as a result of a tender offer to purchase all Formula Vision
shares held by the public, we purchased 5,556,406 shares of Formula Vision,
representing 21.5% of the share capital of Formula Vision, for aggregate
consideration of $11.6 million.

In
March 2001, we completed a $10.0 million investment in convertible preferred
shares of Sapiens representing approximately 24% of the outstanding share
capital of Sapiens on an as converted basis.

During
May until July 2001, we purchased from ForSoft and from one of its subsidiaries
their entire interest in several providers of software solutions for niche
markets. We paid an aggregate of $18.3 million for these acquisitions.

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In July
2001, Formula announced a distribution of a dividend in kind to its shareholders, consisted
of Formula Visions shares held by Formula, and representing approximately 72%
of the outstanding share capital of Formula Vision. The distribution of Formula
Visions shares was completed in August 2001.

In
September 2001, we purchased 37.3% of the outstanding share capital of Liraz.
The aggregate consideration we paid for this transaction was $5.6 million. In
October 2001, we published a special public tender offer, pursuant to which we
purchased an additional 6.0% of the outstanding share capital of Liraz for
aggregate consideration of $589,000. In addition, in October 2001, we purchased
500,000 shares of Liraz for aggregate consideration of $670,000.

In
December 2001, we sold to Formula Vision our entire interest in certain
privately-held companies that develop products and services aimed primarily for
sale in international markets, for a consideration of $58.9 million. As part of
the transaction, Formula Vision issued to us, in December 2001, a series of
debentures of $58.9 million in the aggregate

Net
cash used in investing activities during 2001 and 2002 years related primarily to the
purchase of fixed assets, investments in subsidiaries and affiliates and
acquisitions of new companies by us and our subsidiaries.

For
a summary of our recent material investment activities, see Item 4.A. Information on the Company-Capital Expenditures and
Divestitures.

We
believe that the net cash proceeds we raised by financing activities, together
with cash flows from operating activities, will be sufficient to meet our cash
needs for the next 12 months at the current level of operations. We will
consider in the future additional equity issuances, debt issuances or
borrowings from banks if necessary to meet cash needs for our growth.

Commitmentsand Contingent Liabilities

Liens

We
have pledged securities and bank accounts in favor of banks under our credit
facilities.

Some
of our subsidiaries have floating liens in favor of banks and other financial
institutions. In addition, some of our subsidiaries have liens on leased
vehicles, leased equipment and other assets in favor of the leasing companies.

Guarantees

We
are a guarantor for the completion of certain projects by some of the companies
in which we sold our interest to Formula Vision. Some of these guarantees
cannot be assigned to third parties. Under our agreement with Formula Vision,
we are entitled to indemnification by Formula Vision, if any of these
guarantees is exercised.

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As
of December 31, 2001, we guarantee loans extended by various banks to companies
in which we sold our interest to Formula Vision. These guarantees aggregate
approximately $12 million. During March 2002, we were released
from these guarantees.

In
connection with the purchase of interest in Matrix, we agreed to guarantee a
loan in the amount of $8.34 million extended by a commercial bank to the former
principal shareholders of Matrix.

Other Contractual
Commitments

In
December 2001, in connection with credit facilities we have entered into with
various banks, Formula committed, among other things, not to distribute dividends at rates
that exceed prevailing rates in other companies operating in our area of
activity. In addition, the loans provided by the banks will be repayable, at
the discretion of the banks, in the event that Dan Goldstein or Gad Goldstein
cease to serve in their current positions in Formula.

In
connection with the sale of our interest in certain companies to Formula
Vision, Formula Vision assumed all our rights and obligations under the
agreements with each of Shamrock, FIMI and IDB with respect to the companies
transferred to Formula Vision. For more information, see Item 4.A. -History and
Development of the Company-Capital Expenditures and Divestitures.

In
connection with the purchase of shares of New Applicom and
Sintec from third parties prior to
selling these shares to Matrix in October 2002, we granted the sellers certain
put options to sell to us Matrixs shares that they received in exchange for
the shares of New Applicom and Sintec. For more
information, see Item
4.A. History and Development of the
Company-Capital Expenditures and
Divestitures-Sale of New Applicom, Sintec and Sivan to Matrix.

Formula
and certain of our subsidiaries have committed not to create a floating charge
on our assets.

Related
Party Transactions

During
2001 and 2002, we conducted certain transactions as part of our restructuring
process to simplify our corporate structure and business environment included
combining some smaller subsidiaries to create a small number of larger
subsidiaries with greater operating efficiencies. The purpose of the
restructuring process was to enable us to focus on later-stage companies, in
which our management can contribute a high added value which will enable us to
maximize these companies potential. For additional information about these
transactions, see Item 7.B. Related Party Transactions and Item 4.A.History
and Development of the Company - Capital Expenditures and Divestitures.

In
November 2001,we sold to Formula Vision our interest in certain of our
privately held subsidiaries.  The
consideration was calculated based on the book value of the transferred
companies as of June 30, 2001, plus amounts invested by Formula prior to the
closing of the transaction, which we believe reflects the fair value of the
companies.

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In
November 2002, we sold to Matrix our entire shareholdings in New Applicom,
Sintec and Sivan. The purpose of the transaction was to create the largest
information technology company in Israel, providing Matrix with critical mass,
operating efficiencies, and a more unified corporate structure. The price per
share paid to us by Matrix for each of New Applicoms, Sintecs and Sivans
shares previously held by us and those purchased from third parties was equal
to the equity per share of each of the companies. The price per share paid to
us by Matrix for the shares purchased in the tender offers was equal to the
purchase price we paid for them in the tender offers.

In
November 2002, we sold to Crystal, in a share exchange transaction, our 57.9%
interest in Liraz. In consideration for our holdings in Liraz, Crystal issued
to us Crystal ordinary shares representing 9.0% of Crystal outstanding share
capital. The exchange ratio was set at 1:1.67, which we believe reflects a fair
ratio between the values of the two companies.

Effective
Corporate Tax Rates in Israel

Certain
of the companies in the Formula Group have been granted approved enterprise status under the Investment
Law. Accordingly, if these companies comply with certain requirements, they are
eligible for certain tax benefits for the first seven years in which they
generate taxable income.  Income derived
from these companies approved enterprise programs will be tax exempt for a period
of two years after the companies have taxable income. They will also be subject
to a 25% company tax rate for the following five years. Under certain
circumstances, if the percentage of the share capital that foreign shareholders
hold in subsidiaries and affiliates of these companies exceeds 25%, future approved enterprises of
the applicable subsidiary or affiliate would qualify for reduced tax rates for
an additional three years, after the seven years mentioned above. We cannot
assure you that these companies will obtain approval for additional approved
enterprises, that the provisions of the Investment Law will not change, or that
the above-mentioned shareholding portion will be reached or maintained for each
subsequent year.  In addition, our equity
in affiliated companies net income is not subject to tax in Israel. Gains from
changes in holdings in subsidiaries and affiliated companies resulting from
issuances to third parties are also not taxable in Israel. These exemptions
cause our effective tax rate to fluctuate from period to period. As a result of
the approved enterprise status of certain of our subsidiaries, we received tax
benefits of $2.5 million in 2000, $1.9 million in 2001 and $228,000 in 2002.

On
January 1, 2003, Israels tax laws had undergone a significant tax reform
(Amendment 132 to the Income Tax Ordinance (New Version) - 1961), referred to
as the new law.
The underlying principle of the new law
is to broaden the categories of taxable income, and reduce the tax rates
imposed on employment income.

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C.Research and
Development, Patents and Licenses

In
2002, we spent on research and development activities $16 million, in 2001 we
spent $21.3 million and in 2000 we spent $20.5 million. The decrease in the
amount spent on research and development activities in 2002 compared to 2001,
relates primarily to the sale to Formula Vision at the end of 2001, of certain
of our privately-held subsidiaries characterized by substantial research and
development activities.  For a description of our research and
development activities, see Item 4.B. Business Overview-Software Development.

For
information concerning our intellectual property rights, see Item 4.B.
Business Overview-Intellectual Property Rights.

D.Trend Information

We
have been affected by global economic changes, in particular the recent sharp
decline in capital spending in the information technology sector and the
overall business slow-down in North America and Europe, as well as in
Israel. As a result of these global trends, our subsidiaries Magic, Crystal and
New Applicom posted in 2001, restructuring charges of $6.6 million, $2.8
million and $1.5 million, related primarily to severance costs for employees,
relocation expenses and expenses related to closing of branches. In addition,
Magic wrote off goodwill of $22.0 million with respect to certain investments,
Applicom wrote-off goodwill of $5.0 million with respect to its investments in
Net Quotient Consulting Group Inc. and Xtivia Technologies Inc., Crystal wrote
off goodwill of $4.0 million and Formula wrote off $4.8 million with respect to
its investment in Thoughtbubble.
In 2002, we continued to be affected by the slow down in the markets in which
we operate. This resulted in a slight decrease in demand for our products and
services. We cannot assure you that this trend will not
continue. Uncertainties in the North American and European market have influenced the purchasing
patterns of leading software developers who delayed their planned orders and
caused certain developers to reduce the amount of their planned license
commitment. These changes in purchasing patterns in the IT industry affected
directly the operating results of some of our subsidiaries, which in turn
affected our consolidated operating results.

As
IT spending is more cautious, we have pursued a strategy aimed at addressing
current market needs through the introduction of cost-effective, new and
enhanced products. We strive to use our best efforts to take advantage of the
current slow-down to prepare our infrastructure to maximize the long-term
growth potential of the software market. We have recently completed a
reorganization of the Formula Group involving a restructuring of our corporate structure and work
force.

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ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES

A.Directors and
Senior Management

The
following table describes information about our directors and senior management
as of June 1, 2003.

|Name                    |  | Age |  | Position                                      
|----------------------- |  | --- |  | ----------------------------------------------
|                        |  |     |  |                                               
|Dan Goldstein           |  | 49  |  | Chairman of the Board, Chief Executive Officer
|Gad Goldstein           |  | 44  |  | President, Director                           
|Shai Beilis             |  | 55  |  | Director                                      
|Shlomo Nass             |  | 43  |  | Director                                      
|Prof. Moshe Zviran (1)  |  | 47  |  | Director                                      
|Daphna Kedmi (1)        |  | 50  |  | Director                                      
|Bruria Gross Prushansky |  | 50  |  | Secretary and General Counsel                 
|Naamit Salomon          |  | 39  |  | Vice President, Finance                       

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(1)            Outside
director. See Item 6.C. Board Practices Outside Directors; Audit Committee, Internal Auditor, Approval of
Certain Transactions, below.

Dan Goldstein has served as a chairman of
our board of directors and our chief executive officer since January 1985. Mr.
Goldstein is also the chairman of the board of directors of Matrix, New Applicom, nextSource and Sapiens
and is a director of Crystal, Magic, Sivan and of other companies within the
Formula Group.  Mr. Goldstein holds a BA degree in mathematics and computer
sciences and an MA degree in business administration, both from Tel Aviv
University. Dan Goldstein is the brother of Gad Goldstein.

Gad Goldstein has served as one of our
directors since January 1985. Mr. Goldstein was our vice president from 1985
through 1995 and was appointed our president in 1995. Mr. Goldstein is chairman
of the board of Crystal and is also a director of other companies within the
Formula Group, including
New Applicom, Matrix, Magic and Sivan. Mr. Goldstein holds a BA degree in
economics and an MA degree in business administration, both from Tel Aviv
University. Gad Goldstein is the brother of Dan Goldstein.

Shai Beilis has served as one of our
directors since December 1997. Mr. Beilis is also a director of New Applicom
and Crystal. From July 1993 to the beginning of 1995, Mr. Beilis served as the
managing director of Clal Computers and Technology Ltd., an Israeli information
technology company. Mr. Beilis holds a B.Sc. in mathematics and economics from
the Hebrew University in Jerusalem and an MA in computer science from the
Weizmann Institute of Science.

ShlomoNass has served as one of our directors since April 2003.  Mr. Nass is the president and a
partner in I.G.B. - Israel Global Business, an investment group.Mr. Nass performed various public duties and serves as a director of several public companies.  Mr. Nass holds a B.Sc. degree in economics
and accounting, and an LL.B degree both from the Bar-Ilan
University.  Mr. Nass is a certified public accountant, a member of the Israeli Bar and
holds a Ph.D. in law.

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Professor
Moshe Zviran
has served as one of our directors since January 2000.  He is currently an associate professor at
the Tel Aviv University Graduate School of Management.  Professor Zviran holds a BA degree in
mathematics and computer sciences and a M.Sc. and Ph.D. in business
administration  information systems, all from Tel Aviv University.

Daphna
Kedmi
has served as one of our directors since January 2000.  Since February 2000, Ms. Kedmi has served as
general counsel for Nice Systems Ltd. 
From 1998 until February 2000, Ms. Kedmi served as general counsel for
Tadiran Ltd., a major Israeli electronics holding company.  In addition, from 1988 until 1998, she
served as general counsel of Elisra Electronic Systems Ltd., a defense
electronics company. Ms. Kedmi is a member of the Israeli Bar and holds an
LL.B. degree from the University of Tel Aviv.

Bruria Gross Prushansky has served as our
secretary and general counsel since January 1997. From 1994 until the end of
1996, Ms. Gross Prushansky was in the private practice of law. From 1988 until
1994, Ms. Gross Prushansky was the general counsel of Elite Industries Ltd., a
major Israeli food company. Ms. Gross Prushansky, who is a member of the
Israeli Bar, holds an LL.B. degree from Tel Aviv University and has an MA
degree in business administration from the Recanati executive MBA program of
Tel Aviv University.

Naamit Salomonhas served as our vice
president, finance since August 1997. 
Ms. Salomon also serves as a director of Magic. From 1990 through August
1997, Ms. Salomon was a controller of two large, privately held companies in
the Formula Group.  Ms. Salomon holds a BA
degree in economics and business administration from Ben Gurion University.

B.Compensation

In
2002, we paid to our directors and officers (seven persons) aggregate direct
remuneration of approximately $845,600. This amount includes amounts set aside or accrued to
provide post-employment benefits.

This
amount does not include the following:

| |  | amounts expended by us for automobiles made available to our
  officers;                                                               
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                        
| |  | expenses, including business travel, professional and business
  association dues and expenses, that we reimburse our officers for; and
| |   |                                                                                                                                        
| |  | other fringe benefits that companies in Israel commonly reimburse or
  pay to their officers.                                          

The amount also includes
payment of directors fees to our non-employee directors. Our employee
directors do not receive fees for their services as directors. In 2002, we paid
an aggregate amount of $58,383 for post-employment benefits for our executive officers and directors.

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In November 2000,
options to purchase 16,000 ordinary shares were granted to certain of our
officers under the 2000 share option plan. No director has been granted options
under this plan.  The exercise price of
the options is $30.8  per share, as indexed to the Israeli
CPI. The options vest over a three-year period from the date of grant. Options to purchase
10,666 ordinary shares are currently exercisable. These options expire on the fifth
anniversary of the date of grant.

Effective
January 1, 1999, all of our executive officers and directors (other than the
outside directors) entered into written employment agreements with us pursuant
to which, among other things, we pay them a monthly salary in an agreed amount.
The salary is linked to the Israeli CPI. 
Each party may terminate the agreement upon a 90-day notice.  In addition, two of our executive officers
are entitled to bonuses which aggregate approximately 3.5% of our consolidated
net income exceeding $10 million.

C.Board Practices

Pursuant
to our articles of association, directors are elected at the annual general
meeting of shareholders by a vote of the holders of a majority of the voting
power represented at the meeting. Each director, except for the outside
directors described below, holds office until the next annual general meeting
of shareholders. Officers are appointed by our board of directors. For information
regarding the employment agreements of our officers, see Item 6.B.
Compensation.

Outside
Directors

Under
the Companies Law, companies incorporated under the laws of Israel whose shares
have been offered to the public in or outside of Israel, are required to
appoint at least two outside directors. This law provides that a person may not
be appointed as an outside director if the person or the persons relative,
partner, employer or any entity under the persons control, has, as of the date
of the persons appointment to serve as outside director, or had, during the
two years preceding that date, any affiliation with the company or any entity
controlling, controlled by or under common control with the company. The term
affiliation includes:

| |  | an employment relationship;                                             
| | - | ------------------------------------------------------------------------
| |   |                                                                         
| |  | a business or professional relationship maintained on a regular
  basis;
| |   |                                                                         
| |  | control; and                                                            
| |   |                                                                         
| |  | service as an office holder.                                            

No person may serve as an outside
director if the persons position or other business activities create, or may
create, a conflict of interest with the persons responsibilities as an outside
director or may otherwise interfere with the persons ability to serve as an
outside director. Outside directors are to be elected by a majority vote at a
shareholders meeting, provided that either:

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| |  | the majority of shares voted at the meeting, including at least
  one-third of the shares of non-controlling shareholders voted at the meeting,
  vote in favor of election of the director; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                
| |  | the total number of shares of non-controlling shareholders voted
  against the election of the director does not exceed one percent of the
  aggregate voting rights in the company.           

The initial
term of an outside director is three years and may be extended for an
additional three years. The independent directors appointed before the new
Companies Law became effective shall serve as outside directors for a term of
five years commencing upon their appointment in accordance with the provisions
of the Israeli Companies Ordinance [New Version] 1983. These directors may not
be reappointed until after two years have passed from the conclusion of their
term.

Each
committee of a companys board of directors is required to include at least one
outside director. However, the audit committee shall include all the outside
directors.

An
outside director is entitled to compensation as provided in regulations
promulgated under the Companies Law and is otherwise prohibited from receiving
any compensation, directly or indirectly, in connection with services provided
as an outside director. We compensate our two outside directors in accordance
with regulations promulgated under the Israeli Companies Law, 1999.

Audit
Committee

The
Companies Law requires public companies to appoint an audit committee. We have
established an audit committee, consisting of the two outside directors, Prof.
Moshe Zviran and Daphna Kedmi, as well as Shai Beilis. The responsibilities of
the audit committee under the Companies Law include identifying irregularities
in the management of the companys business and approving related party
transactions as required by law. Under the Companies Law, an audit committee
must consist of at least three directors, including all of the outside
directors. The chairman of the board of directors, any director employed by or
otherwise providing services to the company, and a controlling shareholder or
any relative of a controlling shareholder, may not be a member of the audit
committee.

In
addition, under the rules of the Nasdaq, we are currently required to have at
least two independent directors and to maintain an audit committee, at least a
majority of whose members are independent of management. Our outside
directors qualify as independent directors under the rules of the Nasdaq.

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Internal
Auditor

Under
the Companies Law, the board of directors must appoint an internal auditor,
nominated by the audit committee. The role of the internal auditor is to
examine, among other matters, whether the companys actions comply with the law
and orderly business procedure. Under the Companies Law, the internal auditor
may be an employee of the company but not an office holder, or an affiliate, or
a relative of an office holder or affiliate, and he may not be the companys
independent accountant or its representative.

Exculpation,
Insurance and Indemnification of Directors and Officers

Under
the Companies Law, an Israeli company may not exempt an office holder from
liability with respect to a breach of his duty of loyalty, but may exempt in
advance an office holder from his liability to the company, in whole or in
part, with respect to a breach of his duty of care.

Office
Holders Insurance

Our
articles of association provide that, subject to the provisions of the
Companies Law, we may enter into a contract for the insurance of the liability
of any of our office holders imposed on the office holder in respect of an act
performed in his or her capacity as an office holder, with respect to:

| | a breach of his
  duty of care to us or to another person;                                                                                                                            
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                       
| | a breach of
  his duty of loyalty to us, provided that the office holder acted in good
  faith and had reasonable cause to assume that his act would not prejudice our
  interests; or
|  |                                                                                                                                                                                       
| | a financial
  liability imposed upon him in favor of another person.                                                                                                                  

We have
obtained an insurance policy covering the Formula Groups directors and officers
liability. Our subsidiaries participate in the premium payments of the
insurance, on a proportional basis. The total premium Formula paid during 2002 was approximately $40,000.

Indemnification
of Office Holders. Our articles of
association provide that we may indemnify an office holder against:

| | a financial
  liability imposed on him in favor of another person by any judgment,
  including a settlement or an arbitrators award approved by a court
  concerning an act performed in his capacity as an office holder; and                                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                               
| | reasonable
  litigation expenses, including attorneys fees, expended by the office holder
  or charged to him by a court, in proceedings we institute against him or
  instituted on our behalf or by another person, or in a criminal charge from
  which he was acquitted, in each case relating to an act performed in his
  capacity as an office holder.

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Limitations on
Insurance and Indemnification. The Companies Law provides that a company may not indemnify an office
holder nor enter into an insurance contract which would provide coverage for
any monetary liability incurred as a result of any of the following:

| | a breach by the office holder of his duty
  of loyalty unless the office holder acted in good faith and had a reasonable
  basis to believe that the act would not prejudice the company;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                          
| | a breach by
  the office holder of his duty of care if the breach was done intentionally or
  recklessly;                                                                                
|  |                                                                                                                                                                                          
| | any act or
  omission done with the intent to derive an illegal personal benefit; or                                                                                                     
|  |                                                                                                                                                                                          
| | any fine
  levied against the office holder.                                                                                                                                             

In addition,
under the Companies Law, indemnification of, and procurement of insurance
coverage for, our office holders must be approved by our audit committee and
our board of directors and, in specified circumstances, by our shareholders.

In
February 2002, we granted to each of our office holders an indemnification
letter, pursuant to which we undertook to indemnify
each office holder in respect of certain obligations and expenses. For
information concerning the indemnification arrangement with our office holders,
see Item 7.B. Related Party Transactions-Indemnification of Office Holders.

Approval
of Certain Transactions under the Companies Law

The
Companies Law codifies the fiduciary duties that office holders, including
directors and executive officers, owe to a company. An office holders
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of
loyalty includes (i) avoiding any conflict of interest between the office
holders position in the company and his personal affairs, (ii) avoiding any
competition with the company, (iii) avoiding exploiting any business
opportunity of the company in order to receive personal advantage for himself
or others, and (iv) revealing to the company any information or documents
relating to the companys affairs which the office holder has received due to
his position as an office holder. Each person listed in the table under
Directors and Senior Management above is an office holder. Under the
Companies Law, arrangements regarding the compensation of directors require the
approval of the audit committee, the board of directors and shareholder
approval.

The
Companies Law requires that an office holder of a company promptly disclose any
personal interest that he or she may have and all related material information
known to him or her, in connection with any existing or proposed transaction by
the company. In addition, if the transaction is an extraordinary transaction
as defined under Israeli law, the office holder must also disclose any personal
interest held by the office holders spouse, siblings, parents, grandparents,
descendants, spouses descendants and the spouses of any of the foregoing. In
addition, the office holder must also disclose any interest held by any
corporation in which the office holder owns 5% or more of the share capital, is
a director or general manager or in which he or she has the right to appoint at
least one director or the general manager. An extraordinary transaction is
defined as a transaction other than in the ordinary course of business,
otherwise than on market terms, or that is likely to have a material impact on
the companys profitability, assets or liabilities.

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Under the
Companies Law, after the office holder complies with the disclosure
requirements described above, only board approval is required for any transaction which is not
an extraordinary transaction, unless the articles of association of the company
provide otherwise, and provided the transaction is not adverse to the companys
interest. If the transaction is an extraordinary transaction, the company must
receive any approval stipulated by the articles of association, the approval of
the companys audit committee and the approval of the board of directors, as
well as, under certain circumstances, approval by a meeting of the shareholders
of the company. An office holder 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 be present at this meeting or vote on this matter.

The
Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company, which includes a shareholder that holds 25% or
more of the voting rights in the company if no other shareholder owns more than
50% of the voting rights in the company. Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal
interest, and the terms of compensation of a controlling shareholder who is an
office holder, require the approval of the audit committee, the board of
directors and the shareholders of the company. The shareholder approval must
include at least one-third of the shareholders who have no personal interest in
the transaction and are present, in person or by proxy, at the meeting or,
alternatively, the total shareholdings of those who have no personal interest
in the transaction who vote against the transaction must not represent more
than one percent of the voting rights in the company. In certain cases provided
in regulations promulgated under the Companies Law, shareholder approval is not
required.

In
a private placement of securities that will increase the relative holdings of a
shareholder that holds five percent or more of the companys outstanding share
capital (assuming the exercise or conversion of all securities held by that
person that are exercisable for or convertible into shares) or that will cause
any person to become, as a result of the issuance, a holder of more than five
percent of the companys outstanding share capital, the Companies Law requires
that the company receive its shareholders approval. In certain cases provided
in regulations promulgated under the Companies Law, shareholder approval is not
required.

D.     Employees

We
have approximately 3,500 full-time employees, of whom approximately 3,100 are software
professionals.  In 2001, we had approximately 3,700 full-time employees, of whom approximately 3,300 were software professionals. In 2000, we had approximately 4,400 full-time employees,
of whom approximately 3,960 were software professionals. The decrease in the number of employees in 2002
compared to 2001 relates primarily to the sale of certain of our privately-held
subsidiaries to Formula Vision, at the end of 2001. The decrease in the number
of employees in 2001 compared to 2000 relates primarily to the restructuring
process held by certain of our subsidiaries, including closing of branches.

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With respect
to our employees in Israel, we are subject to various Israeli labor laws and labor practices,
and to administrative orders extending certain provisions of collective
bargaining agreements between the Histadrut (Israels General Federation of
Labor) and the Coordinating Bureau of Economic Organizations (the Israeli
federation of employers organizations) to all private sector employees. For
example, mandatory cost of living adjustments, which compensate Israeli
employees for a portion of the increase in the Israeli consumer price index,
are determined on a nationwide basis. Israeli law also requires the payment of
severance benefits upon the termination, retirement or death of an employee. We
meet this requirement by contributing on an ongoing basis towards managers
insurance funds that combine pension, insurance and, if applicable, severance
pay benefits. In addition, Israeli employers and employees are required to pay
specified percentages of wages to the National Insurance Institute, which is
similar to the United States Social Security Administration. Other provisions
of Israeli law or regulation govern matters such as the length of the workday,
minimum wages, other terms of employment and restrictions on discrimination. We
are also subject to the labor laws and regulations of other jurisdictions in
the world where we have employees.

E.Share Ownership

The
following table presents information regarding the ownership of our ordinary
shares by the persons listed in the table under Directors and Senior
Management, as of June 1, 2003.

|Name                                                    |  | Shares beneficially owned |  | Options to purchase 
  ordinary shares          
|------------------------------------------------------- |  | ------------------------- |  | ------------------------------------------------
|                                                        |  |                           |  |                                                 
|                                                        |  | Number                    |  | Percentage of outstanding 
  ordinary shares (1)
|                                                        |  |                           |  |                                                 
|Dan
  Goldstein (2)                                     |  | 2,000,034                 |  | 20.0%                                           
|Gad
  Goldstein (3)                                     |  | 325,000                   |  | 3.3%                                            
|All
  directors and officers as a group (8 persons) (4) |  | 2,330,534                 |  | 23.3%                                           

---

|(1) | Percentages in the above
  table are based on 10,000,000 ordinary shares outstanding as of June 1, 2003.                                                                                                                                                                                                                                              
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | In
  January 2002, Dan Goldstein purchased 850,000 ordinary shares from Shamrock
  Holdings of California Inc. On February 20, 2002, Dan Goldstein, his brother
  Gad Goldstein and Iscal Holdings Ltd. entered into a binding memorandum. For
  details of the binding memorandum, see Item 7. Major Shareholders and
  Related Party Transactions.
|(3) | In
  January 2002, Gad Goldstein purchased 150,000 ordinary shares from Shamrock
  Holdings of California Inc. For information regarding a binding memorandum
  entered between Gad Goldstein, his brother Dan Goldstein and Iscal Holdings
  Ltd. on February 20, 2002, see Item 7. Major Shareholders and Related Party
  Transactions.           
|(4) | Each
  of the directors and executive officers not separately identified in the
  above table beneficially owns less than one percent of our outstanding
  ordinary shares (including options held by each of these persons) and have
  therefore not been separately disclosed.                                                                      

|(5) | These options to
  purchase 16,000 ordinary shares vest in one-third increments on each of
  November 19, 2001, 2002 and 2003 at an exercise price of $30.8 per share, as indexed to the Israeli CPI. These options expire in November 2005.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Arrangements Involving the Issue or Grant of
Options to Purchase Shares

The 1997 Share
Option Plan

In
August 1997, we adopted a share option plan under which we may grant options to
purchase up to an aggregate of 200,000 ordinary shares to employees and members
of our and our subsidiaries management. In August 1997, we granted options to
purchase 135,000 ordinary shares to certain of our employees, including options
to purchase 97,000 shares granted to certain of our officers and
directors.  The exercise price of these
options was $18.6 per
share, as indexed to the Israeli CPI. The options vested over a three-year period from the
date of grant. These options expired in August 2002.  Of these options, options to purchase 76,650 shares have been
exercised.

The
2000 Share Option Plan

In
November 2000, we adopted a share option plan under which we may grant options
to purchase up to an aggregate of 300,000 ordinary shares to employees and
members of our management. Of these options, we granted in November 2000,
options to purchase 64,500 ordinary shares to certain of our employees,
including options to purchase 16,000 shares granted to certain of our officers
and directors. The exercise price of these options is $30.8 per share, as
indexed to the Israeli CPI. The options vest over a three-year period from the
date of grant. The options expire on the fifth anniversary of the date of
grant.  As of June 15, 2003, none of these options has
been exercised.

Option Plans of Our Subsidiaries

Our
operating subsidiaries generally have share option plans pursuant to which
qualified directors, employees and consultants may be granted options for the
purchase of securities in these subsidiaries. 
In addition, these subsidiaries may from time to time grant options to
third parties as part of a business transaction.

Options
Granted to Shandol

On
September 6, 1999, an extraordinary general meeting of shareholders approved
the grant of options to purchase 1,000,000 ordinary shares to Shandol Ltd., one
of our former subsidiaries, currently a subsidiary of Formula Vision. On August
10, 2000, an extraordinary general meeting of shareholders approved the grant
of additional options to Shandol to purchase 500,000 ordinary shares. In
November 2001, Shandol exercised options to purchase 1,000,000 ordinary shares.
The remaining options to purchase 500,000 ordinary shares are still
outstanding. The exercise price of these options is the average price of an
ordinary share on the TASE during the 14 trading days prior to the notice of
exercise. These options expire five years from the date of grant.

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ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.Major Shareholders

The
following table presents information regarding the ownership of our ordinary
shares at June 1, 2003 by each person known to us to be the beneficial owner of
more than 5% of our ordinary shares based on information provided to us by the
holders or disclosed in public filings with the Securities and Exchange
Commission.  Except where we indicated
otherwise, we believe, based on information furnished by these owners, that the
beneficial owners of our shares listed below have sole investment and voting
power with respect to the shares.

|Name and Address                        |  | Shares
  Beneficially
  Owned |  | Percent ofClass(1)
|--------------------------------------- |  | ----------------------------- |  | ------------------
|                                        |  |                               |  |                   
|Dan Goldstein(2)                        |  | 2,000,034                     |  | 20.0%             
|Iscal Holdings Ltd.(3)                  |  | 791,468                       |  | 7.9%              
|Computer Direct to Israel (MIL) Ltd.(4) |  | 579,838                       |  | 5.8%              

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|(1) | Ordinary
  shares deemed beneficially owned by virtue of the right of any person or
  group to acquire these ordinary shares within 60 days of June 1, 2003, are treated as outstanding only for the purposes of determining the
  percent owned by this person or group. Percentages in the above table are based on 10,000,000 ordinary shares
  outstanding as of June 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Dan
  Goldstein purchased 850,000 ordinary shares from Shamrock Holdings of
  California Inc. On February 20, 2002, Dan Goldstein, his brother Gad
  Goldstein and Iscal Holdings Ltd. entered into a binding memorandum,pursuant to which the parties agreed to
  sign within 30 days an agreement with respect to (i) first refusal rights in
  the event of a sale of Formula shares by either of the parties; (ii)
  bring-along and tag-along rights upon sale of shares; and (iii) an
  undertaking of Iscal with respect to a minimum rate of holdings of Formulas
  shares and terms of sale of the shares to third parties. In addition, the
  binding memorandum provides that if within nine months, Iscal holdings in
  Formula exceed 2,300,000 ordinary shares, representing 22.28% of Formula
  outstanding share capital, the parties will enter into a voting agreement
  with respect, inter alia, to exercising voting rights at our general
  meetings. In the event that Iscals holdings exceed 1,000,000 ordinary
  shares, representing 9.7% of Formula outstanding share capital, or
  constituting at least 40% of Dan and Gad Goldsteins holdings in Formula shares,
  the parties will enter into a partial voting agreement which will entitle
  Iscal to nominate at least one director to our board of directors. Any voting
  agreement, if agreed upon, is subject to the approvals required under the
  Companies Law, including a tender offer, if required. A comprehensive
  agreement or voting agreements between Dan
  Goldstein, Gad Goldstein and Iscal have not been
  signed.
|(3) | Foichtweinger
  1984 Investments Ltd., the major
  shareholder of Iscal, holds a 24.9% interest in Iscal. For information regarding a binding memorandum
  entered between Dan Goldstein, Gad Goldstein and Iscal Holdings Ltd. on
  February 20, 2002, see footnote (2) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(4) | Computer
  Direct to Israel (MIL) Ltd. is publicly traded on the TASE. Computer Direct
  is owned by Adi Eyal (49.26%), Clal Holdings
  Insurance Industries Ltd. (9.16%) and Aloni
  Chetz Ltd. (7.61%).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

As of June
1, 2003, 10,000,000 ordinary shares were issued and outstanding, excluding
324,780 ordinary shares that we purchased during 2002. At that date, we had
approximately 15 shareholders of record. All of our ordinary shares
have equal voting rights. However, under applicable Israeli law, the shares we
hold have no voting rights and, therefore, are excluded from the number of our
outstanding shares.

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As of June 1,
2003, 490,662 ADSs
were issued and outstanding pursuant to a depositary agreement with The Bank of
New York, representing 490,662 of our
ordinary shares. As of that date, there were 10 registered holders of ADSs in the United States.

B.Related Party
Transactions

Purchase
of Sintec Media Shares by Formula Vision

In
September 2001, Sintec entered into an agreement with Formula Vision, pursuant
to which Formula Vision purchased Sintecs entire shareholdings in Sintec Media
Ltd., representing
25% of Sintec Media Ltd.s outstanding
share capital, for aggregate consideration of $2.6 million. In connection with
this transaction, Formula Vision has granted to Sintec an option, exercisable
within three years from the date of closing, to purchase up to 10% of the
shares sold to Formula Vision, at the same purchase price set out in the
agreement between the parties. This transaction is considered a related party
transaction since Dan and Gad Goldstein serve as directors of Formula Vision
and Sintec.

Purchase
of T-Soft Shares by Formula Vision

In
September 2001, Comsoft Technologies Ltd. entered into an agreement with
Formula Vision, pursuant to which Formula Vision purchased Comsofts entire
shareholdings in T-Soft Ltd., representing 46% of T-Soft Ltd.s outstanding share capital, for
aggregate consideration of $2.8 million. In connection with this transaction,
Formula Vision has granted to Comsoft an option, exercisable within three years
from the date of closing, to purchase up to 10% of the shares sold to Formula
Vision, at the same purchase price set out in the agreement between the
parties. This transaction is considered a related party transaction since Dan
and Gad Goldstein serve as directors of Formula Vision and Comsoft.

Purchase
of LetMeKnow Shares and Polyglot Shares by Formula Vision

In
September 2001, Formula Vision entered into an agreement with a wholly owned
subsidiary of Crystal, pursuant to which Formula Vision purchased the entire
shareholdings of Crystals subsidiary in LetMeKnow Ltd. and Polyglot Ltd., for
aggregate consideration of $1.5 million. In addition, Crystal transferred to
Formula Vision its undertakings in connection with convertible loans in an
aggregate of $400,000 and guarantees of $600,000 extended to LetMeKnow, and
shareholders loan of $82,000 and guarantees of up to $1.1 million extended by
Crystal to Polyglot. In connection with this transaction, Formula Vision has
granted to Crystals subsidiary an option, exercisable within three years from
the date of closing, to purchase up to 10% of the shares sold to Formula
Vision, at the same purchase price set out in the agreement between the
parties. This transaction is considered a related party transaction since Dan
and Gad Goldstein serve as directors of Formula Vision and Crystal.

Transactions
between Formula and Formula Vision

In
July 2001, Formula granted to Formula Vision, an option to purchase our
interests in certain privately-held companies. On November 28, 2001, Formula
Vision exercised the option. Accordingly, we transferred to Formula Vision our
entire interest, including related obligations, in certain companies for
aggregate consideration of $58.9 million. Under the agreement with Formula
Vision, Formula Vision issued to us in December 2001, a series of debentures of
$58.9 million in the aggregate, linked to the Israeli CPI and bearing an interest at an
annual rate of 5%. On March 31, 2002, we lent to Formula Vision an additional
$19.4 million in consideration for a series of debentures with similar terms of
the debentures issued in December 2001. Formula is entitled, during a 3-year
period, to repurchase from Formula Vision up to 10% of the sold shares of the
transferred companies, at the same purchase price set out in the agreement
between the parties.  As part of the
agreement between us and Formula Vision, we also transferred to Formula Vision
our rights and obligations with respect to the transferred companies under our
agreements with each of Shamrock, FIMI and IDB. This series of transactions is
considered a related party transaction since Dan and Gad Goldstein serve as
directors of Formula and Formula Vision.

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For more information about the
transaction between Formula and Formula Vision, see Item 4.A. History and
Development of the Company -Capital
Expenditures and Divestitures-Restructuring of Our Corporate Structure.

Transactions
between Formula and Matrix

In
November 2002, we completed a sale to Matrix of our entire
shareholdings in New Applicom, Sintec and Sivan, for an aggregate consideration
of $29.7 million. The purpose of the transaction was to create the largest
information technology company in Israel, providing Matrix with critical mass,
operating efficiencies and a more unified corporate structure. In this
transaction, we sold to Matrix (i) shares previously held by us; (ii) shares
that we purchased in October 2002 from third parties; and (iii) shares
that we purchased in tender offers that we published in October 2002. The price per share
paid to us by Matrix for each of New Applicoms, Sintecs and Sivans shares
previously held by us and those purchased from third parties was equal to the
equity per share of each of the companies. The price per share paid to us by
Matrix for the shares purchased in the tender offers was equal to the purchase
price we paid for them in the tender offers.

For
additional information regarding this transaction, see Item 4.A.History and Development of the Company-Capital Expenditures and
Divestitures - Sale of New Applicom, Sintec and Sivan to Matrix.

Sale of Lirazs
shares toCrystal

In November 2002, we sold to Crystal,in a share exchange
transaction, our 57.9% interest in Liraz.In consideration, Crystal issued to us Crystal ordinary shares representing 9.0% of Crystal outstanding share
capital. The
exchange ratio was set at 1:1.67, which we believe reflects
a fair ratio between the values of the two companies.

For
additional information regarding this transaction, see Item 4.A.History and Development of the Company-Capital Expenditures and
Divestitures - Sale of Liraz to Crystal.

67

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Indemnification
of Office Holders

In
February 2002, we granted to each of our office holders an indemnification
letter, pursuant to which we undertook to indemnify
each office holder in respect of an obligation or expense imposed on the office
holder in respect of an act performed in his or her capacity as an office
holder, provided, however, that the undertaking is limited to categories of
events specified in the indemnification letter and subject to the provisions of
any law, as follows:

| | (i)     a
  financial obligation imposed on him or her in favor of another person by a
  court judgment, including a compromise judgment or an arbitrators award
  approved by court; and                                                                                                                                                                                                                                                                               
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (ii)     reasonable
  litigation expenses including attorneys fees, expended by an office holder
  or charged to the office holder by a court, in a proceeding instituted
  against the office holder by the company or on its behalf or by another
  person, or in a criminal charge from which the office holder was acquitted,
  or in a criminal proceeding in which the office holder was convicted of an
  offense that does not require proof of criminal intent.

The
indemnification described above shall also apply to an obligation or expense
imposed on the office holder in respect of an act performed in his or her
capacity as an office holder or an employee of one of our subsidiaries. Our
undertaking for indemnification is limited to up to 25% of our equity as it appears in our latest
financial statements known at the date of indemnification.

Our
undertaking for indemnification shall not apply to a liability incurred as a
result of any of the following:

| | (i)          a
  breach by the office holder of his or her duty of loyalty, unless the office
  holder acted in good faith and had a reasonable basis to believe that the act
  would not prejudice the company;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                 
| | (ii)         a
  breach by the office holder of his or her duty of care if the breach was done
  intentionally or recklessly;                                                                                   
| |                                                                                                                                                                                                                 
| | (iii)        any
  act or omission done with the intent to derive an illegal personal benefit;
  or                                                                                                             
| |                                                                                                                                                                                                                 
| | (iv)        any
  fine levied against the office holder.                                                                                                                                                        

We
shall not be required to indemnify an office holder, if the office holder, or
anyone on its behalf, already received payment in respect of a liability
subject to indemnification, under an effective insurance coverage or an
effective indemnification arrangement with a third party, provided, however,
that if such payment made to the office holder does not cover the entire
liability subject to the indemnification, we shall indemnify the office holder
in respect of the difference between the amount paid to the office holder and
the liability subject to the indemnification.

68

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Office
Holders Insurance

We have
obtained an insurance policy covering the Formula Groups directors and officers
liability. Our subsidiaries participate in the premium payments of the
insurance, on a proportional basis. The total premium Formula paid during 2002 was approximately $40,000.

Other
Transactions

From
time to time, in our ordinary course of business, we engage in transactions
with our subsidiaries and affiliates. We believe that these agreements are made
on an arms length basis upon terms and conditions no less favorable to us, our
subsidiaries and affiliates, as we could obtain from unaffiliated third
parties. If we engage with our subsidiaries and affiliates in transactions
which are not in the ordinary course of business, we receive the approvals
required under the Companies Law. These approvals include audit committee
approval, board approval and, in certain circumstances, shareholders approval.
See Item 6.C. Board Practices.

C.       Interests of Experts and
Counsel

Not
applicable.

ITEM 8.
FINANCIAL INFORMATION

A.Consolidated
Statements and Other Financial Information

Financial Statements

The
financial statements required by this item are found at the end of this annual
report, beginning on page F-1.

Legal
Proceedings

We
are not involved in any material legal proceedings. We are also not involved in
any proceedings in which any of our directors, members of our senior management
or any of our affiliates is either a party adverse to us or to our subsidiaries
or has a material interest adverse to us or to our subsidiaries.

Dividend
policy

In
August 2001, Formula distributed to its shareholders a dividend in kind of
Formula Visions (formerly known as Mashov) shares held by Formula. Other than
this distributon, Formula has never declared or paid dividends to our
shareholders and we do not intend to pay dividends in the future. We anticipate
that we will retain all of our future earnings for use in the expansion and
operation of our business.

B.Significant Changes

Except as otherwise
disclosed in this annual report, there has been no material change in our financial position since December 31,
2002.

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ITEM 9. THE
OFFER AND LISTING

A.       Offer andListing Details

Price
Range of Ordinary Shares

The
following table shows the high and low closing price for our ordinary shares on
the TASE, for the periods indicated.  The exchange rate reported by the Bank of
Israel on June 24, 2003 was NIS 4.40=$1.00.

|Calendar Period        |  | Closing Price
  Per Share |       
|---------------------- |  | ------------------------- | ------
|                       |  |                           |       
|                       |  | in NIS                    |       
|                       |  | High                      |       
|                       |  |                           |       
|1998                   |  |                           | 164.50
|1999                   |  |                           | 189.90
|2000                   |  |                           | 355.00
|2001                   |  |                           | 151.30
|First Quarter          |  |                           | 151.30
|Second Quarter         |  |                           | 119.10
|Third Quarter          |  |                           | 88.40 
|Fourth Quarter         |  |                           | 76.80 
|2002                   |  |                           | 75.80 
|First Quarter          |  |                           | 75.80 
|Second Quarter         |  |                           | 57.10 
|Third Quarter          |  |                           | 56.00 
|Fourth Quarter         |  |                           | 50.20 
|2003                   |  |                           |       
|First Quarter          |  |                           | 41.33 
|January                |  |                           | 41.33 
|February               |  |                           | 37.54 
|March                  |  |                           | 40.93 
|April                  |  |                           | 49.60 
|May                    |  |                           | 53.60 
|June (through June 16) |  |                           | 51.40 

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Price
Range of American Depositary Shares

The
following table shows, for the periods indicated, the high and low closing sale
prices for the ADSs, as reported by the Nasdaq National Market.

|                       |  | High |       | Low | 
|---------------------- |  | ---- | ----- | --- | 
|                       |  |      |       |     | 
|                       |  | In $ |      
|1998                   |  |      | 47.25 |     | 
|1999                   |  |      | 47.94 |     | 
|2000                   |  |      | 92.19 |     | 
|2001                   |  |      | 38.00 |     | 
|First Quarter          |  |      | 38.00 |     | 
|Second Quarter         |  |      | 29.24 |     | 
|Third Quarter          |  |      | 21.80 |     | 
|Fourth Quarter         |  |      | 17.67 |     | 
|2002                   |  |      | 16.92 |     | 
|First Quarter          |  |      | 16.92 |     | 
|Second Quarter         |  |      | 11.92 |     | 
|Third Quarter          |  |      | 11.67 |     | 
|Fourth Quarter         |  |      | 10.70 |     | 
|2003                   |  |      |       |     | 
|First Quarter          |  |      | 8.75  |     | 
|January                |  |      | 8.55  |     | 
|February               |  |      | 8.10  |     | 
|March                  |  |      | 8.75  |     | 
|April                  |  |      | 11.00 |     | 
|May                    |  |      | 12.12 |     | 
|June (through June 16) |  |      | 11.66 |     | 

B.       Plan
of Distribution

Not applicable

C.       Markets

Since our initial public offering in
1991, our ordinary shares have been traded in Israel on the TASE. No U.S.
trading market exists for the ordinary shares. Since October 1997, our ADSs are
traded on the Nasdaq National Market, under the symbol FORTY.

D.       Selling
Shareholders

Not applicable

E.       Dilution

Not applicable

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F.       Expenses
of the Issue

Not applicable

ITEM 10.
ADDITIONAL INFORMATION

A.       Share
Capital

Not applicable

B.Memorandum and
Articles of Association

We
are registered with the Israeli Companies Register under the number
52-003669-0. Our objects are specified in our memorandum of association. These
objects include:

| |  | operating within the field of informational and computer systems;                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                            
| |  | providing management, consulting and sale services for computers,
  computer equipment, software for computers and for information systems;
| |   |                                                                                                                                            
| |  | the business of systems analysis, systems programming and computer
  programming; and                                                      
| |   |                                                                                                                                            
| |  | establishing facilities for instruction and training for computers
  and digital systems.                                                  

Description
of Our Share Capital

Our
company share capital consists of ordinary shares. Our articles of association
do not restrict in any way the ownership of our ordinary shares by
non-residents, except that these restrictions may exist with respect to
citizens of countries which are in a state of war with Israel.

Dividend
and Liquidation Rights

We
may declare a dividend to be paid to the holders of ordinary shares according
to their rights and interests in our profits. We may invest or use for our own
benefit all unclaimed dividends. If dividends remain unclaimed for seven years
from the date we declared the dividend they lapse and revert back to us. Our
board of directors can cause us to pay the dividend to a holder who would have
been entitled if the dividend had not reverted back to us. In case of
liquidation, after satisfying liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to their holdings.
This right may be affected by the grant of a preferential dividend or
distribution rights to the holders of a class of shares with preferential
rights that may be authorized in the future. Under the Companies Law, the
declaration of a dividend does not require the approval of the shareholders of
the company, unless the companys articles of association require otherwise.
Our articles of association provide that our board of directors may declare and
pay dividends without any further action of our shareholders.

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Redemption
provisions

In
accordance with our articles of association, we may issue redeemable shares and
accordingly redeem those shares.

Voting,
Shareholder Meetings and Resolutions

Holders
of our ordinary shares have one vote for each ordinary share held on all
matters submitted to the vote of shareholders. These 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.

We
must hold an annual general meeting once a year with a maximum period of
fifteen months between the meetings. All other meetings of shareholders other
than annual general meetings are considered special general meetings. Our board
of directors may call a special general meeting whenever it decides it is
appropriate. In addition, shareholders representing 5% of the outstanding share
capital may require the board of directors to call a special general
meeting.   The quorum required for a
general meeting of shareholders consists of two or more holders present in
person or by proxy who hold or represent at least 25% of the voting power. A meeting
adjourned for a lack of a quorum generally is adjourned to the same day in the
following week at the same time and place or any time and place as the chairman
of the meeting may decide with the consent of the holders of a majority of the
voting power represented at the meeting in person or by proxy and voting on the
question of adjournment. At the reconvened meeting, if a quorum is not present
within half an hour from the time appointed for holding the meeting, the
required quorum will consist of two shareholders present in person or by proxy.

Under
the Companies Law, unless otherwise provided in the articles of association or
applicable law, all resolutions of the shareholders require a simple majority,
except in certain circumstances provided for under the Companies Law, which
require a majority of at least 75% of the shares present at the meeting. In
accordance with the Companies Law, all shareholders meetings require prior
notice of at least 21 days.

Under
the Companies Law, a shareholder has a duty to act in good faith towards the
company in which he holds shares and towards other shareholders and to refrain
from abusing his power in the company including voting in the general meeting
of shareholders on:

| |  | any amendment to the articles of association                                       
| | - | -----------------------------------------------------------------------------------
| |   |                                                                                    
| |  | an increase of the companys authorized share capital                              
| |   |                                                                                    
| |  | a merger; or                                                                       
| |   |                                                                                    
| |  | approval of some of the acts and transactions which require
  shareholder approval.

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A
shareholder has the general duty to refrain from depriving rights of other
shareholders. Any controlling shareholder, any shareholder who knows that it
possesses the power to determine the outcome of a shareholder vote and any
shareholder that, under the provisions of the articles of association, has the
power to appoint an office holder in the company, is under a duty to act in fairness towards the company.
The Companies Law does not describe the substance of this duty.

Transfer
of Shares

Fully
paid ordinary shares are issued in registered form and may be freely
transferred under our articles of association unless the transfer is restricted
or prohibited by another instrument.

Modification
of Class Rights

Under
our articles of association, the rights attached to any class unless otherwise
provided by the terms of the class including voting, rights to dividends and
the like, may be varied by adoption of the necessary amendment to the articles
of association, provided that the affected shareholders approve the change by a
class meeting in which a simple majority of the voting power of the class
represented at the meeting and voting on the matter approves the change.

Election
of Directors

Our
ordinary shares do not have cumulative voting rights in the election of
directors. As a result, the holders of ordinary shares that represent more than
50% of the voting power represented at a shareholders meeting have the power to
elect all of our directors, other than the outside directors which are appointed
by a special majority of shareholders. For a summary of those provisions in our
articles of association with respect to the directors, see Item 6. Directors,
Senior Management and Employees.

Anti-Takeover
Provisions; Mergers and Acquisitions under Israeli Law

Mergers

The
Companies Law includes provisions that allow a merger transaction and requires
that each company that is party to a merger approve the transaction by its
board of directors and a vote of the majority of its shares voting on the
proposed merger at a shareholders meeting called on at least 21 days prior
notice. In determining whether a majority has approved the merger, shares held
by the other party to the merger or any person holding at least 25% of the other
party to the merger are excluded from the vote. The Companies Law does not
require court approval of a merger other than in specified situations. 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 any of the parties to the merger. In addition, a
merger may not be completed unless at least 70 days have passed from the time
that a proposal for approval of the merger has been filed with the Israeli
registrar of companies.

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Tender
Offers

The
Companies law also provides that an acquisition of shares of a public company
on the open market must be made by means of a tender offer if as a result of
the acquisition the purchaser would become a 25% shareholder of the company.
The rule does not apply if there is already another 25% shareholder of the
company. Similarly, the 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 purchaser would become a 45% shareholder, unless there is a
50% shareholder of the company. These rules do not apply if the acquisition is
made by way of a merger as opposed to a tender offer. Regulations adopted under
the Companies Law provide that these tender offer requirements do not apply to
companies whose shares are listed for trading outside of Israel if, according
to the law in the country in which the shares are traded, including the rules
and regulations of the stock exchange on which the shares are traded, there is
either a limitation on acquisition of any level of control of the company, or
the acquisition of any level of control requires the purchaser to do so by means of a tender offer
to the public. The Companies Law also provides that if following any
acquisition of shares, the acquirer holds 90% or more of the companys shares
or of a class of shares, the acquisition must be made by means of a tender
offer for all the target companys shares or all the shares of the class, as
applicable. An acquirer who wishes to eliminate all minority shareholders must
do so by way of a tender offer and acquire 95% of all shares not held by or for
the benefit of the acquirer before the acquisition. If, however, the tender
offer to acquire 95% is not successful, the acquirer may not acquire shares
tendered if by doing so the acquirer would own more than 90% of the shares of
the target company.

C.Material Contracts

For
a summary of our material contracts, see Item 4.A. Information on the
Company  Capital
Expenditures and Divestitures.

D.Exchange Controls

Under
current Israeli regulations, we may pay dividends or other distributions in
respect of our ordinary shares either in non-Israeli or Israeli currencies. If
we make these payments in Israeli currency, they will be freely transferred in
non-Israeli currencies at the rate of exchange prevailing at the time of
conversion. We expect therefore, that dividends, if any, that we pay to holders
of ADSs, will be paid in dollars, net of conversion expenses of the depositary,
the Bank of New York and Israeli income taxes. Because exchange rates between
the NIS and the dollar fluctuate continuously, a U.S. shareholder will be
subject to the risk of currency fluctuations between the date when we declare
NIS-denominated dividends and the date when we pay them in NIS. See Item 3.D. Risk Factors.

Non-residents
of Israel may freely hold and trade our ADSs or ordinary shares pursuant to the
general permit issued under the Israeli Currency Control Law, 1978.  Neither our articles of association nor the
laws of the State of Israel restrict in any way the ownership of our ordinary
shares by non-residents, except that these restrictions may exist with respect
to citizens of countries which are in a state of war with Israel.

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E.Taxation

Israeli
Taxation

The
following is general information regarding Israeli tax laws to which U.S. and
other non-Israeli shareholders may be subject. It does not cover all possible
tax considerations and therefore you should not rely on this information as
legal or professional tax advice. You should consult your own tax advisor as to
the particular tax consequences of an investment in our ordinary shares or
ADSs, including the effects of applicable Israeli or foreign or other tax laws
and possible changes in the tax laws.

To
the extent that the discussion is based on legislation yet to be judicially or
administratively interpreted, we cannot assure you that the views we express
herein will accord with any such interpretation in the future.

On
January 1, 2003 Israels tax laws had undergone a significant tax reform
(Amendment 132 to Israels Income Tax Ordinance (New Version) - 1961), referred
to as the new law.
The underlying principle of the new law
is to broaden the categories of taxable income, and reduce the tax rates
imposed on employment income. Under the new law, individual shareholders (which are not subject to the provisions of
the Inflationary Adjustments Law), selling our ordinary shares shall be subject
to a 15% tax rate on any capital gain accrued after January 1, 2003. Under the new law, foreign residents
will continue to be exempt from capital gains tax on sale of traded securities
of Israeli companies.  The foregoing does not apply to companies which
are subject to Chapter II of the Income Tax (Inflationary Adjustments) Law,
1985. In general, Chapter II of the Inflationary Adjustments Law applies to all
Israeli companies, except for companies which comply with all of the following:
(i) they do not generate any business income; (ii) they do not apply for a
deduction of financing expenses; and (iii) they are held only by individuals.
Notwithstanding the foregoing, dealers in securities in Israel are taxed at
regular tax rates applicable to business income. We obtained a ruling from the
Israeli income tax authorities confirming that capital gains received upon sale
of ADSs will be subject to the same treatment as capital gains received upon
sale of our ordinary shares.

Pursuant
to the convention between the Government of the United States of America and
the Government of Israel with respect to taxes on income (the U.S.-Israel tax
treaty), the sale, exchange or disposition of our ADSs or ordinary shares by a
person who qualifies as a resident of the United States under the treaty and
who is entitled to claim the benefits afforded to him by the treaty, will
generally not be subject to Israeli capital gains tax. This exemption shall not
apply to a person who held, directly or indirectly, shares representing 10% or
more of the voting power in our company during any part of the 12-month period
preceding the sale, exchange or disposition, subject to certain conditions. A
sale, exchange or disposition of our shares by a U.S. resident qualified under
the treaty, who held, directly or indirectly, shares representing 10% or more
of the voting power in our company at any time during the preceding 12-month
period would be subject to Israeli tax, to the extent applicable. However,
under the treaty, this U.S. resident would be permitted to claim a credit for
these taxes, if apply, against the U.S. income tax with respect to the sale,
exchange or disposition, subject to the limitations in U.S. laws applicable to
foreign tax credits.

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Non-residents of
Israel are subject to income tax on income accrued or derived from sources in Israel or
received in Israel. These sources of income include passive income like
dividends, royalties and interest, as well as non-passive income from services
rendered in Israel. On distributions of dividends other than bonus shares
(stock dividends) we should generally withhold at source income tax at a rate
of 25%, unless a different rate applies under a treaty between Israel and the
shareholders country of residence. Under the U.S.-Israel tax treaty, the
maximum tax on dividends paid to a holder of our ADSs or ordinary shares who is
a resident of the United States will be 25% or 12.5% if the holder is a company
which holds, directly or indirectly, shares representing 10% or more of the
voting power in our company during any part of the 12-month period preceding
the date of payment of the dividend. 
However, under the Law for the Encouragement of Capital Investments,
1959 (the Investments Law), dividends generated by an approved enterprise are
taxed at the rate of 15%.

United
States Federal Income Tax Considerations

Subject to the limitations described herein, this discussion summarizes
the material United States federal income tax consequences of the purchase, ownership and
disposition of our ordinary shares or ADSs to a United States holder.  A United States holder is a holder of our
ordinary shares or ADSs who is:

| |  | an
  individual citizen or resident of the United States;                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                          
| |  | a
  corporation (or another entity taxable as a corporation for United States federal
  income tax purposes) created or organized under the laws of the United States
  or any political subdivision thereof;                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                          
| |  | an estate,
  the income of which may be included in gross income for United States federal
  income tax purposes regardless of its source; or                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                          
| |  | a trust (i)
  if, in general, a United States court is able to exercise primary supervision
  over its administration and one or more United States persons have the
  authority to control all of its substantial decisions or (ii) that has in
  effect a valid election under applicable United States Treasury regulations
  to be treated as a United States person.

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Unless otherwise specifically indicated, this discussion does not
consider the United States tax consequences to a person that is not a United
States holder and considers only United States holders that will own the
ordinary shares or ADSs as capital assets.

This discussion is based on current provisions of the Internal Revenue
Code of 1986, as amended,
referred to as the Code, current and proposed Treasury
regulations promulgated under the Code and administrative and judicial
interpretations of the Code, all as currently in effect and all of which are
subject to change, possibly with a retroactive effect. This discussion does not
address all aspects of United States federal income taxation that may be
relevant to any particular United States holder based on the United States
holders particular circumstances.  In
particular, this discussion does not address the United States federal income
tax consequences to United States holders who are broker-dealers or who own,
directly, indirectly or constructively, 10% or more of our outstanding voting
shares, United States holders holding the ordinary shares or ADSs as part of a
hedging, straddle or conversion transaction, United States holders whose
functional currency is not the United States dollar, insurance companies,
tax-exempt organizations, financial institutions and persons subject to the
alternative minimum tax, who may be subject to special rules not discussed
below. Additionally, the tax treatment of persons who hold the ordinary shares
or ADSs through a partnership or other pass-through entity is not considered,
nor is the possible application of United States federal estate or gift taxes
or any aspect of state, local or non- United States tax laws.

You are advised to consult your tax advisor with respect to the
specific United States federal, state, local and foreign income tax
consequences to you of purchasing, holding or disposing of our ordinary shares
or ADSs.

Taxation on
Distributions on the Ordinary Shares or ADSs

In August 2001, Formula distributed
to its shareholders a dividend in kind of Formula Visions (formerly known as
Mashov
Computers Ltd.) shares
held by Formula, which was distributed in the form of cash to holders of our
ADRs. Other than this distribution, Formula has never paid dividends,
and currently does not intend to pay dividends in the future.  If Formula makes distributions in the future, the amount of the distribution with
respect to the ordinary shares or ADSs will equal the amount of cash and the
fair market value of any property distributed and will also include the amount
of any Israeli taxes withheld,  as described above under Israeli
Taxation. A distribution paid by us with respect to the ordinary shares or
ADSs to a United States holder will be treated as dividend income to the extent that the
distribution does not exceed our current and accumulated earnings and profits,
as determined for United States federal income tax purposes.  Dividends that are received by United States holders that are individuals, estates or trusts will be taxed at the
rate applicable to long-term capital gains (a maximum rate of 15%), provided
that such dividends meet the requirements of qualified dividend income.  Dividends that fail to meet such
requirements, and dividends received by corporate United States holders, are
taxed at ordinary income rates.  No
dividend received by a United States holder will be a qualified dividend
(1) if the United States holder held the ordinary share or ADS with
respect to which the dividend was paid for less than 61 days during the 120-day
period beginning on the date that is 60 days before the ex-dividend date with
respect to such dividend, excluding for this purpose, under the rules of Code
section 246(c), any period during which the United States holder has an option
to sell, is under a contractual obligation to sell, has made and not closed a
short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified
option to buy, or has otherwise diminished its risk of loss by holding other
positions with respect to, such ordinary share or ADS (or substantially
identical securities); or (2) to the extent that the United States holder
is under an obligation (pursuant to a short sale or otherwise) to make related
payments with respect to positions in property substantially similar or related
to the ordinary share or ADS with respect to which the dividend is paid.  If we were to be a passive foreign investment company, a foreign
personal holding company or a foreign investment company (as such terms are
defined in the Code) for any year, dividends paid on our ordinary shares or
ADSs in such year or in the following year would not be qualified
dividends.  In addition, a non-corporate
United States holder will be able to take a qualified dividend into account in
determining its deductible investment interest (which is generally limited to
its net investment income) only if it elects to do; in such case the dividend
will be taxed at ordinary income rates.

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The amount of any distribution which exceeds the amount treated as a
dividend will be treated first as a non-taxable return of capital, reducing the
United States holders tax basis in its ordinary shares or ADSs to the extent
thereof, and then as capital gain from the deemed disposition of the ordinary
shares or ADSs. Corporate holders will not be allowed a deduction for dividends
received in respect of the ordinary shares or ADSs.

Dividends paid by us in NIS will be included in the income of United
States holders at the dollar amount of the dividend (including any Israeli
taxes withheld therefrom), based upon the spot rate of exchange in effect on
the date of the distribution. United States holders will have a tax basis in
the NIS for United States federal income tax purposes equal to that dollar value. Any subsequent
gain or loss in respect of the NIS arising from exchange rate fluctuations will
generally be taxable as United States source ordinary income or loss.

Subject to the limitations set forth in the Code and the Treasury
regulations thereunder, United States holders may elect to claim as a foreign
tax credit against their United
States federal income tax liability the Israeli income tax withheld from
dividends received in respect of the ordinary shares or ADSs. The limitations
on claiming a foreign tax credit include, among others, computation rules under
which foreign tax credits allowable with respect to specific classes of income
cannot exceed the United States federal income taxes otherwise payable with
respect to each such class of income. In this regard, dividends paid by us will
be foreign source passive income for U.S. foreign tax credit purposes or, in
the case of a financial services entity, financial services income. United
States holders that do not elect to claim a foreign tax credit may instead
claim a deduction for the Israeli income tax withheld. The rules relating to
foreign tax credits are complex, and you should consult your tax advisor to
determine whether and to what extent you would be entitled to this credit.  A United
States holder will be denied a foreign tax credit for Israeli income tax
withheld from a dividend received on the ordinary shares or ADSs (i) if the
United States holder has not held the ordinary shares or ADSs for at least 16
days of the 30 day period beginning on the date which is 15 days before the
ex-dividend date with respect to such dividend or (ii) to the extent the United
States holder is under an obligation to make related payments with respect to
positions in substantially similar or related property.  Any days during which a United States holder
has substantially diminished its risk of loss on the ordinary shares or ADSs
are not counted toward meeting the required 16 day holding period.  Distributions of current or accumulated
earnings and profits will be foreign source passive income for United States foreign tax credit purposes.

79

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Taxation on Disposition of the Ordinary Shares or ADSs

Subject to the discussion below under Tax Consequences if We are a
Passive Foreign Investment Company, upon the sale, exchange or other
disposition of our ordinary shares or ADSs, a United States holder will
recognize capital gain or loss in an amount equal to the difference between the
amount realized on the disposition and the United States holders tax basis in
the ordinary shares or ADSs. The gain or loss recognized on the disposition
will be long-term capital gain or loss if the United States holder held the
ordinary shares or ADSs for more than one year at the time of the
disposition.  Gain or loss recognized by
a United States holder on a sale, exchange or other disposition of ordinary
shares or ADSs will be treated as U.S. source income or loss for United States foreign tax credit
purposes.

A United States holder that uses the cash method of accounting
calculates the dollar value of the proceeds received on the sale as of the date
that the sale settles.  However, a
United States holder that uses the accrual method of accounting is required to
calculate the value of the proceeds of the sale as of the trade date and may
therefore realize foreign currency gain or loss.  A United States holder may avoid realizing foreign currency gain
or loss by electing to use the settlement date to determine the proceeds of
sale for purposes of calculating the foreign currency gain or loss.  In addition, a United States holder that
receives foreign currency upon disposition of ordinary shares or ADSs and
converts the foreign currency into dollars after the settlement date or trade
date (whichever date the United States holder is required to use to calculate
the value of the proceeds of sale) will have foreign exchange gain or loss
based on any appreciation or depreciation in the value of the foreign currency
against the dollar, which will generally be United States source ordinary
income or loss.

Tax
Consequences if We are a Passive Foreign Investment Company

We will be a passive foreign investment company, or PFIC, if either (1)
75% or more of our gross income in a taxable year is passive income; or (2) 50%
or more of the value, determined on the basis of a quarterly average, of our
assets in a taxable year are held for the production of passive income. If we
own (directly or indirectly) at least 25% by value of the stock of another
corporation, we will be treated for purposes of the foregoing tests as owning our
proportionate share of the other corporations assets and as directly earning
our proportionate share of the other corporations income. If we are a PFIC, a
United States holder must determine under which of three alternative taxing
regimes it wishes to be taxed:

| |  | The QEF
  regime applies if the United States holder elects to treat us as a  qualified electing fund (QEF) for the
  first taxable year in which the United States holder owns our ordinary shares
  or ADSs or in which we are a PFIC, whichever is later, and if we comply with
  certain reporting requirements.  If
  the QEF regime applies, then each year that we are a PFIC such United States
  holder will include in its gross income a proportionate share of the our
  ordinary earnings (which is taxed as ordinary income) and net capital gain
  (which is taxed as long-term capital gain), subject to a separate election to
  defer payment of taxes, which deferral is subject to an interest charge.  These amounts would be included in income
  by an electing United States holder for its taxable year in which our taxable
  year ends, whether or not such amounts are actually distributed to the United
  States holder.  A United States
  holders basis in our ordinary shares or ADSs for which a QEF election has
  been made would be increased to reflect the amount of any taxed but
  undistributed income.  Generally, a
  QEF election allows an electing United States holder to treat any gain
  realized on the disposition of his ordinary shares or ADSs as capital gain.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

80

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| |   | Once made, the QEF
  election applies to all subsequent
  taxable years of the United States holder in which it holds our ordinary
  shares or ADSs and for which we are a PFIC, and can be revoked only with the
  consent of the Internal Revenue Service. 
  The QEF election is made by attaching a completed Internal Revenue
  Service Form 8621, including the PFIC annual information statement, to a
  timely filed United States federal income tax return.  Even if a QEF election is not made, a U.S.
  person who is a shareholder in a PFIC must file a completed Internal Revenue
  Service Form 8621 every year.                                                                                                                                                                                                                                                                                     
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | If a
  QEF election is made after the first taxable year in which a United States
  holder holds our ordinary shares or ADSs and we are a PFIC, then special
  rules would apply.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | A second regime, the
  mark-to-market regime, may be elected so long as our ordinary shares or
  ADSs are publicly traded.  Pursuant to
  this regime, an electing United States holders ordinary shares or ADSs are
  marked-to-market each year and the United States holder recognizes as ordinary income or loss an amount equal to
  the difference as of the close of the
  taxable year between the fair market value of our ordinary shares or ADSs and
  the United States holders adjusted tax basis therein.  Losses are allowed only to the extent of
  net mark-to-market gain previously included by the United States holder under
  the election for prior taxable years. 
  An electing United States holders adjusted basis in our ordinary
  shares or ADSs is increased by income recognized under the mark-to-market
  election and decreased by the deductions allowed under the election.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | Under
  the mark-to-market election, gain on the sale of our ordinary shares or ADSs
  is treated as ordinary income, and loss on the sale of our ordinary shares or
  ADSs, to the extent the amount of loss does not exceed the net mark-to-market
  gain previously included, is treated as ordinary loss.  The mark-to-market election applies to the
  tax year for which the election is made and all later tax years, unless the
  ordinary shares or ADSs cease to be marketable or the Internal Revenue
  Service consents to the revocation of the election.                                                                                                                                                                                                                                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   | If
  the mark-to-market election is made after the first taxable year in which a
  United States holder holds our ordinary shares or ADSs and we are a PFIC,
  then special rules would apply.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | A United States holder
  making neither the QEF election nor the mark-to-market election is subject to
  the excess distribution regime. 
  Under this regime, excess distributions are subject to special tax
  rules.  An excess distribution is
  either (1) a distribution with respect to ordinary shares or ADSs that is
  greater than 125% of the average distributions received by the United States
  holder from us over the shorter of either the preceding three years or such
  United States holders holding period for our ordinary shares or ADSs, or (2)
  100% of the gain from the disposition of our ordinary shares or ADSs.                                                                                                                                                                                                                                                              

81

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| |  | Excess distributions must be allocated ratably to each day that a
  United States holder has held our ordinary shares or ADSs.  A United States holder must include
  amounts allocated to the current taxable year in its gross income as ordinary
  income for that year.  All amounts
  allocated to prior years of the United States holder would be taxed at the
  highest tax rate for each such prior year applicable to ordinary income.  The United States holder also would be
  liable for interest on the deferred tax liability for each such prior year
  calculated as if such liability had been due with respect to each such prior
  year.  A United States holder that is
  an individual is not allowed a deduction for interest on the deferred tax
  liability.  The portions of gains and
  distributions that are not characterized as excess distributions are
  subject to tax in the current year under the normal tax rules of the Code.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | A United States person who
  inherits shares or ADSs in a foreign corporation that was a PFIC in the hands
  of the decedent (who did not make either of the elections described above), is
  denied the otherwise available step-up in the tax basis of such shares or
  ADSs to fair market value at the date of death.  The U.S. person steps into the shoes of the decedent and will
  be subject to the rules described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

We believe that in 2002 we were not a PFIC and currently we expect that
we will not be a PFIC in 2003.  However,
PFIC status is determined as of the end of the taxable year and is dependent on
a number of factors, including the value of our assets and the amount and type
of our gross income.  Therefore, there
can be no assurance that we will not become a PFIC for the current fiscal year
ending December 31, 2003 or in a future year. 
We will notify United States holders in the event we conclude that we
will be treated as a PFIC for any taxable year to enable United States holders
to consider whether or not to elect to treat us as a QEF for United States
federal income tax purposes or to mark to market the ordinary shares or ADSs
or to become subject to the excess distribution regime.

United States holders are urged to
consult their tax advisors regarding the application of the PFIC rules,
including eligibility for and the manner and advisability of making, the QEF
election or the mark-to-market election.

82

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Information
Reporting and Backup Withholding

A United States holder generally is subject to information reporting
and may be subject to backup withholding at rate of up to 28% with respect to
dividend payments and receipt of the proceeds from the disposition of the
ordinary shares or ADSs. Backup withholding will not apply with respect to
payments made to exempt recipients, including corporations and tax-exempt
organizations, or if a United States holder provides a correct taxpayer
identification number (or certifies that he has applied for a taxpayer
identification number), certifies that such holder is not subject to backup
withholding or otherwise establishes an exemption. Backup withholding is not an
additional tax and may be claimed as a credit against the United States federal
income tax liability of a United States holder, or alternatively, the United
States holder may be eligible for a refund of any excess amounts withheld under
the backup withholding rules, in either case, provided that the required
information is furnished to the Internal Revenue Service.

Non-United States
holders of Ordinary Shares or ADSs

Except as provided below, a non-United States holder of ordinary shares
or ADSs (except certain former United States citizens and long-term residents of the United States) will not be
subject to United States federal income or withholding tax on the receipt of
dividends on, and the proceeds from the disposition of, an ordinary share or
ADS, unless that item is effectively connected with the conduct by the
non-United States holder of a trade or business in the United States and, in
the case of a resident of a country which has an income tax treaty with the
United States, that item is attributable to a permanent establishment in the
United States or, in the case of an individual, a fixed place of business in
the United States. In addition, gain recognized by an individual non-United
States holder will be subject to tax in the United States if the non-United
States holder is present in the United States for 183 days or more in the
taxable year of the sale and other conditions are met.

Non-United States holders will not be subject to information reporting
or backup withholding with respect to the payment of dividends on ordinary
shares or ADSs unless the payment is made through a paying agent, or an office
of a paying agent, in the United States. Non-United States holders will be
subject to information reporting and backup withholding at a rate of up to 28%
with respect to the payment within the United States of dividends on the
ordinary shares or ADSs unless the holder provides its taxpayer identification
number, certifies to its foreign status, or otherwise establishes an exemption.

Non-United States holders will be subject to information reporting and
backup withholding at a rate of up to 28% on the receipt of the proceeds from
the disposition of the ordinary shares or ADSs to, or through, the United
States office of a broker, whether domestic or foreign, unless the holder
provides a taxpayer identification number, certifies to its foreign status or
otherwise establishes an exemption. Non-United States holders will not be
subject to information reporting or backup withholding with respect to the
receipt of proceeds from the disposition of the ordinary shares or ADSs by a
foreign office of a broker; provided, however, that if the broker is a U.S.
person or a U.S. related person, information reporting (but not backup
withholding) will apply unless the broker has documentary evidence in its
records of the non-United States holders foreign status or the non-United
States holder certifies to its foreign status under penalties of perjury or
otherwise establishes an exemption. For this purpose, a U.S. related person is
a broker or other intermediary that maintains one or more enumerated U.S.
relationships. Backup withholding is not an additional tax and may be claimed
as a credit against the United States federal income tax liability of a
non-United States holder, or alternatively, the non-United States holder may be
eligible for a refund of any excess amounts withheld under the backup
withholding rules, in either case, provided that the required information is
furnished to the Internal Revenue Service.

83

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F.       Dividend
and Paying Agents

Not applicable.

G.       Statement
by Experts

Not applicable.

H.Documents On
Display

We
are subject to the informational requirements of the Securities Exchange Act of
1934, as amended, applicable to foreign private issuers and fulfill the
obligations with respect to such requirements by filing reports with the
Securities and Exchange Commission. You may read and copy any document we file
with the Securities and Exchange Commission without charge at the

Securities
and Exchange Commissions public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material may be obtained by mail from
the Public Reference Branch of the Securities and Exchange Commission at such
address, at prescribed rates. Please call the Securities and Exchange
Commission at 1-800-SEC-0330 for further information on the public reference
room.

As
a foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, we are not required under the Exchange Act to file
periodic reports and financial statements with the Securities and Exchange
Commission as frequently or as promptly as United States companies whose
securities are registered under the Exchange Act. However we intend to file
with the Securities and Exchange Commission, within 180 days after the end of
each fiscal year, an annual report on Form 20-F containing financial statements
which will be examined and reported on, with an opinion expressed, by an
independent public accounting firm, as well as reports on Form 6-K containing
unaudited financial information for the first three quarters of each fiscal
year, within 60 days after the end of each such quarter.

I.       Subsidiary
Information

Not applicable.

84

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ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The
majority of our assets are comprised of (i) cash and cash equivalents, in NIS
and in dollars, and (ii) holdings of securities of our subsidiaries. We are
exposed to the risk of currency exchange rate fluctuations and the impacts of
inflation.  In addition, we are exposed
to the risk of fluctuations in the market price of securities of companies we
hold.

Currency
Exchange Rate Fluctuations and Impact of Inflation

In
light of the nature of our activities, we invest our cash and cash equivalents
in short term deposits. As of December 31, 2002, we invested approximately 56% of the cash we held in dollar
accounts and the remainder 44% in NIS accounts.

An
increase in value of the NIS against the dollar (after taking into account the
rate of inflation or deflation in Israel) may have a negative impact on our
operating results and financial condition. In particular, our finance expenses
may increase. Depending upon the circumstances, we will consider entering into
currency hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rate of the dollar against the NIS.  There can be no assurance that these activities,
or others that we may use from time to time, will eliminate the negative
financial impact of currency fluctuations and inflation.

We
do not engage in currency speculation. 
Generally, we do not hold nor have we issued, to any material extent,
any derivatives or other financial instruments for trading purposes.

We
include the gains and losses related to foreign currency transactions in the
statement of income in the period in which the changes in the exchange rates
occur.

Fluctuations
in Market Price of Securities We Hold

We
hold securities of several publicly traded companies on the Nasdaq National
Market and the TASE. These companies include Magic, Crystal,  Matrix and Sapiens. We consider these
holdings as long-term holdings. We are exposed to the risk of fluctuation of
the price of these companies securities. 
All of these publicly traded companies have experienced significant
historical volatility in their stock prices. Fluctuations in the market price
of our holdings in these companies may result in the fluctuation of the value
of our assets. We typically do not attempt to reduce or eliminate our market
exposure on these securities.

ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

Not applicable.

85

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P
A R T   II

ITEM 13. DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES.

Not applicable.

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

Not applicable.

ITEM 15.
CONTROLS AND PROCEDURES

(a)
Within 90 days prior to the filing date of this annual report on Form 20-F, we
have carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and vice president, finance,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, the chief executive officer and vice president, finance
concluded that our disclosure controls and procedures are effective in assuring
that all material information relating to our company is made known to them.

(b)
There have been no significant changes in our internal controls or in other
factors, which could significantly affect the internal controls subsequent to
the date of their evaluation.

ITEM 16A. AUDIT
COMMITTEE FINANCIAL EXPERT

Not applicable.

ITEM 16B. CODE
OF ETHICS

Not applicable.

86

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P
A R T  III

ITEM 17.
FINANCIAL STATEMENTS

We
have responded to Item 18 in lieu of this item.

ITEM 18.
FINANCIAL STATEMENTS

The
financial statements required by this item are found at the end of this annual
report, beginning on page F-1.

ITEM 19.
EXHIBITS

|Exhibit
  No. |                                                                                                                                                                 
|------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |                                                                                                                                                                 
|              |                                                                                                                                                                 
|1.1           | Memorandum of Association*                                                                                                                                      
|              |                                                                                                                                                                 
|1.2           | Articles of Association as amended on January 7, 2001**                                                                                                         
|              |                                                                                                                                                                 
|2             | The description of terms of debentures
  issued by the Registrant in May 2002 contained in Section 2.3 of the prospectus of the Registrant dated May 23, 2002***
|              |                                                                                                                                                                 
|4.1           | Agreement dated October 1, 1999 between the Registrant and Shamrock
  Holdings of California Inc.****                                                           
|              |                                                                                                                                                                 
|4.2           | Agreement dated January 24, 2001 among the Registrant, Sapiens
  International Corporation N.V. and Yarnfield International Limited**                           
|              |                                                                                                                                                                 
|4.3           | Agreement dated December 30, 2001 between the Registrant and Formula
  Vision Technologies (F.V.T.) Ltd. (English summary accompanied by Hebrew
  original)*****
|              |                                                                                                                                                                 
|4.4           | Share Exchange Agreement dated October 13, 2002 among the Registrant, Crystal Systems Solutions Ltd. and certain shareholders of Liraz
  Systems Ltd.           
|              |                                                                                                                                                                 
|4.5           | Agreement for the Sale of Shares dated
  October 13, 2002 between the Registrant and Matrix I.T. Ltd. (English translation from Hebrew
  original)              
|              |                                                                                                                                                                 
|4.6           | Form of the 1997 Share Option Plan (English translation from Hebrew
  original)*                                                                                

87

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|Exhibit
  No. |                                                                                                                                            
|------------- | -------------------------------------------------------------------------------------------------------------------------------------------
|              |                                                                                                                                            
|4.7           | Form of the 2000 Share Option Plan (English translation from Hebrew
  original)**                                                          
|              |                                                                                                                                            
|4.8           | Letter of Indemnification, dated February 14, 2002*****                                                                                    
|              |                                                                                                                                            
|8             | List of Subsidiaries                                                                                                                       
|              |                                                                                                                                            
|10.1          | Certification of the Chief Executive
  Officer pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of
  the Sarbanes-Oxley Act
|              |                                                                                                                                            
|10.2          | Certification of the Vice President,
  Finance pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of
  the Sarbanes-Oxley Act

---

**    Incorporated by reference to the Annual Report on Form 20-F
filed with the Securities and Exchange Commission on June 29, 2001.

***  
Incorporated by reference to the Form 6-K filed with the Securities and Exchange
Commission on June 14, 2002.

**** 
Incorporated by reference to the Annual Report on Form 20-F filed with
the Securities and Exchange Commission on June 21, 2000.

*****  Incorporated by reference to
the Annual Report on Form 20-F filed with the Securities and Exchange
Commission on June 28, 2002.

88

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FORMULA SYSTEMS
(1985) LTD.

(An Israeli corporation)

2002 Annual Report

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

2002 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

|                                     | Page                                           
|------------------------------------ | -----------------------------------------------
|                                     |                                                
|REPORT OF
  INDEPENDENT AUDITORS     | F-1                                            
|                                     |                                                
|CONSOLIDATED
  FINANCIAL STATEMENTS: |                                                
|                                     |                                                
|                                     | Balance
  Sheets                               
|                                     |                                                
|                                     | Statements
  of Operations                     
|                                     |                                                
|                                     | Statements
  of Changes in Shareholders Equity
|                                     |                                                
|                                     | Statements
  of Cash Flows                     
|                                     |                                                
|                                     | Notes to
  Financial Statements                

The amounts are stated in U.S. dollars ($).

---

---

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---

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Independent
Auditors Report

To the Shareholders of

FORMULA SYSTEMS
(1985) LTD.

We have audited the consolidated balance sheets of Formula Systems
(1985) Ltd. and its subsidiaries (the Company) as of December 31, 2002 and
2001 and the consolidated statements of income, changes in shareholders equity
and cash flows for each of the three years in the period ended December 31,
2002. 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
did not audit the financial statements of certain subsidiaries, whose assets
included in consolidation constitute approximately 30% and 18.54% of total
consolidated assets as of December 31, 2001 and 2002, respectively, and whose
revenues included in consolidation constitute approximately 21%, 30% and 21.82%
of total consolidated revenues for the years ended December 31, 2000, 2001 and
2002, respectively.  The financial
statements of those subsidiaries were audited by other auditors, whose reports
have been furnished to us, and our opinion, insofar as it relates to the
amounts included for those subsidiaries is based solely on the reports of the
other auditors. We did not audit an equity investee of the Company, insofar as
it relates to that investment and its operation income, is based on the reports
of the other auditor.

We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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 and the reports of the other independent auditors provide a reasonable
basis for our opinion.

In our opinion, based on our audits and the reports of other auditors
the consolidated financial statements present fairly, in all material respects,
the consolidated financial position of the Company as of December 31, 2002 and
2001, and the related consolidated results of its operations and cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.

As disclosed in Note 1.A. to the financial statements, the Company has
changed its method of reporting from principles of accounting generally
accepted in Israel to those generally accepted in the United States. In
addition, the Company has adopted the U.S. dollar as its reporting currency.

As discussed in Note 1.H. to the consolidated financial statements,
effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.

Tel-Aviv, Israel

June 30, 2003

| |  | /s/ BDO Ziv Haft
BDO Ziv HaftCertified Public Accountants (Isr.)
| |  | ------------------------------------------------------------------------------

F-1

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---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

CONSOLIDATED BALANCE SHEETS

|                                              |                                        | December 31,                  |        
|--------------------------------------------- | -------------------------------------- | ----------------------------- | -------
|                                              |                                        |                               |        
|                                              |                                        | 2002                          |        
|                                              |                                        |                               |        
|                                              |                                        | (U.S. $ in t h o u s a n d s) |        
|                                              |                                        |                               |        
|                                              |                                        |                               |        
|ASSETS                                        |                                        |                               |        
|CURRENT ASSETS:                               |                                        |                               |        
|                                              | Cash
  and cash equivalents (Note 16A) |                               |        
|                                              | Short-term
  investments               |                               |        
|                                              | Trade
  receivables (Note 16B)         |                               |        
|                                              | Other
  accounts receivable (Note 16C) |                               |        
|                                              | Inventories                            |                               |        
|                                              |                                        |                               |        
|                                              |                                        |                               | 193,536
|                                              |                                        |                               |        
|                                              |                                        |                               |        
|LONG-TERM INVESTMENTS, LOANS AND RECEIVABLES: |                                        |                               |        
|                                              | Loan
  and other investments (Note 3)  |                               |        
|                                              | Investments
  in affiliates (Note 4)   |                               |        
|                                              |                                        |                               |        
|                                              |                                        |                               | 26,059 
|                                              |                                        |                               |        
|                                              |                                        |                               |        
|DEBENTURES (Note 2K)                          |                                        |                               | 75,951 
|                                              |                                        |                               |        
|                                              |                                        |                               |        
|SEVERANCE PAY FUND (Note 9)                   |                                        |                               | 8,262  
|                                              |                                        |                               |        
|                                              |                                        |                               |        
|FIXED ASSETS, NET (Note 5)                    |                                        |                               | 25,045 
|                                              |                                        |                               |        
|                                              |                                        |                               |        
|GOODWILL (Note 1H)                            |                                        |                               | 115,165
|                                              |                                        |                               |        
|                                              |                                        |                               |        
|OTHER ASSETS, NET (Note 6)                    |                                        |                               | 24,579 
|                                              |                                        |                               |        
|                                              |                                        |                               |        
|                                              |                                        |                               |        
|                                              |                                        |                               |        
|                                              |                                        |                               | 468,597
|                                              |                                        |                               |        

F-2

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

|                                        |                                                                                                                                                                                                                                               | December 31,                  |        
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | -------
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               | 2002                          |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               | (U.S. $ in t h o u s a n d s) |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|LIABILITIES AND SHAREHOLDERS
  EQUITY  |                                                                                                                                                                                                                                               |                               |        
|CURRENT LIABILITIES:                    |                                                                                                                                                                                                                                               |                               |        
|                                        | Credit
  from banks and others (Note 16E)                                                                                                                                                                                                     |                               |        
|                                        | Trade
  payables                                                                                                                                                                                                                              |                               |        
|                                        | Other
  accounts payable (Note 16F)                                                                                                                                                                                                           |                               |        
|                                        | Restructuring
  accrual                                                                                                                                                                                                                       |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               |                               | 177,396
|                                        |                                                                                                                                                                                                                                               |                               |        
|LONG-TERM LIABILITIES:                  |                                                                                                                                                                                                                                               |                               |        
|                                        | Debentures
  (Note 8)                                                                                                                                                                                                                         |                               |        
|                                        | Provision
  for losses in formerly owned investee                                                                                                                                                                                             |                               |        
|                                        | Deferred
  taxes                                                                                                                                                                                                                              |                               |        
|                                        | Customer
  advances                                                                                                                                                                                                                           |                               |        
|                                        | Liabilities
  to banks and others (Note 7)                                                                                                                                                                                                    |                               |        
|                                        | Liability
  due to activity acquisition                                                                                                                                                                                                       |                               |        
|                                        | Accrued
  severance pay (Note 9)                                                                                                                                                                                                              |                               |        
|                                        | Unrealized
  gain (Note 11)                                                                                                                                                                                                                   |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               |                               | 65,722 
|                                        |                                                                                                                                                                                                                                               |                               |        
|MINORITY INTEREST                       |                                                                                                                                                                                                                                               |                               | 72,130 
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|COMMITMENTS AND CONTINGENCIES (Note 12) |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|SHAREHOLDERS EQUITY (Note 13):         |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        | Share
  capital - ordinary shares of NIS 1 par value (authorized - December 
  31, 2002 and 2001 - 25,000,000 and 14,000,000 shares, respectively; issued: 
  December 31, 2002 - 10,324,780 shares; December 31, 2001 - 10,324,780
  shares) |                               |        
|                                        | Additional
  paid-in capital                                                                                                                                                                                                                  |                               |        
|                                        | Retained
  earnings                                                                                                                                                                                                                           |                               |        
|                                        | Accumulated
  other comprehensive loss                                                                                                                                                                                                        |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               |                               | 156,747
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        | Cost
  of 324,780 Company shares held by the Company                                                                                                                                                                                          |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        | Total
  shareholders equity                                                                                                                                                                                                                  |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               |                               |        
|                                        |                                                                                                                                                                                                                                               |                               | 468,597
|                                        |                                                                                                                                                                                                                                               |                               |        

The
accompanying notes are an integral part of the financial statements.

F-3

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                             |                                        | Year ended December 31,                         |        
|------------------------------------------------------------ | -------------------------------------- | ----------------------------------------------- | -------
|                                                             |                                        |                                                 |        
|                                                             |                                        | 2002                                            |        
|                                                             |                                        |                                                 |        
|                                                             |                                        | (U.S. $ in thousands, except per share amounts) |        
|                                                             |                                        |                                                 |        
|Revenues (Note 16G)                                          |                                        |                                                 | 283,310
|Cost of
  revenues                                           |                                        |                                                 | 186,908
|                                                             |                                        |                                                 |        
|                                                             | Gross profit                           |                                                 |        
|Research and
  development costs, net                        |                                        |                                                 | 15,967 
|Selling,
  general and administrative expenses               |                                        |                                                 | 85,292 
|Restructuring
  and non-recurring costs (Note 16H)           |                                        |                                                 | 1,829  
|                                                             |                                        |                                                 |        
|                                                             | Operating
  income (loss)              |                                                 |        
|Financial
  income, net (Note 16I)                           |                                        |                                                 | 3,605  
|Gain on
  realization of shareholdings, net (Note 16K)       |                                        |                                                 | 4,668  
|Other
  expenses, net (Note 16J)                             |                                        |                                                 | (2,100 
|                                                             |                                        |                                                 |        
|                                                             | Income
  (loss) before taxes on income |                                                 |        
|Taxes on
  income (Note 15)                                  |                                        |                                                 | 2,014  
|                                                             |                                        |                                                 |        
|                                                             |                                        |                                                 | (2,527 
|Equity in
  losses of affiliated companies, net              |                                        |                                                 | (2,327 
|Minority
  interest in losses (profits), net                 |                                        |                                                 | 2,448  
|                                                             |                                        |                                                 |        
|                                                             | Net income
  (loss)                    |                                                 |        
|                                                             |                                        |                                                 |        
|                                                             |                                        |                                                 |        
|Earnings
  (loss) per share (Note 16M):                      |                                        |                                                 |        
|                                                             | Basic                                  |                                                 |        
|                                                             |                                        |                                                 |        
|                                                             | Diluted                                |                                                 |        
|                                                             |                                        |                                                 |        
|Weighted
  average number of shares outstanding  (Note 16M): |                                        |                                                 |        
|                                                             | Basic                                  |                                                 |        
|                                                             |                                        |                                                 |        
|                                                             | Diluted                                |                                                 |        
|                                                             |                                        |                                                 |        
|                                                             |                                        |                                                 |        

The
accompanying notes are an integral part of the financial statements.

F-4

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                           |                                                                                              | Share Capital |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|-------------------------- | -------------------------------------------------------------------------------------------- | ------------- | ----------------------------- | ---------- | ------ | ----- | ----------------------------- |  | ------------------- | ------ | --------------------------------------------------- | ------- | ------------------------------------------------ | - | ------ | ------- | - | -
|                           |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|                           |                                                                                              |               | Number of
  Shares            |            | Amount |       | Additional 
  paid-in Capital |  | Retained
  Earnings |        | Accumulated
  other
  comprehensive
  income (loss) |         | Cost of
  Company
  Shares Held by
  the Company |   | Total  |        
|                           |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |        
|                           |                                                                                              |               | (U.S. $ in t h o u s a n d s) |           
|                           |                                                                                              |               |                               |           
|Balance at January 1, 2000 |                                                                                              |               | 9,271,529                     |            |        | 2,862 |                               |  | 65,413              |        |                                                     | 119,206 |                                                  |   | (9,259 | )       |   | -
|Changes
  during 2000:     |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|                           | Net income                                                                                   |               |                               | -          |        |       | -                             |  |                     | -      |                                                     |         | 37,979                                           |   |        | -       |   |  
|                           | Currency translation
  adjustments                                                           |               |                               | -          |        |       | -                             |  |                     | -      |                                                     |         | -                                                |   |        | 4,289   |   |  
|                           | Total comprehensive income                                                                   |               |                               | -          |        |       | -                             |  |                     | -      |                                                     |         | -                                                |   |        | -       |   |  
|                           |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|                           | Exercise of employee share
  options                                                         |               |                               | 50,574     |        |       | 12                            |  |                     | 900    |                                                     |         | -                                                |   |        | -       |   |  
|                           | Deferred compensation                                                                        |               |                               | -          |        |       | -                             |  |                     | 2,254  |                                                     |         | -                                                |   |        | -       |   |  
|                           | Purchase of shares of a subsidiary
  by subsidiary thereof                                   |               |                               | -          |        |       | -                             |  |                     | 4,467  |                                                     |         | -                                                |   |        | -       |   |  
|                           | Tax resulting from the sale
  of a company to controlling shareholders                       |               |                               | -          |        |       | -                             |  |                     | (502   | )                                                   |         | -                                                |   |        | -       |   |  
|                           | Tax benefit resulting from
  issuance expenses                                               |               |                               | -          |        |       | -                             |  |                     | 623    |                                                     |         | -                                                |   |        | -       |   |  
|                           | Tax benefit resulting from
  exercise of employee options                                    |               |                               | -          |        |       | -                             |  |                     | 634    |                                                     |         | -                                                |   |        | -       |   |  
|                           | Capital fund arising from elimination of gain on realization of Investment                   |               |                               | -          |        |       | -                             |  |                     | 794    |                                                     |         | -                                                |   |        | -       |   |  
|                           |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|                           | Balance at
  December 31, 2000                                                               |               |                               | 9,322,103  |        |       | 2,874                         |  |                     | 74,583 |                                                     |         | 157,185                                          |   |        | (4,970  | ) |  
|Changes
  during 2001:     |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|                           | Net loss                                                                                     |               |                               | -          |        |       | -                             |  |                     | -      |                                                     |         | (59,861                                          | ) |        | -       |   |  
|                           | Currency translation
  adjustments                                                           |               |                               | -          |        |       | -                             |  |                     | -      |                                                     |         | -                                                |   |        | (11,993 | ) |  
|                           | Total comprehensive loss                                                                     |               |                               | -          |        |       | -                             |  |                     | -      |                                                     |         | -                                                |   |        | -       |   |  
|                           |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|                           | Issuance of share capital                                                                    |               |                               | 1,000,000  |        |       | 226                           |  |                     | 12,091 |                                                     |         | -                                                |   |        | -       |   |  
|                           | Exercise of employee share
  options                                                         |               |                               | 2,677      |        |       | 1                             |  |                     | 44     |                                                     |         | -                                                |   |        | -       |   |  
|                           | Deferred compensation                                                                        |               |                               | -          |        |       | -                             |  |                     | 1,637  |                                                     |         | -                                                |   |        | -       |   |  
|                           | Capital fund arising from
  transactions between the Company and certain controlling parties |               |                               | -          |        |       | -                             |  |                     | 1,575  |                                                     |         | -                                                |   |        | -       |   |  
|                           | Dividend in kind                                                                             |               |                               | -          |        |       | -                             |  |                     | -      |                                                     |         | (6,971                                           | ) |        | -       |   |  
|                           |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|                           | Balance at
  December 31, 2001                                                               |               |                               | 10,324,780 |        |       | 3,101                         |  |                     | 89,930 |                                                     |         | 90,353                                           |   |        | (16,963 | ) |  
|Changes
  during 2002:     |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|                           | Net loss                                                                                     |               |                               | -          |        |       | -                             |  |                     | -      |                                                     |         | (2,406                                           | ) |        | -       |   |  
|                           | Currency translation adjustments                                                             |               |                               | -          |        |       | -                             |  |                     | -      |                                                     |         | -                                                |   |        | (6,734  | ) |  
|                           | Total comprehensive loss                                                                     |               |                               | -          |        |       | -                             |  |                     | -      |                                                     |         | -                                                |   |        | -       |   |  
|                           |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|                           | Proceeds from sale of call
  warrants                                                        |               |                               | -          |        |       | -                             |  |                     | 1,056  |                                                     |         | -                                                |   |        | -       |   |  
|                           | Deferred compensation                                                                        |               |                               | -          |        |       | -                             |  |                     | 214    |                                                     |         | -                                                |   |        | -       |   |  
|                           | Purchase of treasury stock                                                                   |               |                               | (324,780   | )      |       | -                             |  |                     | -      |                                                     |         | -                                                |   |        | -       |   |  
|                           | Alimentation of tax benefit
  resulting from issuance expenses                               |               |                               | -          |        |       | -                             |  |                     | (1,804 | )                                                   |         | -                                                |   |        | -       |   |  
|                           |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  
|                           | Balance at
  December 31, 2002                                                               |               |                               | 10,000,000 |        |       | 3,101                         |  |                     | 89,396 |                                                     |         | 87,947                                           |   |        | (23,697 | ) |  
|                           |                                                                                              |               |                               |            |        |       |                               |  |                     |        |                                                     |         |                                                  |   |        |         |   |  

The accompanying notes are an integral part
of the financial statements.

F-5

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                        |                                                                                           | Year ended December 31, | 
|--------------------------------------- | ----------------------------------------------------------------------------------------- | ----------------------- | 
|                                        |                                                                                           |                         | 
|                                        |                                                                                           | 2002                    | 
|                                        |                                                                                           |                         | 
|                                        |                                                                                           | (U.S. $ in thousands)   | 
|                                        |                                                                                           |                         | 
|CASH
  FLOWS FROM OPERATING ACTIVITIES: |                                                                                           |                         | 
|                                        | Net income (loss)                                                                         |                         | 
|                                        | Adjustments to reconcile
  net income (loss) to net cash provided byoperating activities: |                         | 
|                                        | Impairment of investments
  in investees and write-down of loans                          |                         | 
|                                        | Minority interest in
  earnings (losses) of consolidated subsidiaries                     |                         | 
|                                        | Equity in losses of
  affiliated companies, net                                           |                         | 
|                                        | Depreciation and
  amortization                                                           |                         | 
|                                        | Increase (decrease) in
  accrued severance pay, net                                       |                         | 
|                                        | Loss (gain) from sale of fixed
  assets                                                   |                         | 
|                                        | Gain on realization of
  shareholdings                                                    |                         | 
|                                        | Amortization of deferred
  warrant compensation                                           |                         | 
|                                        | Erosion of debentures and
  change in accrued interest                                    |                         | 
|                                        | Erosion of (appreciation
  in) value of long term loans and deposits, net                 |                         | 
|                                        | Tax benefit relating to
  issuance expenses and employee optionsexercised                 |                         | 
|                                        | Deferred taxes                                                                            |                         | 
|                                        | Decrease in marketable
  securities                                                       |                         | 
|                                        | Changes in operating
  assets and liabilities:                                            |                         | 
|                                        | Decrease (increase) in
  inventories                                                      |                         | 
|                                        | Decrease (increase) in
  trade receivables                                                |                         | 
|                                        | Decrease (increase) in other
  accounts receivable                                        |                         | 
|                                        | Increase (decrease) in
  trade payables                                                   |                         | 
|                                        | Increase (decrease) in
  other accounts payable and restructuring accrual                 |                         | 
|                                        | Increase in customer
  advances, net of work in progress                                  |                         | 
|                                        |                                                                                           |                         | 
|                                        | Net cash
  provided by operating activities                                               |                         | 
|                                        |                                                                                           |                         | 
|                                        |                                                                                           |                         | 
|                                        |                                                                                           |                         | 

The accompanying notes are an integral part
of the financial statements.

F-6

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                             |                                                                                               |  | Year ended December 31, |        
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                             |                                                                                               |  |                         |        
|                                                             |                                                                                               |  | 2002                    |        
|                                                             |                                                                                               |  |                         |        
|                                                             |                                                                                               |  | (U.S. $ in thousands)   |        
|                                                             |                                                                                               |  |                         |        
|CASH
  FLOWS FROM INVESTING ACTIVITIES:                      |                                                                                               |  |                         |        
|                                                             | Acquisition of newly-consolidated
  subsidiaries (Appendix C)                                 |  |                         | (1,774 
|                                                             | Proceeds from realization
  of investment in previously-consolidatedsubsidiaries (Appendix D) |  |                         | (9     
|                                                             | Investment in debentures                                                                      |  |                         | (19,422
|                                                             | Proceeds from repayment of
  debentures                                                       |  |                         | 2,919  
|                                                             | Sale of marketable
  securities, net                                                          |  |                         | (1,857 
|                                                             | Pledge of cash                                                                                |  |                         | -      
|                                                             | Purchase of fixed assets                                                                      |  |                         | (3,382 
|                                                             | Fulfillment of guarantees                                                                     |  |                         | -      
|                                                             | Proceeds from sale of
  fixed assets                                                          |  |                         | 1,160  
|                                                             | Investment in and loans to
  affiliated and other companies                                   |  |                         | (17,488
|                                                             | Proceeds from sale of
  investments in and loans to affiliated companies                      |  |                         | 2,128  
|                                                             | Purchase of activity by a
  consolidated company                                              |  |                         | (1,330 
|                                                             | Purchase of know-how by
  consolidated companies                                              |  |                         | (353   
|                                                             | Investment in bank
  deposits, net                                                            |  |                         | (180   
|                                                             | Additional investment in
  previously consolidated company                                    |  |                         | -      
|                                                             | Capitalization of software
  development and other costs                                      |  |                         | (4,424 
|                                                             | Purchase of minority
  interest in subsidiaries                                               |  |                         | (16,231
|                                                             | Dividends received from
  affiliated companies                                                |  |                         | 31     
|                                                             |                                                                                               |  |                         |        
|                                                             | Net cash
  used in investing activities                                                       |  |                         | (60,212
|                                                             |                                                                                               |  |                         |        
|CASH
  FLOWS FROM FINANCING ACTIVITIES:                      |                                                                                               |  |                         |        
|                                                             | Acquisition of newly -
  consolidated subsidiaries (Appendix E)                               |  |                         | -      
|                                                             | Proceeds from sale of call
  warrants                                                         |  |                         | 2,174  
|                                                             | Issuance of debentures                                                                        |  |                         | 29,453 
|                                                             | Purchase of treasury stock                                                                    |  |                         | (3,398 
|                                                             | Issuance of share capital                                                                     |  |                         | -      
|                                                             | Exercise of companys
  options into shares                                                   |  |                         | -      
|                                                             | Dividend to minority
  shareholders in subsidiaries                                           |  |                         | (128   
|                                                             | Short-term bank credit,
  net                                                                 |  |                         | 37,061 
|                                                             | Repayment of long-term
  loans                                                                |  |                         | (5,045 
|                                                             | Receipt of long-term loans                                                                    |  |                         | 4,841  
|                                                             | Issuance in a subsidiary
  to minority shareholders, net                                      |  |                         | 356    
|                                                             | Debenture redemption                                                                          |  |                         | -      
|                                                             | Purchase of treasury stock
  in a subsidiary by a subsidiary thereof                          |  |                         | (482   
|                                                             |                                                                                               |  |                         |        
|                                                             | Net cash
  provided by financing activities                                                   |  |                         | 64,832 
|                                                             |                                                                                               |  |                         |        
|                                                             |                                                                                               |  |                         |        
|Effect of exchange rate changes on cash and cash equivalents |                                                                                               |  | (2,575                  | )      
|                                                             |                                                                                               |  |                         |        
|                                                             |                                                                                               |  |                         |        
|NET
  INCREASE (DECREASE) IN CASH AND CASH     EQUIVALENTS   |                                                                                               |  | 7,014                   |        
|CASH AND
  CASH EQUIVALENTS AT BEGINNING OF YEAR             |                                                                                               |  | 83,547                  |        
|                                                             |                                                                                               |  |                         |        
|                                                             | CASH AND
  CASH EQUIVALENTS AT END OF YEAR                                                    |  |                         | 90,561 
|                                                             |                                                                                               |  |                         |        
|                                                             |                                                                                               |  |                         |        

The accompanying notes are an integral part
of the financial statements.

F-7

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Appendix A - Supplemental cash flow
information:

|                               |  | Year ended December 31, | 
|------------------------------ |  | ----------------------- | 
|                               |  |                         | 
|                               |  | 2002                    | 
|                               |  |                         | 
|                               |  | (U.S. $ in thousands)   | 
|                               |  |                         | 
|Cash paid during the year for: |  |                         | 
|Interest                       |  | 5,616                   | 
|                               |  |                         | 
|Income tax                     |  | 5,940                   | 
|                               |  |                         | 

Appendix B - Non-cash activities:

|                                                                                                                           |  | Year ended December 31, | 
|-------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  | 2002                    | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  | (U.S. $ in thousands)   | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  |                         | 
|Transfer of
  investments and loans against debentures                                                                     |  | -                       | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  |                         | 
|Purchase of
  fixed assets against trade payables                                                                          |  | -                       | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  |                         | 
|Investment
  in a consolidated company against issuance of sharecapital to minority
  shareholders of consolidated company |  | 9,358                   | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  |                         | 
|Realization
  of investment in a consolidated company againstaccounts receivable                                           |  | -                       | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  |                         | 
|Purchase of
  activity against long term liability                                                                         |  | 2,503                   | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  |                         | 
|Investment
  in affiliates and other companies recorded againstaccounts payable                                            |  | -                       | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  |                         | 
|Purchase of
  shares from minority shareholders of subsidiary againstaccounts payable                                      |  | 262                     | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  |                         | 
|Realization
  of convertible debenture in a subsidiary                                                                     |  | 242                     | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  |                         | 
|Purchase of
  shares from minority shareholders of subsidiaryagainst debentures                                            |  | 1,310                   | 
|                                                                                                                           |  |                         | 
|                                                                                                                           |  |                         | 
|Realization
  of investment in an exchange shares transaction                                                              |  | 6,422                   | 
|                                                                                                                           |  |                         | 

The accompanying notes are an integral part
of the financial statements.

F-8

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Appendix C - Acquisition of
newly-consolidated subsidiaries:

|                                                                               |                                                          |  | Year ended December 31, |       
|------------------------------------------------------------------------------ | -------------------------------------------------------- |  | ----------------------- | ------
|                                                                               |                                                          |  |                         |       
|                                                                               |                                                          |  | 2002                    |       
|                                                                               |                                                          |  |                         |       
|                                                                               |                                                          |  | (U.S. $ in thousands)   |       
|                                                                               |                                                          |  |                         |       
|Assets and liabilities of subsidiaries consolidated as of 
  acquisition date: |                                                          |  |                         |       
|                                                                               | Working
  capital (other than cash and cash equivalents) |  |                         | 1,019 
|                                                                               | Liabilities
  arising from purchase of activity          |  |                         | (743  
|                                                                               | Investment
  in affiliates and others including loans    |  |                         | (6,232
|                                                                               | Fixed assets                                             |  |                         | 480   
|                                                                               | Other assets
  and deferred expenses                     |  |                         | 413   
|                                                                               | Goodwill
  arising upon acquisition                      |  |                         | 6,654 
|                                                                               | Long-term
  liabilities                                  |  |                         | (77   
|                                                                               | Minority
  interest at acquisition date                  |  |                         | 260   
|                                                                               | Capital gain
  from merger transaction                   |  |                         | -     
|                                                                               |                                                          |  |                         |       
|                                                                               | Total                                                    |  |                         | 1,774 
|                                                                               |                                                          |  |                         |       
|                                                                               |                                                          |  |                         |       

Appendix D - Proceeds from realization of
investments in previously-consolidated subsidiaries:

|                                                                                |                                                               | Year ended December 31, |     
|------------------------------------------------------------------------------- | ------------------------------------------------------------- | ----------------------- | ----
|                                                                                |                                                               |                         |     
|                                                                                |                                                               | 2002                    |     
|                                                                                |                                                               |                         |     
|                                                                                |                                                               | (U.S. $ in thousands)   |     
|                                                                                |                                                               |                         |     
|Assets and liabilities of consolidated subsidiaries as of date of
  realization |                                                               |                         |     
|                                                                                | Working
  capital (other than cash and cash equivalents)      |                         | 289 
|                                                                                | Debtor in
  respect of sale of companies                      |                         | -   
|                                                                                | Investment
  in affiliate (including loans)                   |                         | (221
|                                                                                | Loans to
  others                                             |                         | -   
|                                                                                | Fixed assets                                                  |                         | -   
|                                                                                | Other assets
  and deferred expenses                          |                         | 31  
|                                                                                | Goodwill                                                      |                         | (76 
|                                                                                | Long-term
  liabilities                                       |                         | (14 
|                                                                                | Loss (gain)
  from realization of investments in subsidiaries |                         | -   
|                                                                                | Minority
  interest                                           |                         | -   
|                                                                                | Dividend in
  kind                                            |                         | -   
|                                                                                | Debentures                                                    |                         | -   
|                                                                                | Unrealized
  gain                                             |                         | -   
|                                                                                |                                                               |                         |     
|                                                                                | Total                                                         |                         | 9   
|                                                                                |                                                               |                         |     
|                                                                                |                                                               |                         |     

The accompanying notes are an integral part
of the financial statements.

F-9

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Appendix E - Acquisition of
newly-consolidated subsidiaries(*):

|                                                                               |       | Year ended December 31, |  
|------------------------------------------------------------------------------ | ----- | ----------------------- | -
|                                                                               |       |                         |  
|                                                                               |       | 2002                    |  
|                                                                               |       |                         |  
|                                                                               |       | (U.S. $ in thousands)   |  
|                                                                               |       |                         |  
|Assets and liabilities of subsidiaries consolidated as of 
  acquisition date: |       |                         |  
|Working
  capital (other than cash and cash equivalents)                       |       | -                       |  
|Goodwill
  realized                                                            |       | -                       |  
|Minority
  interest at acquisition date                                        |       | -                       |  
|Unrealized
  gain                                                              |       | -                       |  
|                                                                               |       |                         |  
|                                                                               | Total |                         | -
|                                                                               |       |                         |  

|(*) | In the
  framework of a subsidiarys reverse acquisition into a listed company shell.
  The Company considers this activity to be a financing activity because in
  substance it constitutes a flotation of the subsidiary on the stock market.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part
of the financial statements.

F-10

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -
Summary of Significant Accounting Policies:

|A. | General:                                                                                                                                                                                                                                                                                                                                                               
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                        
|   | Formula
  Systems (1985) Ltd. (the company) was founded in 1985 in Israel. Since 1991
  the Companys shares have been traded on the Tel Aviv Stock Exchange (TASE)
  and since 1997 through American Depositary Shares (ADS) under the symbol
  FORTY on the NASDAQ National Market in the United States. Each ADS represents
  one ordinary share of the Company.
|   |                                                                                                                                                                                                                                                                                                                                                                        
|   | The
  Company through its subsidiaries (Group, Formula) deals in development, production and
  marketing of information technology (IT) solutions and services company. The Company operates in two principal business
  segments, IT Services and Proprietary Software Solutions. For a description
  of the segments - see Note 16.L.                          
|   |                                                                                                                                                                                                                                                                                                                                                                        
|   | Listed below
  are details relating to the Company subsidiaries and material investments as
  at:                                                                                                                                                                                                                                                                      

| | Name of Investee:                                      |  | Percentage of ownership and
  control |  | Percentage of ownership |      | Percentage of control | 
| | ------------------------------------------------------ |  | ------------------------------------- |  | ----------------------- | ---- | --------------------- | 
| |                                                        |  |                                       |  |                         |      |                       | 
| |                                                        |  | December 31, 2002                     |  | December 31, 2001       |     
| |                                                        |  |                                       |  |                         |     
| |                                                        |  | %                                     |  | %                       |      | %                     | 
| |                                                        |  |                                       |  |                         |      |                       | 
| |                                                        |  |                                       |  |                         |      |                       | 
| | Matrix
  IT Ltd.  (Matrix)                           |  | 65.2                                  |  |                         | 85   |                       | 
| | Crystal
  Systems Solutions Ltd. (Crystal)           |  | 58.35                                 |  |                         | 49.6 |                       | 
| | Magic
  Software Enterprises Ltd. (Magic)            |  | 52.6                                  |  |                         | 48.8 |                       | 
| | NextSource
  Inc.                                      |  | 100                                   |  |                         | 100  |                       | 
| | Sapiens
  International Corporation N.V 
  (Sapiens) |  | 47.48                                 |  |                         | 24   |                       | 

| | The above list consists only of
  active companies held directly by the Company.
| | --------------------------------------------------------------------------------

F-11

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant
Accounting Policies (cont.):

|A. | General (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Change in Accounting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | On 2002 the
  company adopted U.S. GAAP and prepared accordingly its financial statements.
  All the consolidated financial statements for the periods presented have been
  restated to comply with U.S. GAAP. Under U.S. GAAP the company couldnt use a
  price adopted currency (as used before) and start to use as its functional
  currency the nominal New Israeli Shekel (NIS).                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Accounting Principles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The
  financial statements are prepared in accordance with accounting principles
  generally accepted (GAAP) in the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Functional and Reporting Currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The currency
  of the primary economic environment in which the operations of the Company
  and most of its subsidiaries are conducted is nominal NIS. The functional
  currency of the remaining subsidiaries is the U.S. dollar (dollar). The
  Company elected to use, as its reporting currency, the dollar.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The
  Financial Statement of the Company and most of its Subsidiaries whose
  functional currency is NIS have been translated to dollars under the
  principles described in Financial Accounting Standards Board Statement No.
  52. Assets and liabilities have been translated at period-end exchange
  rates.  Results of operations have
  been translated at the exchange rate at the dates on which those transactions
  occur or at average exchange rates. Differences resulting from translation
  are presented under shareholders equity in the item accumulated other
  comprehensive income (loss). Thus, subsidiaries whose functional currency is
  the dollar, their financial statement is presented in the consolidation, at
  their original amounts.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Use of
  Estimates and Assumptions in the Preparation of the Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities, disclosure of contingent
  assets and liabilities at the dates of the financial statements and the
  reported amounts of revenues and expenses during the reporting periods.                                                                                                                                                                                                                                                                                                                                                                  
|   | Actual results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|B. | Principles of Consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | The consolidated
  financial statements include the accounts of the Company and all of its
  subsidiaries in which it has a controlling interest. Intercompany
  transactions and balances were eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-12

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -
Summary of Significant Accounting Policies (cont.):

|C. | Cash Equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Cash
  equivalents are considered by the Company to be highly-liquid investments,
  including, inter alia, short-term deposits with banks, the maturity of which
  did not exceed three months at the time of deposit and which are not
  restricted.                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|D. | Investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Investments
  in affiliates over which the Company exercises significant influence are
  accounted for under the equity method. Investments in marketable securities
  are classified as trading, and unrealized gains or losses thereon are
  reported in the statement of income in accordance with Statements of
  Financial Accounting Standards (SFAS) No. 115 Accounting for Certain
  Investments in Debt. As to goodwill - see Note 1.H.  Investments in other companies are
  accounted for under the cost method.
|   | Investments
  are periodically reviewed to determine whether an other-than-temporary
  impairment in value has occurred, in which case the investment is written
  down to its fair value.                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|E. | Inventory:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The
  inventory is mainly constituted of hardware.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Inventory is
  valued at the lower of cost or market value. Cost is determined on the first
  in - first out basis.                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|F. | Debentures:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Debentures
  from investments sales relate to transaction carried out on December 31,
  2001. The debentures were issued by Formula Vision in connection with the
  sale of non-public companies held by the Company to Formula Vision.                                                                                                                                                                                                                                                                                          
|   | The Company
  evaluates periodicaly, the financial strength of Formula Vision and its
  ability to meet the repayment schedule of the loan (see Note 2.K).                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|G. | Fixed Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Fixed assets
  are stated at cost, and are depreciated by the straight-line method, over
  their estimated useful lives.  Annual
  rates of depreciation are as follows:                                                                                                                                                                                                                                                                                                                                                         

| |                           |  | %                   | 
| | ------------------------- |  | ------------------- | 
| |                           |  |                     | 
| | Computers
  and equipment |  | 6 - 33 (mainly 33)  | 
| | Motor
  vehicles          |  | 15                  | 
| | Buildings                 |  | 4                   | 
| | Leasehold
  improvements  |  | 10 - 20 (mainly 20) | 

F-13

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -
Summary of Significant Accounting Policies (cont.):

|H. | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Goodwill
  reflects the excess of the purchase price of subsidiaries acquired over the
  fair value of net assets acquired. Until December 31, 2001 goodwill was
  amortized in equal annual installments, over period of 10 years. In the event it was
determined that goodwill is not recoverable, its book value was written off and charged
to the statement of operation as goodwill impairment.                                                                                                                                                                                                                                                                                                                         
|   | In July
  2001, the Financial Accounting Standards Board (FASB) issued Statement of
  Financial Accounting Standards No. 142, Goodwill and Other Intangible
  Assets (SFAS 142). SFAS 142 requires goodwill to be tested for impairment
  on an annual basis and between annual tests in certain circumstances, and
  written down when impaired, rather than being amortized as previous accounting
  standards required. Furthermore, SFAS 142 requires purchased intangible
  assets other than goodwill to be amortized over their useful lives unless
  these lives are determined to be indefinite.                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | SFAS 142 is
  effective for fiscal years beginning after December 15, 2001. In accordance
  with SFAS 142, the Company ceased amortizing goodwill totaling $105
  million as of the beginning of 2002 ($115 million to the end of 2002). As of
  January 1 the Company has completed the transitional impairment review of goodwill.
  Based on the impairment tests performed, there was no impairment of goodwill
  on January 1, 2002. The Company has selected December 31st as the
  date on which it will perform its annual goodwill impairment test. As of
  December 31, 2002, no impairment was required. There can be no assurance that
  future goodwill impairment tests will not result in a charge to earnings.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The
  following table presents the impact of SFAS 142 on net income (loss) and net
  income (loss) per share had the accounting standard been in effect for 2002,
  2001 and 2000 (in thousands except per-share amounts):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                                   |  | Year ended December 31, |       
| | ------------------------------------------------- |  | ----------------------- | ------
| |                                                   |  |                         |       
| |                                                   |  | 2002                    |       
| |                                                   |  |                         |       
| |                                                   |  | (U.S.$ in thousands)    |       
| |                                                   |  |                         |       
| | Net income
  (loss) as reported                   |  |                         | (2,406
| | Amortization
  of goodwill                        |  |                         | -     
| |                                                   |  |                         |       
| | Net income
  (loss) adjusted                      |  |                         | (2,406
| |                                                   |  |                         |       
| | Basic net
  income (loss) per share as reported   |  |                         | (0.24 
| | Basic net
  income (loss) per share adjusted      |  |                         | (0.24 
| | Diluted net
  income (loss) per share as reported |  |                         | (0.24 
| | Diluted net
  income (loss) per share adjusted    |  |                         | (0.24 

F-14

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -
Summary of Significant Accounting Policies (cont.):

|I. | Software Development Costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Development
  costs of software that is intended for sale that were incurred after the
  establishment of technological feasibility of the relevant product, are
  capitalized. Technological feasibility is determined when detailed program
  design is completed and verified in accordance with the provisions of SFAS
  No. 86 of the FASB.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Software
  development costs incurred before technological feasibility is established
  are charged to the statement of income as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Amortization
  of capitalized software development costs begins when the product is
  available for general release to customers. Annual amortization is computed
  by the straight-line method, over the remaining useful life of the product or
  based on the ratio of current gross revenues to current and anticipated
  future gross revenues, whichever is higher. Currently, amortization is
  computed by the straight-line method, mainly over a period of 3 years. During
  the year ended December 31, 2002, a consolidated subsidiaries capitalized
  software development costs aggregating $4.4 million (2001 - $9.9 million,
  2000 - $13 million) and amortized capitalized software development costs
  aggregating $5.1 million (2001 - $6.6 million, 2000 - $0.9 million).
|   | In
  managements estimate, total capitalized costs do not exceed the net
  realizable value of the software product.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In the event
  that unamortized software development costs exceed the net realizable value
  of the product, they are written down to net realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|J. | Impairment in value of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | On January
  1, 2002, the Company adopted SFAS 144, Accounting for the Impairment or
  Disposal of Long-Lived Assets. SFAS 144 requires that long-lived assets, to
  be held and used by an entity, be reviewed for impairment and, if necessary,
  written down to the estimated fair values, whenever events or changes in
  circumstances indicate that the carrying amount of the assets may not be
  recoverable through undiscounted future cash flows. The adoption of SFAS 144
  did not have a material effect on the financial position and results of
  operations of the Company.                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|K. | Revenue Recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Revenues
  derived from direct software license agreements are recognized in accordance
  with Statement of Position (SOP) 97-2 Software Revenue Recognition (as
  amended by SOP 98-4 and SOP 98-9), upon delivery of the software when
  collection is probable, the license fee is otherwise fixed or determinable
  and persuasive evidence of an arrangement exists.                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | When a
  project involves significant modification of software, revenue is generally
  recognized according to the percentage of completion method. Under this
  method, estimated revenue is generally accrued based on costs incurred to
  date as a percentage of total updated estimated costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-15

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -
Summary of Significant Accounting Policies (cont.):

|K. | Revenue Recognition (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company
  recognizes revenues from projects (i) with respect to projects billed
  on a time and material basis, based on SOP 81-1 Accounting for Performance
  of Construction - Type and Certain Production - Type Contracts, using
  contract accounting on a percentage of completion method, based on the
  relationship of actual costs incurred to total costs estimated to be incurred
  over the duration of the contract. Provision for estimated losses on
  uncompleted contracts are made in the period in which such losses are first
  determined, in the amount of the estimated loss on the entire contract. As of
  December 31, 2002 no such estimated losses were identified. and (ii) with
  respect to fixed
  fee contracts, based upon the percentage of completion method. The
  Company recognizes contract losses, if any, in the period in which they first
  become evident.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Revenues
  from contractual maintenance contract and training are recognized relatively
  over the contract period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Revenues
  from sales of hardware are recognized when the merchandise is delivered to
  the customer, provided no significant vendor obligations remains.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Management
  believes that the Companys revenue recognition policies are in accordance
  with the Securities and Exchange Commission Staff Accounting Bulletin
  No. 101, Revenue Recognition in Financial Statements (SAB 101).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|L. | Provision for warranty:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In
  light of past experience, the Company and the majority of its subsidiaries do
  not record any provision for warranty of their products and services. Some
  subsidiaries record a provision for warranty, based on past experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|M. | Advertising Costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company
  expenses advertising costs as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|N. | Gain on Realization of Shareholdings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The results
  of realization of the Companys shareholdings in investees arising from
  issuance of stock by the investees to third parties is recognized in
  accordance with the provisions of Staff Accounting Bulletin (SAB) No. 51 of
  the Securities and Exchange Commission. The Company charges to the statement
  of operations such results, provided that the conditions stipulated in SAB 51
  for such recognition have been met.                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-16

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -
Summary of Significant Accounting Policies (cont.):

|O. | Deferred Income Taxes:                                                                                                                                                                                                                                                                                                                                                                       
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                              
|   | The Company
  applies the provisions of SFAS 109 Accounting for Income Taxes of the FASB,
  see also Note 15.E.                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                              
|P. | Earnings (Loss) Per Share:                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                              
|   | Earnings
  (loss) per share (EPS) were computed in accordance with provisions of SFAS
  No. 128 of the FASB (SFAS 128). SFAS 128 requires the presentation of both
  basic and diluted EPS.                                                                                                                                                                                              
|   | Basic net
  earnings (loss) per share is computed based on the weighted average number of
  common shares outstanding during each year. Diluted earnings (loss) per share
  is computed based on the weighted average number of common shares outstanding
  during each year, plus dilative potential common shares considered outstanding
  during the year.                                
|Q. | Company shares held by the Company:                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                              
|   | Company
  shares held by the Company are presented as a reduction of shareholders
  equity, at their cost to the Company, under cost of Company shares held by
  the Company. Gains and losses on sale of these shares, net of related income
  taxes, are carried to additional paid-in capital and to return earnings
  respectively.                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                              
|R. | Concentration of credit risks - allowance for doubtful accounts:                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                              
|   | Most of the
  Groups cash and cash equivalents and short-term investment as of December
  31, 2002 and 2001 were deposited with Israeli U.S. and European banks. The
  Company is of the opinion that the credit risk in respect of these balances
  is remote.                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                              
|   | Most of the
  Groups sales are made in Israel, North America and Europe, to a large number
  of customers.                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                              
|   | In general,
  the exposure to the concentration of credit risks relating to trade
  receivables is limited, due to the relatively large number of customers. The
  Group performs ongoing credit evaluations of its customers for the purpose of
  determining the appropriate allowance for doubtful accounts. An appropriate
  allowance for doubtful accounts is included in the accounts.
|   | The
  allowance for doubtful accounts charged to general and administrative expenses
  amounted to $2.8 million, $3.8 million and $0.98 million in 2002, 2001 and
  2000, respectively, and has been determined for specific debts doubtful of
  collection.                                                                                                                                 
|   | Debentures
  (see Note 1F).                                                                                                                                                                                                                                                                                                                                                                  

F-17

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -
Summary of Significant Accounting Policies (cont.):

|S. | Options granted to employees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company
  accounts for its Employee Stock Option Plans using the treatment prescribed
  by Accounting Principles Board Opinion No. 25, Accounting for Stock
  Issued to Employees (APB 25) and FASB issued Interpretation No. 44,
  Accounting for Certain Transactions Involving Stock Compensation (FIN
  44).  Under APB 25, compensation
  cost for employee stock option plans is measured using the intrinsic value
  based method of accounting.                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In October
  1995, the FASB issued Statement No. 123, Accounting for Stock-Based
  Compensation (SFAS 123).  This
  Statement, effective as of the 1997 financial statements, established a fair
  value based method of accounting for an employee stock option or similar
  equity instrument, and encourages adoption of such method for stock
  compensation plans. SFAS 148 Accounting for stock based compensation
  amended SFAS 123 to provide alternative methods of transition for a voluntary
  change to the fair value based method of accounting for such plans.
|   | However, it
  also allows companies to account for those plans, with respect to options
  granted to employees, using the accounting treatment prescribed by
  APB 25.                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company
  has elected to account for share option plans according to APB 25 and
  FASB interpretation No. 44 and has accordingly complied with the disclosure
  requirements set forth in SFAS 123 for companies electing to apply
  APB 25.                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Compensation
  cost was charged to income in 2002, 2001 and 2000 in respect of such plans in
  the net amount of $239 thousand, $2,817 thousand and $1,429 thousand
  respectively. Had compensation cost for the Companys plans been determined
  based on the fair value at the grant date, consistent with the method of
  SFAS 123 as amended by SFAS 148, the Companys net income and earnings
  per share would have been decreased to the pro-forma amounts indicated below:                                                                                               

F-18

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli
Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -
Summary of Significant Accounting Policies (cont.):

|S. | Options granted to employees (cont.):
|-- | -------------------------------------

| |                                                                                                                                               |                               | Year Ended December 31                          |       
| | --------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ----------------------------------------------- | ------
| |                                                                                                                                               |                               |                                                 |       
| |                                                                                                                                               |                               | 2002                                            |       
| |                                                                                                                                               |                               |                                                 |       
| |                                                                                                                                               |                               | (U.S.$ in thousands except per share
  amounts) |       
| |                                                                                                                                               |                               |                                                 |       
| |                                                                                                                                               |                               |                                                 |       
| | Net income
  (loss), as reported                                                                                                              |                               |                                                 | (2,406
| | Add:
  Stock-based employee compensation expenseincluded in reported net income,
  net of related taxeffects                                  |                               |                                                 | 239   
| | Deduct:
  Total stock-based employee compensationexpense determined under fair value
  based method forall awards, net of related tax effects |                               |                                                 | (1,421
| |                                                                                                                                               |                               |                                                 |       
| |                                                                                                                                               | Pro-forma
  net income (loss) |                                                 |       
| |                                                                                                                                               |                               |                                                 |       
| | Earnings per
  share:                                                                                                                         |                               |                                                 |       
| |                                                                                                                                               |                               |                                                 |       
| |                                                                                                                                               | Basic - as
  reported         |                                                 |       
| |                                                                                                                                               |                               |                                                 |       
| |                                                                                                                                               |                               |                                                 |       
| |                                                                                                                                               | Basic - pro
  forma           |                                                 |       
| |                                                                                                                                               |                               |                                                 |       
| |                                                                                                                                               | Diluted - as
  reported       |                                                 |       
| |                                                                                                                                               |                               |                                                 |       
| |                                                                                                                                               |                               |                                                 |       
| |                                                                                                                                               | Diluted -
  pro forma         |                                                 |       
| |                                                                                                                                               |                               |                                                 |       

|T. | Comprehensive Income:                                                                                                                                                                                                                                                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                              
|   | Comprehensive
  income presented in shareholders equity, includes in addition to net income
  (loss), translation gains and losses of non NIS and dollar currency financial
  statements of subsidiaries companies and translation adjustment due to change
  from functional currency to reporting currency.                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                              
|U. | Financial Instruments:                                                                                                                                                                                                                                                                                                                                                       
|   | In June 1998,
  the FASB issued SFAS 133 - Accounting for Derivatives Instruments and
  Hedging Activities.  SFAS 133 is
  effective for all fiscal quarters of fiscal years beginning after June 15,
  1999.  SFAS 133 sets new accounting
  treatment for this issue. The new pronouncement requires all derivatives to
  be stated, on the balance sheet, at fair value.
|   | In June
  1999, the FASB issued SFAS 137 Deferral of the Effective Date of FASB
  Statement No. 133, which defers the implementation of SFAS 133 to the
  fiscal quarters of fiscal years beginning after June 15, 2000.                                                                                                                                                   
|   | The
  application of SFAS 133 did not have any material impact on the Companys
  consolidated financial statements.                                                                                                                                                                                                                                                         

F-19

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 1 - Summary of Significant
  Accounting Policies (cont.):
|--------------------------------------------------------------
|                                                              
|V.                                                            
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              
|                                                              

F-20

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 2 -
  Certain Transactions:
|--------------------------------
|                                
|A.                              
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                

F-21

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 2 -
  Certain Transactions (cont.):
|----------------------------------------
|                                        
|A.                                      
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|B.                                      

F-22

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 2 -
  Certain Transactions (cont.):
|----------------------------------------
|                                        
|C.                                      
|                                        
|D.                                      
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|E.                                      

F-23

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 2 -
  Certain Transactions (cont.):
|----------------------------------------
|                                        
|F.                                      
|                                        
|G.                                      
|                                        
|H.                                      
|                                        
|I.                                      
|                                        
|                                        

F-24

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 2 -
  Certain Transactions (cont.):
|----------------------------------------
|                                        
|J.                                      
|                                        
|K.                                      
|                                        
|                                        
|                                        
|                                        

F-25

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 2 -
  Certain Transactions (cont.):
|----------------------------------------
|                                        
|K.                                      
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|L.                                      

F-26

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 2 -
  Certain Transactions (cont.):
|----------------------------------------
|                                        
|L.                                      
|                                        
|                                        
|                                        
|                                        
|                                        
|M.                                      
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|N.                                      

F-27

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 2 -
  Certain Transactions (cont.):
|----------------------------------------
|                                        
|O.                                      
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        

F-28

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 2 - Certain Transactions (cont.):
|--------------------------------------
|                                      
|O.                                    
|                                      
|                                      
|                                      
|P.                                    
|                                      
|Note 3 - Loans and Other Investments: 
|                                      
|Composition:                          
|                                      
|A.                                    

| |                            |  | Interest
  rate |  |         |        |                        |  |      
| | -------------------------- |  | --------------- |  | ------- | ------ | ---------------------- |  | -----
| |                            |  |                 |  |         |        |                       
| |                            |  | December
  31,  |  |         |        | December
  31,        
| |                            |  |                 |  |         |        |                       
| |                            |  | 2000
  and 2001 |  |         |        | 2002                   |  | 2001 
| |                            |  |                 |  | Linkage |        |                        |  |      
| |                            |  | %               |  | basis   |        | (U.S.$
  in thousands)
| |                            |  |                 |  |         |        |                        |  |      
| | Cost of shares             |  |                 |  |         |        |                        |  | 2,680
| |                            |  |                 |  |         |        |                        |  |      
| | Long-term prepaid expenses |  |                 |  |         |        |                        |  | 223  
| |                            |  |                 |  |         |        |                        |  |      
| | Deposit                    |  |                 |  |         | Dollar |                        |  | -    
| | Deposit                    |  |                 |  |         | CPI    |                        |  | 193  
| | Convertible loan           |  | -               |  |         | Dollar |                        |  | -    
| | Loan                       |  | LIBOR + 1       |  |         | Dollar |                        |  | -    
| | Loan                       |  | 4               |  |         | CPI    |                        |  | 304  
| |                            |  |                 |  |         |        |                        |  |      
| |                            |  |                 |  |         |        |                        |  | 497  
| |                            |  |                 |  |         |        |                        |  |      
| |                            |  |                 |  |         |        |                        |  |      
| | Total                      |  |                 |  |         |        |                        |  | 3,400
| |                            |  |                 |  |         |        |                        |  |      

F-29

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 3 - Loans and Other Investments(cont.):
|--------------------------------------------
|                                            
|B.                                          

| |                                                                                    |  | December 31,         |    
| | ---------------------------------------------------------------------------------- |  | -------------------- | ---
| |                                                                                    |  |                      |    
| |                                                                                    |  | 2002                 |    
| |                                                                                    |  |                      |    
| |                                                                                    |  | (U.S.$ in thousands) |    
| |                                                                                    |  |                      |    
| |                                                                                    |  |                      |    
| | First year                                                                         |  |                      | 76 
| | Second year                                                                        |  |                      | 76 
| | Third year                                                                         |  |                      | 76 
| | Fourth year                                                                        |  |                      | 76 
| | No set repayment date                                                              |  |                      | -  
| |                                                                                    |  |                      |    
| | Total                                                                              |  |                      | 304
| |                                                                                    |  |                      |    
| | *          Loans
  convertible, under certain terms, to shares of other companies. |  |                      |    

|Note 4 -
  Investments in Affiliates:
|-------------------------------------
|                                     
|A.                                   

| |                                                                      |  | December 31,         |        
| | -------------------------------------------------------------------- |  | -------------------- | -------
| |                                                                      |  |                      |        
| |                                                                      |  | 2002                 |        
| |                                                                      |  |                      |        
| |                                                                      |  | (U.S.$ in thousands) |        
| |                                                                      |  |                      |        
| | Investment in
  shares:                                              |  |                      |        
| | Cost                                                                 |  |                      | 24,327 
| | Goodwill and allocated original excess cost **                       |  |                      | (12,552
| |                                                                      |  |                      |        
| | Net asset value as of acquisition date                               |  |                      | 11,775 
| | Equity in post-acquisition undistributed retained losses, net        |  |                      | (4,063 
| |                                                                      |  |                      |        
| | Net asset value as of balance sheet
  date                           |  |                      | 7,712  
| | Balance of goodwill                                                  |  |                      | 12,026 
| |                                                                      |  |                      |        
| |                                                                      |  |                      | 19,738 
| |                                                                      |  |                      |        
| | Loans to
  affiliates:                                               |  |                      |        
| | Index-linked and interest-free *                                     |  |                      | 339    
| | Convertible loan linked to the dollar and bearing annual interest of |  |                      |        
| | LIBOR + 1% - repayable in 2007                                       |  |                      | 2,582  
| |                                                                      |  |                      |        
| | Total                                                                |  |                      | 22,659 
| |                                                                      |  |                      |        

| | *  | No repayment date has been set.                                                                                                                                                         
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                         
| | ** | Starting January 1, 2002 the investment is being tested for
impairment on   an annual basis rather than amortizing goodwill as previous accounting standards
  required (see Note 1.H.).

|B. | Sapiens:                                                                                                                                                                                                            
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                     
|   | During 2001 the Company completed a $10 million investment in
  convertible preferred shares of Sapiens representing approximately 24% of
  Sapiens outstanding shares capital on a converted basis (see Note 2.E.)

F-30

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 4 -
  Investments in Affiliates (cont.):
|---------------------------------------------
|                                             
|B.                                           
|                                             
|                                             
|                                             
|                                             

| |                   |  | December 31, 2002    |       
| | ----------------- |  | -------------------- | ------
| |                   |  |                      |       
| |                   |  | (U.S.$ in thousands) |       
| |                   |  |                      |       
| |                   |  |                      |       
| | Total asset       |  |                      | 65,152
| | Total liabilities |  |                      | 49,257
| |                   |  |                      |       

| |                |  | For the yearended    |       
| | -------------- |  | -------------------- | ------
| |                |  |                      |       
| |                |  | December 31, 2002    |       
| |                |  |                      |       
| |                |  | (U.S.$ in thousands) |       
| |                |  |                      |       
| |                |  |                      |       
| | Total revenues |  |                      | 64,828
| | Net loss       |  |                      | 5,153 
| |                |  |                      |       

| |                       |  | Market
  Value       |        | Books
  Value |  |       
| | --------------------- |  | -------------------- | ------ | ------------- |  | ------
| |                       |  |                      |        |               |  |       
| |                       |  | December 31, 2002    |        |              
| |                       |  |                      |        |              
| |                       |  | (U.S.$ in thousands) |        |              
| |                       |  |                      |        |              
| |                       |  |                      |        |              
| | Investment in Sapiens |  |                      | 22,949 |               |  | 19,133
| |                       |  |                      |        |               |  |       
| |                       |  |                      |        |               |  |       

|Note 5 - Fixed Assets:                                    
|----------------------------------------------------------
|                                                          
|Composition
  of assets, grouped by major classifications:

| |                           |                           | December 31,           |       
| | ------------------------- | ------------------------- | ---------------------- | ------
| |                           |                           |                        |       
| |                           |                           | 2002                   |       
| |                           |                           |                        |       
| |                           |                           | (U.S.$ in
  thousands) |       
| |                           |                           |                        |       
| | Cost:                     |                           |                        |       
| |                           | Computers
  and equipment |                        |       
| |                           | Motor
  vehicles          |                        |       
| |                           | Buildings                 |                        |       
| |                           | Leasehold
  improvements  |                        |       
| |                           |                           |                        |       
| |                           |                           |                        | 59,236
| |                           |                           |                        |       
| | Accumulated Depreciation: |                           |                        |       
| |                           | Computers
  and equipment |                        |       
| |                           | Motor
  vehicles          |                        |       
| |                           | Buildings                 |                        |       
| |                           | Leasehold
  improvements  |                        |       
| |                           |                           |                        |       
| |                           |                           |                        | 34,191
| |                           |                           |                        |       
| | Undepreciated
  balance   |                           |                        | 25,045
| |                           |                           |                        |       

F-31

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 6 - Other Assets, Net:
|---------------------------
|                           
|Comprised as follows:      

|                            |                                          | December 31,           |       
|--------------------------- | ---------------------------------------- | ---------------------- | ------
|                            |                                          |                        |       
|                            |                                          | 2002                   |       
|                            |                                          |                        |       
|                            |                                          | (U.S.$ in
  thousands) |       
|                            |                                          |                        |       
|Original
  amounts:         |                                          |                        |       
|                            | Capitalized
  software development costs |                        |       
|                            | Deferred
  expenses and others           |                        |       
|                            | Deferred tax
  asset                     |                        |       
|                            |                                          |                        |       
|                            |                                          |                        | 43,038
|                            |                                          |                        |       
|Accumulated
  amortization: |                                          |                        |       
|                            | Capitalized
  software development costs |                        |       
|                            | Deferred
  expenses and others           |                        |       
|                            | Deferred tax
  asset                     |                        |       
|                            |                                          |                        |       
|                            |                                          |                        | 18,459
|                            |                                          |                        |       
|Amortized
  cost            |                                          |                        | 24,579
|                            |                                          |                        |       

|Note 7 -
  Liabilities to Banks and Others:
|-------------------------------------------
|                                           
|A.                                         

|      |  |  | Interest
  rate   |  |  |          |  | Long-term liabilities |       | Current maturities   |  | Total long-term liabilities net of current
  maturities |       | Total long-term liabilities net of current
  maturities | 
|----- |  |  | ----------------- |  |  | -------- |  | --------------------- | ----- | -------------------- |  | ------------------------------------------------------- | ----- | ------------------------------------------------------- | 
|      |  |  |                   |  |  |          |  |                       |       |                      |  |                                                         |       |                                                         | 
|      |  |  | December 31, 2002 |  |  |          |  | December 31, 2002     |       | December 31, 2001    | 
|      |  |  |                   |  |  | Linkage  |  |                       |       |                      | 
|      |  |  | %                 |  |  | basis    |  | (U.S.$ in thousands)  |       | (U.S.$ in thousands) | 
|      |  |  |                   |  |  |          |  |                       |       |                      | 
|      |  |  |                   |  |  |          |  |                       |       |                      |  |                                                         |       |                                                         | 
|      |  |  | 2-11.5            |  |  | Dollar   |  |                       | 5,893 |                      |  |                                                         | 1,050 |                                                         | 
|      |  |  | 11                |  |  | Unlinked |  |                       | -     |                      |  |                                                         | -     |                                                         | 
|      |  |  | 5-8               |  |  | CPI      |  |                       | 3,868 |                      |  |                                                         | 1,155 |                                                         | 
|      |  |  |                   |  |  |          |  |                       |       |                      |  |                                                         |       |                                                         | 
|Total |  |  |                   |  |  |          |  |                       | 9,761 |                      |  |                                                         | 2,205 |                                                         | 
|      |  |  |                   |  |  |          |  |                       |       |                      |  |                                                         |       |                                                         | 

| |                                 |  | December 31,           |      
| | ------------------------------- |  | ---------------------- | -----
| |                                 |  |                        |      
| |                                 |  | 2002                   |      
| |                                 |  |                        |      
| |                                 |  | (U.S.$ in
  thousands) |      
| |                                 |  |                        |      
| |                                 |  |                        |      
| | First year (current maturities) |  |                        | 2,205
| | Second year                     |  |                        | 3,034
| | Third year                      |  |                        | 3,032
| | Fourth year                     |  |                        | 1,475
| | Fifth year                      |  |                        | 15   
| | Sixth year and thereafter       |  |                        | -    
| |                                 |  |                        |      
| | Total                           |  |                        | 9,761
| |                                 |  |                        |      

C.      As to liens and guarantees, see Note 12.

F-32

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 8 - Debentures: 
|---------------------
|                     
|Comprised as follows:

|                             |  |  |          |  |  |         |  |  |          |  | December 31,         |       
|---------------------------- |  |  | -------- |  |  | ------- |  |  | -------- |  | -------------------- | ------
|                             |  |  |          |  |  |         |  |  |          |  |                      |       
|                             |  |  |          |  |  |         |  |  |          |  | 2002                 |       
|                             |  |  |          |  |  |         |  |  | Interest |  |                      |       
|                             |  |  | Currency |  |  | Linkage |  |  | rate     |  | (U.S.$ in thousands) |       
|                             |  |  |          |  |  |         |  |  |          |  |                      |       
|                             |  |  |          |  |  |         |  |  |          |  |                      |       
|Debenture (1)                |  |  | NIS      |  |  | CPI     |  |  | 5.67%    |  |                      | 14,908
|Convertible debenture (2)    |  |  | NIS      |  |  | CPI     |  |  | 4.95%    |  |                      | 14,098
|Convertible debnture (3)     |  |  | Dollar   |  |  | Dollar  |  |  | 5%       |  |                      | 4,720 
|                             |  |  |          |  |  |         |  |  |          |  |                      |       
|                             |  |  |          |  |  |         |  |  |          |  |                      | 33,726
|                             |  |  |          |  |  |         |  |  |          |  |                      |       
|                             |  |  |          |  |  |         |  |  |          |  |                      |       
|(1)          See
  Note 2.L. |  |  |          |  |  |         |  |  |          |  |                      |       
|(2)          See Note
  2.M. |  |  |          |  |  |         |  |  |          |  |                      |       
|(3)          See
  Note 2.A. |  |  |          |  |  |         |  |  |          |  |                      |       



|Note 9 - Accrued Severance Pay,
  Net:
|--------------------------------------
|                                      
|A.                                    
|                                      
|                                      

| |                             |  | December 31,           |       
| | --------------------------- |  | ---------------------- | ------
| |                             |  |                        |       
| |                             |  | 2002                   |       
| |                             |  |                        |       
| |                             |  | (U.S.$ in
  thousands) |       
| |                             |  |                        |       
| |                             |  |                        |       
| | Accrued
  severance pay     |  |                        | 12,048
| | Less -
  severance pay fund |  |                        | (8,262
| |                             |  |                        |       
| |                             |  |                        | 3,786 
| |                             |  |                        |       
| |                             |  |                        |       

|   | The Company
  may make withdrawals from the managers insurance policies only for the
  purpose of paying severance pay.                                                  
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                           
|B. | The expenses
  in respect of severance pay for the years ended December 31, 2002, 2001 and
  2000 were $2,917 thousand, $4,933 thousand and $4,517 thousand, respectively.

F-33

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 10 -
  Employee Option Plans in Subsidiaries:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Certain subsidiaries granted options to their employees to purchase
  shares in the respective companies. 
  The options were granted mainly in 1999-2002. The options are
  exercisable, in general, 2-3 years after the date of grant.  Most of 
  the options were granted as part of plans that were adopted in
  accordance with the provisions of Section 102 of the Israeli Income Tax
  Ordinance, which stipulate, inter alia, that the subsidiaries will be able to
  claim as an expense for tax purposes, the benefit that was charged to the
  employees for tax purposes, if and when the employees become liable for tax
  on the said benefit. With regard to expenses in respect of the benefit to the
  employees, and additional disclosure required by FAS 123, see Note 1.S.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|  |                                                                                                                                                                                                                                                                                                                                                                                            |  | Year ended
  December 31, 2002 |                     | Year ended
  December 31, 2001 |                                 | Year ended
  December 31, 2000
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ------------------- | ------------------------------ | ------------------------------- | ------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                |                     |                                |                                 |                               
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                | Number
  of options |                                | WeightedAverageExercise
  Price |                               
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                |                     |                                |                                 |                               
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                |                     |                                | $                               |                               
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                |                     |                                |                                 |                               
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                |                     |                                |                                 |                               
|  | Options
  outstanding at 
       beginning of year                                                                                                                                                                                                                                                                                                                                         |  |                                | 1,193,650           |                                |                                 | 7.55                          
|  | Changes
  during the year:                                                                                                                                                                                                                                                                                                                                                                 |  |                                |                     |                                |                                 |                               
|  | Granted                                                                                                                                                                                                                                                                                                                                                                                    |  |                                | 339,100             |                                |                                 | 3.38                          
|  | Exercised                                                                                                                                                                                                                                                                                                                                                                                  |  |                                | (90,000             | )                              |                                 | 3.57                          
|  | Forfeited                                                                                                                                                                                                                                                                                                                                                                                  |  |                                | (117,550            | )                              |                                 | 7.44                          
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                |                     |                                |                                 |                               
|  | Options outstanding
          at
  end of year                                                                                                                                                                                                                                                                                                                                             |  |                                | 1,325,200           |                                |                                 | 6.72                          
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                |                     |                                |                                 |                               
|  | Options
  exercisable at year-end                                                                                                                                                                                                                                                                                                                                                          |  |                                | 903,317             |                                |                                 | 7.63                          
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                |                     |                                |                                 |                               
|  | Weighted-average
  fair value of options granted during the year*                                                                                                                                                                                                                                                                                                                          |  |                                | 0.99                |                                |                                 |                               
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                |                     |                                |                                 |                               
|  |                                                                                                                                                                                                                                                                                                                                                                                            |  |                                |                     |                                |                                 |                               
|* | The fair
  value of each option granted is estimated on the date of grant, using the
  Black-Scholes option-pricing model with the following weighted average
  assumptions: dividend yield of 0% for all years; expected volatility: 2002 -
  67%, 2001 - 61%, 2000 - 73%, risk-free interest rate: 2002  1.75%, 2001 -
  3%, 2000 - 5% and expected life: 2000, 2001 and 2002 -3 years.

F-34

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 10 - Employee Option Plans in
  Subsidiaries (cont.):
|----------------------------------------------------------
|                                                          
|B.                                                        

| |                              |  | Options Outstanding                           |           | Options Exercisable                             |      
| | ---------------------------- |  | --------------------------------------------- | --------- | ----------------------------------------------- | -----
| |                              |  |                                               |           |                                                 |      
| | Range of
  Exercise
  Prices |  | Number
  Outstanding
  at December
  31, 2002 |           | Weighted Average
  Remaining
  Contractual Life |      
| |                              |  |                                               |           |                                                 |      
| | $                            |  |                                               |           |                                                 | Years
| |                              |  |                                               |           |                                                 |      
| |                              |  |                                               |           |                                                 |      
| | 3.00                         |  |                                               | 80,000    |                                                 |      
| | 3.50                         |  |                                               | 207,650   |                                                 |      
| | 4.50                         |  |                                               | 76,550    |                                                 |      
| | 5.20                         |  |                                               | 139,500   |                                                 |      
| | 5.50                         |  |                                               | 13,000    |                                                 |      
| | 6.50                         |  |                                               | 311,900   |                                                 |      
| | 8.00                         |  |                                               | 92,000    |                                                 |      
| | 9.00                         |  |                                               | 30,000    |                                                 |      
| | 9.63                         |  |                                               | 125,000   |                                                 |      
| | 10.50                        |  |                                               | 249,600   |                                                 |      
| |                              |  |                                               |           |                                                 |      
| |                              |  |                                               | 1,325,200 |                                                 |      
| |                              |  |                                               |           |                                                 |      

|C. | The following table is a summary of the status of option plans in
  Magic Software Enterprises Ltd. As of December 31, 2002, 2001 and 2000:
|-- | -------------------------------------------------------------------------------------------------------------------------------------------

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | Year ended
  December 31, 2002 |           | Year ended
  December 31, 2001 |  | Year ended
  December 31, 2000 | 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | --------- | ------------------------------ |  | ------------------------------ | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                |           |                                |  |                                | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | Number of Options              |           | WeightedAverageExercisePrice   |  | Number of Options              | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                |           |                                |  |                                | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                |           | $                              |  |                                | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                |           |                                |  |                                | 
|  | Options outstanding at the
       beginning of the year                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                | 3,711,655 |                                |  | 3.22                           | 
|  | Granted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                | 195,773   |                                |  | 1.28                           | 
|  | Exercised                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                | (55,169   | )                              |  | 1.38                           | 
|  | Cancelled                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                | (375,207  | )                              |  | 8.16                           | 
|  | Forfeited                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                | (725,115  | )                              |  | 3.01                           | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                |           |                                |  |                                | 
|  | Outstanding at the end of
      the year                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                                | 2,751,937 |                                |  | 2.31                           | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                |           |                                |  |                                | 
|  | Exercisable at the end of
       the year                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                | 2,103,941 |                                |  | 2.35                           | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                |           |                                |  |                                | 
|  | Weighted average fair
    value of options granted
    during the year *                                                                                                                                                                                                                                                                                                                                                                                                                        |  |                                |           |                                |  | 0.54                           | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                |           |                                |  |                                | 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |                                |           |                                |  |                                | 
|* | The fair value of options granted is estimated on the date of grant,
  using the Black-Scholes Option Valuation Model, with the following
  weighted-average assumptions for each of the three years in the period ended
  December 31, 2002: expected volatility of 1.024, 0.44 and 0.996,
  respectively, risk-free interest rates of 1.75%, 3% and 5% respectively,
  dividend yields of 0% for each year, and a weighted average expected life of
  the option of four years for each year.

F-35

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 10 - Employee Option Plans in
  Subsidiaries (cont.):
|----------------------------------------------------------
|                                                          
|C.                                                        
|                                                          
|                                                          

| |                           |  | Options Outstanding                         |  | Options Exercisable                             | 
| | ------------------------- |  | ------------------------------------------- |  | ----------------------------------------------- | 
| |                           |  |                                             |  |                                                 | 
| | Range of Exercise
  Price |  | Number Outstanding
  at
  December 31, 2002 |  | Weighted
  Average Remaining Contractual
  Life | 
| |                           |  |                                             |  |                                                 | 
| | $                         |  |                                             |  | Years                                           | 
| |                           |  |                                             |  |                                                 | 
| |                           |  |                                             |  |                                                 | 
| | 0-1                       |  | 20,000                                      |  |                                                 | 
| | 1-2                       |  | 2,340,887                                   |  |                                                 | 
| | 2-3                       |  | 82,551                                      |  |                                                 | 
| | 3-4                       |  | 40,220                                      |  |                                                 | 
| | 5-6                       |  | 86,473                                      |  |                                                 | 
| | 6-7                       |  | 1,011                                       |  |                                                 | 
| | 9-10                      |  | 91,260                                      |  |                                                 | 
| | 10-11                     |  | 80,535                                      |  |                                                 | 
| | 19-20                     |  | 9,000                                       |  |                                                 | 
| |                           |  |                                             |  |                                                 | 
| |                           |  | 2,751,937                                   |  |                                                 | 
| |                           |  |                                             |  |                                                 | 
| |                           |  |                                             |  |                                                 | 

|D. | A summary of the status of option plans in Matrix I.T. Ltd. as of
  December 31, 2002 and changes during the years then ended is given below:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                      |  | Year ended
  December 31, 2002
| | ------------------------------------------------------------------------------------ |  | ------------------------------
| |                                                                                      |  |                               
| |                                                                                      |  |                               
| |                                                                                      |  | Number of
  options           
| |                                                                                      |  |                               
| |                                                                                      |  |                               
| | Options outstanding at beginning of year                                             |  |                               
| | Changes during
  the year:                                                           |  |                               
| | Granted                                                                              |  |                               
| | Exercised                                                                            |  |                               
| | Forfeited                                                                            |  |                               
| |                                                                                      |  |                               
| | Options
  outstanding at end of year                                                 |  |                               
| |                                                                                      |  |                               
| |                                                                                      |  |                               
| | Options
  exercisable at end of year                                                 |  |                               
| |                                                                                      |  |                               
| |                                                                                      |  |                               
| | Weighted
  average fair value of 
              options
  granted during the year(*) |  |                               
| |                                                                                      |  |                               
| |                                                                                      |  |                               

|* | The fair value of options granted is estimated on the date of grant
  using the Black-Scholes option-pricing model, with the following weighted
  average assumptions used for grants: dividend yield of 0% the weekly expected
  volatility of 4.17% in 2002, risk-free interest rate (in NIS terms) of 9% in
  2002, and expected lives of 7 years.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-36

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 10 - Employee Option Plans in
  Subsidiaries (cont.):
|----------------------------------------------------------
|                                                          
|D.                                                        
|                                                          
|                                                          

| |                            |  | Options Outstanding                      |  | Options Exercisable                           | 
| | -------------------------- |  | ---------------------------------------- |  | --------------------------------------------- | 
| |                            |  |                                          |  |                                               | 
| | Range of Exercise
  Prices |  | Number Outstanding
  at December31, 2002 |  | Weighted
  Average Remaining Contractual Life | 
| |                            |  |                                          |  |                                               | 
| | $                          |  |                                          |  | Years                                         | 
| |                            |  |                                          |  |                                               | 
| |                            |  |                                          |  |                                               | 
| | 1.48                       |  | 3,260,000                                |  |                                               | 
| |                            |  |                                          |  |                                               | 
| |                            |  |                                          |  |                                               | 

|Note 11 - Unrealized Gains:
|---------------------------
|                           
|A.                         
|                           
|                           
|                           
|                           
|                           
|                           
|                           
|                           
|                           
|                           
|                           
|                           
|B.                         

F-37

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 11 - Unrealized Gains (cont.):
|-----------------------------------
|                                   
|C.                                 

| |                                                                                           |  | December 31,          |      
| | ----------------------------------------------------------------------------------------- |  | --------------------- | -----
| |                                                                                           |  |                       |      
| |                                                                                           |  | 2002                  |      
| |                                                                                           |  |                       |      
| |                                                                                           |  | (U.S. $ in thousands) |      
| |                                                                                           |  |                       |      
| |                                                                                           |  |                       |      
| | Gain resulting from Matrix - Note 2.O.                                                    |  |                       | 1,642
| | Gain resulting from the sale of certain companies to Formula Vision -
  
       Note 2.K. |  |                       | 1,060
| | Gain resulting from a reverse acquisition of Matrix - Note 2.I.                           |  |                       | 3,078
| | Gain resulting from Sintec Media Ltd.                                                     |  |                       | 210  
| | Gain resulting from Sintec Advanced Technologies Ltd.                                     |  |                       | 93   
| | Gain resulting from T-Soft                                                                |  |                       | 101  
| |                                                                                           |  |                       |      
| |                                                                                           |  |                       | 6,184
| |                                                                                           |  |                       |      

|Note 12 -
  Commitments and Contingencies:
|------------------------------------------
|                                          
|A.                                        
|                                          
|                                          
|                                          
|                                          
|B.                                        
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          

F-38

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 12 - Commitments and Contingencies (cont.):
|------------------------------------------------
|                                                
|C.                                              
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|D.                                              
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                

F-39

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 12 - Commitments and Contingencies (cont.):
|------------------------------------------------
|                                                
|D.                                              
|                                                
|                                                
|                                                
|                                                
|                                                
|E.                                              
|                                                
|                                                
|                                                
|F.                                              
|                                                
|                                                

|                    |  | U.S.$ in
  thousands
|------------------- |  | --------------------
|                    |  |                     
|2003                |  |                     
|2004                |  |                     
|2005                |  |                     
|2006                |  |                     
|2007 and thereafter |  |                     
|                    |  |                     
|                    |  |                     
|                    |  |                     

| | Rent expenses for the years ended December 31, 2002, 2001and 2000,
  were approximately $7,418 thousand, $8,365 thousand and $6,228 thousand,
  respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

F-40

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 13 - Shareholders Equity:
|-------------------------------
|                               
|A.                             

| |                                       |  | December 31, 2002 |            | December 31, 2001
| | ------------------------------------- |  | ----------------- | ---------- | -----------------
| |                                       |  |                   |            |                  
| |                                       |  |                   | Authorized |                  
| |                                       |  |                   |            |                  
| |                                       |  |                   | NIS        |                  
| |                                       |  |                   |            |                  
| |                                       |  |                   |            |                  
| | Ordinary Shares, NIS 1 par value each |  |                   | 25,000,000 |                  
| |                                       |  |                   |            |                  

| | 1. | The shares are traded on the Tel-Aviv Stock Exchange and through
  ADSs, each representing one Ordinary Share of NIS 1 par value, quoted on
  the NASDAQ National Market in the United States.  The closing price on the Tel-Aviv Stock Exchange at December
  31, 2002, was NIS 40.14. The closing price of the ADS on the NASDAQ National
  Market on that date was $8.16.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 2. | On June 25, 1998, the Company completed a public offering of its
  shares on the over-the-counter market in the U.S. The Company received $56
  million, net, in exchange for 1,600,000 ADSs.  The offering price was $35 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 3. | In November 1998, the Company raised approximately $3 million in a
  private placement of 107,100 shares of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 4. | During 2000, as a result of a change in estimate, the Company decided
  to change the accounting treatment with regard to shares of Crystal
  Systems Solutions Ltd. and
  Forsoft Ltd. (subsidiaries) purchased by subsidiaries thereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Such shares were accounted for in prior years as treasury stock held
  for the short term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Under the new treatment, such shares are accounted for as treasury
  stock intended for retirement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 5. | The Companys General Meeting approved,
in September 1999 and August 2000, the allotment of 1,000 thousand and 500 thousand options, respectively,
  to Shandol Ltd., (a company transfered to Formula Vision within the framework of the companies
transfered from the Company to Formula Vision - see Note 2.k.), a wholly-owned subsidiary. The 1,000 thousand options were
  issued in order to assure the availability of the Companys shares once a
  request from Shamrock for exercising their option occur. The 500 thousand options
  were issued in order to assure the availability of the Companys shares as
  long as the convertible options are outstanding, with no need for additional
  action in the future. Those options exercise price is equal to the Company
  share market price.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 6. | During November 2001 Shandol exercised 1,000,000
options into the shares of the Company for a consideration of $12 million - see Note 2.A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-41

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 13 - Shareholders Equity
  (cont.):
|-----------------------------------------
|                                         
|A.                                       
|                                         
|                                         
|                                         
|                                         
|                                         
|B.                                       
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         

F-42

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note
  13 - Shareholders Equity (cont.):
|-----------------------------------------
|                                         
|B.                                       
|                                         
|                                         

|                                                                                             |  | Year ended 
  December 31, 2002       |         | Year ended
  December 31, 2001 |                                       | Year ended 
  December 31, 2000 |     
|-------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ------------------------------ | ------------------------------------- | ------------------------------- | ----
|                                                                                             |  |                                      
|                                                                                             |  | Weighted
  Average
  Exercise
  Price |         |                                | Weighted
  Average
  Exercise
  Price |                                 |     
|Number of
  Options                                                                          |  |                                       |         | Number of
  Options            |                                       |                                 |     
|                                                                                             |  | $                                     |         |                                | $                                     |                                 |     
|                                                                                             |  |                                       |         |                                |                                       |                                 |     
|                                                                                             |  |                                       |         |                                |                                       |                                 |     
|Options
  outstanding at
    beginning of year                                               |  |                                       | 122,850 |                                |                                       |                                 | 25  
|Changes during the
     year:                                                                |  |                                       |         |                                |                                       |                                 |     
|Granted                                                                                      |  |                                       | -       |                                |                                       |                                 | -   
|Exercised                                                                                    |  |                                       | -       |                                |                                       |                                 | -   
|Expired                                                                                      |  |                                       | (58,350 | )                              |                                       |                                 | 18.6
|                                                                                             |  |                                       |         |                                |                                       |                                 |     
|Options
  outstanding at
        end of year                                                 |  |                                       | 64,500  |                                |                                       |                                 | 30.8
|                                                                                             |  |                                       |         |                                |                                       |                                 |     
|Options
  exercisable at 
        end of year                                                |  |                                       | 43,000  |                                |                                       |                                 | 30.8
|                                                                                             |  |                                       |         |                                |                                       |                                 |     
|Weighted avarage fair 
         value of options 
         granted during the 
         year |  |                                       |         |                                |                                       |                                 | -   
|                                                                                             |  |                                       |         |                                |                                       |                                 |     

| | The following table summarizes information regarding options
  outstanding at December 2002:
| | --------------------------------------------------------------------------------------------

|                           |  |  | Options Outstanding                             |        | Options Exercisable                             |  
|-------------------------- |  |  | ----------------------------------------------- | ------ | ----------------------------------------------- | -
|                           |  |  |                                                 |        |                                                 |  
|                           |  |  | Number
  Outstanding
  at
  December 31,
  2002 |        | Weighted Average
  Remaining
  Contractual Life |  
|Range of 
  exercise price |  |  |                                                 |        |                                                 |  
|                           |  |  |                                                 |        |                                                 |  
|                           |  |  |                                                 |        |                                                 |  
|$                          |  |  |                                                 | Years  |                                                 | $
|                           |  |  |                                                 |        |                                                 |  
|                           |  |  |                                                 |        |                                                 |  
|30.8                       |  |  |                                                 | 64,500 |                                                 |  
|                           |  |  |                                                 |        |                                                 |  

F-43

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note
  13 - Shareholders Equity (cont.):                                      
|-------------------------------------------------------------------------------
|                                                                               
|C.                                                                             
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|D.                                                                             
|                                                                               
|                                                                               
|                                                                               
|Note 14 - Financial Instruments and
  Monetary Balances in Non-dollar Currency:
|                                                                               
|A.                                                                             
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|B.                                                                             
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               

F-44

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 14 - Financial Instruments and
  Monetary Balances in Non-dollar Currency (cont.):
|---------------------------------------------------------------------------------------
|                                                                                       
|C.                                                                                     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|Note 15 - Taxes on Income:                                                             
|                                                                                       
|A.                                                                                     
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       
|                                                                                       

F-45

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 15 -
  Taxes on Income (cont.):
|------------------------------------
|                                    
|A.                                  
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|B.                                  
|                                    
|                                    

F-46

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 15 - Taxes on Income (cont.):
|----------------------------------
|                                  
|C.                                
|                                  
|                                  
|                                  
|D.                                
|                                  
|                                  
|                                  
|E.                                
|                                  
|                                  

| |                                     |  | December 31, |         |     
| | ----------------------------------- |  | ------------ | ------- | ----
| |                                     |  |              |        
| |                                     |  | 2002         |         | 2001
| |                                     |  |              |         |     
| |                                     |  |              |         |     
| | Net
  operating loss carry forwards |  |              | 71,795  |     
| | Software
  development costs        |  |              | 324     |     
| | Allowances
  and reserves           |  |              | 6,633   |     
| |                                     |  |              |         |     
| |                                     |  |              | 78,752  |     
| | Valuation
  allowance               |  |              | (76,105 | )   
| |                                     |  |              |         |     
| |                                     |  |              | 2,647   |     
| |                                     |  |              |         |     

| |    | Deferred
  taxes were computed at a tax rate of 36%.
| | -- | ----------------------------------------------------
| |    |                                                     
| | 2. | Presentation in balance sheets:                     

| |                                    |  | December 31,          |       |     
| | ---------------------------------- |  | --------------------- | ----- | ----
| |                                    |  |                       |      
| |                                    |  | 2002                  |       | 2001
| |                                    |  |                       |       |     
| |                                    |  | (U.S. $ in thousands) |      
| |                                    |  |                       |      
| |                                    |  |                       |       |     
| | Stated
  in current assets         |  |                       | 1,859 |     
| | Stated
  in current liabilities    |  |                       | -     |     
| | Stated
  in other assets           |  |                       | 1,659 |     
| | Stated
  in long term liabilities  |  |                       | (871  | )   
| |                                    |  |                       |       |     
| | Total
  included in balance sheets |  |                       | 2,647 |     
| |                                    |  |                       |       |     

F-47

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 15 - Taxes on Income (cont.):
|----------------------------------
|                                  
|F.                                

| |                                           |             | Year ended December 31, |      
| | ----------------------------------------- | ----------- | ----------------------- | -----
| |                                           |             |                         |      
| |                                           |             | 2002                    |      
| |                                           |             |                         |      
| |                                           |             | (U.S. $ in thousands)   |      
| |                                           |             |                         |      
| | Current
  taxes:                          |             |                         |      
| |                                           | In
  Israel |                         |      
| |                                           | Abroad      |                         |      
| |                                           |             |                         |      
| |                                           |             |                         | 3,333
|
| | Taxes in Israel in respect of prior years |             |                         | (954 
| | Deferred taxes in Israel,  net            |             |                         | (365 
| |                                           |             |                         |      
| |                                           | Total       |                         |      
| |                                           |             |                         |      
| |                                           |             |                         |      

|G. | Theoretical Tax:                                                                                                                                                                                                        
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                         
|   | A
  reconciliation between the theoretical tax expense, assuming that all income
  was taxed at ordinary tax rates, and the actual income tax expense, as
  recorded in the statement of operations, is presented below:

| |                                                                               |                                                                                        | Year ended December 31, |     
| | ----------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ----------------------- | ----
| |                                                                               |                                                                                        |                         |     
| |                                                                               |                                                                                        | 2002                    |     
| |                                                                               |                                                                                        |                         |     
| |                                                                               |                                                                                        | (U.S. $ in thousands)   |     
| |                                                                               |                                                                                        |                         |     
| |                                                                               |                                                                                        |                         |     
| | Income
  (loss) before taxes on income, as per the statement 
  of operations |                                                                                        |                         | (513
| |                                                                               |                                                                                        |                         |     
| | Theoretical
  tax - 36%                                                       |                                                                                        |                         | (185
| | Additional
  tax (tax savings) in respect of:                                 |                                                                                        |                         |     
| |                                                                               | Non-deductible
  expenses (mainly amortization of goodwill)                            |                         |     
| |                                                                               | Tax-exempt
  income (mainly relating to decrease in shareholdings)                     |                         |     
| |                                                                               | Tax-exempt
  income and reduced tax rates in companies which have approved enterprises |                         |     
| |                                                                               | Losses
  and timing differences for which deferred taxes were not recorded             |                         |     
| |                                                                               | Taxes
  in respect of previous years                                                   |                         |     
| |                                                                               | Effect
  of the Inflationary Adjustments Law                                           |                         |     
| |                                                                               | Other                                                                                  |                         |     
| |                                                                               |                                                                                        |                         |     
| |                                                                               | Taxes on income as per the statement of operations                                     |                         |     
| |                                                                               |                                                                                        |                         |     
| |                                                                               |                                                                                        |                         |     
| |                                                                               | Effective
  tax rate - in%                                                             |                         |     
| |                                                                               |                                                                                        |                         |     
| |                                                                               |                                                                                        |                         |     

F-48

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
|--------------------------------------------------------
|                                                        
|Balance sheet:                                          
|                                                        
|A.                                                      
|                                                        
|                                                        

| |                      |                             | December 31,          |       
| | -------------------- | --------------------------- | --------------------- | ------
| |                      |                             |                       |       
| |                      |                             | 2002                  |       
| |                      |                             |                       |       
| |                      |                             | (U.S. $ in thousands) |       
| |                      |                             |                       |       
| | In NIS:              |                             |                       |       
| |                      | Cash
  on hand and in banks |                       |       
| |                      | Deposits
  (a)              |                       |       
| |                      |                             |                       |       
| |                      |                             |                       | 37,110
| |                      |                             |                       |       
| | In foreign currency: |                             |                       |       
| |                      | Cash
  on hand and in banks |                       |       
| |                      | Deposits
  (b)              |                       |       
| |                      |                             |                       |       
| |                      |                             |                       | 53,451
| |                      |                             |                       |       
| |                      |                             |                       |       
| |                      | Total                       |                       |       
| |                      |                             |                       |       
| |                      |                             |                       |       

|   | (a)                | Most
  of the deposits are not linked and bear annual interest of 3%-8.73%.     
|-- | ------------------ | --------------------------------------------------------------------------------
|   | (b)                | The
  deposits are mainly in U.S dollars and bear annual interest of 0.6%-1.51%.
|   |                    |                                                                                 
|B. | Trade Receivables:
|   |                   
|   | Composition:      

| |                                        |       | December 31,          |       
| | -------------------------------------- | ----- | --------------------- | ------
| |                                        |       |                       |       
| |                                        |       | 2002                  |       
| |                                        |       |                       |       
| |                                        |       | (U.S. $ in thousands) |       
| |                                        |       |                       |       
| | In NIS                                 |       |                       |       
| | Trade
  accounts receivable            |       |                       | 41,873
| | Notes
  receivable                     |       |                       | 2,835 
| | Less
  provision for doubtful accounts |       |                       | (3,699
| |                                        |       |                       |       
| |                                        |       |                       | 41,009
| | In foreign currency                    |       |                       |       
| | Trade
  accounts receivable            |       |                       | 30,024
| | Less
  provision for doubtful accounts |       |                       | (3,391
| |                                        |       |                       |       
| |                                        |       |                       | 26,633
| |                                        |       |                       |       
| |                                        | Total |                       |       
| |                                        |       |                       |       
| |                                        |       |                       |       

F-49

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|C.                                                                
|                                                                  
|                                                                  

| |                                                                            |       | December 31,          |      
| | -------------------------------------------------------------------------- | ----- | --------------------- | -----
| |                                                                            |       |                       |      
| |                                                                            |       | 2002                  |      
| |                                                                            |       |                       |      
| |                                                                            |       | (U.S. $ in thousands) |      
| |                                                                            |       |                       |      
| | Government
  departments                                                   |       |                       | 7,036
| | Employees
  (1)                                                            |       |                       | 1,578
| | Prepaid
  expenses and advances to suppliers                               |       |                       | 5,987
| | Deferred
  taxes                                                           |       |                       | 1,859
| | Affiliates                                                                 |       |                       | -    
| | Accounts
  receivable resulting from realization of holdings in affiliates |       |                       | -    
| | Other                                                                      |       |                       | 3,182
| |                                                                            |       |                       |      
| |                                                                            | Total |                       |      
| |                                                                            |       |                       |      
| |                                                                            |       |                       |      

|   | (1)                                             | These
  balances are linked to the CPI, and bear interest at an annual rate of 4%.
|-- | ----------------------------------------------- | ----------------------------------------------------------------------------------
|   |                                                 |                                                                                   
|D. | The Companys long-lived assets are as follows:

| |        |  | December 31,          |       
| | ------ |  | --------------------- | ------
| |        |  |                       |       
| |        |  | 2002                  |       
| |        |  |                       |       
| |        |  | (U.S. $ in thousands) |       
| |        |  |                       |       
| | Israel |  |                       | 20,343
| | U.S.A. |  |                       | 2,666 
| | Others |  |                       | 2,036 
| |        |  |                       |       
| |        |  |                       | 25,045
| |        |  |                       |       

|E. | Credit from Banks:
|-- | ------------------
|   |                   
|   | Composition:      

| |                                                   |       | Interest
  rate     |           |                 |  |                       |              |      |  |        |        |  |  |       
| | ------------------------------------------------- | ----- | ------------------- | --------- | --------------- |  | --------------------- | ------------ | ---- |  | ------ | ------ |  |  | ------
| |                                                   |       |                     |           |                 |  |                       | December 31, |     
| |                                                   |       | December 31,
  2002 |           |                 |  |                       |              |     
| |                                                   |       |                     |           |                 |  | 2002                  |              | 2001 | 
| |                                                   |       |                     |           | Linkage
  basis |  |                       |              |      |  |       
| |                                                   |       | %                   |           |                 |  | (U.S. $ in thousands) |             
| |                                                   |       |                     |           |                 |  |                       |              |     
| | Bank
  overdraft                                  |       |                     | 9-17      |                 |  | Unlinked              |              |      |  | 1,564  |        |  |  | 3,806 
| | Short-term
  bank loans                           |       |                     | 5.4-12    |                 |  | Unlinked              |              |      |  | 59,811 |        |  |  | 37,960
| | Short-term
  bank loans                           |       |                     | 2-4       |                 |  | Dollar                |              |      |  | 12,901 |        |  |  | 9,083 
| | Short-term
  bank loans                           |       |                     | 4.2-7.2   |                 |  | CPI                   |              |      |  | 8,706  |        |  |  | -     
| | Short-term
  bank loans                           |       |                     | Libor+1.2 |                 |  | Euro                  |              |      |  | 1,825  |        |  |  | -     
| | Short-term
  bank loans                           |       |                     | 2         |                 |  | Yen                   |              |      |  | 740    |        |  |  | -     
| | Current
  maturities of long-term loansfrom banks |       |                     |           |                 |  |                       |              |      |  | 2,205  |        |  |  | 2,403 
| |                                                   |       |                     |           |                 |  |                       |              |      |  |        |        |  |  |       
| |                                                   | Total |                     |           |                 |  |                       |              |      |  |        | 87,752 |  |  |       
| |                                                   |       |                     |           |                 |  |                       |              |      |  |        |        |  |  |       
| |                                                   |       |                     |           |                 |  |                       |              |      |  |        |        |  |  |       

F-50

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|F.                                                                
|                                                                  
|                                                                  

| |                                                              |       | December 31,          |       
| | ------------------------------------------------------------ | ----- | --------------------- | ------
| |                                                              |       |                       |       
| |                                                              |       | 2002                  |       
| |                                                              |       |                       |       
| |                                                              |       | (U.S. $ in thousands) |       
| |                                                              |       |                       |       
| | Employees
  and other wage and salary related liabilities    |       |                       | 21,845
| | Government
  departments                                     |       |                       | 8,359 
| | Prepaid
  income and customer advances                       |       |                       | 17,419
| | Excess
  of provision for losses over investment in investee |       |                       | -     
| | Deferred
  taxes                                             |       |                       | -     
| | Other
  payables and credit balances                         |       |                       | 12,549
| |                                                              |       |                       |       
| |                                                              | Total |                       |       
| |                                                              |       |                       |       
| |                                                              |       |                       |       

|G. | Revenues:                              
|-- | ---------------------------------------
|   |                                        
|   | Revenues classified by geographic area:

| |                |                 | Year ended December 31, |        
| | -------------- | --------------- | ----------------------- | -------
| |                |                 |                         |        
| |                |                 | 2002                    |        
| |                |                 |                         |        
| |                |                 | (U.S. $ in thousands)   |        
| |                |                 |                         |        
| | Israel         |                 |                         | 156,212
| | International: |                 |                         |        
| |                | United
  States |                         |        
| |                | Other           |                         |        
| |                |                 |                         |        
| |                |                 |                         | 127,098
| |                |                 |                         |        
| |                | Total           |                         |        
| |                |                 |                         |        
| |                |                 |                         |        

|H. | Restructuring and non-recurring costs:
|-- | --------------------------------------

| |                              |       | Year ended December 31, |      
| | ---------------------------- | ----- | ----------------------- | -----
| |                              |       |                         |      
| |                              |       | 2002                    |      
| |                              |       |                         |      
| |                              |       | (U.S. $ in thousands)   |      
| |                              |       |                         |      
| | Wages
  and related expenses |       |                         | 1,169
| | Relocation
  expenses        |       |                         | 396  
| | Closing
  of branch expenses |       |                         | 264  
| | Other                        |       |                         | -    
| |                              |       |                         |      
| |                              | Total |                         |      
| |                              |       |                         |      
| |                              |       |                         |      

| | Restructuring
  expenses were recorded in consolidated companies. During 2002 and 2001 these
  companies announced the adoption of a restructing plan in order to reduce
  expenses and improve organizational and business efficiency.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-51

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|I.                                                                
|                                                                  
|                                                                  

| |                                                          |       | Year ended December 31, |       
| | -------------------------------------------------------- | ----- | ----------------------- | ------
| |                                                          |       |                         |       
| |                                                          |       | 2002                    |       
| |                                                          |       |                         |       
| |                                                          |       | (U.S. $ in thousands)   |       
| |                                                          |       |                         |       
| | Financing
  income                                       |       |                         | 12,621
| | Financing
  costs related to long-term credit            |       |                         | (2,601
| | Financing
  costs related to short-term credit and other |       |                         | (6,314
| | Gain
  (loss) from marketable securities                 |       |                         | (101  
| |                                                          |       |                         |       
| |                                                          | Total |                         |       
| |                                                          |       |                         |       
| |                                                          |       |                         |       

|J. | Other Expenses, Net:
|-- | --------------------
|   |                     
|   | Composition:        

| |                                                                                                                     |       | Year ended December 31, |       
| | ------------------------------------------------------------------------------------------------------------------- | ----- | ----------------------- | ------
| |                                                                                                                     |       |                         |       
| |                                                                                                                     |       | 2002                    |       
| |                                                                                                                     |       |                         |       
| |                                                                                                                     |       | (U.S. $ in thousands)   |       
| |                                                                                                                     |       |                         |       
| | Gain
  (loss) on sale of fixed
  assets, net                                                                        |       |                         | (176  
| | Dividend
  received from another company                                                                            |       |                         | -     
| | Provision
  for impairment in value of investment in affiliates and other companies and
  write-off of goodwill (1) |       |                         | (1,656
| | Other                                                                                                               |       |                         | (268  
| |                                                                                                                     |       |                         |       
| |                                                                                                                     | Total |                         |       
| |                                                                                                                     |       |                         |       
| |                                                                                                                     |       |                         |       

| | (1) | Mainly
  includes in the year 2001 amortization of goodwill and depreciation in value of
  investments, in Magic Software Enterprises Ltd. - $ 22 million, in Crystal
  Systems Solutions Ltd. - $ 4 million, in New Applicom Ltd. - $ 5 million and
  the impairment of a convertible loan to Thougtbubble Productions
  Inc.amounting to approximatly  $ 4.8
  million.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-52

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|K.                                                                
|                                                                  
|                                                                  

| |                                                                                                       |       | Year ended December 31, |       
| | ----------------------------------------------------------------------------------------------------- | ----- | ----------------------- | ------
| |                                                                                                       |       |                         |       
| |                                                                                                       |       | 2002                    |       
| |                                                                                                       |       |                         |       
| |                                                                                                       |       | (U.S. $ in thousands)   |       
| |                                                                                                       |       |                         |       
| | Loss
  from realization of Compubyte Computers (2d below)                                             |       |                         | (609  
| | Gain
  from realization of investment in Level 8                                                      |       |                         | 5,466 
| | Gain
  (loss) from sale and decrease in shareholding 
  percentage in Magic (see  2a below)           |       |                         | (38   
| | Gain
  from decrease in shareholding percentage in Walla (see
  2b below)                             |       |                         | -     
| | Gain
  from decrease in shareholding percentage in Airport
  Intersystems                             |       |                         | -     
| | Gain
  from decrease in shareholding percentage in Matrix                                             |       |                         | 915   
| | Gain
  (loss) from sale and decrease in shareholding
  percentage in New Applicom Ltd. (see 2c below) |       |                         | -     
| | Realization
  of unrealized gain from New Applicom issuance
  of shares (see Note 11.A.2)             |       |                         | -     
| | Gain
  (loss) on realization of other investments                                                     |       |                         | (1,066
| |                                                                                                       |       |                         |       
| |                                                                                                       | Total |                         |       
| |                                                                                                       |       |                         |       
| |                                                                                                       |       |                         |       

| | 2. | Additional information:
| | -- | -----------------------
| |    |                        
| |    | a)                     
| |    |                        
| |    | b)                     
| |    |                        
| |    |                        
| |    |                        
| |    |                        

F-53

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|K.                                                                
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|L.                                                                
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  

F-54

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|L.                                                                
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  

F-55

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|L.                                                                
|                                                                  
|                                                                  

| |                              |  | Software 
  Services  |         | Proprietary
  Software
  Products |  | Total |        
| | ---------------------------- |  | --------------------- | ------- | --------------------------------- |  | ----- | -------
| |                              |  |                       |         |                                   |  |       |        
| |                              |  | (U.S. $ in thousands) |        
| |                              |  |                       |        
| | Revenues:                    |  |                       |         |                                   |  |       |        
| | 2002                         |  |                       | 172,068 |                                   |  |       | 113,121
| | 2001                         |  |                       | 213,859 |                                   |  |       | 182,745
| | 2000                         |  |                       | 217,077 |                                   |  |       | 191,972
| |                              |  |                       |         |                                   |  |       |        
| | Inter-segment sales:         |  |                       |         |                                   |  |       |        
| | 2002                         |  |                       | 726     |                                   |  |       | 1,153  
| | 2001                         |  |                       | 4,913   |                                   |  |       | 4,009  
| | 2000                         |  |                       | 3,373   |                                   |  |       | 3,207  
| |                              |  |                       |         |                                   |  |       |        
| | Operating income (loss):     |  |                       |         |                                   |  |       |        
| | 2002                         |  |                       | (1,435  | )                                 |  |       | (5,251 
| | 2001                         |  |                       | (10,416 | )                                 |  |       | (46,878
| | 2000                         |  |                       | (2,041  | )                                 |  |       | 89     
| |                              |  |                       |         |                                   |  |       |        
| | Financial income (expenses): |  |                       |         |                                   |  |       |        
| | 2002                         |  |                       | 5,549   |                                   |  |       | (1,944 
| | 2001                         |  |                       | (7,302  | )                                 |  |       | 9,982  
| | 2000                         |  |                       | 3,911   |                                   |  |       | 4,556  
| |                              |  |                       |         |                                   |  |       |        
| | Net income (loss)            |  |                       |         |                                   |  |       |        
| | 2002                         |  |                       | (1,105  | )                                 |  |       | (1,301 
| | 2001                         |  |                       | (18,781 | )                                 |  |       | (41,080
| | 2000                         |  |                       | 7,648   |                                   |  |       | 30,331 

F-56

---

---

FORMULA SYSTEMS (1985)
LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 -
  SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (cont.):
|------------------------------------------------------------------
|                                                                  
|L.                                                                

| |                                |  | Software 
  Services  |         | Proprietary
  Software
  Products |  | Total |        
| | ------------------------------ |  | --------------------- | ------- | --------------------------------- |  | ----- | -------
| |                                |  |                       |         |                                   |  |       |        
| |                                |  | (U.S. $ in thousands) |        
| |                                |  |                       |        
| | Identifiable assets:           |  |                       |         |                                   |  |       |        
| | 2002                           |  |                       | 155,908 |                                   |  |       | 173,325
| | 2001                           |  |                       | 156,740 |                                   |  |       | 184,764
| |                                |  |                       |         |                                   |  |       |        
| | Identifiable liabilities:      |  |                       |         |                                   |  |       |        
| | 2002                           |  |                       | 130,017 |                                   |  |       | 54,332 
| | 2001                           |  |                       | 95,303  |                                   |  |       | 63,982 
| |                                |  |                       |         |                                   |  |       |        
| | Depreciation and amortization: |  |                       |         |                                   |  |       |        
| | 2002                           |  |                       | 5,196   |                                   |  |       | 7,710  
| | 2001                           |  |                       | 11,043  |                                   |  |       | 18,852 
| | 2000                           |  |                       | 9,489   |                                   |  |       | 12,830 
| |                                |  |                       |         |                                   |  |       |        
| | Investments in fixed assets:   |  |                       |         |                                   |  |       |        
| | 2002                           |  |                       | 1,740   |                                   |  |       | 1,642  
| | 2001                           |  |                       | 6,362   |                                   |  |       | 4,774  

| | Reconciliation between the data on sales and income of
  operating segments and the data in the consolidated financial statements:
| | ----------------------------------------------------------------------------------------------------------------------------------

| |           |                                         | 2002                  |  | 2001    |   | 2000 | 
| | --------- | --------------------------------------- | --------------------- |  | ------- | - | ---- | 
| |           |                                         |                       |  |         |   |      | 
| |           |                                         | (U.S. $ in thousands) | 
| |           |                                         |                       | 
| | Revenues: |                                         |                       |  |         |   |      | 
| |           | Revenues
  as above                     |                       |  | 285,189 |   |      | 
| |           | Less
  inter-segment transactions       |                       |  | (1,879  | ) |      | 
| |           |                                         |                       |  |         |   |      | 
| |           | Revenues as per statement of operations |                       |  | 283,310 |   |      | 
| |           |                                         |                       |  |         |   |      | 
| |           |                                         |                       |  |         |   |      | 

F-57

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 -
  SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (cont.):
|------------------------------------------------------------------
|                                                                  
|L.                                                                

| |                           |                                                        | 2002                  |  | 2001    |  
| | ------------------------- | ------------------------------------------------------ | --------------------- |  | ------- | -
| |                           |                                                        |                       |  |         |  
| |                           |                                                        | (U.S. $ in thousands) | 
| |                           |                                                        |                       | 
| |                           |                                                        |                       | 
| | Identifiable assets:      |                                                        |                       |  |         |  
| |                           | Total
  assets of operating segments                   |                       |  | 329,233 |  
| |                           | Assets
  not identifiable to a particular segment      |                       |  | 171,963 |  
| |                           | Elimination
  of inter-segment assets and other        |                       |  | (32,599 | )
| |                           |                                                        |                       |  |         |  
| |                           | Total assets as per consolidated balance sheet         |                       |  | 468,597 |  
| |                           |                                                        |                       |  |         |  
| |                           |                                                        |                       |  |         |  
| | Identifiable liabilities: |                                                        |                       |  |         |  
| |                           | Total
  liabilities of operating segments              |                       |  | 184,349 |  
| |                           | liabilities
  not identifiable to a particular segment |                       |  | 91,425  |  
| |                           | Elimination
  of inter-segment liabilities and other   |                       |  | (32,656 | )
| |                           |                                                        |                       |  |         |  
| |                           | Total liabilities as per consolidated balance sheet    |                       |  | 243,118 |  
| |                           |                                                        |                       |  |         |  
| |                           |                                                        |                       |  |         |  

|M. | Earnings (Loss) Per Share:                                                                            
|-- | ------------------------------------------------------------------------------------------------------
|   |                                                                                                       
|   | The
  following table sets forth the computation of basic and diluted net earnings
  (loss) per share:

| |                                                                                               |  | Year ended December 31, |       
| | --------------------------------------------------------------------------------------------- |  | ----------------------- | ------
| |                                                                                               |  |                         |       
| |                                                                                               |  | 2002                    |       
| |                                                                                               |  |                         |       
| |                                                                                               |  | (U.S. $ in thousands)   |       
| |                                                                                               |  |                         |       
| |                                                                                               |  |                         |       
| | Net
  income (loss)                                                                           |  |                         | (2,406
| |                                                                                               |  |                         |       
| | Number
  for basic and diluted earnings (loss) per share - income available to
  shareholders |  |                         | (2,406
| |                                                                                               |  |                         |       
| | Weighted
  average shares outstanding                                                         |  |                         |       
| | Denominator
  for basic net earnings (loss) per share                                         |  |                         | 10,171
| | Effect
  of dilutive securities                                                               |  |                         | (*  - 
| |                                                                                               |  |                         |       
| | Denominator
  for diluted net earnings (loss) per share                                       |  |                         | 10,171
| |                                                                                               |  |                         |       
| | Basic
  net earnings (loss) per share                                                         |  |                         | (0.24 
| |                                                                                               |  |                         |       
| | Diluted
  net earnings (loss) per share                                                       |  |                         | (0.24 
| |                                                                                               |  |                         |       
| |                                                                                               |  |                         |       
| | *) Anti
  dilutive.                                                                           |  |                         |       

F-58

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 16 -
  SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (cont.):
|------------------------------------------------------------------
|                                                                  
|M.                                                                
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Note 17 - Transactions with Related
  Parties:                    
|                                                                  
|A.                                                                
|                                                                  
|B.                                                                
|                                                                  
|C.                                                                
|                                                                  

F-59

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 17 - Transactions with Related
  Parties (cont.):
|------------------------------------------------------
|                                                      
|D.                                                    
|                                                      
|E.                                                    
|                                                      
|                                                      
|F.                                                    
|                                                      
|G.                                                    

F-60

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 18 - Subsequent Event:
|---------------------------
|                           
|A.                         
|                           
|B.                         
|                           
|C.                         
|                           
|D.                         
|                           
|E.                         

F-61

---

---

ERNST
&YOUNG

REPORT OF INDEPENDENT
AUDITORSTo the Shareholders of

# MAGIC SOFTWARE
ENTERPRISES LTD.

We
have audited the accompanying consolidated balance sheets of Magic Software Enterprises
Ltd. (the Company) and its subsidiaries as of December 31, 2001 and 2002 and
the related consolidated statements of operations, changes in shareholders equity
and cash flows for each of the two years in the period ended December  31, 2002.
These financial statements are the responsibility of Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain subsidiaries, which statements
reflect total assets of 15% and 14% as of December 31, 2001 and 2002, respectively, and
total revenues of 39% and 34% for each of the two years in the period ended December 31,
2002. Those statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for those subsidiaries,
is based solely on the reports of the other auditors.

We
conducted our audits in accordance with auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes 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 and
the reports of other auditors provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the reports of the other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiaries as of December 31,
2001 and 2002, and the related consolidated results of their operations and cash flows for
each of the two years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States.

As
discussed in Note 2i to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standard No. 142 in 2002.

| |  | /s/ KOST FORER & GABBAY
KOST FORER & GABBAYA Member of Ernst & Young Global
| |  | -----------------------------------------------------------------------------------------

Tel-Aviv, Israel
March 18, 2003



---

---

SAPIENS INTERNATIONAL CORPORATION N.V.AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2002

IN U.S. DOLLARS

INDEX

|                                               | Page           
|---------------------------------------------- | ---------------
|                                               |                
|Report of Independent Auditors                 | F - 2          
|                                               |                
|Consolidated Balance Sheets                    | F - 3 - F - 4  
|                                               |                
|Consolidated Statements of Operation           | F - 5          
|                                               |                
|Statements of Changes in Shareholders Equity  | F - 6 - F - 8  
|                                               |                
|Consolidated Statements of Cash Flows          | F - 9 - F - 10 
|                                               |                
|Notes to the Consolidated Financial Statements | F - 11 - F - 38

---

---

---

ERNST
&YOUNG

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

SAPIENS INTERNATIONAL CORPORATION N.V.

We have
audited the consolidated balance sheets of Sapiens International Corporation
N.V. (the Company) and its subsidiaries as of December 31, 2001 and 2002, and
the related consolidated statements of operations, changes in shareholders
equity and cash flows for each of the three years in the period ended December
31, 2002. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes 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 consolidated financial position of the
Company and its subsidiaries as of December 31, 2001 and 2002, and the results
of their operations and cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States.

|                  | /s/ KOST FORER & GABBAY         
|----------------- | --------------------------------
|                  |                                 
|Tel-Aviv, Israel  | KOST FORER &
  GABBAY           
|February 26, 2003 | A Member of Ernst & Young Global

F - 2

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|CONSOLIDATED BALANCE SHEETS                                  
|                                                             
|U.S. dollars in thousands                                    

|                                       |                                                                                                                                                              | December 31, |       
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------ | ------
|                                       |                                                                                                                                                              |              |       
|                                       |                                                                                                                                                              | 2001         |       
|                                       |                                                                                                                                                              |              |       
|                                       | ASSETS                                                                                                                                                       |              |       
|                                       |                                                                                                                                                              |              |       
|CURRENT
  ASSETS:                      |                                                                                                                                                              |              |       
|                                       | Cash and
  cash equivalents                                                                                                                                  |              | $     
|                                       | Restricted
  cash deposits (Note 3)                                                                                                                          |              |       
|                                       | Marketable
  securities and short-term deposits (Note 4)                                                                                                     |              |       
|                                       | Trade
  receivables (net of allowance for doubtful accounts of $4,599 and $4,001 as
  of December 31, 2001 and 2002, respectively) (Note 5)                  |              |       
|                                       | Other
  receivables and prepaid expenses (Note 6)                                                                                                            |              |       
|                                       |                                                                                                                                                              |              |       
|                                       |                                                                                                                                                              |              |       
|Total
  current assets                 |                                                                                                                                                              |              | 41,734
|                                       |                                                                                                                                                              |              |       
|                                       |                                                                                                                                                              |              |       
|PROPERTY AND
  EQUIPMENT, NET (Note 7) |                                                                                                                                                              |              | 4,097 
|                                       |                                                                                                                                                              |              |       
|                                       |                                                                                                                                                              |              |       
|OTHER
  ASSETS:                        |                                                                                                                                                              |              |       
|                                       | Capitalized
  software development costs, net of accumulated amortization of $ 20,719 and
  $ 21,072 as of December 31, 2001 and 2002, respectively(Note 8a) |              |       
|                                       | Goodwill
  (Note 8)                                                                                                                                          |              |       
|                                       | Other, net
  (Note 9)                                                                                                                                        |              |       
|                                       |                                                                                                                                                              |              |       
|                                       |                                                                                                                                                              |              |       
|Total other
  assets                   |                                                                                                                                                              |              | 22,549
|                                       |                                                                                                                                                              |              |       
|                                       |                                                                                                                                                              |              |       
|Total assets                           |                                                                                                                                                              | $            | 68,380
|                                       |                                                                                                                                                              |              |       
|                                       |                                                                                                                                                              |              |       

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

F - 3

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|CONSOLIDATED BALANCE SHEETS                                  
|                                                             
|U.S. dollars in thousands (except share and per share data)  

|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------ | ------- | - | - | ------ | ------- | -
|                                                  |                                                                                                                                                                                                                                                                                                                                   | December 31, |       
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |       
|                                                  |                                                                                                                                                                                                                                                                                                                                   | 2001         |        | 2002    |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |  
|                                                  | LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                                                                                              |              |        |         |   |   |        |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|CURRENT
  LIABILITIES:                            |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  | Short-term
  bank credit (Note 11a)                                                                                                                                                                                                                                                                                               |              | $      | 16,209  |   |   | $      | 5,006   |  
|                                                  | Current
  maturities of long-term debt (Note 11b)                                                                                                                                                                                                                                                                                 |              |        | 245     |   |   |        | 4,477   |  
|                                                  | Trade
  payables                                                                                                                                                                                                                                                                                                                  |              |        | 3,242   |   |   |        | 2,578   |  
|                                                  | Deferred
  revenues                                                                                                                                                                                                                                                                                                               |              |        | 1,633   |   |   |        | 3,683   |  
|                                                  | Other
  liabilities and accrued expenses (Note 10)                                                                                                                                                                                                                                                                                |              |        | 18,768  |   |   |        | 14,541  |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|Total
  current liabilities                       |                                                                                                                                                                                                                                                                                                                                   |              | 40,097 |         |   |   | 30,285 |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|LONG-TERM
  LIABILITIES:                          |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  | Convertible
  subordinated notes and other long-term liabilities (Note 11b)                                                                                                                                                                                                                                                       |              |        | 7,365   |   |   |        | 7,787   |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|REDEEMABLE
  SHARES IN A SUBSIDIARY (Note 1c)     |                                                                                                                                                                                                                                                                                                                                   |              | 10,711 |         |   |   | 11,185 |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|COMMITMENT
  AND CONTINGENT LIABILITIES (Note 12) |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|SHAREHOLDERS
  EQUITY (Note 15):                 |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  | Share
  capital:                                                                                                                                                                                                                                                                                                                  |              |        |         |   |   |        |         |  
|                                                  | Convertible
  Preferred shares: Authorized - 20,000 and 0 of 681 par value at December 31,
  2001 and 2002, respectively; Issued and outstanding 10,000 and 0 at December
  31, 2001 and 2002, respectively; Aggregate liquidation preference of
  approximately $15,000 and $ 0 as of December 31, 2001 and 2002, respectively. |              |        | 6,361   |   |   |        | -       |  
|                                                  | Common
  shares: Authorized 14,000,000 and 20,000,000 of 2.30 par value at
  December 31, 2001 and 2002, respectively; Issued: 4,942,932 and
  11,028,909 at December 31, 2001 and 2002, respectively; Outstanding:
  4,901,138 and 10,987,115 at December 31, 2001 and 2002, respectively.                                      |              |        | 10,020  |   |   |        | 23,773  |  
|                                                  | Additional
  paid-in capital                                                                                                                                                                                                                                                                                                      |              |        | 80,514  |   |   |        | 82,648  |  
|                                                  | Deferred
  stock compensation                                                                                                                                                                                                                                                                                                     |              |        | (68     | ) |   |        | (21     | )
|                                                  | Treasury
  shares                                                                                                                                                                                                                                                                                                                 |              |        | (2,423  | ) |   |        | (2,423  | )
|                                                  | Note
  receivable from a related party shareholder                                                                                                                                                                                                                                                                                |              |        | (975    | ) |   |        | (975    | )
|                                                  | Accumulated
  other comprehensive loss                                                                                                                                                                                                                                                                                            |              |        | (5,088  | ) |   |        | (3,820  | )
|                                                  | Accumulated
  deficit                                                                                                                                                                                                                                                                                                             |              |        | (78,134 | ) |   |        | (83,287 | )
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|Total
  shareholders equity                      |                                                                                                                                                                                                                                                                                                                                   |              | 10,207 |         |   |   | 15,895 |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|Total
  liabilities and shareholders equity      |                                                                                                                                                                                                                                                                                                                                   | $            | 68,380 |         |   | $ | 65,152 |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  
|                                                  |                                                                                                                                                                                                                                                                                                                                   |              |        |         |   |   |        |         |  

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

F - 4

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS                        
|                                                             
|U.S. dollars in thousands (except per share data)            

|                                                  |                                                       | Year ended December 31, |       
|------------------------------------------------- | ----------------------------------------------------- | ----------------------- | ------
|                                                  |                                                       |                         |       
|                                                  |                                                       | 2000                    |       
|                                                  |                                                       |                         |       
|Revenues (Note 16b):                              |                                                       |                         |       
|                                                  | Products                                              |                         | $     
|                                                  | Consulting
  and other services                       |                         |       
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Total
  revenues                                  |                                                       |                         | 72,744
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Cost of
  revenues:                               |                                                       |                         |       
|                                                  | Products                                              |                         |       
|                                                  | Consulting
  and other services                       |                         |       
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Total cost
  of revenues                          |                                                       |                         | 50,935
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Gross profit                                      |                                                       |                         | 21,809
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Operating
  expenses:                             |                                                       |                         |       
|                                                  | Research and
  development, net (Note 17a)            |                         |       
|                                                  | Selling,
  marketing, general and administrative, net |                         |       
|                                                  | Aborted
  merger costs                                |                         |       
|                                                  | Restructuring
  costs (Note 1b)                       |                         |       
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Total
  operating expenses                        |                                                       |                         | 60,809
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Operating
  loss                                  |                                                       |                         | 39,000
|Financial
  expenses, net (Note 17b)              |                                                       |                         | 632   
|Other
  expenses, net                             |                                                       |                         | 403   
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Loss before
  taxes on income                     |                                                       |                         | 40,035
|Taxes on
  income (benefit) (Note 14)             |                                                       |                         | (1,949
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         | 38,086
|Minority
  interest in earnings of a subsidiary   |                                                       |                         | -     
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Net loss                                          |                                                       |                         | 38,086
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Dividends on
  Preferred shares (Note 15g)        |                                                       |                         | 107   
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Net loss to
  shareholders of Common shares       |                                                       | $                       | 38,193
|                                                  |                                                       |                         |       
|                                                  |                                                       |                         |       
|Basic and
  diluted net loss per share (Note 17c) |                                                       | $                       | 8.46  
|                                                  |                                                       |                         |       

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

F - 5

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY                
|                                                             
|U.S. dollars in thousands                                    

|                                                                                                     |                                                                      | preferred 
  shares |   | common
  shares |   | Additional
  paid-in 
  capital |       | Deferred 
  stock 
  compensation |  | Proceeds 
  on 
  account 
  of shares |        | Treasury
  shares |   | Common
  shares 
  accrued as
  dividends |      | Accumulated
  other
  comprehensive
  loss |  | Accumulated
  deficit |       | Total
|---------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ------------------- | - | --------------- | - | ------------------------------- | ----- | --------------------------------- |  | -------------------------------------- | ------ | ----------------- | - | ----------------------------------------- | ---- | ------------------------------------------ |  | --------------------- | ----- | -----
|                                                                                                     |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|Balance as of January 1,
  2000                                                                      |                                                                      | $                   | 4 |                 |   | $                               | 8,694 |                                   |  | $                                      | 69,593 |                   |   | $                                         | -    |                                            |  | $                     | -     |      
|Comprehensive loss:                                                                                  |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|Net loss                                                                                             |                                                                      |                     | - |                 |   |                                 | -     |                                   |  |                                        | -      |                   |   |                                           | -    |                                            |  |                       | -     |      
|                                                                                                     |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|                                                                                                     | Other comprehensive loss:                                            |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|                                                                                                     | Unrealized losses on
  available-for-sale marketable securities, net |                     |   | -               |   |                                 |       | -                                 |  |                                        |        | -                 |   |                                           |      | -                                          |  |                       |       | -    
|                                                                                                     | Foreign currency translation
  adjustments                           |                     |   | -               |   |                                 |       | -                                 |  |                                        |        | -                 |   |                                           |      | -                                          |  |                       |       | -    
|                                                                                                     |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|                                                                                                     | Other comprehensive loss                                             |                     |   | -               |   |                                 |       | -                                 |  |                                        |        | -                 |   |                                           |      | -                                          |  |                       |       | -    
|                                                                                                     |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|                                                                                                     | Total comprehensive loss                                             |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|                                                                                                     |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|Conversion of Preferred
  shares to Common shares:                                                   |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|                                                                                                     | Series D1                                                          |                     |   | (1              | ) |                                 |       | 131                               |  |                                        |        | (130              | ) |                                           |      | -                                          |  |                       |       | -    
|                                                                                                     | Series E                                                           |                     |   | (2              | ) |                                 |       | 169                               |  |                                        |        | (167              | ) |                                           |      | -                                          |  |                       |       | -    
|                                                                                                     | Series D2                                                          |                     |   | (1              | ) |                                 |       | 104                               |  |                                        |        | (103              | ) |                                           |      | -                                          |  |                       |       | -    
|Employee stock options
  exercised                                                                   |                                                                      |                     | - |                 |   |                                 | 166   |                                   |  |                                        | 832    |                   |   |                                           | -    |                                            |  |                       | -     |      
|Warrants exercised                                                                                   |                                                                      |                     | - |                 |   |                                 | 2     |                                   |  |                                        | 6      |                   |   |                                           | -    |                                            |  |                       | -     |      
|Compensation expense related
  to issuance of warrants to service providers                          |                                                                      |                     | - |                 |   |                                 | -     |                                   |  |                                        | 78     |                   |   |                                           | -    |                                            |  |                       | -     |      
|Deferred stock compensation
  related to options repriced                                            |                                                                      |                     | - |                 |   |                                 | -     |                                   |  |                                        | 628    |                   |   |                                           | (628 | )                                          |  |                       | -     |      
|Amortization expense on
  re-priced options                                                          |                                                                      |                     | - |                 |   |                                 | -     |                                   |  |                                        | -      |                   |   |                                           | 453  |                                            |  |                       | -     |      
|Deferred tax benefit on
  exercised options                                                          |                                                                      |                     | - |                 |   |                                 | -     |                                   |  |                                        | 547    |                   |   |                                           | -    |                                            |  |                       | -     |      
|Common shares accrued as
  dividends on Preferred shares                                             |                                                                      |                     | - |                 |   |                                 | -     |                                   |  |                                        | -      |                   |   |                                           | -    |                                            |  |                       | -     |      
|Common shares issued as
  dividends on Preferred shares                                              |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|Series D1                                                                                          |                                                                      |                     | - |                 |   |                                 | 31    |                                   |  |                                        | 326    |                   |   |                                           | -    |                                            |  |                       | -     |      
|Series E                                                                                           |                                                                      |                     | - |                 |   |                                 | 40    |                                   |  |                                        | 366    |                   |   |                                           | -    |                                            |  |                       | -     |      
|Series D2                                                                                          |                                                                      |                     | - |                 |   |                                 | 25    |                                   |  |                                        | 286    |                   |   |                                           | -    |                                            |  |                       | -     |      
|Shares issued as payment in
  respect of acquisitions adjustments of SAIC, Syspart and Sapiens Japan |                                                                      |                     | - |                 |   |                                 | 2     |                                   |  |                                        | (317   | )                 |   |                                           | -    |                                            |  |                       | -     |      
|Proceeds on account of
  shares                                                                      |                                                                      |                     | - |                 |   |                                 | -     |                                   |  |                                        | -      |                   |   |                                           | -    |                                            |  |                       | 5,000 |      
|                                                                                                     |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|Balance as of December 31,
  2000                                                                    |                                                                      | $                   | - |                 |   | $                               | 9,364 |                                   |  | $                                      | 71,945 |                   |   | $                                         | (175 | )                                          |  | $                     | 5,000 |      
|                                                                                                     |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      
|                                                                                                     |                                                                      |                     |   |                 |   |                                 |       |                                   |  |                                        |        |                   |   |                                           |      |                                            |  |                       |       |      

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

F - 6

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY                
|                                                             
|U.S. dollars in thousands                                    

|                                                                        |                                                                      | Convertible
  preferred 
  shares |       | common
  shares |  | Additional
  paid-in 
  capital |        | Deferred 
  stock 
  compensation |  | Proceeds 
  on 
  account 
  of shares |        | Treasury
  shares |  | Note 
  receivable
  from a 
  shareholder |      | Accumulated
  other
  comprehensive
  loss |  | Accumulated
  deficit |        | Total
|----------------------------------------------------------------------- | -------------------------------------------------------------------- | --------------------------------- | ----- | --------------- |  | ------------------------------- | ------ | --------------------------------- |  | -------------------------------------- | ------ | ----------------- |  | ------------------------------------------ | ---- | ------------------------------------------ |  | --------------------- | ------ | -----
|                                                                        |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      
|Balance as of January 1,
  2001                                         |                                                                      | $                                 | -     |                 |  | $                               | 9,364  |                                   |  | $                                      | 71,945 |                   |  | $                                          | (175 | )                                          |  | $                     | 5,000  |      
|Total comprehensive loss:                                               |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      
|Net loss                                                                |                                                                      |                                   | -     |                 |  |                                 | -      |                                   |  |                                        | -      |                   |  |                                            | -    |                                            |  |                       | -      |      
|                                                                        |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      
|Other comprehensive loss:                                               |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      
|                                                                        | Unrealized losses on
  available-for-sale marketable securities, net |                                   |       | -               |  |                                 |        | -                                 |  |                                        |        | -                 |  |                                            |      | -                                          |  |                       |        | -    
|                                                                        | Foreign currency translation
  adjustments                           |                                   |       | -               |  |                                 |        | -                                 |  |                                        |        | -                 |  |                                            |      | -                                          |  |                       |        | -    
|                                                                        |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      
|Other comprehensive loss                                                |                                                                      |                                   | -     |                 |  |                                 | -      |                                   |  |                                        | -      |                   |  |                                            | -    |                                            |  |                       | -      |      
|                                                                        |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      
|Total comprehensive loss                                                |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      
|                                                                        |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      
|Employee stock options
  exercised                                      |                                                                      |                                   | -     |                 |  |                                 | 1      |                                   |  |                                        | (1     | )                 |  |                                            | -    |                                            |  |                       | -      |      
|Compensation expense related
  to issuance of warrants to banks         |                                                                      |                                   | -     |                 |  |                                 | -      |                                   |  |                                        | 203    |                   |  |                                            | -    |                                            |  |                       | -      |      
|Amortization expense on
  re-priced options                             |                                                                      |                                   | -     |                 |  |                                 | -      |                                   |  |                                        | -      |                   |  |                                            | 107  |                                            |  |                       | -      |      
|Issuance of Series F
  convertible Preferred shares and warrants, net |                                                                      |                                   | 6,361 |                 |  |                                 | -      |                                   |  |                                        | 8,518  |                   |  |                                            | -    |                                            |  |                       | (5,000 | )    
|Common shares issued for a
  note to a related party                    |                                                                      |                                   | -     |                 |  |                                 | 655    |                                   |  |                                        | 320    |                   |  |                                            | -    |                                            |  |                       | -      |      
|Payment in respect of
  acquisition adjustment of Syspart               |                                                                      |                                   | -     |                 |  |                                 | -      |                                   |  |                                        | (471   | )                 |  |                                            | -    |                                            |  |                       | -      |      
|                                                                        |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      
|Balance as of December 31,
  2001                                       |                                                                      | $                                 | 6,361 |                 |  | $                               | 10,020 |                                   |  | $                                      | 80,514 |                   |  | $                                          | (68  | )                                          |  | $                     | -      |      
|                                                                        |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      
|                                                                        |                                                                      |                                   |       |                 |  |                                 |        |                                   |  |                                        |        |                   |  |                                            |      |                                            |  |                       |        |      

The accompanying notes are an integral part
of the financial statements.

F - 7

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY                
|                                                             
|U.S. dollars in thousands                                    

|                                                                             |                                                                      | Convertible 
  preferred 
  shares |       | common 
  shares |   | Additional
  paid-in 
  capital |        | Deferred 
  stock 
  compensation |  | Treasury
  shares |        | Note
  receivable 
  from a 
  shareholder |   | Accumulated 
  other 
  comprehensive
  loss |     | Accumulated 
  deficit |  | Total |       
|---------------------------------------------------------------------------- | -------------------------------------------------------------------- | ---------------------------------- | ----- | ---------------- | - | ------------------------------- | ------ | --------------------------------- |  | ----------------- | ------ | ------------------------------------------ | - | -------------------------------------------- | --- | ---------------------- |  | ----- | ------
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|Balance as of January 1,
  2002                                              |                                                                      | $                                  | 6,361 |                  |   | $                               | 10,020 |                                   |  | $                 | 80,514 |                                            |   | $                                            | (68 | )                      |  | $     | (2,423
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|Total comprehensive loss:                                                    |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             | Net loss                                                             |                                    |       | -                |   |                                 |        | -                                 |  |                   |        | -                                          |   |                                              |     | -                      |  |       |       
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             | Other comprehensive loss:                                            |                                    |       | -                |   |                                 |        | -                                 |  |                   |        | -                                          |   |                                              |     | -                      |  |       |       
|                                                                             | Unrealized losses on
  available-for-sale marketable securities, net |                                    |       | -                |   |                                 |        | -                                 |  |                   |        | -                                          |   |                                              |     | -                      |  |       |       
|                                                                             | Foreign currency translation
  adjustments                           |                                    |       | -                |   |                                 |        | -                                 |  |                   |        | -                                          |   |                                              |     | -                      |  |       |       
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             | Other comprehensive loss                                             |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             | Total Comprehensive loss                                             |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             | Employee stock options exercised                                     |                                    |       | -                |   |                                 |        | 117                               |  |                   |        | (105                                       | ) |                                              |     | -                      |  |       |       
|                                                                             | Amortization expense on
  re-priced options                          |                                    |       | -                |   |                                 |        | -                                 |  |                   |        | -                                          |   |                                              |     | 47                     |  |       |       
|                                                                             | Conversion of Series F
  Preferred shares and exercise of warrants   |                                    |       | (6,361           | ) |                                 |        | 13,636                            |  |                   |        | 2,725                                      |   |                                              |     | -                      |  |       |       
|                                                                             | Payment in respect of
  acquisition adjustment of Syspart            |                                    |       | -                |   |                                 |        | -                                 |  |                   |        | (486                                       | ) |                                              |     | -                      |  |       |       
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|Balance as of December 31,
  2002                                            |                                                                      | $                                  | -     |                  |   | $                               | 23,773 |                                   |  | $                 | 82,648 |                                            |   | $                                            | (21 | )                      |  | $     | (2,423
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|Accumulated unrealized gain
  from available- for-sale marketable securities |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|Accumulated foreign currency
  translation adjustments                       |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|Accumulated other
  comprehensive loss                                       |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       
|                                                                             |                                                                      |                                    |       |                  |   |                                 |        |                                   |  |                   |        |                                            |   |                                              |     |                        |  |       |       

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

F - 8

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                        
|                                                             
|U.S. dollars in thousands                                    

|                                                                                                         |  | Year ended December 31, |        
|-------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                         |  |                         |        
|                                                                                                         |  | 2000                    |        
|                                                                                                         |  |                         |        
|Cash flows
  from operating activities:                                                                  |  |                         |        
|Net loss                                                                                                 |  | $                       | (38,086
|                                                                                                         |  |                         |        
|Adjustments
  to reconcile net loss to net cash provided by (used
  in) operating activities:            |  |                         |        
|Depreciation,
  amortization and impairment                                                              |  |                         | 6,984  
|Amortization
  of deferred gain on sale - leaseback transaction                                          |  |                         | (226   
|Gain
  on marketable securities                                                                          |  |                         | (91    
|Loss
  (gain) on disposal of property and equipment                                                      |  |                         | (8     
|Amortization
  of compensation expenses related to issuance
            of warrants to service providers |  |                         | 78     
|Amortization
  expense on re-priced options                                                              |  |                         | 453    
|Decrease
  (increase) in trade receivables                                                               |  |                         | (873   
|Decrease
  (increase) in other receivables and prepaid
            expenses                              |  |                         | (251   
|Decrease
  (increase) in deferred income taxes, net                                                      |  |                         | (2,636 
|Reduction
  of income taxes related to employee stock option
            exercised                       |  |                         | 547    
|Increase
  (decrease) in trade payables                                                                  |  |                         | 2,702  
|Increase
  (decrease) in deferred revenues                                                               |  |                         | 942    
|Increase
  (decrease) in other liabilities and accrued expenses                                          |  |                         | 9,332  
|Accrued
  interest on redeemable shares in a subsidiary                                                  |  |                         | -      
|Gain
  on payment of convertible subordinated notes                                                      |  |                         | -      
|Minority
  interests in earnings of a subsidiary                                                         |  |                         | -      
|                                                                                                         |  |                         |        
|                                                                                                         |  |                         |        
|Net cash
  provided by (used in) operating activities                                                    |  |                         | (21,133
|                                                                                                         |  |                         |        
|Cash flows
  from investing activities:                                                                  |  |                         |        
|Purchase
  of property and equipment                                                                     |  |                         | (3,663 
|Increase
  in capitalized software development costs                                                     |  |                         | (4,250 
|Decrease
  (increase) in restricted cash                                                                 |  |                         | -      
|Purchase
  of short-term deposits and marketable securities                                              |  |                         | (6,763 
|Proceeds
  from sale of marketable securities                                                            |  |                         | 12,078 
|Proceeds
  from sale of property and equipment                                                           |  |                         | 38     
|Purchase
  of other assets                                                                               |  |                         | (321   
|Payment
  for acquisition of IMA                                                                         |  |                         | (275   
|Payment
  for acquisition of Syspart                                                                     |  |                         | (164   
|Payment
  for acquisition of SAIC                                                                        |  |                         | (401   
|                                                                                                         |  |                         |        
|                                                                                                         |  |                         |        
|Net cash
  used in investing activities                                                                  |  |                         | (3,721 
|                                                                                                         |  |                         |        

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

F - 9

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                        
|                                                             
|U.S. dollars in thousands                                    

|                                                                                            |  | Year ended December 31, |       
|------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                            |  |                         |       
|                                                                                            |  | 2000                    |       
|                                                                                            |  |                         |       
|Cash flows
  from financing activities:                                                     |  |                         |       
|Proceeds
  from issuance of redeemable shares in a subsidiary                               |  |                         | 14,675
|Redemption
  of redeemable shares in subsidiary                                             |  |                         | -     
|Proceeds
  from issuance of Series F convertible Preferred shares
      and warrants, net |  |                         | -     
|Proceeds
  from exercise of Series F convertible Preferred share
      warrants           |  |                         |       
|Proceeds
  from exercise of options and warrants                                            |  |                         | 819   
|Proceeds
  on account of shares                                                             |  |                         | 5,000 
|Increase
  (decrease) in short-term bank debt, net                                          |  |                         | 13,204
|Payment
  of convertible subordinated notes                                                 |  |                         | -     
|Principal
  payment of long-term liabilities                                                |  |                         | (255  
|Proceeds
  from long-term bank loans                                                        |  |                         | -     
|                                                                                            |  |                         |       
|                                                                                            |  |                         |       
|Net cash
  provided by financing activities                                                 |  |                         | 33,443
|                                                                                            |  |                         |       
|                                                                                            |  |                         |       
|Effect of
  exchange rate changes on cash and cash equivalents                              |  |                         | (286  
|                                                                                            |  |                         |       
|                                                                                            |  |                         |       
|Increase
  (decrease) in cash and cash equivalents                                          |  |                         | 8,303 
|Cash and
  cash equivalents at the beginning of year                                        |  |                         | 8,735 
|                                                                                            |  |                         |       
|                                                                                            |  |                         |       
|Cash and
  cash equivalents at the end of year                                              |  | $                       | 17,038
|                                                                                            |  |                         |       
|                                                                                            |  |                         |       
|Supplemental
  cash flow activities:                                                        |  |                         |       
|Cash
  paid during the year for:                                                            |  |                         |       
|Interest                                                                                    |  | $                       | 1,305 
|                                                                                            |  |                         |       
|                                                                                            |  |                         |       
|Income
  taxes                                                                              |  | $                       | 337   
|                                                                                            |  |                         |       
|                                                                                            |  |                         |       
|Non-cash
  transactions:                                                                    |  |                         |       
|                                                                                            |  |                         |       
|Common
  shares accrued as dividends on Preferred shares                                    |  | $                       | 107   
|                                                                                            |  |                         |       
|                                                                                            |  |                         |       
|Common
  shares issued as dividends on Preferred shares                                     |  | $                       | 1,074 
|                                                                                            |  |                         |       
|                                                                                            |  |                         |       
|Revaluation
  of Syspart acquisition against liability                                      |  | $                       | -     
|                                                                                            |  |                         |       

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

F - 10

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 1: | BUSINESS
  AND ORGANIZATION
|------- | ---------------------------
|        |                            
|        | a.                         
|        |                            
|        |                            
|        |                            
|        |                            
|        |                            
|        | b.                         
|        |                            
|        |                            
|        |                            
|        |                            
|        |                            
|        | c.                         
|        |                            
|        |                            

F - 11

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 1: | BUSINESS
  AND ORGANIZATION (Cont.)                                                                                                                         
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                             
|        |                                                                                                                                                             
|        |                                                                                                                                                             
|        |                                                                                                                                                             
|        |                                                                                                                                                             
|        |                                                                                                                                                             
|        |                                                                                                                                                             
|        |                                                                                                                                                             
|        |                                                                                                                                                             
|NOTE 2: | SIGNIFICANT
  ACCOUNTING POLICIES                                                                                                                           
|        |                                                                                                                                                             
|        | The
  consolidated financial statements have been prepared in accordance with
  accounting principles generally accepted in the United States (U.S. GAAP).
|        |                                                                                                                                                             
|        |                                                                                                                                                             
|        | a.                                                                                                                                                          
|        |                                                                                                                                                             
|        |                                                                                                                                                             

F - 12

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 2: | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)
|------- | -----------------------------------------
|        |                                          
|        | b.                                       
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        | c.                                       
|        |                                          
|        |                                          
|        |                                          
|        | d.                                       
|        |                                          
|        |                                          
|        |                                          
|        | e.                                       
|        |                                          
|        |                                          

F - 13

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 2: | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)
|------- | -----------------------------------------
|        |                                          
|        | f.                                       
|        |                                          
|        |                                          
|        |                                          
|        | g.                                       
|        |                                          
|        |                                          

| |  | Equipment
  and furniture         |  | 4 - 15 years                                                                            | 
| |  | --------------------------------- |  | --------------------------------------------------------------------------------------- | 
| |  | Computer
  equipment and software |  | 3 - 5 years                                                                             | 
| |  | Motor
  vehicles                  |  | 3 - 7 years                                                                             | 
| |  | Leasehold improvements            |  | (Over the shorter of the term of the lease or the estimated useful
  life of the asset) | 

| |    | The Company
  periodically assesses the recoverability of the carrying amount of property
  and equipment and provides for any possible impairment loss based upon the
  difference between the carrying amount and fair value of such assets, in
  accordance with Statement of Financial Accounting Standard No. 144
  Accounting for the Impairment or Disposal of Long- Lived Assets (SFAS No.
  144). As of December 31, 2002, no impairment losses have been identified.                                                                                                                                                                                                                                                                                                                                                      
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | h. | Impairment
  of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The
  Companys long-lived assets and certain identifiable intangibles are reviewed
  for impairment in accordance with SFAS No. 144 Accounting for the Impairment
  or Disposal of Long-Lived Assets whenever events or changes in circumstances
  indicate that the carrying amount of an asset may not be recoverable.
  Recoverability of assets to be held and used is measured by a comparison of
  the carrying amount of an asset to the future undiscounted cash flows
  expected to be generated by the assets. If such assets are considered to be
  impaired, the impairment to be recognized is measured by the amount by which
  the carrying amount of the assets exceeds the fair value of the assets.
  Assets to be disposed of are reported at the lower of the carrying amount or
  fair value less costs to sell.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | i. | Capitalized
  software development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Research and
  development costs incurred in the process of developing new products or
  product improvements, are charged to expense as incurred, net of
  participation by the Office of the Chief Scientist in Israels Ministry of
  Industry and Trade (the OCS).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F - 14

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 2: | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)
|------- | -----------------------------------------
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        | j.                                       
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        | k.                                       
|        |                                          
|        |                                          

| | Prepaid
  royalties                                    |  | 15 years  | 
| | ------------------------------------------------------ |  | --------- | 
| | Distribution
  rights                                  |  | 7 years   | 
| | Technology,
  usage rights and other intangible assets |  | 5-8 years | 

F - 15

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 2: | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)
|------- | -----------------------------------------

| |    | Before the
  adoption of SFAS No. 144 the Company evaluated the recoverability of
  long-lived assets annually and the appropriateness of the amortization period
  based on the estimated future undiscounted cash flows derived from the asset.
  In 2001, such impairments were indicated and the Company recognized
  impairment loss in the amount of $519,000, which was included in the
  marketing, selling, general and administrative expenses                                                                                                                                                                                                                                 
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | As of
  December 31, 2002, no impairment losses have been identified.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | l. | Revenue
  recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Product
  revenues include implementation services contracts (which include the sale of
  software technology and services) and software license sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Revenues
  from implementation services contracts are recognized based on Statement of
  Opinion No. 81-1 Accounting for Performance of Construction-Type and Certain
  Production -Type Contracts (SOP No. 81-1), using contract accounting on a
  percentage of completion method based on the relationship of actual costs
  incurred to total costs estimated to be incurred over the duration of the
  contract. Provisions for estimated losses on uncompleted contracts are made
  in the period in which such losses are first determined, in the amount of the
  estimated loss on the entire contract. As of December 31, 2002, no such
  estimated losses were identified.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Revenues
  earned under software licensing agreements with end-users are recognized when
  all criteria outlined in Statement of Position No. 97-2 Software Revenue
  Recognition (SOP No. 97-2) (as amended) are met. Revenues from license
  fees are recognized when persuasive evidence of an agreement exists, delivery
  of the product has occurred, no significant obligations with regard to
  implementation remain, the fee is fixed or determinable and collectibility is
  probable.                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  and its subsidiaries do not grant rights of return.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Where
  software arrangements involve multiple elements, revenues are allocated to
  each element based on vendor specific objective evidence (VSOE) of the
  relative fair values of each element in the arrangement, in accordance with
  the residual method prescribed by Statement of Opinion No. 98-9.
  Modification of SOP 97-2, Software Revenue Recognition With Respect to
  Certain Transactions (SOP No. 98-9). The Companys VSOE used to allocate
  the sales price to consulting, training and maintenance is based on the price
  charged when these elements are sold separately. License revenues are
  recorded based on the residual method.                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Under the
  residual method, revenue is recognized for the delivered elements when (1)
  there is VSOE of the fair values of all the undelivered elements other than
  those accounted for using long-term contract accounting, and (2) all revenue
  recognition criteria of SOP 97-2, as amended, are satisfied.                                                                                                                                                                                                                                                                                                                                                                       

F - 16

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 2: | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)
|------- | -----------------------------------------

| |    | Consulting
  and other services revenues also include training and post-contract
  maintenance services. Revenues from consulting, maintenance and training
  services are recognized ratably over the contractual period or as services
  are performed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Deferred
  revenues include amounts received from customers for which revenues have not
  yet been recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | m. | Advertising
  expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Advertising
  expenses are charged to the statement of operations as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | n. | Government
  grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Royalty-bearing
  grants from the Government of Israel for the funding of research and
  development projects are recognized at the time the Company is entitled to
  such grants on the basis of the related costs incurred, and are recorded as a
  reduction of research and development costs.                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | o. | Income
  taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  and its subsidiaries account for income taxes in accordance with Statement of
  Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS
  No. 109). This Statement prescribes the use of the liability method whereby
  deferred tax assets and liability account balances are determined based on
  the differences between financial reporting and tax bases of assets and
  liabilities and are measured using the enacted tax rates and laws that will
  be in effect when the differences are expected to reverse. The Company and
  its subsidiaries provide a valuation allowance, if necessary, to reduce
  deferred tax assets to their estimated realizable value.          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | p. | Concentrations
  of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Financial
  instruments that potentially subject the Company and certain of its
  subsidiaries to concentrations of credit risk consist principally of cash and
  cash equivalents, marketable securities, short-term deposits, and trade
  receivables. The Companys cash, cash equivalents and short-term deposits are
  invested in deposits with major international financial institutions. Such
  deposits in the United States may be in excess of insured limits and are not
  insured in other jurisdictions. Management believes that the financial
  institutions that hold the Companys investments are financially sound and,
  accordingly, minimal credit risk exists with respect to these investments.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The
  Companys trade receivables are derived from sales to large and solid
  organizations located mainly in Europe, North America and Israel. The Company
  performs ongoing credit evaluations of its customers and has established an
  allowance for doubtful accounts based upon factors surrounding the credit
  risk of specific customers and other information. In certain circumstances,
  the Company may require letters of credit, other collateral or additional
  guarantees.                                                                                                                                                                                                                            

F - 17

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 2: | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)
|------- | -----------------------------------------
|        |                                          
|        |                                          
|        |                                          
|        | q.                                       
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        | r.                                       
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          

F - 18

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 2: | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)
|------- | -----------------------------------------

| | s. | Basic and
  diluted net earnings (loss) per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Basic net
  earnings (loss) per share is calculated based on the weighted average number
  of Common shares outstanding during each year including contingent shares.
  Diluted net earnings per share is computed based on the weighted average
  number of Common shares outstanding during each year, plus dilutive potential
  Common shares considered outstanding during the year, in accordance with
  Statement of Financial Accounting Standard No. 128, Earnings Per Share
  (SFAS No. 128).                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | In 2000,
  2001 and 2002, all convertible Preferred shares, outstanding stock options,
  convertible subordinate notes and warrants have been excluded from the
  calculation of the diluted net loss per Common share because all such
  securities were anti-dilutive for the period presented. The total weighted
  average number of shares related to the outstanding convertible Preferred
  shares, options and warrants excluded from the calculations of diluted net
  loss per share was 1,510,658, 3,265,349 and 3,892,357 for the years ended
  December 31, 2000, 2001 and 2002, respectively.                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | t. | Stock-based
  compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company
  has elected to follow Accounting Principles Board Opinion No. 25 Accounting
  for Stock Issued to Employees (APB No. 25) and FASB Interpretation No. 44
  Accounting for Certain Transactions Involving Stock Compensation (FIN No.
  44) in accounting for its employee stock option plans. Under APB No. 25,
  when the exercise price of the Companys share options is less than the
  market price of the underlying shares on the date of grant, compensation
  expense is recognized.                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Under
  Statement of Financial Accounting Standard No. 123 Accounting for
  Stock-Based Compensation (SFAS No. 123), pro forma information regarding
  net income (loss) and net earnings (losses) per share is required as if the
  Company had accounted for its employee stock options under the fair value
  method of that Statement. The fair value for these options was estimated at
  the date of grant using the Black-Scholes option pricing model with the
  following weighted-average assumptions for 2000, 2001 and 2002: risk-free
  interest rates of 6.5% , 2.5% and 2% respectively, dividend yields of 0% for
  each year, volatility factors of the expected market price of the Companys
  Common shares of 0.867, 0.82 and 0.97 respectively and a weighted-average
  expected life of the options of 6 years for each year.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The
  weighted-average fair value of the options at their grant dates in 2000, 2001
  and 2002 was $ 7.15, $ 3.45 and $ 4.48, respectively. All options
  were granted at the fair market value at the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F - 19

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 2: | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)
|------- | -----------------------------------------

| |  | Pro forma
  information under SFAS No. 123:
| |  | -------------------------------------------

| |                                                            |  | Year ended December 31,   |       
| | ---------------------------------------------------------- |  | ------------------------- | ------
| |                                                            |  |                           |       
| |                                                            |  | 2000                      |       
| |                                                            |  |                           |       
| |                                                            |  | U.S. dollars in thousands |       
| |                                                            |  |                           |       
| | Net loss to
  shareholders of Common shares as
  reported |  | $                         | 38,193
| |                                                            |  |                           |       
| | Pro forma
  net loss to shareholders of
  Common shares   |  | $                         | 47,919
| |                                                            |  |                           |       
| |                                                            |  |                           |       
| | Pro forma
  basic and diluted net loss per share           |  | $                         | 10.62 
| |                                                            |  |                           |       

| |    | The Company
  applies SFAS No. 123 and EITF 96-18 Accounting for Equity Instruments that
  are Issued to Other than Employees for Acquiring, or in Conjunction with
  Selling, Goods or Services (EITF No. 96-18) with respect to warrants and
  options issued to non-employees. SFAS No. 123 requires use of an option
  valuation model to measure the fair value of the options at the grant date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | u. | Employee
  rights upon retirement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  has various defined contribution plans for employees of its subsidiaries
  around the world. Most of the plans are those required according to the laws
  of the country in which the subsidiary operates. Contributions made under the
  plans are invested with financial institutions. Benefits under the plans are
  based on contributions from employees and the Company and earnings on
  insurance contracts or other investment instruments in which the contributions
  are invested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Expense for
  contributions made to these plans was $ 1,408,000, $ 1,346,000 and
  $ 1,243,000 for 2000, 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | v. | Impact of
  recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In April
  2002, the FASB issued SFAS No. 145, Rescission of SFAS No. 4, 44 and 64,
  Amendment of SFAS No. 13, and Technical Corrections, (SFAS No. 145) which
  rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of
  Debt, and an amendment of that Statement, and SFAS No. 64, Extinguishments
  of Debt Made to Satisfy Sinking-Fund Requirements.  SFAS No. 145 amends SFAS No. 44, Accounting for Intangible
  Assets for Motor Carriers.  SFAS No.
  145 amends SFAS No. 13, Accounting for Leases, to eliminate an
  inconsistency between the required accounting for sale-leaseback transactions
  and the required accounting for certain lease modifications that have
  economic effects that are similar to sale-leaseback transactions. SFAS No.
  145 also amends other existing authoritative pronouncements to make various
  technical corrections, clarify meanings, or describe their applicability
  under changed conditions. SFAS No. 145 is effective for fiscal years
  beginning May 15, 2002. The Company does not expect the adoption of SFAS 145
  to have a material impact on the Companys results of operation or financial
  position.

F - 20

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 2: | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)
|------- | -----------------------------------------
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          
|        |                                          

F - 21

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 2:  | SIGNIFICANT
  ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | w.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|NOTE 3:  | RESTRICTED
  CASH DEPOSITS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | Restricted
  cash deposits are maintained with banks as security for the Companys revolving
  credit line. In 2001, the Company was restricted from withdrawing any portion
  of the secured balances until repayment of the credit line. In 2002, the
  restriction was eliminated as part of the decrease in the credit line.                                                                                                                                                                                                                                                     
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | Such
  restricted cash deposits are recorded at cost.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|NOTE 4:  | MARKETABLE
  SECURITIES AND SHORT-TERM DEPOSITS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | At December
  31, 2001 and 2002, the Companys short-term investments were classified as
  available-for-sale securities and were carried at fair value. Gross realized
  gains on sales of these securities included in earnings in 2000, 2001 and
  2002 totaled $ 163,000, $ 124,000 and $ 0, respectively. Gross
  realized losses on sales of these securities included in earnings in 2000,
  2001 and 2002 totaled $ 49,000, $ 0 and $ 0, respectively. As
  of December 31, 2002,  the Company has
  short-term deposits of $ 1,618,000 and marketable securities of $34,000.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | As for
  pledges see Note 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|NOTE 5:- | TRADE
  RECEIVABLES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         | The
  Companys trade receivables are composed of accounts receivable in the
  amounts of $ 11.6 million and $ 9.9 million as of December 31, 2001
  and 2002, respectively and unbilled receivables in the amounts of $ 6
  million and $ 0.5 million as of December 31, 2001 and 2002,
  respectively.                                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|NOTE 6:  | OTHER
  RECEIVABLES AND PREPAID EXPENSES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                                    |  | December 31,             
| | ---------------------------------- |  | -------------------------
| |                                    |  |                          
| |                                    |  | 2001                     
| |                                    |  |                          
| |                                    |  | U.S. dollars in thousands
| |                                    |  |                          
| |                                    |  |                          
| | Sales and
  other taxes receivable |  | $                        
| | Prepaid
  expenses                 |  |                          
| | Deferred
  income taxes            |  |                          
| | Government
  grants                |  |                          
| | Other                              |  |                          
| |                                    |  |                          
| |                                    |  |                          
| |                                    |  | $                        
| |                                    |  |                          

F - 22

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 7: | PROPERTY
  AND EQUIPMENT, NET
|------- | -----------------------------

| |                                   |  | Cost                      |        | Accumulated Depreciation
| | --------------------------------- |  | ------------------------- | ------ | ------------------------
| |                                   |  |                           |        |                         
| |                                   |  | December 31               |        | December 31             
| |                                   |  |                           |        |                         
| |                                   |  | 2001                      |        | 2002                    
| |                                   |  |                           |        |                         
| |                                   |  | U.S. dollars in thousands
| |                                   |  |                          
| |                                   |  |                           |        |                         
| | Equipment
  and furniture         |  | $                         | 2,532  |                         
| | Computer
  equipment and software |  |                           | 10,560 |                         
| | Motor
  vehicles                  |  |                           | 139    |                         
| | Leasehold
  improvements          |  |                           | 1,974  |                         
| |                                   |  |                           |        |                         
| |                                   |  |                           |        |                         
| |                                   |  | $                         | 15,205 |                         
| |                                   |  |                           |        |                         

|        | Depreciation
  expense totaled $ 2,213,000, $ 2,318,000 and $ 1,592,000 for the
  years ended December 31, 2000, 2001 and 2002, respectively.
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                              
|        | As for
  pledges see Note 13.                                                                                                                
|        |                                                                                                                                              
|NOTE 8: | GOODWILL                                                                                                                                     
|        |                                                                                                                                              
|        | a.                                                                                                                                           
|        |                                                                                                                                              
|        | b.                                                                                                                                           

| |                                     |  | Year ended December 31,  
| | ----------------------------------- |  | -------------------------
| |                                     |  |                          
| |                                     |  | 2000                     
| |                                     |  |                          
| |                                     |  | U.S. dollars in thousands
| |                                     |  |                          
| |                                     |  |                          
| | Reported net
  loss                 |  | $                        
| | Goodwill
  amortization             |  |                          
| |                                     |  |                          
| |                                     |  |                          
| | Adjusted net
  loss                 |  | $                        
| |                                     |  |                          
| |                                     |  |                          
| | Basic and
  diluted loss per share: |  |                          
| | Reported
  loss per-share           |  | $                        
| | Goodwill
  amortization             |  | $                        
| |                                     |  |                          
| |                                     |  |                          
| | Adjusted
  net loss per-share       |  | $                        
| |                                     |  |                          

F - 23

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 9: | OTHER
  ASSETS
|------- | --------------
|        |               
|        | a.            
|        |               
|        | b.            

| |                                   |  | Cost                      |       | Accumulated amortization
| | --------------------------------- |  | ------------------------- | ----- | ------------------------
| |                                   |  |                           |       |                         
| |                                   |  | December 31               |       | December 31             
| |                                   |  |                           |       |                         
| |                                   |  | 2001                      |       | 2002                    
| |                                   |  |                           |       |                         
| |                                   |  | U.S. dollars in thousands
| |                                   |  |                          
| |                                   |  |                           |       |                         
| | Prepaid
  royalties               |  | $                         | 2,083 |                         
| | Technology
  and usage rights     |  |                           | 895   |                         
| | Other
  intangible assets         |  |                           | 370   |                         
| | Distribution
  rights             |  |                           | 1,070 |                         
| | Long-term
  deferred income taxes |  |                           | 4,484 |                         
| |                                   |  |                           |       |                         
| |                                   |  |                           |       |                         
| |                                   |  | $                         | 8,902 |                         
| |                                   |  |                           |       |                         

| |    | Amortization
  of other assets charged to expenses was $ 489,000, $ 563,000 and
  $ 368,000 for 2000, 2001 and 2002, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                   
| |    | As for
  impairments see Note 2h.                                                                                                 
| |    |                                                                                                                                   
| | c. | Estimated
  amortization expense for the years ended:                                                                             

| |                       |  | December 31,
| | --------------------- |  | ------------
| |                       |  |             
| |                       |  |             
| | 2003                  |  | $           
| | 2004                  |  |             
| | 2005                  |  |             
| | 2006                  |  |             
| | 2007 and
  thereafter |  |             
| |                       |  |             
| |                       |  |             
| |                       |  | $           
| |                       |  |             

|NOTE 10: | OTHER
  LIABILITIES AND ACCRUED EXPENSES
|-------- | ----------------------------------------

| |                                           |  | December 31,             
| | ----------------------------------------- |  | -------------------------
| |                                           |  |                          
| |                                           |  | 2001                     
| |                                           |  |                          
| |                                           |  | U.S. dollars in thousands
| |                                           |  |                          
| |                                           |  |                          
| | Employee and
  related payroll accruals   |  | $                        
| | Sales and
  other taxes payable           |  |                          
| | Accrued
  royalties to the OCS (Note 12a) |  |                          
| | Accrued
  expenses                        |  |                          
| |                                           |  |                          
| |                                           |  |                          
| |                                           |  | $                        
| |                                           |  |                          

F - 24

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 11: | DEBT
|-------- | ----
|         |     
|         | a.  
|         |     
|         |     
|         |     
|         |     

| |                    |  |                         |  | Weighted average
  interest |      |             
| | ------------------ |  | ----------------------- |  | --------------------------- | ---- | ------------
| |                    |  |                         |  |                             |      |             
| |                    |  |                         |  | December 31,                |      | December 31,
| |                    |  |                         |  |                             |      |             
| |                    |  |                         |  | 2001                        |      | 2002        
| |                    |  |                         |  |                             |      |             
| |                    |  | Linkage                 |  | %                           |      | %           
| |                    |  |                         |  |                             |      |             
| | Credit lines       |  | New Israeli
  shekel *) |  |                             | 5.46 |             
| |                    |  | Euro **)                |  |                             | -    |             
| |                    |  |                         |  |                             |      |             
| | Short-term
  loans |  | U.S.
  dollar *)        |  |                             | 3.73 |             
| |                    |  | British Pound           |  |                             | -    |             
| |                    |  |                         |  |                             |      |             
| |                    |  |                         |  |                             |      |             
| |                    |  |                         |  |                             |      |             
| |                    |  |                         |  |                             |      |             

| | *)  | Including
  non-material amounts linked to the Euro.                                
| | --- | ------------------------------------------------------------------------------------
| | **) | Including
  non-material amounts linked to the U.S. dollar and to the British Pound.

F - 25

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 11: | DEBT
  (Cont.)
|-------- | --------------
|         |               
|         | b.            
|         |               

| |                                                                                                         |  |              |  |            |  |                                  |  | December 31,               
| | ------------------------------------------------------------------------------------------------------- |  | ------------ |  | ---------- |  | -------------------------------- |  | ---------------------------
| |                                                                                                         |  |              |  | Rate of    |  |                                  |  |                            
| |                                                                                                         |  | Linkage      |  | interest   |  | Maturity                         |  | 2001                       
| |                                                                                                         |  |              |  |            |  |                                  |  |                            
| |                                                                                                         |  |              |  | %          |  |                                  |  | U.S. dollars
  in thousands
| |                                                                                                         |  |              |  |            |  |                                  |  |                            
| | Convertible
  subordinated
     notes (Old Notes -
     conversion price $ 160
     per Common share) |  | US Dollar    |  | 5          |  | September
  2003                 |  | $                          
| | Long- term
  loans                                                                                      |  | US Dollar    |  | 3.75       |  | June 2004
  through
  March 2005 |  |                            
| | Capital
  lease obligations
     (Note 12b)                                                             |  | Euro         |  | 5          |  | August 2005                      |  |                            
| | Other
  long-term debts *)                                                                              |  | Japanese Yen |  | 1.8 - 3.15 |  | February 2006                    |  |                            
| |                                                                                                         |  |              |  |            |  |                                  |  |                            
| |                                                                                                         |  |              |  |            |  |                                  |  |                            
| |                                                                                                         |  |              |  |            |  |                                  |  |                            
| | Less -
  current maturities                                                                             |  |              |  |            |  |                                  |  |                            
| |                                                                                                         |  |              |  |            |  |                                  |  |                            
| |                                                                                                         |  |              |  |            |  |                                  |  |                            
| |                                                                                                         |  |              |  |            |  |                                  |  |                            
| | Minority
  interest                                                                                     |  |              |  |            |  |                                  |  |                            
| |                                                                                                         |  |              |  |            |  |                                  |  |                            
| |                                                                                                         |  |              |  |            |  |                                  |  |                            
| |                                                                                                         |  |              |  |            |  |                                  |  | $                          
| |                                                                                                         |  |              |  |            |  |                                  |  |                            

| |  | *) Including
  non-material amounts linked to other currencies.                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                   
| |  | In 2002, the
  Company executed an early redemption of some of the convertible subordinated
  notes in the amount of approximately $ 2.7 million, which resulted in a gain
  of $409,000 recorded as other income.
| |  |                                                                                                                                                                                                                   
| |  | Long-term
  debt maturities after December 31, 2002 are as follows (U.S. dollars in
  thousands):                                                                                                                 

| | 2003 |   | $      | 4,477 | 
| | ---- | - | ------ | ----- | 
| | 2004 |   |        | 1,610 | 
| | 2005 |   |        | 6,084 | 
| | 2006 |   |        | 8     | 
| |      |   |        |      
| |      |   |        |      
| |      | $ | 12,179 |      
| |      |   |        |      

|         |                                          | Interest
  expense was $ 0.4 million, $ 1.3 million and $ 1.0 million for
  2000, 2001 and 2002, respectively.                                                                                                                                                                         
|-------- | ---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                          |                                                                                                                                                                                                                                                                                        
|NOTE 12: | COMMITMENTS
  AND CONTINGENT LIABILITIES
|         |                                          |                                                                                                                                                                                                                                                                                        
|         | a.                                       | Sapiens Technologies Ltd. (hereafter - Technologies)
  a subsidiary incorporated in Israel partially finances its research and
  development expenditures under programs sponsored by the OCS of Israel for
  the support of research and development activities conducted in Israel.

F - 26

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 12: | COMMITMENTS
  AND CONTINGENT LIABILITIES (Cont.)
|-------- | ------------------------------------------------
|         |                                                 
|         |                                                 
|         |                                                 
|         |                                                 
|         |                                                 
|         |                                                 
|         |                                                 
|         | b.                                              

| |                                       |  | Operating
  leases        |       | Capital
  leases
| | ------------------------------------- |  | ------------------------- | ----- | ----------------
| |                                       |  |                           |       |                 
| |                                       |  | U.S. dollars in thousands
| |                                       |  |                          
| |                                       |  |                           |       |                 
| | 2003                                  |  | $                         | 2,920 |                 
| | 2004                                  |  |                           | 2,673 |                 
| | 2005                                  |  |                           | 1,234 |                 
| | 2006                                  |  |                           | 1,101 |                 
| | 2007 and
  thereafter                 |  |                           | 1,350 |                 
| |                                       |  |                           |       |                 
| |                                       |  |                           |       |                 
| | Total future
  minimum lease payments |  | $                         | 9,278 |                 
| |                                       |  |                           |       |                 

| |    | Rent expense
  for the years ended December 31, 2000, 2001 and 2002 was $ 2,892,000,
  $ 2,631,000 and $ 2,489,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | c. | In 2000, the
  Company filed a lawsuit against GIE AGF Systems DInformation (hereinafter -
  AGF SI), a customer, regarding an unpaid balance related to a year 2000
  project performed during 1998 and 1999. The Companys claim was in respect
  of  a dispute over the implementation
  of contracts signed between the parties regarding the above project. While
  the Company, based on the advice of its legal counsel, believed that the
  court would rule in its favor and the amounts recorded  would be collected, on February 14, 2001
  the French court ruled that AGF SI must pay the Company the sum of
  approximately $3 million. In accordance with SFAS No. 5 Accounting for
  Contingencies, as a result of the ruling, the Company recorded a provision
  of $2.4 million for selling, marketing, general and administrative expenses
  in the fourth quarter of 2000.

F - 27

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 12: | COMMITMENTS
  AND CONTINGENT LIABILITIES (Cont.)                                                                                                      
|-------- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                       
|         |                                                                                                                                                       
|         |                                                                                                                                                       
|         | d.                                                                                                                                                    
|         |                                                                                                                                                       
|         | e.                                                                                                                                                    
|         |                                                                                                                                                       
|NOTE 13: | SECURITY
  INTERESTS AND PLEDGES                                                                                                                      
|         |                                                                                                                                                       
|         | The Company
  and several of its subsidiaries granted floating charges to the banks and
  issued cross guaranties in support of the credit facilities.
|         |                                                                                                                                                       
|         | All of the
  Companys leased assets are pledged to the finance companies that provided
  the lease financing and the banks providing credit lines.   
|         |                                                                                                                                                       
|         | The Company
  pledged bank guarantees in the amount of $ 0.5 million as security for the
  rent of its offices in Israel.                             
|         |                                                                                                                                                       
|NOTE 14: | TAXES ON
  INCOME                                                                                                                                     
|         |                                                                                                                                                       
|         | a.                                                                                                                                                    
|         |                                                                                                                                                       
|         |                                                                                                                                                       
|         |                                                                                                                                                       
|         |                                                                                                                                                       
|         |                                                                                                                                                       
|         |                                                                                                                                                       

F - 28

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 14: | TAXES ON
  INCOME (Cont.)
|-------- | -------------------------
|         |                          
|         | b.                       
|         |                          
|         |                          
|         |                          
|         |                          
|         |                          
|         |                          
|         |                          
|         |                          
|         |                          
|         |                          
|         |                          
|         |                          

F - 29

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 14: | TAXES ON
  INCOME (Cont.)
|-------- | -------------------------
|         |                          
|         |                          
|         |                          
|         | c.                       
|         |                          
|         |                          
|         |                          
|         |                          
|         |                          
|         | d.                       
|         |                          
|         |                          

| |                              |  | December 31, 2001         |        | December 31, 2002
| | ---------------------------- |  | ------------------------- | ------ | -----------------
| |                              |  |                           |        |                  
| |                              |  | Current                   |        | Non-
  current   
| |                              |  |                           |        |                  
| |                              |  | U.S. dollars in thousands
| |                              |  |                          
| |                              |  |                           |        |                  
| | Gross
  deferred tax assets  |  |                           | 2,478  |                  
| | Less -
  valuation allowance |  |                           | (1,823 | )                
| |                              |  |                           |        |                  
| |                              |  |                           |        |                  
| | Net deferred
  tax asset     |  | $                         | 655    |                  
| |                              |  |                           |        |                  

F - 30

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 14: | TAXES ON
  INCOME (Cont.)
|-------- | -------------------------
|         |                          
|         |                          
|         |                          
|         |                          

| |                      |  | Year ended December 31,  
| | -------------------- |  | -------------------------
| |                      |  |                          
| |                      |  | 2000                     
| |                      |  |                          
| |                      |  | U.S. dollars in thousands
| |                      |  |                          
| |                      |  |                          
| | Current
  (foreign)  |  | $                        
| | Deferred
  (foreign) |  |                          
| |                      |  |                          
| |                      |  |                          
| |                      |  | $                        
| |                      |  |                          

| |    | The
  Companys entire provision for taxes on income relates to operations in
  jurisdictions other than the Netherlands Antilles. The effective income tax
  rate varies from period to period because each jurisdiction in which the
  Company operates has its own system of taxation (not only with respect to the
  nominal rate, but also with respect to the allowance of deductions, credits
  and other benefits). In addition, the provision for income taxes for the
  fiscal years ended December 31, 2000, 2001 and 2002, does not include the
  recognition of a majority of the deferred tax assets relating to the net
  operating losses of the Companys subsidiaries worldwide. The main
  reconciling item from the statutory tax rate of the Company to the effective
  tax rate is the non-recognition of tax benefits from accumulated net
  operating losses carryforward among the various subsidiaries worldwide due to
  the uncertainty of the realization of such tax benefits.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | e. | Israeli tax
  reform:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | On January
  1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the
  reform, Israel resident companies are subject to Israeli tax on income
  accrued or derived in Israel or abroad.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | In addition,
  the concept of controlled foreign corporation was introduced, according to
  which an Israeli company may become subject to Israeli taxes on certain
  income of a non-Israeli subsidiary if the subsidiarys primary source of
  income is passive income (such as interest, dividends, royalties, rental
  income or capital gains). The tax reform also substantially changed the
  system of taxation of capital gains.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F - 31

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 15: | SHAREHOLDERS
  EQUITY
|-------- | ----------------------
|         |                       
|         | a.                    
|         |                       
|         | b.                    
|         |                       
|         |                       
|         |                       
|         |                       
|         |                       
|         |                       
|         |                       
|         |                       
|         |                       
|         |                       
|         |                       
|         |                       
|         |                       
|         |                       

F - 32

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 15: | SHAREHOLDERS
  EQUITY (Cont.)
|-------- | ------------------------------
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         | c.                            
|         |                               
|         |                               

F - 33

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 15: | SHAREHOLDERS
  EQUITY (Cont.)
|-------- | ------------------------------
|         |                               
|         | d.                            
|         |                               
|         | e.                            
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         | f.                            
|         |                               
|         |                               
|         |                               
|         | g.                            
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               
|         |                               

F - 34

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 15: | SHAREHOLDERS
  EQUITY (Cont.)
|-------- | ------------------------------
|         |                               
|         |                               
|         |                               
|         |                               

| |                                         |  | Year ended December 31,
| | --------------------------------------- |  | -----------------------
| |                                         |  |                        
| |                                         |  | 2000                   
| |                                         |  |                        
| |                                         |  | Shares                 
| |                                         |  |                        
| | Outstanding at
  January 1              |  | 868,553                
| |                                         |  |                        
| | Granted                                 |  | 1,087,150              
| | Exercised                               |  | (74,650                
| | Cancelled and forfeited                 |  | (90,439                
| |                                         |  |                        
| | Outstanding at
     December 31         |  | *) 1,790,614           
| |                                         |  |                        
| |                                         |  |                        
| | Exercisable options at
     December 31 |  | 424,833                
| |                                         |  |                        

| |  | *)                                                                                                                | Including
  154,560, 154,000 and 102,100 options repriced to zero, as of December 31,
  2000, 2001 and 2002, respectively.
| |  | ----------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                  
| |  | The options
  outstanding as of December 31, 2002, have been classified by range of
  exercise price, as follows:

| | Exercise price        |  | Options
  outstanding
  as of
  December 31,
  2002 |  | Weighted
  average
  remaining
  contractual
  life (years) |      | Weighted
  average
  exercise
  Price |  | Options
  exercisable
  as of
  December 31,
  2002 |       | Weighted
  average
  exercise
  Price
| | --------------------- |  | --------------------------------------------------- |  | ----------------------------------------------------------- | ---- | ------------------------------------- |  | --------------------------------------------------- | ----- | -------------------------------------
| |                       |  |                                                     |  |                                                             |      |                                       |  |                                                     |       |                                      
| |                       |  |                                                     |  |                                                             |      |                                       |  |                                                     |       |                                      
| | $       -             |  | 102,100                                             |  |                                                             | 4.86 |                                       |  | $                                                   | -     |                                      
| | $ 3.25
  - $ 3.75     |  | 189,170                                             |  |                                                             | 9.22 |                                       |  | $                                                   | 3.55  |                                      
| | $ 4.065
  - $ 5.7     |  | 837,800                                             |  |                                                             | 8.31 |                                       |  | $                                                   | 4.50  |                                      
| | $ 11.25
  - $ 16.875  |  | 185,825                                             |  |                                                             | 3.32 |                                       |  | $                                                   | 12.00 |                                      
| | $ 19.375
  - $ 29.375 |  | 68,300                                              |  |                                                             | 7.54 |                                       |  | $                                                   | 28.75 |                                      
| | $ 32.5
  - $ 47.5     |  | 143,608                                             |  |                                                             | 6.07 |                                       |  | $                                                   | 38.30 |                                      
| | $ 61.25
  - $ 69.375  |  | 53,910                                              |  |                                                             | 7.06 |                                       |  | $                                                   | 67.50 |                                      
| |                       |  |                                                     |  |                                                             |      |                                       |  |                                                     |       |                                      
| |                       |  | 1,580,713                                           |  |                                                             |      |                                       |  | $                                                   | 11.25 |                                      
| |                       |  |                                                     |  |                                                             |      |                                       |  |                                                     |       |                                      

| | h. | Warrants:                                                                                                                         
| | -- | ----------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                   
| |    | In 1996,
  1997 and 1999, warrants were granted to service providers. As of December 31,
  2002, 225,086 warrants are outstanding.

F - 35

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 15: | SHAREHOLDERS
  EQUITY (Cont.)
|-------- | ------------------------------
|         |                               
|         | i.                            
|         |                               
|         | j.                            
|         |                               
|NOTE 16: | GEOGRAPHIC
  INFORMATION      
|         |                               
|         | a.                            
|         |                               
|         | b.                            
|         |                               
|         |                               

| |    |                      | Year ended December 31,  
| | -- | -------------------- | -------------------------
| |    |                      |                          
| |    |                      | 2000                     
| |    |                      |                          
| |    |                      | U.S. dollars in thousands
| |    |                      |                          
| | 1. | Revenues:            |                          
| |    | U.K.                 |                          
| |    | North
  America      |                          
| |    | France               |                          
| |    | Germany              |                          
| |    | Israel               |                          
| |    | Other                |                          
| |    |                      |                          
| |    |                      |                          
| |    |                      |                          
| |    |                      |                          
| | 2. | Long-lived
  assets: |                          
| |    | France               |                          
| |    | Dutch
  Antilles     |                          
| |    | Israel               |                          
| |    | Germany              |                          
| |    | Other                |                          
| |    |                      |                          
| |    |                      |                          
| |    |                      | $                        
| |    |                      |                          

F - 36

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 17: | SELECTED
  STATEMENTS OF OPERATIONS DATA
|-------- | ----------------------------------------
|         |                                         
|         | a.                                      

| |                                                             |  | Year ended December 31,  
| | ----------------------------------------------------------- |  | -------------------------
| |                                                             |  |                          
| |                                                             |  | 2000                     
| |                                                             |  |                          
| |                                                             |  | U.S. dollars in thousands
| |                                                             |  |                          
| |                                                             |  |                          
| | Total costs                                                 |  | $                        
| |                                                             |  |                          
| | Less
  - capitalized software development
            costs |  |                          
| | Less
  - royalty-bearing grants                             |  |                          
| |                                                             |  |                          
| |                                                             |  |                          
| | Research and
  development costs, net                       |  | $                        
| |                                                             |  |                          

| | b. | Financial
  income (expenses):
| | -- | ------------------------------

| | Financial
  income:                                      |  |   |       |  |  |   |       |  |  |   |       | 
| | -------------------------------------------------------- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
| | Interest                                                 |  | $ | 973   |  |  | $ | 518   |  |  | $ | 778   | 
| | Foreign
  currency translation differences               |  |   | 3,904 |  |  |   | 3,728 |  |  |   | 6,511 | 
| | Realized
  gain on sale of marketable
        securities |  |   | 163   |  |  |   | 124   |  |  |   | -     | 
| |                                                          |  |   |       |  |  |   |       |  |  |   |       | 
| |                                                          |  |   |       |  |  |   |       |  |  |   |       | 
| |                                                          |  |   | 5,040 |  |  |   | 4,370 |  |  |   | 7,289 | 
| |                                                          |  |   |       |  |  |   |       |  |  |   |       | 
| | Financial
  expenses:                                    |  |   |       |  |  |   |       |  |  |   |       | 
| | Interest                                                 |  |   | 1,419 |  |  |   | 1,818 |  |  |   | 1,747 | 
| | Foreign
  currency translation differences               |  |   | 4,114 |  |  |   | 5,277 |  |  |   | 6,351 | 
| | Bank charges
  and others                                |  |   | 139   |  |  |   | 462   |  |  |   | 162   | 
| |                                                          |  |   |       |  |  |   |       |  |  |   |       | 
| |                                                          |  |   |       |  |  |   |       |  |  |   |       | 
| |                                                          |  |   | 5,672 |  |  |   | 7,557 |  |  |   | 8,260 | 
| |                                                          |  |   |       |  |  |   |       |  |  |   |       | 
| |                                                          |  |   |       |  |  |   |       |  |  |   |       | 
| | Financial
  expenses, net                                |  | $ | 632   |  |  | $ | 3,187 |  |  | $ | 971   | 
| |                                                          |  |   |       |  |  |   |       |  |  |   |       | 

| | c. | Losses per
  share data:                                                                     
| | -- | ---------------------------------------------------------------------------------------------
| |    |                                                                                              
| |    | The
  following table sets forth the calculation of basic and diluted net losses
  per share.
| |    |                                                                                              
| |    | 1.     Numerator:                                                                            

| |  |                                                                                                      | Year ended December 31,  
| |  | ---------------------------------------------------------------------------------------------------- | -------------------------
| |  |                                                                                                      |                          
| |  |                                                                                                      | 2000                     
| |  |                                                                                                      |                          
| |  |                                                                                                      | U.S. dollars in thousands
| |  |                                                                                                      |                          
| |  | Net loss to shareholders
  of Common
     shares                                                     |                          
| |  | Effect of dilutive
  securities:
     Preferred share dividends                                      |                          
| |  |                                                                                                      |                          
| |  | Numerator for diluted
  losses per share -
     loss available to shareholders of
     Common shares |                          
| |  |                                                                                                      |                          

| |  | *) | The effect
  of the inclusion of the convertible Preferred shares dividends in 2000 would
  be anti-dilutive.
| |  | -- | -------------------------------------------------------------------------------------------------------------

F - 37

---

---

|SAPIENS INTERNATIONAL CORPORATION N.V.
  AND ITS SUBSIDIARIES
|-------------------------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   
|                                                             

|NOTE 17: | SELECTED
  STATEMENTS OF OPERATIONS DATA (Cont.)
|-------- | ------------------------------------------------

| | 2. | Denominator:                                                                                                                                                    |                           | 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | 
| |    |                                                                                                                                                                 | Year ended December 31,  
| |    |                                                                                                                                                                 |                          
| |    |                                                                                                                                                                 | 2000                      | 
| |    |                                                                                                                                                                 |                           | 
| |    |                                                                                                                                                                 | U.S. dollars in thousands
| |    |                                                                                                                                                                 |                          
| |    | Weighted
  average number of shares                                                                                                                             |                           | 
| |    | Common
  shares to be issued as dividends                                                                                                                       |                           | 
| |    |                                                                                                                                                                 |                           | 
| |    |                                                                                                                                                                 |                           | 
| |    | Denominator
  for net basic earnings per   share                                                                                                                |                           | 
| |    |                                                                                                                                                                 |                           | 
| |    |                                                                                                                                                                 |                           | 
| |    | Effect of
  dilutive securities:                                                                                                                                |                           | 
| |    | Employee
  stock options                                                                                                                                        |                           | 
| |    | Warrants
  issued to third parties                                                                                                                              |                           | 
| |    | Convertible
  Preferred shares                                                                                                                                  |                           | 
| |    | Redeemable
  shares in subsidiary                                                                                                                               |                           | 
| |    | Convertible
  subordinated notes                                                                                                                                |                           | 
| |    |                                                                                                                                                                 |                           | 
| |    |                                                                                                                                                                 |                           | 
| |    | Dilutive
  potential Common shares                                                                                                                              |                           | 
| |    |                                                                                                                                                                 |                           | 
| |    | Denominator
  for diluted net earnings per
     share - adjusted weighted average
     shares, assumed conversions and
     exercise of options and/or warrants |                           | 
| |    |                                                                                                                                                                 |                           | 

|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |  | *) | Because of
  the loss in 2000, 2001 and 2002, the effect of the inclusion of the
  convertible Preferred shares, options, warrants, redeemable shares in
  subsidiary and convertible subordinated notes would be anti-dilutive.
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|NOTE 18:- | SUBSEQUENT
  EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|          | In June
  2003, the Company extended its credit agreements with Bank Hapoalim Ltd.,
  Bank Leumi Le Israel Ltd, Discount Bank Ltd. and Mizrahi Bank Ltd. regarding
  its existing credit lines in the total amount of $ 25.5 million, of which $
  18 million is available until March
  31, 2004 and $ 7.5 million is available until March 31, 2005. Under the terms
  of these credit line agreements, the Company and several of its subsidiaries
  recorded floating charges in favour of the banks and issued cross guarantees
  in support of the credit facilities. Additionally, the Company is required to
  maintain certain financial ratios.

- - - - - - - - - - - - -

F - 38

---

---

SIGNATURES

The registrant hereby certifies
that it meets all of the requirements for filing on Form 20-F and that it has
duly caused and authorized the undersigned to sign this annual report on its
behalf.

FORMULA SYSTEMS (1985) LTD.

|By: | /s/Dan Goldstein                                    |  | June 30, 2003
|--- | --------------------------------------------------- |  | -------------
|    |                                                     |  |              
|    | Dan Goldstein                                       |  | Date         
|    | Chairman of the Board and
  Chief Executive Officer |  |              

---

---

CERTIFICATIONS

I, Dan Goldstein, certify
that:

1. I have reviewed this annual report on Form
20-F of Formula Systems (1985) Ltd;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this annual report;

4. The registrants other certifying officers
and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:

| | a. | designed such disclosure
  controls and procedures to ensure that material information relating to the
  registrant, including its consolidated subsidiaries, is made known to us by
  others within those entities, particularly during the period in which this
  annual report is being prepared;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                     
| | b. | evaluated the effectiveness
  of the registrants disclosure controls and procedures as of a date within 90
  days prior to the filing date of this annual report (the Evaluation Date);
  and                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                     
| | c. | presented in this annual
  report our conclusions about the effectiveness of the disclosure controls and
  procedures based on our evaluation as of the Evaluation Date;                                                                                                                            

5. The registrants other certifying officers
and I have disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or persons
performing the equivalent function):

| | a. | all significant
  deficiencies in the design or operation of internal controls which could
  adversely affect the registrants ability to record, process, summarize and
  report financial data and have identified for the registrants auditors any
  material weaknesses in internal controls; and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                       
| | b. | any fraud, whether or not
  material, that involves management or other employees who have a significant
  role in the registrants internal controls; and                                                                                                                                            

---

---

6. The registrants other certifying officers and I
have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: June 30,
2003

| | /s/
  Dan Goldstein         | 
| | --------------------------- | 
| |                             | 
| | Dan
  Goldstein             | 
| | Chairman of
  the Board and
| | Chief Executive
  Officer  

---

---

CERTIFICATIONS

I, Naamit Salomon, certify
that:

1. I have reviewed this annual report on Form
20-F of Formula Systems (1985) Ltd;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this annual report;

4. The registrants other certifying officers
and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:

| | a. | designed such disclosure
  controls and procedures to ensure that material information relating to the
  registrant, including its consolidated subsidiaries, is made known to us by
  others within those entities, particularly during the period in which this
  annual report is being prepared;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                     
| | b. | evaluated the
  effectiveness of the registrants disclosure controls and procedures as of a
  date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                     
| | c. | presented in this annual
  report our conclusions about the effectiveness of the disclosure controls and
  procedures based on our evaluation as of the Evaluation Date;                                                                                                                            

5. The
registrants other certifying officers and I have disclosed, based on our most
recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
function):

| | a. | all significant
  deficiencies in the design or operation of internal controls which could
  adversely affect the registrants ability to record, process, summarize and
  report financial data and have identified for the registrants auditors any
  material weaknesses in internal controls; and
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

---

| | b. | any fraud, whether or not
  material, that involves management or other employees who have a significant
  role in the registrants internal controls; and
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

6. The
registrants other certifying officers and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: June 30,
2003

| | /s/
  Naamit Salomon      | 
| | ------------------------- | 
| |                           | 
| | Naamit
  Salomon          | 
| | Vice
  President, Finance

---

---

Exhibit
Index

|Exhibit No. |  |                                                                                                                                                                   
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                   
|            |  |                                                                                                                                                                   
|1.1         |  | Memorandum
  of Association*                                                                                                                                      
|            |  |                                                                                                                                                                   
|1.2         |  | Articles
  of Association as amended on January 7, 2001**                                                                                                         
|            |  |                                                                                                                                                                   
|2           |  | The description of terms of debentures
  issued by the Registrant in May 2002 contained in Section 2.3 of the prospectus of the Registrant
dated May 23, 2002.
***
|            |  |                                                                                                                                                                   
|4.1         |  | Agreement dated October 1, 1999 between the Registrant and Shamrock
  Holdings of California Inc.****                                                             
|            |  |                                                                                                                                                                   
|4.2         |  | Agreement dated January 24, 2001 among the Registrant, Sapiens
  International Corporation N.V. and Yarnfield International Limited**                             
|            |  |                                                                                                                                                                   
|4.3         |  | Agreement
  dated December 30, 2001 between the Registrant and Formula Vision
  Technologies (F.V.T.) Ltd. (English summary accompanied by Hebrew original)*****  
|            |  |                                                                                                                                                                   
|4.4         |  | Share Exchange Agreement dated October 13, 2002 among the Registrant, Crystal Systems Solutions Ltd. and certain shareholders of Liraz
  Systems Ltd.             
|            |  |                                                                                                                                                                   
|4.5         |  | Agreement for the Sale of Shares dated
  October 13, 2002 between the Registrant and Matrix I.T. Ltd. (English translation from Hebrew
  original)                
|            |  |                                                                                                                                                                   
|4.6         |  | Form
  of the 1997 Share Option Plan (English translation from Hebrew original)*                                                                                  
|            |  |                                                                                                                                                                   
|4.7         |  | Form
  of the 2000 Share Option Plan (English translation from Hebrew original)**                                                                                 
|            |  |                                                                                                                                                                   
|4.8         |  | Letter
  of Indemnification, dated February 14, 2002*****                                                                                                         
|            |  |                                                                                                                                                                   
|8           |  | List
  of Subsidiaries                                                                                                                                            
|            |  |                                                                                                                                                                   
|10.1        |  | Certification of the Chief Executive Officer
  pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act                                 
|            |  |                                                                                                                                                                   
|10.2        |  | Certification of the Vice President, Finance
  pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act                                 

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**     Incorporated
by reference to the Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 29, 2001.

***    Incorporated
by reference to the Form 6-K filed with the
Securities and Exchange Commission on June 14, 2002.

****   Incorporated
by reference to the Annual Report on Form 20-F filed with the Securities and
Exchange Commission on June 21, 2000.

*****  Incorporated by reference to the Annual Report on Form 20-F
filed with the Securities and Exchange Commission on June 28, 2002.

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# SHARE EXCHANGE
AGREEMENT

THIS
SHARE EXCHANGE AGREEMENT (this Agreement), is made as of the 13 day of
October, 2002, by and among Crystal Systems Solutions Ltd., a public company
organized under the laws of the State of Israel and whose Ordinary Shares are traded on
Nasdaq (the Company or Crystal) and each of the
investors identified in Schedule 1.1 attached hereto (each, an
Investor, and collectively, the Investors).

W
I T N E S S E T H:

WHEREAS,
the Board of Directors of the Company (the Board) has determined that
it is in the best interests of the Company to issue, in the aggregate, Three Million, Four
Hundred and Seventy Eight Thousand and Six Hundred and Twenty Four (3,478,624) of the
Companys Ordinary Shares, nominal value NIS 0.01 per share (Crystal
Shares), in exchange for, in the aggregate, of Five Million, Eight Hundred and
Nine Thousand, Three Hundred and two (5,809,302) Ordinary Shares, nominal value NIS 0.01
per share of Liraz Systems Ltd. (respectively Liraz and the
Liraz Shares), on the terms and conditions more fully set forth in this
Agreement; and

WHEREAS,
the Investors desire to purchase Crystal Shares in exchange for Liraz Shares pursuant to
the terms and conditions more fully set forth in this Agreement.

NOW,
THEREFORE, in consideration of the mutual promises and covenants set forth herein, the
parties hereby agree as follows:

1.    
          Issue and Purchase of Shares.

1.1.    
          Issue and Purchase of Shares. Subject to the terms and conditions hereof,
          the Company shall issue and allot to each Investor one (1) Crystal Share for
          every one and sixty-seven one hundredths (1.67) Liraz Share sold by such
          Investor to the Company. The number of Crystal Shares to be purchased by each
          Investor from the Company, and the number of Liraz Shares to be sold by each
          Investor to the Company in exchange therefor, are set forth opposite such
          Investors name in Schedule 1.1 attached hereto.

2.    
          Closing of Issue and Purchase.

2.1
    Closing. The issue and allotment of the Crystal Shares, and the transfer of the
Liraz Shares in exchange therefor, shall take place at a closing (the
Closing) to be held at the offices of Goldfarb, Levy, Eran & Co.,
within seven (7) business days of the approval by the Companys shareholders of the
transactions set forth in this Agreement, subject to the provisions of Section 8.1 below-,
or such other date, time and place as the Company and the Investors shall mutually agree.

2.2
    Transactions at the Closing. At the Closing, the following transactions shall
occur, which transactions shall be deemed to take place simultaneously and no transaction
shall be deemed to have been completed or any document delivered until all such
transactions have been completed and all required documents delivered:

2.2.1
    The Company shall deliver to the Investors the following documents:

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(a)  True and correct copies of the resolutions of the Companys shareholders
          approving by the majority required under applicable law the transactions set
          forth in this Agreement, as transactions with a controlling shareholder of the
          Company;

(b) 
          True and correct copies of resolutions of the Board of Directors of the Company
          issuing and allotting the Crystal Shares to the Investors in exchange for the
          Liraz Shares, and approving all other transactions set forth herein;

(c)  Validly executed share certificates covering the Crystal Shares, issued in the
          names of the respective Investors, bearing a restrictive legend providing
          substantially as follows:

| | THE
SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED BY THE HOLDER FOR ITS OWN
ACCOUNT, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO THE DISTRIBUTION OF SUCH SHARES.
THE SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO RULE 144 OR ANOTHER
EXEMPTION UNDER THE SECURITIES ACT OF 1933.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(d) 
          A certificate duly executed by an executive officer of the Company, dated as of
          the date of the Closing, in the form attached hereto as Schedule 2.2.1(d)
          (the Compliance Certificate);

(e)   Copies of all applicable consents and waivers required of the Company by
          applicable law, regulation or contract, in connection with the transactions
          contemplated hereby.

2.2.2
    Each Investor shall deliver to the Company the following:

(a)  Either: (i) A validly executed share transfer deed concerning the transfer of
          such Investors Liraz Shares to the Company, together with the original,
          executed share certificate issued by Liraz in respect of such Liraz Shares; or
          (ii) an irrevocable letter of instructions to the Tel Aviv Stock Exchange Member
          through which such Liraz Shares are held for the account of such Investor, with
          instructions to transfer such Liraz Shares to an account designated by the
          Company, maintained with any Tel Aviv Stock Exchange Member;

(b)  Copies of all applicable consents and waivers required of the Investors by
          applicable law, regulation or contract, in connection with the transactions
          contemplated hereby.

2.2.3    
The Company shall record the allotment of the Crystal Shares to the Investors, in the
respective numbers indicated in Schedule 1.1 opposite the names of the
Investors, in the register of shareholders of the Company.

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3.    
          Registration Rights. The Company covenants and agrees as
          follows:

3.1.    Definitions.  For purposes of this Section 3:

Registrable Shares
means (i) the Crystal Shares, and (ii) any other securities of the Company issued as a
dividend or other distribution with respect to, or in exchange for or in replacement of,
such Crystal Shares.

Register,
registered and registration refer to a registration
effected by filing a registration statement in compliance with the Securities Act of 1933,
as amended (the Securities Act), and the declaration or ordering by the
Securities & Exchange Commission of effectiveness of such registration statement, or
the equivalent actions under the laws of another jurisdiction.

3.2    Incidental Registration. If the Company, at any time proposes to (a) register any
of its newly issued securities for primary sale in an underwritten offering, or (b)
register for resale outstanding securities of the Company previously issued to a third
party in a private placement in such aggregate number that at the time of such issuance
equals or exceeds thirty percent (30%) of the Companys then issued and paid up
capital, it shall give notice to each of the Investors of such intention. Upon the written
request of an Investor, given within twenty (20) days after receipt of any such notice,
the Company shall include in such registration all of the Registrable Shares indicated in
such request, so as to permit the disposition of the Registable Shares so registered, at
the expense of the Company provided that all underwriting commissions shall be paid by the
parties selling shares with respect to their shares sold. Notwithstanding any other
provision of this Section 3, if the registration is underwritten and the managing
underwriter advises the Company that marketing factors require a limitation of the number
of shares to be underwritten, then the number of Crystal Shares that may be included in
such registration shall be reduced as required by the underwriters, and the securities to
be registered in such registration shall be allocated as follows: first, securities
proposed to be sold by the Company or resold by such third party, as applicable, shall be
registered; and second, the Registrable Shares requested to be registered by
Investors shall be registered, (such Registrable Shares to be divided among the Investors,
on a pro rata basis, based on the total number of Registrable Shares requested to be
registered). The Company may postpone or withdraw the filing or the effectiveness of such
an incidental registration at any time in its sole discretion.

3.3
    Form F-3 Registration.

3.3.1  At anytime during the three (3) year period following the Closing, in case the Company
shall receive from any Investor(s) holding, in the aggregate, at least twenty percent
(20%) of the Crystal Shares issued hereunder a written request or requests that the
Company effect a registration on Form F-3, and any related qualification or
compliance, with respect to Registrable Shares, the Company shall within twenty (20) days
after receipt of any such request give written notice of the proposed registration, and
any related qualification or compliance, to all other Investors, and include in such
registration all Registrable Shares held by all such Investors who wish to participate in
such registration and provide the Company with written requests for inclusion therein
within fifteen (15) days after the receipt of the Companys notice. Thereupon, the
Company shall, at its expense, effect such registration and all such qualifications and
compliances as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Investors Registrable Securities as are
specified in such request, together with all or such portion of the Registrable Shares of
any other Investor or Investors joining in such request as are specified in a written
request given within fifteen (15) days after receipt of such written notice from the
Company;

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3.3.2  
Notwithstanding the foregoing, if the underwriter advises the Investors in writing that
marketing factors require a limitation of the number of shares to be underwritten (or, in
the case such registration and offering shall not be underwritten, any other factor arises
requiring such a limitation in the number of shares to be so registered), then there shall
be included in such registration and underwriting to the extent necessary to satisfy such
limitation the Registrable Shares held by the Investors (pro rata to the respective number
of Registrable Shares required by such Investors to be included in the registration).

3.3.3  
Notwithstanding the foregoing, the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 3.3, (i) if
Form F-3 is not available for such offering by the Investors; (ii) if the
Investors, together with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Shares and such other
securities (if any) at an aggregate price to the public (net of any underwriters
discounts or commissions) of less than One Million United States dollars ($1,000,000);
(iii) if the Company shall furnish to the Investors a certificate signed by the
President or CEO of the Company stating that in the good faith judgment of the Board of
Directors of the Company it would be seriously detrimental to the Company or its
stockholders for such Form F-3 registration statement to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form F-3
registration statement for a period of not more than one hundred twenty (120) days after
receipt of the request of the Investors under this Section 3.3; provided,
however, that the Company shall not utilize this right more than once in any twelve
(12) month period; (iv)  during the period starting with the date sixty (60) days
prior to the Companys estimated date of filing of, and ending on the date six (6)
months immediately following the effective date of, any registration statement pertaining
to securities of the Company (other than a registration of securities in a Rule 145
transaction or with respect to an employee benefit plan), provided that the Company is
actively employing in good faith reasonable efforts to cause such registration statement
to become effective and that the Companys estimate of the date of filing such
registration statement is made in good faith; (v) in any particular jurisdiction in
which the Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or compliance;
or (vi) if the Company has already effected one F-3 registration statement under this
Section 3.3.

3.4.    Indemnities. In the event of any registration of Registrable Shares pursuant to this Section 3:

3.4.1  
The Company will indemnify and hold harmless, to the fullest extent permitted by law, any
Investor and any underwriter for such Investor, and each person, if any, who controls the
Investor or such underwriter, from and against any and all losses, damages, claims,
liabilities, joint or several, costs and expenses (including any amounts paid in any
settlement effected with the Companys reasonable consent) to which the Investor or
any such underwriter or controlling person may become subject under applicable law or
otherwise, insofar as such losses, damages, claims, liabilities (or actions or proceedings
in respect thereof), costs or expenses arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the registration
statement or included in the prospectus, as amended or supplemented, or (ii) the omission
or alleged omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances in which they
are made, not misleading, or (iii) a violation of applicable securities laws by the
Company, and the Company will reimburse the Investor, such underwriter and each such
controlling person of the Investor or the underwriter, promptly upon demand, for any
reasonable legal or any other expenses incurred by them in connection with investigating,
preparing to defend or defending against or appearing as a third-party witness in
connection with such loss, claim, damage, liability, action or proceeding;
provided, however, that the Company will not be liable in any such case to
the extent that any such loss, damage, liability, cost or expense arises out of or is
based upon an untrue statement or alleged untrue statement or omission or alleged omission
so made in conformity with information furnished in writing by an Investor, such
underwriter or such controlling persons specifically for inclusion therein;
provided, further, that this indemnity shall not be deemed to relieve any
underwriter of any of its due diligence obligations; provided, further, that
the indemnity agreement contained in this subsection 3.4.1 shall not apply to amounts
paid in settlement of any such claim, loss, damage, liability or action if such settlement
is effected without the consent of the Company, which consent shall not be unreasonably
withheld. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the selling shareholder, the underwriter or any
controlling person of the selling shareholder or the underwriter, and regardless of any
sale in connection with such offering by the selling shareholder. Such indemnity shall
survive the transfer of securities by a selling shareholder.

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3.4.2  
Each Investor participating in a registration hereunder will indemnify and hold harmless
the Company, each other Investor participating in such registration, any underwriter for
the Company, and each person, if any, who controls the Company or such underwriter or such
other Investor, from and against any and all losses, damages, claims, liabilities, costs
or expenses (including any amounts paid in any settlement effected with the selling
shareholders reasonable consent) to which the Company or any such controlling person
and/or any such underwriter and/or such other Investor may become subject under applicable
law or otherwise, insofar as such losses, damages, claims, liabilities (or actions or
proceedings in respect thereof), costs or expenses arise out of or are based on
(i) any untrue or alleged untrue statement of any material fact contained in the
registration statement or included in the prospectus, as amended or supplemented, or
(ii) the omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading, and each such Investor will
reimburse the Company, each other Investor participating in such registration, any
underwriter and each such controlling person of the Company or any underwriter, promptly
upon demand, for any reasonable legal or other expenses incurred by them in connection
with investigating, preparing to defend or defending against or appearing as a third-party
witness in connection with such loss, claim, damage, liability, action or proceeding; in
each case to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was so made in strict conformity with
written information furnished by such Investor specifically for inclusion therein. The
foregoing indemnity agreement is subject to the condition that, insofar as it relates to
any such untrue statement (or alleged untrue statement) or omission (or alleged omission)
made in the preliminary prospectus but eliminated or remedied in the amended prospectus at
the time the registration statement becomes effective or in the Final Prospectus, such
indemnity agreement shall not inure to the benefit of (i) the Company and
(ii) any underwriter, if a copy of the Final Prospectus was not furnished to the
person or entity asserting the loss, liability, claim or damage at or prior to the time
such furnishing is required by the Securities Act; provided, further, that
this indemnity shall not be deemed to relieve any underwriter of any of its due diligence
obligations; provided, further, that the indemnity agreement contained in
this subsection 3.4.2 shall not apply to amounts paid in settlement of any such
claim, loss, damage, liability or action if such settlement is effected without the
consent of such Investor, as the case may be, which consent shall not be unreasonably
withheld. In no event shall the liability of an Investor exceed the net proceeds from the
offering received by such Investor.

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3.4.3  
Promptly after receipt by an indemnified party pursuant to the provisions of Sections
3.4.1 or 3.4.2 of notice of the commencement of any action involving the subject matter of
the foregoing indemnity provisions, such indemnified party will, if a claim thereof is to
be made against the indemnifying party pursuant to the provisions of said Section 3.4.1 or
3.4.2, promptly notify the indemnifying party of the commencement thereof; but the
omission to notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than hereunder. In case such action is brought
against any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party shall have the right to participate in, and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof with counsel reasonably satisfactory to such indemnified party;
provided, however, that if the defendants in any action include both the
indemnified party and the indemnifying party and there is a conflict of interests which
would prevent counsel for the indemnifying party from also representing the indemnified
party, the indemnified party or parties shall have the right to select one separate
counsel to participate in the defense of such action on behalf of such indemnified party
or parties. After notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be liable to
such indemnified party pursuant to the provisions of said Sections 3.4.1 or 3.4.2 for any
legal or other expense subsequently incurred by such indemnified party in connection with
the defense thereof, unless (i) the indemnified party shall have employed counsel in
accordance with the provision of the preceding sentence, (ii) the indemnifying party shall
not have employed counsel reasonably satisfactory to the indemnified party to represent
the indemnified party within 15 days after the notice of the commencement of the action,
or (iii) the indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. No indemnifying party will
consent to entry of any judgment or enter into any settlement that does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such indemnified
party of a release from all liability in respect to such claim or litigation.

3.4.4  
If recovery is not available under the foregoing indemnification provisions, for any
reason other than as specified therein, the parties entitled to indemnification by the
terms thereof shall be entitled to contribution to liabilities and expenses. In
determining the amount of contribution to which the respective parties are entitled, there
shall be considered the parties relative knowledge and access to information
concerning the matter with respect to which the claim was asserted, the opportunity to
correct and prevent any statement or omission, and any other equitable considerations
appropriate under the circumstances. In no event shall the liability of an Investor exceed
the net proceeds from the offering received by such Investor.

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| | 3.5 | No Conflicting Agreements. The Company represents and warrants to the Investors
that the Company is not a party to any agreement that conflicts in any manner with the
Investors rights to cause the Company to register Registrable Securities pursuant to
this Section 3.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.6 | Notwithstanding any other provision of this Agreement, the Crystal Shares issued hereunder
shall not be sold or traded on any stock exchange prior to the time when such shares are
registered, or may be sold pursuant to any exemption from registration, under the
Securities Act, to the extent such exemption applies. The Crystal Shares shall not be
transferred to, or held by, the nominees company of bank Hapoalim prior to such time.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4.    
          Representations and Warranties of the Company. The Company
          hereby represents and warrants to the Investors, as follows:

4.1  
Organization; Corporate Power. The Company is duly organized, validly existing and
in good standing under the laws of the State of Israel, and has full corporate power and
authority to own, lease and operate its properties and assets and to conduct its business
as now being conducted. The Memorandum and Articles of Association of the Company as in
effect at the Closing are attached hereto as Schedule 4.1 (the
Articles).

4.2  
Share Capital. The Crystal Shares, when issued and allotted in accordance with this
Agreement, will be duly authorized, validly issued, fully paid, nonassessable, and free of
any preemptive rights, and will have the rights, preferences, privileges, and restrictions
set forth in the Articles, and will be free and clear of any liens, claims, encumbrances
or third party rights of any kind and duly registered in the name of each Investor in the
Companys register of shareholders.

4.3  
Financial Statements. The Company has furnished the Investors with its
(i) audited, consolidated, United States Dollar-denominated financial statements as
of and for the year ended December 31, 2001 (the Audited Financial
Statements) and (ii) unaudited, reviewed, consolidated, United States
Dollar-denominated balance sheet and statement of income, as of and for the three and six
month periods ended June 30, 2002, ((i) and (ii) are collectively referred to as the
Crystal Financial Statements and are attached hereto as Schedule
4.3). The Crystal Financial Statements are true and correct in all material respects,
are in accordance with the books and records of the Company and have been prepared in
accordance with United States generally accepted accounting principles consistently
applied, and fairly and accurately present in all material respects the financial position
of the Company as of such dates and the results of its operations for the periods then
ended.

4.4  
Authorization; Approvals. The Company has all requisite power and authority to
execute and deliver this Agreement and all other agreements and instruments contemplated
hereby or which are ancillary hereto and to consummate the transactions and perform its
obligations contemplated hereby and thereby. All corporate action on the part of the
Company, its shareholders and directors necessary for the authorization, execution,
delivery, and performance of all of the Companys obligations under this Agreement,
and the other agreements contemplated hereby or which are ancillary hereto and for the
authorization, issuance, and allotment of the Crystal Shares being sold under this
Agreement has been (or will be) taken prior to the Closing. This Agreement is, and the
other agreements and instruments contemplated hereby or which are ancillary hereto, when
executed and delivered by or on behalf of the Company, shall be, duly and validly
authorized, executed and delivered by the Company. This Agreement constitutes, and the
other agreements and instruments contemplated hereby or which are ancillary hereto, when
executed and delivered by or on behalf of the Company, shall constitute, the valid and
legally binding obligations of the Company, legally enforceable against the Company in
accordance with their respective terms. No consent, approval, order, license, permit,
action by, or authorization of or designation, declaration, or filing with any
governmental authority on the part of the Company is required that has not been, or will
not have been, obtained by the Company prior to the Closing in connection with the valid
execution, delivery and performance of this Agreement and the other agreements and
instruments contemplated hereby or ancillary hereto or the offer, sale, or issuance of the
Crystal Shares, except for approvals to be obtained from the Securities and Exchange
Commission with respect to a registration under Section 3.2 above.

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4.5  
No Breach. Neither the execution and delivery of this Agreement and the other
agreements and instruments contemplated hereby or ancillary hereto nor compliance by the
Company with the terms and provisions hereof or thereof, will conflict with, or result in
a breach or violation of, any of the terms, conditions and provisions of: (i) the
Companys Memorandum of Association or the Articles of Association, or other
governing instruments of the Company, (ii) any judgment, order, injunction, decree,
or ruling of any court or governmental authority, domestic or foreign, (iii) any
agreement, contract, lease, license or commitment to which the Company or any subsidiary
is a party or to which it is subject, or (iv) applicable law. Such execution,
delivery and compliance will not require the consent or approval of any person, which
consent or approval has not heretofore been obtained.

4.6  
Brokers. No agent, broker, investment banker, person or firm acting in a similar
capacity on behalf of or under the authority of the Company is or will be entitled to any
brokers or finders fee or any other commission or similar fee, directly or
indirectly, on account of any action taken by the Company in connection with any of the
transactions contemplated under this Agreement. The Company agrees to indemnify and hold
the Investors harmless from and against any claim or liability resulting from any party
claiming any such commission or fee, if such claims shall be contrary to the foregoing
statement.

4.7  
SEC/Nasdaq Compliance. The Companys annual report on Form 20-F for the one
year period ending 2001 and as filed with the U.S. Securities and Exchange Commission
(SEC) is attached hereto as Schedule 4.7(i) (the 20-F
Report), and all of the press releases issued by the Company after December 31,
2001 through the date hereof are attached hereto as Schedule 4.7(ii) (the 2002
Press Releases), which the Company represents and warrants consists of all press
releases required to be filed with the SEC under applicable laws and regulations since
December 31, 2001 through the date hereof. The Company has not received any correspondence
from the U.S. Securities and Exchange Commission concerning the 20-F Report. The 20-F
Report has been prepared by the Company in accordance with all applicable U.S. securities
laws, regulations and rulings.

4.8  
Experience. The Company is an experienced investor and has reviewed and inspected
all of the data and information provided to it, upon its request, by the Investors in
connection with this Agreement. The Company represents and agrees that the Liraz Shares
are purchased only for investment, for its own account, and without any present intention
to sell or distribute the Liraz Shares.

8

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4.9  
Full Disclosure. The Company has provided each Investor with all information
relating to the Company that such Investor has requested. Neither the Companys
representations made in this Agreement (including the Schedules hereto) nor any
certificates made or delivered by the Company in connection herewith contains any untrue
statement of a material fact or omits to state a material fact necessary to make the
statements herein or therein not misleading, in view of the circumstances in which they
were made.

5.    
          Representations and Warranties of the Investors. Each
          Investor (except DIC Loans Ltd. solely with respect to Sections 5.7, 5.8 and 5.9
          below) hereby represents and warrants, with respect to itself only, to the
          Company as follows:

5.1  
Good Title. Such Investor owns of record (either directly or by way of holding
through a securities custody account owned by such Investor and maintained with a member
of the Tel Aviv Stock Exchange) and beneficially, and has good, valid and marketable title
to, all of the Liraz Shares to be sold hereunder by such Investor, which, upon the
transfer of such Liraz Shares under this Agreement, will be free and clear of any
restrictions on transfer, taxes, security interests, liens, pledges, mortgages, charges,
encumbrances, options, warrants, purchase rights, contracts, commitments, calls, equities,
claims and demands.

5.2  
Authorization; Approvals. Such Investor has all requisite power and authority to
execute and deliver this Agreement and all other agreements and instruments contemplated
hereby or which are ancillary hereto and to consummate the transactions and perform its
obligations contemplated hereby and thereby. All corporate action on the part of the
Investor necessary for the authorization, execution, delivery, and performance of all of
the Investors obligations under this Agreement, and the other agreements
contemplated hereby or which are ancillary hereto and for the transfer of the Liraz Shares
being sold under this Agreement by such Investor has been (or will be) taken prior to the
Closing. This Agreement is, and the other agreements and instruments contemplated hereby
or which are ancillary hereto, when executed and delivered by or on behalf of the
Investor, shall be, duly and validly authorized, executed and delivered by the Investor.
This Agreement constitutes, and the other agreements and instruments contemplated hereby
or which are ancillary hereto, when executed and delivered by or on behalf of the
Investor, shall constitute, the valid and legally binding obligations of the Investor,
legally enforceable against the Investor in accordance with their respective terms. No
consent, approval, order, license, permit, action by, or authorization of or designation,
declaration, or filing with any governmental authority on the part of the Investor is
required that has not been, or will not have been, obtained by the Investor prior to the
Closing in connection with the valid execution, delivery and performance of this Agreement
and the other agreements and instruments contemplated hereby or ancillary hereto or the
offer or sale of the Liraz Shares.

5.3  
No Breach. Neither the execution and delivery of this Agreement and the other
agreements and instruments contemplated hereby or ancillary hereto nor compliance by the
Investor with the terms and provisions hereof or thereof, will conflict with, or result in
a breach or violation of, any of the terms, conditions and provisions of: (i) such
Investors Memorandum of Association or the Articles of Association, or other
governing instruments of the Investor, (ii) any judgment, order, injunction, decree,
or ruling of any court or governmental authority, domestic or foreign, to which the
Investor is a party or to which it is subject, (iii) any agreement, contract, lease,
license or commitment to which the Investor is a party or to which it is subject, or
(iv) applicable law. Such execution, delivery and compliance will not require the
consent or approval of any person, which consent or approval has not heretofore been
obtained.

9

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---

5.4  
Brokers. No agent, broker, investment banker, person or firm acting in a similar
capacity on behalf of or under the authority of such Investor is or will be entitled to
any brokers or finders fee or any other commission or similar fee, directly or
indirectly, on account of any action taken by such Investor in connection with any of the
transactions contemplated under this Agreement. Such Investor agrees to indemnify and hold
the Company harmless from and against any claim or liability resulting from any party
claiming any such commission or fee, if such claims shall be contrary to the foregoing
statement.

5.5  
Experience. Such Investor is an experienced investor and has reviewed and inspected
all of the data and information provided to it, upon its request, by the Company in
connection with this Agreement. Such Investor represents and agrees that the Crystal
Shares to be acquired hereunder by such Investor are purchased only for investment, for
his or its own account, and without any present intention to sell or distribute such
Crystal Shares. The Investor acknowledges that such Crystal Shares are restricted
securities and the certificates therefor shall bear a restrictive legend as set
forth in Section 2.2.1(c) hereof.

5.6  
The Liraz Shares being sold to the Company under this Agreement by such Investor
constitutes such Investors entire holdings in Liraz, including rights convertible
into, or entitling the holder thereof to receive directly or indirectly, additional shares
or securities of Liraz.

5.7  
Financial Statements. The Investors (other than DIC Loans Ltd.) have furnished the
Company with Liraz (i) audited, consolidated, NIS-denominated financial
statements as of and for the year ended December 31, 2001 (the Audited Financial
Statements) and (ii) unaudited, reviewed, consolidated, NIS-denominated
financial statements as of and for the three and six month periods ended June 30, 2002,
((i) and (ii) are collectively referred to as the Liraz Financial
Statements and are attached hereto as Schedule 3.3). The Liraz Financial
Statements are true and correct in all material respects, are in accordance with the books
and records of Liraz and have been prepared in accordance with Israeli generally accepted
accounting principles consistently applied, and fairly and accurately present in all
material respects the financial position of the Liraz as of such dates and the results of
its operations for the periods then ended.

5.8  
Securities Law Compliance. Lirazs annual report for the one year period
ending 2001 and as filed with the Israeli Securities Authority is attached hereto as
Schedule 5.7 (the Annual Report). Liraz has not received any
correspondence from the Israeli Securities Authority concerning the Annual Report. The
Annual Report has been prepared by Liraz in accordance with all applicable Israeli
securities laws, regulations and rulings.

5.9  
Full Disclosure. The Investor has provided the Company with all information
relating to Liraz and such Investor that the Company has requested of such Investor.
Neither such Investors representations as made in this Agreement (including the
Schedules hereto) nor any certificates made or delivered by such Investor in connection
herewith contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading, in view of the
circumstances under which they were made.

10

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---

6.    
          Conditions of Closing of the Investors. The obligations of
          each Investor to purchase the Crystal Shares in exchange for the Liraz Shares,
          at the Closing, are subject to the fulfillment at or before the Closing of the
          following conditions precedent, any one or more of which may be waived in whole
          or in part by the Investors, which waiver shall be at the sole discretion of the
          Investors:

6.1  
Representations and Warranties. The representations and warranties made by the
Company in this Agreement shall have been true and correct when made, and shall be true
and correct as of the Closing as if made on the date of the Closing.

6.2  
Covenants. All covenants, agreements, and conditions contained in this Agreement to
be performed or complied with by the Company prior to the Closing shall have been
performed or complied with by the Company prior to or at the Closing.

6.3  
Consents, etc. The Company shall have secured all permits, consents and
authorizations on the part of the Company that shall be necessary or required lawfully to
consummate this Agreement and to issue the Crystal Shares to each Investor at the Closing.

6.4  
Delivery of Documents. All of the documents to be delivered by the Company pursuant
to Section 2.2.1 shall be in a form and substance satisfactory to the Investors and their
counsel, and shall have been delivered to the Investors.

6.5  
Proceedings and Documents. All corporate and other proceedings of the Company in
connection with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be satisfactory in substance and form to
the Investors and their counsel, and the Investors and their counsel shall have received
all such counterpart originals or certified or other copies of such documents as the
Investors or their counsel may reasonably request.

7.    
          Conditions of Closing of the Company. The Companys
          obligations to sell and issue the Crystal Shares at the Closing are subject to
          the fulfillment at or before the Closing of the following conditions:

7.1  
Representations and Warranties. The representations and warranties made by each
Investor in this Agreement shall have been true and correct when made, and shall be true
and correct as of the Closing as if made on the date of the Closing.

7.2  
Covenants. All covenants, agreements, and conditions contained in this Agreement to
be performed or complied with by the Investors prior to the Closing shall have been
performed or complied with by the Investors prior to or at the Closing.

7.3  
Consents, etc. The Investors shall have secured all permits, consents and
authorizations on their part that shall be necessary or required lawfully to consummate
this Agreement and to transfer the Liraz Shares to the Company at the Closing.

7.4  
Delivery of Documents. All of the documents to be delivered by the Investors
pursuant to Section 2.2.2 shall be in a form and substance satisfactory to the Company and
its counsel, and shall have been delivered to the Company.

11

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---

7.5  
Proceedings and Documents. All corporate and other proceedings of the Investors in
connection with the transactions contemplated by this Agreement and all documents and
instruments incident to such transactions shall be satisfactory in substance and form to
the Company and its counsel, and the Company and its counsel shall have received all such
counterpart originals or certified or other copies of such documents as the Company or its
counsel may reasonably request.

8.    
          Miscellaneous.

8.1  
The Parties hereto acknowledge that in the event that the resolution described under
Section 2.2.1(a) above is not obtained by December 31, 2002, this Agreement shall be
considered null and void by no fault or breach of any of the Parties.

8.2  
Further Assurances. Each of the parties hereto shall perform such further acts and
execute such further documents as may reasonably be necessary to carry out and give full
effect to the provisions of this Agreement and the intentions of the parties as reflected
thereby.

8.3  
Governing Law; Jurisdiction. This Agreement shall be governed by and construed
according to the laws of the State of Israel, without regard to the conflict of laws
provisions thereof. Any dispute arising under or in relation to this Agreement shall be
resolved exclusively in the competent court for Tel Aviv-Jaffa district, and each of the
parties hereby irrevocably submits to the exclusive jurisdiction of such court.

8.4  
Successors and Assigns; Assignment. Except as otherwise expressly limited herein,
the provisions hereof shall inure to the benefit of, and be binding upon, the successors,
assigns, heirs, executors, and administrators of the parties hereto.

8.5  
Entire Agreement; Amendment and Waiver. This Agreement and the Schedules hereto
constitute the full and entire understanding and agreement between the parties with regard
to the subject matters hereof and thereof. Any term of this Agreement may be amended and
the observance of any term hereof may be waived (either prospectively or retroactively and
either generally or in a particular instance) only with the written consent of all parties
to this Agreement.

8.6  
Notices, etc. All notices and other communications required or permitted hereunder
to be given to a party to this Agreement shall be in writing and shall be telecopied or
mailed by registered or certified mail, postage prepaid, or prepaid air courier, or
otherwise delivered by hand or by messenger, addressed to such partys address as set
forth below:

|if to the Investors: | to the addresses set forth in Schedule 1.1
|-------------------- | ------------------------------------------
|                     |                                           
|if to the Company    | Crystal Systems Solutions Ltd.            
|                     | 8 Maskit St., Herzelia                    
|                     | Facsimile: 09-9536111                     
|                     | ATTN: Iris Yahal, CFO                     

or such other address with respect to
a party as such party shall notify each other party in writing as above provided. Any
notice sent in accordance with this Section 8.6 shall be effective (i) if mailed, seven
(7) business days after mailing, (ii) if by air courier two (2) business days after
delivery to the courier service, (iii) if sent by messenger or via telecopier and received
on a business day by 17:00, upon delivery or transmission (and electronic confirmation of
receipt, where applicable), and if sent otherwise, on the first business day following the
day of delivery by messenger or transmission via telecopier and electronic confirmation of
receipt (provided, however, that any notice of change of address shall only be valid upon
receipt).

12

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---

8.7  
Delays or Omissions. No delay or omission to exercise any right, power, or remedy
accruing to any party upon any breach or default under this Agreement, shall be deemed a
waiver of any other breach or default theretofore or thereafter occurring. Any waiver,
permit, consent, or approval of any kind or character on the part of any party of any
breach or default under this Agreement, or any waiver on the part of any party of any
provisions or conditions of this Agreement, must be in writing and shall be effective only
to the extent specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and
not alternative.

8.8  
Severability. If any provision of this Agreement is held by a court of competent
jurisdiction to be unenforceable under applicable law, then such provision shall be
excluded from this Agreement and the remainder of this Agreement shall be interpreted as
if such provision were so excluded and shall be enforceable in accordance with its terms;
provided, however, that in such event this Agreement shall be interpreted so as to give
effect, to the greatest extent consistent with and permitted by applicable law, to the
meaning and intention of the excluded provision as determined by such court of competent
jurisdiction.

8.9  
Counterparts. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original and enforceable against the parties actually executing
such counterpart, and all of which together shall constitute one and the same instrument.

[REMAINDER OF THIS
PAGE INTENTIONALLY LEFT BLANK]

13

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IN
WITNESS WHEREOF the parties have signed this Agreement as of the date first hereinabove
set forth.

# CRYSTAL SYSTEMS
SOLUTIONS LTD.

By:
________________________

Title:
________________________

# DIC LOANS LTD.

By:
________________________

Title:
________________________

# FORMULA SYSTEMS (1985)
LTD.

By:
________________________

Title:
________________________

# ARIE KILMAN

By:
________________________

[Signature Page to
Share Exchange Agreement]

14

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---

SCHEDULE 1.1

|Investor Name and Address:                                                                      | Number of Crystal Shares
Issued by the Company: | Number of Liraz Shares
Transferred by each Investor:
|----------------------------------------------------------------------------------------------- | ----------------------------------------------- | ----------------------------------------------------
|DIC Loans Ltd.
Azrieli Center
Triangular Tower
Tel Aviv
Fax: 03-607-5866
Attn: Legal Counsel    | 510,328                                         | 852,247                                             
|Arie Kilman
Arie Zeev Yizum Asakim Ltd.
Azrieli Center
Triangular Tower, Floor 42
Tel Aviv
Fax: | 215,004
410,179
Total:625,183                   | 359,056
685,000
Total: 1,044,056                    
|Formula Systems (1985) Ltd.
39 Hagalim Blvd., Herzelia
Fax: 09-9598877
Attn: Legal Counsel      | 2,343,113                                       | 3,912,999                                           
|Total                                                                                           | 3,478,624                                       | 5,809,302                                           

15

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# AGREEMENT FOR THE SALE
OF SHARES

# Drawn and signed in
Herzlia on 13 October 2002

|Between: |  |  | Formula Systems (1985) Ltd.       |  |  |                     |  | 
|-------- |  |  | --------------------------------- |  |  | ------------------- |  | 
|         |  |  | Public company number 52-003669-0 |  | 
|         |  |  | Of 3, Hagalim Boulevard, Herzlia  |  | 
|         |  |  | ("Seller")                        |  | 
|         |  |  |                                   |  |  | of the first part;  |  | 
|And:     |  |  | Matrix I.T. Ltd.                  |  |  |                     |  | 
|         |  |  | Public company number 52-003941-3 |  | 
|         |  |  | Of 3, Hagalim Boulevard, Herzlia  |  | 
|         |  |  | ("Buyer")                         |  | 
|         |  |  |                                   |  |  | of the second part; |  | 

|Whereas |  |  | Seller is the owner of 3,768,889 Ordinary Shares of NIS 1 n.v. each ("Ordinary Shares") in the issued  |  | 
|------- |  |  | ------------------------------------------------------------------------------------------------------ |  | 
|        |  |  | share capital of New Applicom Ltd. ("Applicom") and is the owner of 12,910,846 Ordinary Shares in the  |  | 
|        |  |  | issued share capital of Sintec Advanced Technologies Ltd. ("Sintec"), and is the owner of 8,634,152    |  | 
|        |  |  | Ordinary Shares in the issued share capital of Sivan Training and Systems Ltd. ("Sivan"); and -        |  | 
|        |  |  |                                                                                                        |  | 
|Whereas |  |  | On 3 October 2002 Seller published three Tender Offers, as follows: (a) a complete Tender Offer (as    |  | 
|        |  |  | defined in Section 336 of the Companies Law - 1999 - "Complete Tender Offer") for the Applicom shares; |  | 
|        |  |  | (b) a Complete Tender Offer for the Sintec shares; (c) a Complete Tender Offer for the Sivan shares;   |  | 
|        |  |  | and -                                                                                                  |  | 
|        |  |  |                                                                                                        |  | 
|Whereas |  |  | Seller is desirous to sell and to assign to Buyer all Ordinary Shares of Applicom, Sintec and Sivan,   |  | 
|        |  |  | which it shall hold after the closing of the above-mentioned Tender Offers (including, after           |  | 
|        |  |  | completing a forced acquisition under Section 337 of the Companies Law, insofar as it is made) (the    |  | 
|        |  |  | "Shares under Sale"), and Buyer is desirous to buy and accept the assignment by Seller of the Shares   |  | 
|        |  |  | under Sale, all in accordance with the terms and conditions set forth in this Agreement; and -         |  | 
|        |  |  |                                                                                                        |  | 
|Whereas |  |  | Buyer and Seller are desirous to anchor the legal relations between them in all matters relating to    |  | 
|        |  |  | the sale and acquisition of the Shares under Sale, all in accordance with the terms and conditions set |  | 
|        |  |  | forth in this Agreement;                                                                               |  | 

1

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# NOW THERFORE, THE PARTIES DECLARE, STIPULATE AND AGREE AS FOLLOWS:

# 1.     Preamble and Annexes

| | 1.1 | The Preamble to this Agreement and the Annexes hereto form an integral part hereof.                                                                               
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                   
| | 1.2 | The division of this Agreement into clauses and the captions appearing herein are for the
purpose of convenience only and shall not serve in the construal hereof.

# 2.     Definitions

In this Agreement, the following terms shall have the meanings set forth beside them:

|"Approval" -                     |  |  | Any and all approvals and permits required by law for the     |  | 
|-------------------------------- |  |  | ------------------------------------------------------------- |  | 
|                                 |  |  | implementation of this Agreement;                             |  | 
|                                 |  |  |                                                               |  | 
|"Applicom" -                     |  |  | New Applicom Ltd.;                                            |  | 
|                                 |  |  |                                                               |  | 
|"Report on the Results of the    |  |  | A report on the results of the Applicom Tender Offer and/or a |  | 
|Tender Offer" -                  |  |  | report on the results of the Sintec Tender Offer and/or a     |  | 
|                                 |  |  | report on the results of the Sivan Tender Offer, as the case  |  | 
|                                 |  |  | may be, to be published by Seller pursuant to Regulation 5(F) |  | 
|                                 |  |  | of the Securities Regulations (Tender Offer) 2000;            |  | 
|                                 |  |  |                                                               |  | 
|"Law" -                          |  |  | As defined in the Interpretation Ordinance [New Version];     |  | 
|                                 |  |  |                                                               |  | 
|The "Stock Exchange" -           |  |  | The Tel Aviv Stock Exchange Ltd.;                             |  | 
|                                 |  |  |                                                               |  | 
|The "Arbiter" -                  |  |  | A legal practitioner whose identity shall be determined by    |  | 
|                                 |  |  | the parties in mutual consent in writing, and in the absence  |  | 
|                                 |  |  | of such consent, by the Chairman of the Bar Association;      |  | 
|                                 |  |  |                                                               |  | 
|The "Financial Statements of the |  |  | As defined in clause 3.12 of the Agreement;                   |  | 
|Companies under Sale" -          |  | 
|                                 |  |  |                                                               |  | 
|"Notice" -                       |  |  | As defined in clause 7 of the Agreement;                      |  | 
|                                 |  |  |                                                               |  | 
|The "Held Companies" -           |  |  | Any corporation held by the Companies under Sale or any of    |  | 
|                                 |  |  | their number, directly or indirectly;                         |  | 
|                                 |  |  |                                                               |  | 
|The "Companies under Sale" -     |  |  | Applicom, Sintec and Sivan;                                   |  | 
|                                 |  |  |                                                               |  | 
|"Sivan's Loans" -                |  |  | Certain loans extended by Seller to Sivan;                    |  | 
|                                 |  |  |                                                               |  | 
|"Seller" -                       |  |  | The Seller, as defined in the Preamble to this Agreement;     |  | 
|                                 |  |  |                                                               |  | 

2

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|The "Shares under Sale" -          |  |  | The Applicom basic shares, the Sintec basic shares, the Sivan                                            |  | 
|---------------------------------- |  |  | -------------------------------------------------------------------------------------------------------- |  | 
|                                   |  |  | basic shares, the additional Applicom shares, the additional                                             |  | 
|                                   |  |  | Sintec shares, and the additional Sivan shares, which shall                                              |  | 
|                                   |  |  | form all of Seller's shares in the Companies under Sale on                                               |  | 
|                                   |  |  | the Closing Date;                                                                                        |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Applicom Tender Offer" -      |  |  | A Complete Tender Offer for the Applicom shares, published by
Seller on 3 October 2002;                  |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Sivan Tender Offer" -         |  |  | A Complete Tender Offer for the Sivan shares, published by                                               |  | 
|                                   |  |  | Seller on 3 October 2002;                                                                                |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Sintec Tender Offer" -        |  |  | A Complete Tender Offer for the Sintec shares, published by                                              |  | 
|                                   |  |  | Seller on 3 October 2002;                                                                                |  | 
|                                   |  |  |                                                                                                          |  | 
|"Buyer" -                          |  |  | The Buyer, as defined in the Preamble to this Agreement;                                                 |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Consideration" -              |  |  | The cumulative sum of the amounts set forth in clauses 6.1.1                                             |  | 
|                                   |  |  | to 6.1.6 (inclusive) of the Agreement;                                                                   |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Conditions Precedent" -       |  |  | The conditions precedent set forth in this Agreement;                                                    |  | 
|                                   |  |  |                                                                                                          |  | 
|"Trading Day"                      |  |  | A day on which there is trading on the Tel Aviv Stock                                                    |  | 
|                                   |  |  | Exchange Ltd.;                                                                                           |  | 
|                                   |  |  |                                                                                                          |  | 
|"Final Closing Date" -             |  |  | 31 March 2003;                                                                                           |  | 
|                                   |  |  |                                                                                                          |  | 
|"Closing Date" -                   |  |  | The second Trading Day after the day of delivery of the                                                  |  | 
|                                   |  |  | Notice, but no later than the Final Closing Date;                                                        |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Additional Applicom Shares" - |  |  | All the Ordinary Shares of Applicom to be bought by Seller
under or following the Applicom Tender Offer; |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Applicom Basic Shares" -      |  |  | 3,768,889 Ordinary Shares of Applicom;                                                                   |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Additional Sivan Shares" -    |  |  | All the Ordinary Shares of Sivan to be bought by Seller under                                            |  | 
|                                   |  |  | or following the Sivan Tender Offer;                                                                     |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Sivan Basic Shares"-          |  |  | 8,634,152 Ordinary Shares of Sivan;                                                                      |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Additional Sintec Shares" -   |  |  | All the Ordinary Shares of Sintec to be bought by Seller
under or following the Sintec Tender Offer;     |  | 
|                                   |  |  |                                                                                                          |  | 
|The "Sintec Basic Shares" -        |  |  | 12,910,846 Ordinary Shares of Sintec;                                                                    |  | 

3

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|"Ordinary Shares"-           |  |  | Ordinary shares of the nominal value of NIS 1 each;           |  | 
|---------------------------- |  |  | ------------------------------------------------------------- |  | 
|                             |  |  |                                                               |  | 
|"Documents of Incorporation" |  |  | As defined in clause 3.11 of the Agreement;                   |  | 
|                             |  |  |                                                               |  | 
|"Free and Clear"-            |  |  | Free and clear of any encumbrance, mortgage, attachment,      |  | 
|                             |  |  | debt, blocking arrangement or any right of Third Party,       |  | 
|                             |  |  | including option rights or right of first refusal;            |  | 
|                             |  |  |                                                               |  | 
|"Sivan" -                    |  |  | Sivan Training and Systems Ltd.;                              |  | 
|                             |  |  |                                                               |  | 
|"Sintec" -                   |  |  | Sintec Advanced Technologies Ltd.;                            |  | 
|                             |  |  |                                                               |  | 
|The "Sale Transaction" -     |  |  | The sale and assignment of the Shares under Sale by Seller to |  | 
|                             |  |  | Buyer, and purchase of the Shares under Sale by Buyer from    |  | 
|                             |  |  | Seller, all in accordance with the terms and conditions of    |  | 
|                             |  |  | this Agreement;                                               |  | 
|                             |  |  |                                                               |  | 
|"Sivan's Guarantees" -       |  |  | All guarantees extended by Seller in Sivan's favor, copies    |  | 
|                             |  |  | whereof are attached as Annex 2Ato this Agreement;            |  | 
|                             |  |  |                                                               |  | 
|"Withheld Guarantee" -       |  |  | As defined in clause 5.4 of the Agreement;                    |  | 
|                             |  |  |                                                               |  | 
|"Third Party" -              |  |  | Whoever is not among the Seller and/or Buyer and/or           |  | 
|                             |  |  | corporations under their control;                             |  | 
|                             |  |  |                                                               |  | 
|"Material Change" -          |  |  | An event having a material impact, or which reasonably may    |  | 
|                             |  |  | have a material impact, on the assets and/or the results of   |  | 
|                             |  |  | operations and/or equity;                                     |  | 
|                             |  |  |                                                               |  | 
|"Interim Period" -           |  |  | The period from the date this Agreement is signed until the   |  | 
|                             |  |  | Closing Date;                                                 |  | 

4

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# 3.     Sellers Representations and Covenants

Seller hereby declares and covenants toward Buyer as follows:

| | 3.1  | Seller is the owner of the Shares under Sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.2  | On the Closing Date the Shares under Sale shall be Free and Clear.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.3  | On the Closing Date the Shares under Sale shall constitute its complete holdings in the
Companies under Sale.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.4  | Subject to the fulfillment of all Conditions Precedent, there is no legal or any other
prevention from its engagement in this Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.5  | Its signing this Agreement and the implementation of its provisions, subject to the terms
and conditions hereof and fulfillment of all Conditions Precedent, are not contradictory
to: (a) any ruling, order, instruction and/or directive of any court, quasi-judiciary
entity or administrative authority; (b) any contractual engagement, oral or in writing
(including conditional undertaking), whereto Seller is a party; (c) the provisions of any
law.                                                                                                                                                                                                                     
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.6  | It has carried the required resolutions for the purpose of its engagement in this
Agreement and the implementation hereof, and that pursuant to these resolutions, Dan
Goldstein or Gad Goldstein have been empowered to sign this Agreement in its name and on
its behalf, as well as any accompanying documents and/or documents required for the
purpose of implementation hereof.                                                                                                                                                                                                                                                                                              
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.7  | The resolution of the Sellers Board of Directors approving the engagement in this
Agreement and the implementation hereof pursuant to its terms and provisions, and the
Boards approval that all approvals required for Sellers engagement in this
Agreement and the implementation hereof, subject to the fulfillment of all Conditions
Precedent, were accepted, are attached as Annex 3.7 to
this Agreement.                                                                                                                                                                                                                                                               
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.8  | On the Closing Date, Seller shall sell the Shares under Sale to the Buyer pursuant to the
provisions of this Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.9  | The Companies under Sale are public companies lawfully established and incorporated
pursuant to the laws of the State of Israel, and as at the date of signature of this
Agreement, their shares are listed for trade in the Tel Aviv Stock Exchange Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.10 | Applicoms authorized share capital is NIS 10,000,000 divided into 10,000,000
Ordinary Shares, of which 6,370,896 Ordinary Shares have been lawfully allotted according
to Applicoms Memorandum and Articles of Association. 

Sintecs registered share capital is NIS 20,000,000 divided into 20,000,000 Ordinary Shares, of
which 15,330,309 Ordinary Shares have been lawfully allotted according to Sintecs
Memorandum and Articles of Association.
Sivans
registered share capital is NIS 20,000,000 divided into 20,000,000 Ordinary Shares, of
which 12,929,568 Ordinary Shares have been lawfully allotted according to Sivans
Memorandum and Articles of Association.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.11 | A copy of the Memorandum of Association of the Companies under Sale, and a copy of their
Articles of Association (Documents of Incorporation) which have been
submitted to Buyer, are identical to the original and valid Documents of Incorporation of
the Companies under Sale. No resolution has been carried by the Companies under Sale and
no court ruling has been issued that changes, amends or annuls the provisions of the
Documents of Incorporation or any part thereof.                                                                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

4

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| | 3.12 | Copies of the periodic reports of the Companies under Sale as at 31 December 2001, and
reviewed as at 30 June 2002, (the Financial Statements of the Companies under
Sale) submitted to Buyer, are complete and identical to the original Financial
Statements of the Companies under Sale as at these dates. The Financial Statements of the
Companies under Sale properly and lawfully present the position of the Companies under
Sale, their equity, their assets and liabilities, and the results of their operations for
the periods included therein. To the best of Sellers knowledge, except as specified
in Annex 3.12 to the Agreement, from the date of approval
of the Financial Statements of the Companies under Sale as at 30 June 2002 there has been
no Material Change for the worse in the financial position of the Companies under Sale.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.13 | Except for the legal proceedings set forth in Annexes
3.13A-C, the Companies under Sale are not a party to any
material legal proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.14 | Except for Sivans Loans as set forth in Annex 3.14
to the Agreement, Seller has not extended any loans to the Companies under Sale or to any
of their number, which at the date of signature of this Agreement have not been repaid in
full.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 3.15 | Seller is aware that Buyer has relied on the representations and covenantsgiven by Seller
in its decision to engage in this Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

# 4.    Buyers Representations and Covenants

In executing this Agreement, Buyer hereby declares and covenants toward Seller as follows:

| | 4.1 | Subject to the fulfillment of all Conditions Precedent, there is no legal or any other
prevention from its engagement in this Agreement.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

| | 4.2 | Buyers signing this Agreement and the implementation of its provisions, subject to
its terms and conditions and fulfillment of all Conditions Precedent, are not
contradictory to: (a) Buyers Memorandum and Articles of Association; (b) any ruling,
order, instruction and/or directive of any court, quasi-judiciary entity or administrative
authority; (c) any contractual engagement, oral or in writing (including conditional
undertaking), whereto Buyer is a party; (c) the provisions of any law.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.3 | Subject to the fulfillment of all Conditions Precedent, no approval, permit, license or
any other consent are required for the purpose of acquiring the Shares under Sale by
Buyer, and for the purpose of Buyers engagement in this Agreement and its
implementation hereof.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6

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| | 4.4 | Buyers Board of Directors has carried all resolutions required for the purpose of
its engagement in this Agreement and the implementation hereof, and that in accordance
with these resolutions, each of the Buyers authorized signatories under the Minutes
of its signing rights, attached as Annex 4.4 to this
Agreement, has been empowered to sign this Agreement on its behalf, as well as all
accompanying documents and/or documents required for the purpose of its implementation.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.5 | The resolution of the Buyers Board of Directors approving the engagement in this
Agreement and the implementation hereof pursuant to its terms and conditions and
provisions, and the Boards approval that all approvals required for Buyers
engagement in this Agreement and the implementation hereof, subject to the fulfillment of
all Conditions Precedent, were accepted, are attached as Annex
4.5 to this Agreement.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.6 | On the Closing Date, Buyer will buy the Shares under Sale in accordance with the
provisions of this Agreement.
| | --- | --------------------------------------------------------------------------------------------------------------

# 5.     The Sale Transaction

| | 5.1 | Subject to the fulfillment of all Conditions Precedent, Seller will sell and assign to
Buyer, and Buyer will buy and accept the assignment from Seller, of all Shares under Sale,
being Free and Clear, all in accordance with the terms and conditions set forth in this
Agreement.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.2 | Subject to Sellers representations and covenants pursuant to the provisions of
clause 3 of this Agreement, the Shares under Sale shall be bought by Buyer, in their
condition and in the condition of the Companies under Sale and of the Held Companies,
as is, without the receipt of any further representations or declarations from
Seller, from the Companies under Sale, from the Held Companies and/or from any of their
number and/or on their behalf, including, but not limited to, with respect to the position
of the Companies under Sale and the Held Companies, their business, assets, rights or
liabilities, and with respect to any other matter which may be of interest to a reasonable
investor, considering the acquisition of the Shares under Sale.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.2 | Subject to Sellers representations and covenants pursuant to the provisions of
clause 3 of this Agreement, the Shares under Sale shall be bought by Buyer, in their
condition and in the condition of the Companies under Sale and of the Held Companies,
as is, without the receipt of any further representations or declarations from
Seller, from the Companies under Sale, from the Held Companies and/or from any of their
number and/or on their behalf, including, but not limited to, with respect to the position
of the Companies under Sale and the Held Companies, their business, assets, rights or
liabilities, and with respect to any other matter which may be of interest to a reasonable
investor, considering the acquisition of the Shares under Sale.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.3 | On the Closing Date, Seller shall endorse all its rights in Sivan's Loans to Buyer.
| | --- | -----------------------------------------------------------------------------------

| | 5.4 | By no later than 60 days after the Closing Date, Seller shall endorse to Buyer all its
undertakings pursuant to Sivans Guarantees, subject to the receipt of the
creditors consent to such endorsement, insofar as such consent is required by law
and/or agreement. If and to the extent that the creditors consent to the endorsement
of Sivans Guarantees, in whole or in part, is not obtained where such consent is
required by law or agreement (Withheld Guarantee), Buyer shall extend
to Seller a back-to-back guarantee in identical terms and conditions to the Withheld
Guarantee, 60 days after the Closing Date.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

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# 6.     The Consideration

| | 6.1 | In consideration for the Shares under Sale and Sellers other undertakings pursuant
to the provisions of this Agreement, and subject to the fulfillment of all Conditions
Precedent, Buyer hereby warrants to pay to the Seller as follows:
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 6.1.1 |  |  | In consideration for the Applicom Basic Shares  an amount of NIS 78,244,619.             |  | 
| |  |  | ----- |  |  | ----------------------------------------------------------------------------------------- |  | 
| |  |  |       |  |  |                                                                                           |  | 
| |  |  | 6.1.2 |  |  | In consideration for the Sintec Basic Shares  an amount of NIS 49,451,839.               |  | 
| |  |  |       |  |  |                                                                                           |  | 
| |  |  | 6.1.3 |  |  | In consideration for the Sivan Basic Shares  an amount of NIS 1,468,456.                 |  | 
| |  |  |       |  |  |                                                                                           |  | 
| |  |  | 6.1.4 |  |  | In consideration for the Additional Applicom Shares  an amount of NIS 17.5 per           |  | 
| |  |  |       |  |  | Applicom Ordinary Share, multiplied by the number of Ordinary Shares of Applicom to be    |  | 
| |  |  |       |  |  | bought by Seller in accordance with its notice in the Report on the Results of the Tender |  | 
| |  |  |       |  |  | Offer.                                                                                    |  | 
| |  |  |       |  |  |                                                                                           |  | 
| |  |  | 6.1.5 |  |  | In consideration for the Additional Sintec Shares  an amount of NIS 4 per Sintec         |  | 
| |  |  |       |  |  | Ordinary Share, multiplied by the number of Ordinary Shares of Sintec to be bought by     |  | 
| |  |  |       |  |  | Seller in accordance with its notice in the Report on the Results of the Tender Offer.    |  | 
| |  |  |       |  |  |                                                                                           |  | 
| |  |  | 6.1.6 |  |  | In consideration for the Additional Sivan Shares  an amount of NIS 0.7 per Sivan         |  | 
| |  |  |       |  |  | Ordinary Share, multiplied by the number of Ordinary Shares of Sivan to be bought by      |  | 
| |  |  |       |  |  | Seller in accordance with its notice in the Report on the Results of the Tender Offer.    |  | 

| | 6.2 | The consideration shall be paid as follows:
| | --- | -------------------------------------------

| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
|
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 
| |  | 

8

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| | 6.3 | In consideration for Sellers rights in Sivans Loan, Buyer will pay to Seller,
ten months after the Closing Date, an amount of NIS 10,000,000 (First Payment on
Account of the Loan), and eighteen months after the Closing Date, an amount of
NIS 10,100,000 (Second Payment on Account of the Loan). The aforesaid
amounts will be linked to the index known on the Closing Date.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.4 | Seller hereby warrants to use its best endeavors as a shareholder in the Companies under
Sale to procure that during the Interim Period the Companies under Sale shall not declare
and shall not pay a dividend to their shareholders, shall not offer their shareholders
securities by way of rights, shall not distribute bonus shares and shall not execute a
consolidation or division of their share capital.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.5 | If, notwithstanding the foregoing, the Companies under Sale or any of their number shall
actually pay a dividend to their shareholders, the amount of any dividend actually paid to
Seller will be deducted from the amount of the consideration determined for the shares of
that Company under Sale as set forth in clause 6.1 above.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 7.     Conditions Precedent

The closing of the Sale Transaction is conditional on the fulfillment of all Conditions
Precedent, as set forth below:

| | 7.1 | Approval of the Sale Transaction by the General meeting of Buyers shareholders, by
the majority prescribed in Section 275 of the Companies Law  1999;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7.2 | Approval by the Anti-Trust Commissioner, insofar as such approval is required;
| | --- | ------------------------------------------------------------------------------

| | 7.3 | That on the Closing Date there is no attachment and/or court order and/or directive by law
preventing the assignment of the Shares under Sale or any part thereof to Buyer. 
Immediately following the signing of this Agreement, Buyer undertakes to use its best endeavors and to
do as reasonably required, in order to fulfill all the Conditions Precedent, as early as
possible. Immediately after the fulfillment of all the Conditions Precedent for the
implementation of this Agreement, Buyer shall inform Seller thereof in writing (the
Notice).
If all Conditions Precedent have not been fulfilled by the Final Closing Date or if the Sale
Transaction has not been completed by the Final Closing Date for any reason, this
Agreement shall be null and void, and neither of the parties shall have any right or cause
for claim hereunder.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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# 8.     Execution of the
Transaction

| | 8.1 | On the Closing Date at 10:00 a.m., the parties shall convene at Sellers offices at
3, Hagalim Boulevard in Herzlia, and shall act to execute all the following
simultaneously:
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8.1.1 | Buyer shall give to Seller a copy of the resolution carried by Buyer's Board of Directors,
confirming that it has obtained all approvals required by law for the implementation of this
Agreement, in the form attached as Annex 8.1 to this
Agreement.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8.1.2 | Payment of the First Payment on Account of the Shares under Sale and assignment of the
Shares under Sale as determined in clause 6 of this Agreement shall be effected by way of
a transaction outside of the Stock Exchange, by transferring the Shares under Sale from
Sellers securities accounts to the securities account notified by Buyer to Seller in
writing, in consideration for Buyer depositing the First Payment on Account of the Shares
under Sale in the bank account notified by Seller to Buyer in writing.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8.1.3 | Seller shall endorse to Buyer all its rights in Sivans Loan according to the deed of
endorsement, in the form attached as Annex 8.1.3 to the
Agreement.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8.2 | All actions carried out on the Closing Date shall be deemed to have been executed
concurrently. No single action shall be deemed to have been completed, and no single
document shall be deemed to have been delivered, until all actions on this occasion have
been completed and all documents delivered.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8.3 | On the date for effecting the Second Payment on Account of the Shares under Sale, Buyer
shall deposit the Second Payment on Account of the Shares under Sale in the bank account
specified by Seller to Buyer in writing.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8.4 | After 60 days have elapsed from the Closing Date, Buyer shall extend to Seller guarantees
in respect of the Withheld Guarantees, as set forth in clause 5.4 of the Agreement.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8.5 | On the first business day after ten (10) months have elapsed from the Closing Date, Buyer
shall deposit the First Payment on Account of the Loan, plus linkage differentials as
specified in clause 6.3 of the Agreement, in the bank account specified by Seller to Buyer
in writing.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 8.6 | On the first business day after eighteen (18) months have elapsed from the Closing Date,
Buyer shall deposit the Second Payment on Account of the Loan, plus linkage differentials
as specified in clause 6.3 of the Agreement, in the bank account specified by Seller to
Buyer in writing.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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# 9.     Instructions relating to the Interim Period

| | Subject to the provisions of any law, during the Interim Period Seller shall vote at general
meetings of the Companies under Sale that are convened, insofar as they are convened,
against the approval of any Irregular Transaction, as the term is defined in the Companies
Law  1999.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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# 10.     Rights attached to the Shares under Sale

| | From the date the Shares under Sale are assigned by Seller to Buyer in accordance with the
provisions of clause 8 of this Agreement, Buyer shall be entitled to all rights attaching
to the Shares under Sale, including the right to receive any and all dividends actually
paid by the Companies under Sale, in respect of the Shares under Sale as of the Closing
Date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 11.    Indemnification

| | Seller shall indemnify Buyer immediately upon Buyers first demand in writing in the case
where the Companies under Sale or any of their number shall amend, retroactively, their
Financial Statements as at 30 June 2002, in such manner that leads to a decrease in the
total tangible assets after the deduction of liabilities (the Amount of the
Decrease (Net)) of the Companies under Sale or any of their number. The amount
of the indemnification shall be equal to the Amount of the Decrease (Net), multiplied by
the percentage that the Basic Shares form of the issued capital of that Company under
Sale, at the date of signature of the purchase agreement, but not more than the
consideration received by Seller for the Basic Shares of that Company under Sale.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 12.      Taxes and Expenses

| | 12.1 | Seller shall bear the payment of any and all taxes or levies or compulsory payments, if
and to the extent that they apply to it by law as seller of the Shares under Sale.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 12.2 | Buyer shall bear the payment of any and all taxes or levies or compulsory payments, if and
to the extent that they apply to it by law as buyer of the Shares under Sale.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 12.3 | If and to the extent that the obligation to pay stamp duty applies, the parties shall bear
this obligation in equal portions.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------

| | 12.4 | Each party shall bear its expenses, including the fees of its legal counsel in respect of
the preparation and implementation of this Agreement.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------

# 13.     Reports, Confidentiality

| | 13.1 | Subject to the provisions of par. 13.2 below, the parties to this Agreement agree not to
make public and/or disclose information to any Third Party with respect to this Agreement,
without the prior written consent of the other party to the manner and content of such
publication.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 13.2 | The parties shall submit to the Stock Exchange, the Securities Authority and the Registrar
of Companies all reports required by law with respect to the execution and implementation
of this Agreement, as required by law, in prior coordination with the other party hereto.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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| | 13.3 | The parties shall use confidential information which they have received in connection with
this Agreement only and solely for the purpose of fulfilling their undertakings pursuant
to the Agreement, and shall refrain from transferring confidential information to any
Third Party in any manner whatsoever. If the transaction shall not be executed, each party
to the Agreement shall return to the other such confidential information that had reached
its possession in connection with this Agreement, if and to the extent such confidential
information had reached its possession. Confidential
Information  all information relating to the parties to this Agreement
or to the Companies under Sale, except for: (a) information that was known or had become
known to the public, other than due to breach of this Agreement by a party hereto; (b)
information which was independently obtained, without the help of the other parties to
this Agreement; (c) information which disclosure was required by law.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 13.4 | The undertaking pursuant to this clause 13 is not limited in time.
| | ---- | ------------------------------------------------------------------

# 14.     Arbitration

| | 14.1 | In any case of dispute or difference of opinion between the parties in any matter relating
to the execution, validity, breach, implementation or interpretation of this Agreement,
they shall be submitted for decision by an Arbiter.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 14.2 | The Arbiter shall have the right to issue interim injunctions and other provisional aids
that a court is empowered to issue, and shall be subject to the substantive law, but not
to the rules of evidence and legal procedures.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 14.3 | The provisions of this clause shall be deemed to be an arbitration agreement between the
parties, and the provisions of the Supplement to the Arbitration Law  1968 shall
apply to the arbitration proceedings and to the Arbiter.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 15.      Jurisdiction

| | Subject to the provisions of clause 14 of this Agreement with respect to arbitration, jurisdiction
in all matters relating to this Agreement or arising herefrom is granted to the competent
courts in the city of Tel Aviv-Jaffa, and to them alone.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 16.      Miscellaneous

| | 16.1 | The parties will cooperate and will submit to each other any and all documents,
information and data necessary for the preparation of reports and publications, required
by virtue of the provisions of any law, directives of the Securities Authority, the
Registrar of Companies and the Stock Exchange. Each party shall be responsible to the
other for the information or documents it supplies.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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| | 16.2 | This Agreement expresses the full and comprehensive agreement between the parties with
respect to the subjects and matters discussed herein, and replaces and annuls any and all
representations, contracts, negotiations, practices, memoranda, proposals, summaries of
discussions, letters of intent and/or undertaking, and any other document that were in
effect or exchanged by and between the parties (in writing or oral) on the aforesaid
subjects and matters between the parties prior to the signing of this Agreement.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 16.3 | Where a party shall fail to enforce or shall enforce belatedly any of the rights conferred
upon it under this Agreement and/or by law, in a specific case or series of cases, this
shall not be deemed to be a waiver of such right or any other rights.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 16.4 | The rights and undertakings of the parties pursuant to the provisions of this Agreement
may not be endorsed, assigned or encumbered without the other partys consent, in
advance and in writing, subject to each of the parties to this Agreement being entitled to
assign all its rights and undertakings under this Agreement to a company under its
complete control (Assignor and Assignee,
respectively), subject to the Assignee undertaking all the Assignors obligations
under this Agreement. In any such case, the Assignor shall personally guarantee and shall
be liable for the execution of the Assignees undertakings assigned to it as
aforesaid, to the extent that they are so assigned.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 16.5 | This Agreement may be amended or modified at any and all times, by means of a written
document signed by all parties hereto. Each of the parties to this Agreement is entitled
to waive a condition, undertaking, representation or stipulation of this Agreement by
means of a written document signed by the party waiving fulfillment thereof.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 16.6 | Notices with respect to this Agreement shall be sent by registered mail or delivered by
hand according to the addresses of the parties set forth in the Preamble hereto (or any
other address of which appropriate notice in writing is given), and any such notice shall
be deemed to have been delivered to the addressee at the earlier of the following: upon
its actual delivery (or service upon the addressee in the case of refusal to accept it),
or after three (3) business days have elapsed from the date whereon it was handed in to be
sent by registered mail, except for a notice regarding a change of address, which shall be
deemed to have been delivered only upon its actual delivery to the addressee.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 16.7 | Annexes not attached to this Agreement upon the signing hereof shall be completed by the Closing Date.
| | ---- | ------------------------------------------------------------------------------------------------------

# IN WITNESS WHEREOF WE
HAVE SIGNED:

|Seller:           | Buyer:                          
|----------------- | --------------------------------
|By: Dan Goldstein | By: Motti Gutman and Moshe Atias

14

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Exhibit 8

List of Subsidiaries

|Name of Subsidiary                       |  | Country of Incorporation    
|---------------------------------------- |  | ----------------------------
|                                         |  |                             
|Matrix
  IT Ltd.                         |  | Israel                      
|                                         |  |                             
|Magic
  Software Enterprises Ltd.        |  | Israel                      
|                                         |  |                             
|Crystal
  Systems Solutions Ltd.         |  | Israel                      
|                                         |  |                             
|Sapiens
  International Corporation N.V. |  | Netherlands Antilles Islands
|                                         |  |                             
|nextSource
  Inc.                        |  | United States               

---

---

Exhibit 10.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of
Formula Systems (1985) Ltd. (the Company) on Form 20-F for the year ended
December 31, 2002 as filed with the Securities and Exchange Commission on the
date hereof (the Report), I, Dan Goldstein, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C.
§1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)          The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and

(2)          The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.

Date:  June 30, 2003

| | /s/ Dan Goldstein       | 
| | ----------------------- | 
| |                         | 
| | Dan
  Goldstein         | 
| | Chief Executive Officer
| |                        

A signed
original of this written statement required by Section 906 has been provided to
Formula Systems (1985) Ltd. and will be retained by Formula Systems (1985) Ltd.
and furnished to the Securities and Exchange Commission or its staff upon
request.

---

---

Exhibit 10.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of
Formula Systems (1985) Ltd. (the Company) on Form 20-F for the year ended
December 31, 2002 as filed with the Securities and Exchange Commission on the
date hereof (the Report), I, Naamit Salomon, Vice President, Finance of the
Company, certify, pursuant to 18 U.S.C. §1350,
as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)          The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and

(2)          The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.

Date:  June 30, 2003

| | /s/ Naamit Salomon        | 
| | ------------------------- | 
| |                           | 
| | Naamit
  Salomon          | 
| | Vice
  President, Finance
| |                          

A
signed original of this written statement required by Section 906 has been
provided to Formula Systems (1985) Ltd. and will be retained by Formula Systems
(1985) Ltd. and furnished to the Securities and Exchange Commission or its
staff upon request.

---

---