Exhibit 99.1



MAGIC SOFTWARE
ENTERPRISES LTD. AND ITS SUBSIDIARIES



CONSOLIDATED FINANCIAL
STATEMENTS



AS OF DECEMBER
31, 2014



U.S. DOLLARS IN
THOUSANDS



INDEX



|                                                                                      | Page       
|------------------------------------------------------------------------------------- | -----------
|                                                                                      |            
|Reports of Independent Registered Public Accounting Firm                              | F-2 – F-4  
|                                                                                      |            
|Consolidated Balance Sheets                                                           | F-5 - F-6  
|                                                                                      |            
|Consolidated Statements of Income                                                     | F-7        
|                                                                                      |            
|Consolidated Statements of Comprehensive Income                                       | F-8        
|                                                                                      |            
|Statements of Changes in Equity                                                       | F-9        
|                                                                                      |            
|Consolidated Statements of Cash Flows                                                 | F-10 - F-12
|                                                                                      |            
|Notes to Consolidated Financial Statements                                            | F-13 - F-52
|                                                                                      |            
|Appendix to Consolidated Financial Statements - Details of Subsidiaries and Affiliate | F-53       



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



F-1











REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Shareholders and the Board of
Directors 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, 2013 and 2014, and the related consolidated statements of income, comprehensive income, shareholders' equity
and cash flows for each of the three years in the period ended December 31, 2014. 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 7% and 4%
as of December 31, 2013 and 2014, respectively, and total revenues of 16%, 14% and 11% for the years ended December 31, 2012,
2013 and 2014, respectively of the related consolidated totals. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. 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,
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, 2013 and
2014, and the related consolidated results of their operations and their cash flows for each of the three years in the period
ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.



We also have audited,
in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control
over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 21,
2015 expressed an unqualified opinion thereon.



|                 | /s/ Kost
    Forer Gabbay & Kasierer
|---------------- | ------------------------------------
|Tel-Aviv, Israel | KOST
    FORER GABBAY & KASIERER    
|April 21, 2015   | A Member of Ernst & Young Global    



F-2











REPORT OF INDEPENDENT REGISTERED PUBLIC
ACOUNTING FIRM



To the Shareholders and the Board of
Directors of



MAGIC SOFTWARE ENTERPRISES LTD.



We have audited
Magic Software Enterprises Ltd. ("the Company") internal control over financial reporting as of December 31, 2014, based
on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (2013 framework) ("the COSO criteria"). The Company's management is responsible for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting based on our audit.



We conducted our
audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.



A company's internal
control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect
on the financial statements.



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



In our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,
based on the COSO criteria.



F-3











We have also audited,
in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets
of the Company and its subsidiaries as of December 31, 2013 and 2014, and the related consolidated statements of income,
comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2014 and
our report dated April 21, 2015 expressed an unqualified opinion thereon.



|                 | /s/ Kost
    Forer Gabbay & Kasierer
|---------------- | ------------------------------------
|Tel-Aviv, Israel | KOST
    FORER GABBAY & KASIERER    
|April 21, 2015   | A Member of Ernst & Young Global    



F-4







MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES

|CONSOLIDATED
    BALANCE SHEETS
|-------------------------------
|U.S. dollars in thousands      



|                                                                                                                                      |  | December 31, |        
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                                                                      |  | 2013         |        
|ASSETS                                                                                                                                |  |              |        
|                                                                                                                                      |  |              |        
|CURRENT ASSETS:                                                                                                                       |  |              |        
|Cash and cash equivalents                                                                                                             |  | $            | 35,134 
|Available-for-sale marketable securities (Note 4)                                                                                     |  |              | 854    
|Trade receivables (net of allowance for doubtful accounts
    of $ 3,313 and $ 2,380 at December 31,
    2013 and 2014, respectively) |  |              | 31,976 
|Other accounts receivable and
    prepaid expenses (Note 6)                                                                           |  |              | 5,209  
|                                                                                                                                      |  |              |        
|Total current assets                                                                                                                  |  |              | 73,173 
|                                                                                                                                      |  |              |        
|LONG-TERM RECEIVABLES:                                                                                                                |  |              |        
|Severance pay fund                                                                                                                    |  |              | 403    
|Long term deferred tax asset (Note 12)                                                                                                |  |              | 1,674  
|Other long-term receivables                                                                                                           |  |              | 2,118  
|                                                                                                                                      |  |              |        
|Total long-term receivables                                                                                                           |  |              | 4,195  
|                                                                                                                                      |  |              |        
|PROPERTY AND EQUIPMENT, NET (Note
    7)                                                                                              |  |              | 1,773  
|                                                                                                                                      |  |              |        
|INTANGIBLE ASSETS, NET (Note 8)                                                                                                       |  |              | 32,549 
|                                                                                                                                      |  |              |        
|GOODWILL (Note 9)                                                                                                                     |  |              | 55,313 
|                                                                                                                                      |  |              |        
|Totalassets                                                                                                                           |  | $            | 167,003



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





F-5







MAGIC
SOFTWARE ENTERPRISES LTD.

AND
ITS SUBSIDIARIES

|CONSOLIDATED
    BALANCE SHEETS                                
|---------------------------------------------------------------
|U.S.
    dollars in thousands (except share and per share data)



|                                                                                                                                                                                                                 |  | December 31, |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                                                                                                                                                 |  | 2013         |        
|LIABILITIES AND EQUITY                                                                                                                                                                                           |  |              |        
|                                                                                                                                                                                                                 |  |              |        
|CURRENT LIABILITIES:                                                                                                                                                                                             |  |              |        
|Short term debt (Note 11)                                                                                                                                                                                        |  | $            | 1,055  
|Trade payables                                                                                                                                                                                                   |  |              | 4,149  
|Accrued expenses and other accounts payable (Note
    10)                                                                                                                                                        |  |              | 16,937 
|Deferred tax liability (Note 12)                                                                                                                                                                                 |  |              | 2,567  
|Deferred revenues                                                                                                                                                                                                |  |              | 3,294  
|                                                                                                                                                                                                                 |  |              |        
|Totalcurrent liabilities                                                                                                                                                                                         |  |              | 28,002 
|                                                                                                                                                                                                                 |  |              |        
|ACCRUED SEVERANCE PAY                                                                                                                                                                                            |  |              | 1,275  
|                                                                                                                                                                                                                 |  |              |        
|LONG TERM LIABILITIES:                                                                                                                                                                                           |  |              |        
|Long term debt (Note 11)                                                                                                                                                                                         |  |              | 2,274  
|Liabilities due to acquisition activities and other
    (Note 3)                                                                                                                                                 |  |              | 1,396  
|Long term deferred tax liability
    (Note 12)                                                                                                                                                                   |  |              | 2,204  
|                                                                                                                                                                                                                 |  |              |        
|                                                                                                                                                                                                                 |  |              | 5,874  
|                                                                                                                                                                                                                 |  |              |        
|COMMITMENTS AND CONTINGENCIES (Note 15)                                                                                                                                                                          |  |              |        
|                                                                                                                                                                                                                 |  |              |        
|REDEEMABLE NON-CONTROLLING INTEREST                                                                                                                                                                              |  |              | 2,721  
|                                                                                                                                                                                                                 |  |              |        
|EQUITY (Note 13):                                                                                                                                                                                                |  |              |        
|Magic Software Enterprises  equity:                                                                                                                                                                              |  |              |        
|Share capital:                                                                                                                                                                                                   |  |              |        
|Ordinary shares of NIS 0.1 par value - Authorized:
    50,000,000 shares at December 31, 2013 and 2014; Issued and Outstanding: 37,155,355 and 44,174,217 shares at December 31,
    2013 and 2014, respectively |  |              | 826    
|Additional paid-in capital                                                                                                                                                                                       |  |              | 127,060
|Accumulated other comprehensive loss                                                                                                                                                                             |  |              | (172   
|Accumulated (deficit) earnings                                                                                                                                                                                   |  |              | 430    
|                                                                                                                                                                                                                 |  |              |        
|Total Magic Software Enterprises  equity                                                                                                                                                                         |  |              | 128,144
|Non-controlling interests                                                                                                                                                                                        |  |              | 987    
|                                                                                                                                                                                                                 |  |              |        
|Totalequity                                                                                                                                                                                                      |  |              | 129,131
|                                                                                                                                                                                                                 |  |              |        
|Totalliabilities, redeemable non-controlling interest and equity                                                                                                                                                 |  | $            | 167,003



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



F-6







MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES

|CONSOLIDATED
    STATEMENTS OF INCOME            
|-------------------------------------------------
|U.S. dollars in thousands (except per share data)



|                                                                                               |  | Year ended December
    31, |        
|---------------------------------------------------------------------------------------------- |  | --------------------------- | -------
|                                                                                               |  | 2012                        |        
|                                                                                               |  |                             |        
|Revenues (Note 17):                                                                            |  |                             |        
|Software                                                                                       |  | $                           | 23,684 
|Maintenance and technical support                                                              |  |                             | 22,384 
|Consulting services                                                                            |  |                             | 80,312 
|                                                                                               |  |                             |        
|Totalrevenues                                                                                  |  |                             | 126,380
|                                                                                               |  |                             |        
|Cost of revenues:                                                                              |  |                             |        
|Software                                                                                       |  |                             | 7,439  
|Maintenance and technical support                                                              |  |                             | 3,238  
|Consulting services                                                                            |  |                             | 62,716 
|                                                                                               |  |                             |        
|Totalcost of revenues                                                                          |  |                             | 73,393 
|                                                                                               |  |                             |        
|Gross profit                                                                                   |  |                             | 52,987 
|                                                                                               |  |                             |        
|Operating costs and expenses:                                                                  |  |                             |        
|Research and development, net (Note 14a)                                                       |  |                             | 2,947  
|Selling and marketing                                                                          |  |                             | 22,990 
|General and administrative                                                                     |  |                             | 10,642 
|                                                                                               |  |                             |        
|Totaloperating costs and expenses                                                              |  |                             | 36,579 
|                                                                                               |  |                             |        
|Operating income                                                                               |  |                             | 16,408 
|Financial income (expense), net (Note 14b)                                                     |  |                             | 10     
|Other income (expense), net                                                                    |  |                             | 136    
|                                                                                               |  |                             |        
|Income before taxes on income                                                                  |  |                             | 16,554 
|Taxes on income (Note 12)                                                                      |  |                             | 94     
|                                                                                               |  |                             |        
|Net income                                                                                     |  |                             | 16,460 
|Net income attributable to redeemable non-controlling interests                                |  |                             | 184    
|Net income attributable to non-controlling
    interests                                       |  |                             | 93     
|                                                                                               |  |                             |        
|Net income attributable to Magic
    Software Enterprises Shareholders                         |  | $                           | 16,183 
|                                                                                               |  |                             |        
|Net earnings per share attributable to Magic Software
    Enterprises' shareholders (Note 16): |  |                             |        
|Basic and diluted earnings per
    share                                                       |  | $                           | 0.44   



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



F-7







MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES

|CONSOLIDATED
    STATEMENTS OF COMPREHENSIVE INCOME
|---------------------------------------------------
|U.S. dollars in thousands (except per share data)  



|                                                                                  |  | Year ended December
    31, |       
|--------------------------------------------------------------------------------- |  | --------------------------- | ------
|                                                                                  |  | 2012                        |       
|                                                                                  |  |                             |       
|Net income                                                                        |  | $                           | 16,460
|                                                                                  |  |                             |       
|Other comprehensive income (loss), net of tax                                     |  |                             |       
|Foreign currency translation adjustments, net                                     |  |                             | (621  
|Unrealized gain from derivative instruments, net                                  |  |                             | 29    
|Unrealized loss (gain) from available-for-sale
    securities                     |  |                             | 28    
|                                                                                  |  |                             |       
|Total other comprehensive income
    (loss), net of tax                           |  |                             | (564  
|                                                                                  |  |                             |       
|Total comprehensive income                                                        |  |                             | 15,896
|                                                                                  |  |                             |       
|Comprehensive income attributable to redeemable non-controlling
    interests     |  |                             | 157   
|Comprehensive income attributable
    to non-controlling interests                |  |                             | 96    
|                                                                                  |  |                             |       
|Comprehensive income attributable
    to Magic Software Enterprises' shareholders |  | $                           | 15,643



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



F-8







MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES

|STATEMENTS
    OF CHANGES IN EQUITY              
|-------------------------------------------------
|U.S. dollars in thousands (except per share data)



|                                                                   |  | Attributable to the Company's shareholders |           
|------------------------------------------------------------------ |  | ------------------------------------------ | ----------
|                                                                   |  | Number ofShares                            |           
|                                                                   |  |                                            |           
|Balance as of January 1, 2012                                      |  |                                            | 36,490,020
|Exercise of stock options                                          |  |                                            | 136,708   
|Stock-based compensation expenses                                  |  |                                            | -         
|Dividend                                                           |  |                                            | -         
|Acquisition of non-controlling
    interests in Xsell (see Note 3) |  |                                            | -         
|Other comprehensive income                                         |  |                                            | -         
|Net income                                                         |  |                                            | -         
|                                                                   |  |                                            |           
|Balance as of December 31, 2012                                    |  |                                            | 36,626,728
|Exercise of stock options                                          |  |                                            | 528,627   
|Stock-based compensation expenses                                  |  |                                            | -         
|Dividend                                                           |  |                                            | -         
|Other comprehensive income                                         |  |                                            | -         
|Net income                                                         |  |                                            | -         
|                                                                   |  |                                            |           
|Balance as of December 31, 2013                                    |  |                                            | 37,155,355
|Issuance of shares                                                 |  |                                            | 6,903,141 
|Exercise of stock options                                          |  |                                            | 115,721   
|Stock-based compensation expenses                                  |  |                                            | -         
|Dividend                                                           |  |                                            | -         
|Other comprehensive income                                         |  |                                            | -         
|Net income                                                         |  |                                            | -         
|                                                                   |  |                                            |           
|Balance as of December
    31, 2014                                |  |                                            | 44,174,217



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



F-9







MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES

|CONSOLIDATED
    STATEMENTS OF CASH FLOWS
|-----------------------------------------
|U.S. dollars in thousands                



|                                                                                                   |  | Year ended December
    31, |       
|-------------------------------------------------------------------------------------------------- |  | --------------------------- | ------
|                                                                                                   |  | 2012                        |       
|Cash flows from operating activities:                                                              |  |                             |       
|                                                                                                   |  |                             |       
|Net income                                                                                         |  | $                           | 16,460
|Adjustments to reconcile net income to net cash provided
    by operating activities:              |  |                             |       
|Depreciation and amortization                                                                      |  |                             | 7,444 
|Interest expenses related to liabilities in connection
    with acquisitions                       |  |                             | 48    
|Accrued severance pay, net                                                                         |  |                             | 8     
|Loss on sale of property and equipment                                                             |  |                             | -     
|Stock-based compensation expenses                                                                  |  |                             | 515   
|Amortization of marketable securities premium, accretion
    of discount                           |  |                             | -     
|Gain on sale of subsidiary's operation                                                             |  |                             | (136  
|Decrease (increase) in trade receivables, net                                                      |  |                             | 11    
|Decrease (increase) in other long term and short term
    accounts receivable and prepaid expenses |  |                             | 145   
|Increase in trade payables                                                                         |  |                             | 780   
|Increase (decrease) in accrued expenses and other
    accounts payable                             |  |                             | (2,279
|Increase (decrease) in deferred revenues                                                           |  |                             | (1,131
|Change in deferred income taxes,
    net                                                           |  |                             | 1,083 
|                                                                                                   |  |                             |       
|Net cash provided by operating
    activities                                                      |  |                             | 22,948



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



F-10







MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES

|CONSOLIDATED
    STATEMENTS OF CASH FLOWS
|-----------------------------------------
|U.S. dollars in thousands                



|                                                                     |  | Year ended December 31, |        
|-------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                     |  | 2012                    |        
|Cash flows from investing
    activities:                            |  |                         |        
|                                                                     |  |                         |        
|Capitalized software development costs                               |  |                         | (4,969 
|Purchase of property and equipment                                   |  |                         | (510   
|Cash paid in conjunction with acquisitions, net of
    acquired cash |  |                         | (7,627 
|Proceeds from sale of subsidiary's operation                         |  |                         | 136    
|Proceeds from sale of property and equipment                         |  |                         | -      
|Proceeds from maturity of marketable securities                      |  |                         | 343    
|Proceeds from short-term bank deposits                               |  |                         | 3,601  
|Change in loans to employees and other deposits ,net                 |  |                         | (34    
|Investment in marketable securities                                  |  |                         | -      
|Investment in short-term bank
    deposit                            |  |                         | (1,366 
|                                                                     |  |                         |        
|Net cash used in investing activities                                |  |                         | (10,426
|                                                                     |  |                         |        
|Cash flows from financing
    activities:                            |  |                         |        
|                                                                     |  |                         |        
|Proceeds from exercise of options by employees                       |  |                         | 309    
|Issuance of Ordinary shares, net                                     |  |                         | -      
|Dividend paid                                                        |  |                         | (3,661 
|Short-term credit, net                                               |  |                         | 14     
|Purchase of non-controlling interest                                 |  |                         | (87    
|Long term loan received                                              |  |                         | -      
|Repayment of long-term loans                                         |  |                         | -      
|                                                                     |  |                         |        
|Net cash used in financing activities                                |  |                         | (3,425 
|                                                                     |  |                         |        
|Effect of exchange rate changes
    on cash and cash equivalents     |  |                         | (64    
|                                                                     |  |                         |        
|Increase (decrease) in cash and cash equivalents                     |  |                         | 9,033  
|Cash and cash equivalents at the
    beginning of the year           |  |                         | 28,711 
|                                                                     |  |                         |        
|Cash and cash equivalents at
    end of the year                     |  | $                       | 37,744 



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



F-11







MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES

|CONSOLIDATED
    STATEMENTS OF CASH FLOWS
|-----------------------------------------
|U.S. dollars in thousands                



|                                                                                              |  | Year ended December
    31, |      
|--------------------------------------------------------------------------------------------- |  | --------------------------- | -----
|                                                                                              |  | 2012                        |      
|                                                                                              |  |                             |      
|Supplementary information
    on investing and financing activities not involving cash flows: |  |                             |      
|                                                                                              |  |                             |      
|Non-cash activities:                                                                          |  |                             |      
|                                                                                              |  |                             |      
|Deferred acquisition
    payment                                                              |  | $                           | 3,103
|                                                                                              |  |                             |      
|Contingent acquisition payment                                                                |  | $                           | 1,192
|                                                                                              |  |                             |      
|Supplemental disclosure
    of cash flow activities:                                          |  |                             |      
|                                                                                              |  |                             |      
|Cash paid during the year
    for:                                                            |  |                             |      
|                                                                                              |  |                             |      
|Income taxes                                                                                  |  | $                           | 1,250
|                                                                                              |  |                             |      
|Interest                                                                                      |  | $                           | 17   



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



F-12







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



| | NOTE 1:- | GENERAL
| | -------- | -------



Magic Software
Enterprises Ltd., an Israeli company, and its subsidiaries ("the Group") is a global provider of software platforms
and professional services that accelerate the planning, development, deployment and integration of on-premise, mobile and cloud
business applications ("the Magic technology"). Magic technology enables enterprises to accelerate the process of delivering
business solutions that meet current and future needs and allow customers to dramatically improve their business performance and
return on investment. To complement its software products and to increase its traction with customers, the Group also offers a
complete portfolio of IT professional services in the areas of infrastructure design and delivery, application development, technology
planning and implementation services, communications services and solutions, and supplemental staffing services. The Company reports
its results on the basis of two reportable business segments: software services (which include proprietary and non-proprietary
software and related services) and IT professional services (see Note 17 for further details). The principal markets of the Group
are Europe, United States, Japan and Israel (see Note 17).



For information
about the Company's holdings in subsidiaries and affiliates, see Appendix A to the consolidated financial statements.



| | NOTE 2:- | SIGNIFICANT
                                         ACCOUNTING POLICIES
| | -------- | ------------------------------------------------------------------------



The consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S.
GAAP"), applied on a consistent basis, as follows:



Use of
estimates



The preparation
of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The Company's
management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the
time they are made. Actual results could differ from those estimates. The most significant assumptions are employed in estimates
used in determining values of goodwill and identifiable intangible assets and their subsequent impairment analysis, revenue recognition,
tax assets and tax positions, legal contingencies, research and development capitalization, contingent consideration related to
acquisitions and stock-based compensation costs. Actual results could differ from those estimates.



Financial
statements in United States dollars



A substantial
portion of the revenues and expenses of the Company and certain of its subsidiaries is generated in U.S. dollars ("dollar").
The Company's management believes that the dollar is the currency of the primary economic environment in which the Company and
certain of its subsidiaries operate. Thus, the functional and reporting currency of the Company and certain of its subsidiaries
is the dollar.



F-13







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with the Financial
Accounting Standards Board ("FASB) Accounting Standards Codification ("ASC") 830, "Foreign Currency Matters".
All transaction gains and losses of the remeasurement of monetary balance sheet items are reflected in the statements of income
as financial income or expenses, as appropriate.



For those
foreign subsidiaries whose functional currency is not the dollar, all balance sheet amounts have been translated using the exchange
rates in effect at each balance sheet date. Statement of income amounts have been translated using the average exchange rate prevailing
during each year. Such translation adjustments are reported as a component of other comprehensive income (loss) in equity.



Principles
of consolidation



The consolidated
financial statements include the accounts of the Company and its subsidiaries. Intercompany balances and transactions, including
profit from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.



Changes in
the parent's ownership interest in a subsidiary with no change of control are treated as equity transactions, with any difference
between the amount of consideration paid and the change in the carrying amount of the non-controlling interest, recognized in
equity.



Non-controlling
interests of subsidiaries represent the non-controlling share of the total comprehensive income (loss) of the subsidiaries and
fair value of the net assets upon the acquisition of the subsidiaries. The non-controlling interests are presented in equity separately
from the equity attributable to the equity holders of the Company. Redeemable non-controlling interests are classified as mezzanine
equity, separate from permanent equity, on the consolidated balance sheets and measured at each reporting period at the higher
of their redemption amount or the Non controlling interest book value, in accordance with the requirements of ASC 810 "Consolidation"
and ASC 480-10-S99-3A, "Distinguishing Liabilities from Equity".



The following
table provides a reconciliation of the redeemable non-controlling interests:



|January 1, 2014                                                 |  |  | 2,721 |  
|--------------------------------------------------------------- |  |  | ----- | -
|Net income attributable to redeemable non-controlling interests |  |  | 425   |  
|Non-controlling interest as part of acquisitions                |  |  | 158   |  
|Foreign currency translation adjustments                        |  |  | (374  | )
|                                                                |  |  |       |  
|December 31, 2014                                               |  |  | 2,930 |  



F-14







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



Cash and
cash equivalents



Cash and
cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three
months or less, at the date acquired.

Cash and
cash equivalent includes amounts held primarily in NIS, U.S. dollars, Euro, Japanese Yen and British Pound.



Short-term
deposits and restricted deposits



Short-term
deposits include deposits with original maturities of more than three months and less than one year. Such deposits are presented
at cost (including accrued interest) which approximates their fair value. Restricted deposits are used to secure certain Group's
ongoing projects and are classified under other receivables.



Marketable
securities



The Company accounts for investments
in marketable securities in accordance with ASC No. 320, “Investments – Debt and Equity Securities”. Management
determines the appropriate classification of its investments at the time of purchase and reevaluates such determinations at each
balance sheet date. The Company classifies all of its marketable securities as available for sale. Available for sale securities
are carried at fair value, with the unrealized gains and losses, net of tax, reported in “accumulated other comprehensive
income (loss)” in equity. Realized gains and losses on sale of investments are included in “financial income, net”
and are derived using the specific identification method for determining the cost of securities.



The amortized cost of debt
securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization together with interest
on securities is included in “financial income, net”.



The Company recognizes an impairment
charge when a decline in the fair value of its investments in debt securities below the cost basis of such securities is judged
to be other-than-temporary. Factors considered in making such a determination include the duration and severity of the impairment,
the reason for the decline in value, the potential recovery period and the Company’s intent to sell, including whether it
is more likely than not that the Company will be required to sell the investment before recovery of cost basis. For securities
that are deemed other-than-temporarily impaired, the amount of impairment is recognized in “net gain (impairment net of
gains) on sale of marketable securities previously impaired” in the statements of income and is limited to the amount related
to credit losses, while impairment related to other factors is recognized in other comprehensive income.



F-15







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



Property
and equipment, net



Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over
the estimated useful lives of the assets, at the following annual rates:



|                                       | Years                                                         
|-------------------------------------- | --------------------------------------------------------------
|                                       |                                                               
|Computers
    and peripheral equipment | 3                                                             
|Office
    furniture and equipment     | 7 - 15 (mainly
    7)                                         
|Motor
    vehicles                     | 7                                                             
|Software                               | 3 – 5
    (mainly 5)                                          
|Leasehold
    improvements             | Over the shorter
    of the lease term or useful economic life



Business
combinations



The
Company accounts for business combinations under ASC 805, "Business Combinations". ASC 805 requires recognition of assets
acquired, liabilities assumed, non-controlling interest and redeemable non-controlling interest in the acquiree at the acquisition
date, measured at their fair values as of that date. As required by ASC 820, "Fair Value Measurements and disclosures"
the Company applies assumptions that marketplace participants would consider in determining the fair value of assets acquired,
liabilities assumed, non-controlling interest and redeemable non-controlling interest in the acquiree at the acquisition date.
Any excess of the fair value of net assets acquired over purchase price and any subsequent changes
in estimated contingencies are to be recorded in earnings.



Variable
interest entities



ASC 810, "Consolidation"
provides a framework for identifying variable interest entities (or "VIEs") and determining when a company should include
the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.



The Company's assessment of
whether an entity is a VIE and the determination of the primary beneficiary requires judgment and involves the use of significant
estimates and assumptions. Those include, among others, forecasted cash flows, their respective probabilities and the economic
value of certain preference rights. In addition, such assessment also involves estimates of whether a group entity can finance
its current activities, until it reaches profitability, without additional subordinated financial support.



Effective as of January 1,
2010, the Company applies updated guidance for the consolidation of VIEs. The guidance qualitative approach, based on which enterprise
has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses
of, or the right to receive benefits from, the entity that could potentially be significant to the variable interest entity. Determination
about whether an enterprise should consolidate a VIE is required to be evaluated continuously as changes to existing relationships
or future transactions.



F-16







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



One of the Company's U.S. based
consulting and staffing services business acquired through one of its wholly owned subsidiaries on January 17, 2010 is considered
to be a VIE. The subsidiary is the primary beneficiary of the VIE, as a result of the fact that it holds the power to direct the
activities of the acquired business, which significantly impacts its economic performance, and has the right to receive benefits
accruing from the acquired business.



Research
and development costs



Research
and development costs incurred in the process of software development before establishment of technological feasibility are charged
to expenses as incurred. Costs incurred subsequent to the establishment of technological feasibility are capitalized according
to the principles set forth in ASC 985-20, "Costs of Software to be Sold, Leased or Marketed".



The Company and its subsidiaries
establish technological feasibility upon completion of a detailed program design or working model.



Research
and development costs incurred in the process of developing product enhancements are generally charged to expenses as incurred.



Capitalized
software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the software
product (between 4-5 years). The Company assesses the recoverability of these intangible assets on a regular basis by determining
whether the amortization of the asset over its remaining economical useful life can be recovered through undiscounted future operating
cash flows from the specific software product sold. During the years ended December 31, 2012, 2013 and 2014, no such unrecoverable
amounts were identified.



Long-Lived
Assets



The Company
long-lived, non-current assets are comprised mainly of goodwill, identifiable intangible assets and property, plants and equipment.



Impairment
of long-lived assets and intangible assets subject to amortization



The Company's
long-lived assets are reviewed for impairment in accordance with ASC 360, "Property, Plant and Equipment" 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.



As required by ASC 820, "Fair
Value Measurements and disclosures" the Company applies assumptions that marketplace participants would consider in determining
the fair value of long-lived assets (or asset groups).



F-17







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



Intangible
assets with finite lives are amortized over their economic useful life using a method of amortization that reflects the pattern
in which the economic benefits of the intangible assets are consumed or otherwise used up. Distribution rights, acquired technology
and non-compete were amortized on a straight line basis and customer relationships and backlog were amortized on an accelerated
method basis over a period between 3.5 - 15 years based on the intangible assets identified.



During the
years ended December 31, 2012, 2013 and 2014, no impairment was identified.



Goodwill



Goodwill
represents the excess of the purchase price in a business combination over the fair value of the net tangible and intangible assets
acquired. Under ASC 350,"Intangibles - Goodwill and Other", goodwill is subject to an annual impairment test or more
frequently if impairment indicators are present. Goodwill impairment is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. As of December 31, 2014, the Company operates in four reporting units within its operating segments.



Goodwill
reflects the excess of the consideration paid or transferred plus the fair value of contingent consideration and any non-controlling
interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. The goodwill impairment
test is performed according to the following principles:



An initial
qualitative assessment of the likelihood of impairment may be performed. If this step does not result in a more likely than not
indication of impairment, no further impairment testing is required. If it does result in a more likely than not indication of
impairment, the impairment test is performed.



In step one
of the impairment test, the company compares the fair value of the reporting units to the carrying value of net assets allocated
to the reporting units. If the fair value of the reporting unit exceeds the carrying value of the net assets allocated to that
unit, goodwill is not impaired, and no further testing is required. Otherwise, the company must perform the second step of the
impairment test to measure the amount of the impairment.



In the second
step, the reporting unit’s fair value is allocated to all the assets and liabilities of the reporting unit, including any
unrecognized intangible assets, in a hypothetical analysis that simulates the business combination principles to derive an implied
goodwill value. If the implied fair value of the reporting unit’s goodwill is less than its carrying value, the difference
is recorded as impairment



The Company
performed an annual impairment tests as of December 31, of each of 2012, 2013 and 2014 and did not identify any impairment losses
(see Note 9).



F-18







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



Revenue
recognition



The Company
derives its revenues from licensing the rights to use software (proprietary and non-proprietary), provision of related professional
services, maintenance and technical support as well as from other IT professional services. The Company sells its products and
services primarily through its direct sales force and indirectly through distributors and value added resellers.



The Company
accounts for its software sales in accordance with ASC 985-605, "Software Revenue Recognition". Software license revenue
is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the vendor's fee is fixed or determinable,
no further obligation exists and collectability is probable.



Maintenance
and support includes annual maintenance contracts providing for unspecified upgrades for new versions and enhancements on a when-and-if-available
basis for an annual fee. The right for an unspecified upgrade for new versions and enhancements on a when-and-if-available basis
do not specify the features, functionality and release date of future product enhancements for the customer to know what will
be made available and the general timeframe in which it will be delivered.



Maintenance
and support revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term
of the maintenance and support agreement.



As required
by ASC 985-605, the Company allocates revenues to the software component of its multiple-element arrangements using the residual
method when vendor specific objective evidence ("VSOE") of fair value exists for the undelivered elements of the support
and maintenance agreements. VSOE is based on the price charged when an element is sold separately or renewed. Under the residual
method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to
the delivered elements and is recognized as revenue.



The Company
generally does not grant a right of return to its customers. When a right of return exists, the Company defers revenue until the
right of return expires, at which time revenue is recognized provided that all other revenue recognition criteria are met.



Revenue from professional services
related to both software and the IT professional services businesses consists of billable hours for services provided and is recognized
as the services are rendered.



F-19







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



Arrangements
that include professional services bundled with licensed software and other software related elements, are evaluated to determine
whether those services are essential to the functionality of other elements of the arrangement. When services are considered essential
to the software, revenues under the arrangement are recognized using contract accounting based on ASC 605-35, "Construction-Type
and Production-Type Contracts", on a percentage of completion method based on inputs measures. 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
for the entire contract. During the years ended December 31, 2012, 2013 and 2014, no such estimated losses were identified.



When professional
services are not considered essential to the functionality of other elements of the arrangement, revenue allocable to the services
is recognized as the services are performed, using VSOE of fair value. In most cases, the Company has determined that the services
are not considered essential to the functionality of other elements of the arrangement.



Deferred
revenue includes unearned amounts received under maintenance, support and services contracts, and amounts received from customers
but not yet recognized as revenues.



Revenue
from third-party sales is recorded at a gross or net amount according to certain indicators. The application of these indicators
for gross and net reporting of revenue depends on the relative facts and circumstances of each sale and requires significant judgment.



Severance
pay



The Company's and its Israeli
subsidiary's obligation for severance pay with respect to their Israeli employees (for the period for which the employees were
not included under Section 14 of the Severance Pay Law, 1963) is calculated pursuant to the Israeli Severance Pay Law based on
the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date, and are
presented on an undiscounted basis (referred to as the "Shut Down Method"). Employees are entitled to one month's salary
for each year of employment or a portion thereof. The Company's obligation for all of its Israeli employees is fully provided
for by monthly deposits with insurance policies and by an accrual.



The Group has a number of savings
plans in the United States that qualify under Section 401(k) of the Internal Revenue Code. U.S employees may contribute up to
100% of their pretax salary, but not more than statutory limits. Matching contributions are discretionary and are up to 3% of
the participants contributions.  When contributions are granted, they are invested in proportion to each participant's voluntary
contributions in the investment options provided under the plan.



The carrying
value of deposited funds includes profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn
only upon the fulfillment of the obligations pursuant to the Israeli Severance Pay Law or labor agreements and are recorded as
an asset in the Company's consolidated balance sheet.



F-20







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES



|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



The Company
and its Israeli subsidiaries’ agreements with most of their Israeli employees are in accordance with Section 14 of the Severance
Pay Law -1963, mandating that upon termination of such employees' employment; all the amounts accrued in their insurance policies
shall be released to them instead of severance compensation. Upon release of deposited amounts to the employee, no additional
liability exists between the parties regarding the matter of severance pay and no additional payments shall be made by the Company
or its subsidiaries to the employee. Further, the related obligation and amounts deposited on behalf of such obligation are not
stated on the balance sheet, as the Company and its subsidiaries are is legally released from their obligations to employees once
the deposit amounts have been paid.



Severance
expenses for the years ended December 31, 2012, 2013 and 2014 amounted to approximately $ 829, $ 1,371 and $ 1,673,
respectively.



Advertising
expenses



Advertising
expenses are charged to selling and marketing expenses, as incurred. Advertising expenses for the years ended December 31, 2012,
2013 and 2014 amounted to $ 556, $ 306 and $ 466, respectively.



Income
taxes



The Company
and its subsidiaries account for income taxes in accordance with ASC 740, "Income Taxes". The ASC prescribes the use
of the liability method whereby deferred tax asset and liability account balances are determined based on 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. Deferred tax assets and liabilities are classified as current
or non-current according to the expected reversal dates.



The Company
utilizes a two-step approach for recognizing and measuring uncertain tax positions accounted for in accordance with an amendment
of ASC 740 "Income Taxes." Under the first step the Company evaluates a tax position taken or expected to be taken in
a tax return by determining if the weight of available evidence indicates that it is more likely than not that, based on its technical
merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The
second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement
with the tax authorities. The Company accrued interest and penalties related to unrecognized tax benefits in its provisions for
income taxes.



F-21







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES



|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



Basic
and diluted net earnings per share



Basic net
earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted
net earnings per share are computed based on the weighted average number of ordinary shares outstanding during each year, plus
dilutive potential ordinary shares considered outstanding during the year, in accordance with ASC 260, "Earnings Per Share."



A portion
of the outstanding stock options have been excluded from the calculation of the diluted earnings per share because such securities
are anti-dilutive. The total weighted average number of Ordinary shares related to the outstanding options excluded from the calculations
of diluted earnings per share was 669,887, 536,877 and 35,010 for the years ended December 31, 2012, 2013 and 2014, respectively.



Stock-based
compensation



The Company
accounts for stock-based compensation in accordance with ASC 718, "Compensation - Stock Compensation" which requires
companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value
of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods
in the Company's consolidated statement of income.



The Company
recognizes compensation expenses for the value of its awards, which have graded vesting based on the accelerated method over the
requisite service period of each of the awards, net of estimated forfeitures.



The Company
measures and recognizes compensation expense for share-based awards based on estimated fair values on the date of grant using
the Binomial option-pricing model ("the Binomial model"). The Binomial model for option pricing requires a number of
assumptions, of whichthe most significant are the suboptimal
exercise factor and expected stock price volatility. The suboptimal exercise factor is estimated based on employees' historical
option exercise behavior.



The suboptimal
exercise factor is the ratio by which the stock price must increase over the exercise price before employees are expected to exercise
their stock options. Expected volatility is based upon actual historicalstock price movements and was calculated as of the grant dates for different periods, since the Binomial model can be used
for different expected volatilities for different periods. The risk-free interest rate is based on the yield from U.S. Treasury
zero-coupon bonds with an equivalent term to the contractual term of the options. Historically the Company did not hold any foreseeable
plans to pay dividends and therefore used an expected dividend yield of zero in its past years option pricing models. In September
2012, the Company adopted a dividend distribution policy according to which it will distribute in each year a dividend of up to
50% of its annual distributable profits.



F-22







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



The expected
term of options granted is derived from the output of the option valuation model and represents the period of time that options
granted are expected to be outstanding. Estimated forfeitures are based on actual historical pre-vesting forfeitures.



For awards
with performance conditions, compensation cost is recognized over the requisite service period if it is 'probable' that the performance
conditions will be satisfied, as defined in ASC 450-20-20, "Loss Contingencies."



The fair
value for the Company's stock options granted to employees and directors was estimated using the following assumptions:



|                                          |  | 2013        |  | 2014       
|----------------------------------------- |  | ----------- |  | -----------
|                                          |  |             |  |            
|Dividend yield                            |  | 0%          |  | 0%         
|Expected volatility                       |  | 32% - 59%   |  | 32% - 59%  
|Risk-free interest rate                   |  | 0.1% - 2.6% |  | 0.1% - 2.6%
|Expected forfeiture (employees)           |  | -           |  | -          
|Expected forfeiture (executives)          |  | -           |  | -          
|Contractual term of up to                 |  | 10 years    |  | 10 years   
|Suboptimal exercise multiple (employees)  |  | 2           |  | -          
|Suboptimal exercise multiple (executives) |  | 2           |  | 2          



During the
years ended December 31, 2012, 2013 and 2014, the Company recognized stock-based compensation expense related to employee stock
options in the amount of $ 515, $ 325 and $ 1,557, respectively, as follows:



|                                       |  | Year ended December
    31, |    
|-------------------------------------- |  | --------------------------- | ---
|                                       |  | 2012                        |    
|                                       |  |                             |    
|Cost of revenue                        |  | $                           | 16 
|Research and development               |  |                             | 114
|Selling and marketing                  |  |                             | 82 
|General and administrative             |  |                             | 303
|                                       |  |                             |    
|Total stock-based compensation expense |  | $                           | 515



Concentrations
of credit risk



Financial
instruments that potentially subject the Company and its subsidiaries to concentration of credit risk consist principally of cash
and cash equivalents, short-term deposits, marketable securities, trade receivables and foreign currency derivative contracts.



F-23







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



The Company's
cash and cash equivalents and short-term deposits are invested primarily in deposits with major banks worldwide, mainly in the
United States and Israel, however, such cash and cash equivalents and short-term deposits in the United States may be in excess
of insured limits and are not insured in other jurisdictions. The Company believes that such institutions are of high rating and
therefore bear low risk.



The Company's
marketable securities include investments in commercial and government bonds and foreign banks. The Company's marketable securities
are considered to be highly liquid and have a high credit standing. In addition, management considered its portfolios in foreign
banks to be well-diversified (also refer to Note 4).



Trade receivables
of the Company and its subsidiaries are derived from sales to customers located primarily in the United States, Europe, Japan,
South Africa and Israel. The Company performs ongoing credit evaluations of its customers and excluding 2013 to date has not experienced
any material losses. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined
to be doubtful of collection. The expense related to doubtful accounts for the years ended December 31, 2012, 2013 and 2014 was
$ 420, $ 1,285 and $ 735, respectively.



The Company has entered into
foreign exchange forward contracts intended to protect against the changes in value of forecasted non-dollar currency cash flows
related to salary and related expenses. These derivative instruments are designed to offset the Company's non-dollar currency
exposure (see "Derivative instruments" below).



Fair
value measurements



The Company
accounts for certain assets and liabilities at fair value under ASC 820, "Fair Value Measurements and Disclosures".
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions,
ASC 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring
fair value:



| | Level 1 - | Observable
                                         inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in
                                         active markets;
| | --------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Level 2 - | Significant
                                         other observable inputs based on market data obtained from sources independent of the
                                         reporting entity;
| | --------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Level 3 - | Unobservable
                                         inputs which are supported by little or no market activity;
| | --------- | -----------------------------------------------------------------------------------------------------------------



The fair
value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The Company categorized each of its fair value measurements in one of these three levels of hierarchy.



F-24







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



Assets and
liabilities measured at fair value on a recurring basis are comprised of marketable securities, foreign currency forward contracts
and contingent consideration of acquisitions (see Note 5).



The carrying
amounts reported in the balance sheet for cash and cash equivalents, short term bank deposits, trade receivables, other accounts
receivable, short-term bank credit, trade payables and other accounts payable approximate their fair values due to the short-term
maturities of such instruments.



Comprehensive
income (loss)



The Company
accounts for comprehensive income (loss) in accordance with ASC 220, "Comprehensive Income." This Statement establishes
standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial
statements. Comprehensive income (loss) generally represents all changes in equity during the period except those resulting from
investments by, or distributions to, shareholders. The Company determined that its items of other comprehensive income (loss)
relate to gain and loss on foreign currency translation adjustments, unrealized gain and loss on derivative instruments designated
as hedges and unrealized gain and loss on available-for-sale marketable securities.



Derivative
instruments



A material portion of the Company's
revenues, expenses and earnings is exposed to changes in foreign exchange rates. Depending on market conditions, foreign exchange
risk is also managed through the use of derivative financial instruments. These financial instruments serve to protect net income
against the impact of the translation into U.S. dollars of certain foreign exchange-denominated transactions. The derivative instruments
hedge or offset exposures to Euro, Japanese Yen and NIS exchange rate fluctuations.



ASC 815, "Derivatives
and Hedging," requires companies to recognize all of their derivative instruments as either assets or liabilities in their
balance sheet at fair value. Derivative instruments that are designated and qualify as hedges of forecasted transactions (i.e.,
cash flow hedges) are carried at fair value with the effective portion of a derivative's gain or loss recorded in other comprehensive
income and subsequently recognized in earnings in the same period or periods in which the hedged forecasted transaction affects
earnings. For derivative instruments that are not designated and qualified as hedging instruments, the gains or losses on the
derivative instruments are recognized in current earnings during the period of the change in fair values.



The derivative instruments
used by the Company are designed to reduce the market risk associated with the exposure of its underlying transactions to fluctuations
in currency exchange rates.



F-25







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



The Company
has instituted a foreign currency cash flow hedging program in order to hedge against the risk of overall changes in future cash
flows. The Company hedges portions of its forecasted expenses denominated in NIS with currency forwards contracts and put and
call options. These forward and option contracts are designated as cash flow hedges.



For derivative
instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future
cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument
is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change
in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.



For derivative
instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.



The notional principal of foreign
exchange contracts to purchase NIS with U.S. dollars was $ 0 and $ 1,736 as of December 31, 2013 and 2014, respectively.



At December 31, 2014,
the Company did not have any cash flow hedges.



The following
tables present fair value amounts and gains and losses of derivative instruments and related hedged items:



|                                          |  | Fair
    values of derivative instruments           
|----------------------------------------- |  | ----------------------------------------------------
|                                          |  | Assets                                              
|                                          |  |                                                     
|                                          |  | Balance
    sheet item                              
|Assets                                    |  |                                                     
|                                          |  |                                                     
|Derivatives
    not designated as hedging |  | "Other
    accounts receivable and prepaid expenses"
|                                          |  |                                                     
|Total
    derivatives                     |  |                                                     



F-26







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



NOTE
2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)



|                                           |  | Statements                    |  | Gain
    (loss) recognized in the statements of income |    
|------------------------------------------ |  | ----------------------------- |  | ------------------------------------------------------ | ---
|                                           |  | of                            |  | Year
    ended December 31,                            |    
|                                           |  | income
    item               |  | 2012                                                   |    
|                                           |  |                               |  |                                                        |    
|Derivatives
    not designated as hedging: |  |                               |  |                                                        |    
|Foreign
    exchange forward contracts     |  | "Financial
    expenses, net" |  |                                                        | 245
|                                           |  |                               |  |                                                        |    
|Total
    derivatives                      |  |                               |  | $                                                      | 245



Reclassification



Certain amounts
in prior years' financial statements have been reclassified to conform with the current year's presentation. The reclassification
had no effect on previously reported net income, equity or cash flow.



Recently
Issued Accounting Pronouncement:



In August
2014, the Financial Accounting Standards Board (“FASB”) issued amended guidance related to disclosure of uncertainties
about an entity’s ability to continue as a going concern. The new guidance requires management to evaluate whether there
is substantial doubt about the entity’s ability to continue as a going concern and, as necessary, to provide related footnote
disclosures. The guidance has an effective date of December 31, 2016.



In May 2014,
Financial Accounting Standards Board ("FASB") issued ASU 2014-09, "Revenue from Contracts with Customers (Topic
606)", a comprehensive new revenue recognition standard that will supersede existing revenue guidance under US GAAP and IFRS
("ASU 2014-09"). ASU 2014-09's core principle is that a company will recognize revenue when it transfers promised goods
or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange
for those goods or services. ASU 2014-09 is effective for annual periods beginning after December 15, 2016, including interim
periods within that period. Early adoption is not permitted under US GAAP. The Company is currently evaluating the method of adoption,
as well as the effect that adoption of this ASU will have on its consolidated financial statements.



F-27







MAGIC SOFTWARE ENTERPRISES
LTD.

AND ITS SUBSIDIARIES

|NOTES
    TO CONSOLIDATED FINANCIAL STATEMENTS                 
|---------------------------------------------------------------
|U.S. dollars in
    thousands (except share and per share data)



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



In April
2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-08 (ASU 2014-08) “Presentation
of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures
of Disposals of Components of an Entity. The new guidance limits the presentation of discontinued operations to business circumstances
when the disposal of the business operation represents a strategic shift that has had or will have a major effect on operations
and financial results. This guidance is effective for fiscal years beginning January 1, 2015. The company believes that the
adoption of this new standard will not materially impact its consolidated financial statements.



| | NOTE 3:- | BUSINESS
                                         COMBINATION, SIGNIFICANT TRANSACTION AND SALE OF BUSINESS
| | -------- | -----------------------------------------------------------------------------------------------------------



| | a. | On December 27, 2011, the Company
                                         completed the acquisition of the AppBuilder activity of BluePhoenix Solutions ("AppBuilder"),
                                         a leading provider of value-driven legacy IT modernization solutions, for $ 12,565.
                                         During 2012, the Company paid an additional amount of $ 140 with respect to the acquisition.
                                         AppBuilder is a comprehensive application development infrastructure used by many enterprises
                                         around the world. This premier enterprise application development environment is a powerful,
                                         model-driven tool that enables development teams to build, deploy, and maintain large-scale,
                                         custom-built business applications. The Company believes the acquisition will broaden
                                         its product portfolio and strengthens the presence in numerous global markets. Acquisition
                                         related costs were immaterial.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The acquisition
was accounted for by the purchase method. The results of operations were included in the consolidated financial statements of
the Company commencing January 1, 2012.



The following
table summarizes the estimated fair values of the assets acquired and liabilities assumed:



|Net liabilities     |  | $ | (3,248 | )
|------------------- |  | - | ------ | -
|Intangible assets   |  |   | 7,251  |  
|Goodwill            |  |   | 8,702  |  
|                    |  |   |        |  
|Net assets acquired |  | $ | 12,705 |  



Identifiable
intangible assets, including customer relationship were valued using a variation of the income approach. This method utilized a
forecast of expected cash inflows, cash outflows and contributory charges for economic returns on tangible and intangible assets
employed.



F-28









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



| | NOTE 3:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE
OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



Amounts of $ 4,430,
$ 2,138 and $ 683 of the purchase price were allocated to customer relationships, developed technology and backlog, respectively.
The Company amortizes the customer relationships, backlog and acquired technology over periods of 15 years, 15 years and 3.5 years,
respectively.



| | b. | In July 2012, the Company acquired an 80% interest in Comm-IT Group, (including "Comm-IT Technology
Solutions" and "Comm-IT Software"), a software and systems development house that specializes in providing advanced
IT and communications services and solutions, for a total consideration of $ 8,933, of which $ 4,990 was paid upon closing
and the remaining $ 3,943 is to be paid during the next two years, of which, $ 1,192 is contingent upon the acquired business
meeting certain operational targets in 2012 and 2013, and $ 2,751 in deferred payments. The Purchaser and the seller hold
mutual Call and Put options respectively for the remaining 20% interest in the group. As a result of the Put option, the Company
recorded redeemable non-controlling interest in the amount of $ 1,750. In March 2014, the paid the sellers the remaining deferred
payments.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The company believes
that the acquisition of this business will enable it to expand its professional services offering and leverage its relationships
with top tier customers. Acquisition related costs were immaterial.



In accordance
with ASC 805-30-35-1, the Company re-measures the contingent consideration based on the fair value at each reporting date until
the contingency is resolved or the payment is made, while the changes in fair value are recognized in earnings in the financial
expenses using the interest method over the period. The contingent
payment was recorded at present value and was amortized using the interest method during the relevant period into financial expenses.



The acquisition
was accounted for by the purchase method. The results of operations were included in the consolidated financial statements of the
Company commencing July 1, 2012.



F-29









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)





| | NOTE 3:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE
OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



| |  | On May 2013 the company finalized the process of identifying the tangible and intangible assets
for its acquisition. The following table summarize the fair value of the assets and liabilities acquired:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                            |  | As reported on December 31, 2012 |        |   | Adjustment |   |        | Modified | 
|--------------------------- |  | -------------------------------- | ------ | - | ---------- | - | ------ | -------- | 
|                            |  |                                  |        |   |            |   |        |          | 
|Net assets                  |  | $                                | 1,219  |   |            | $ | 14     |          | 
|Non-controlling interest    |  |                                  | (1,880 | ) |            |   | 130    |          | 
|Intangible assets           |  |                                  | 3,873  |   |            |   | 397    |          | 
|Goodwill                    |  |                                  | 5,809  |   |            |   | 439    |          | 
|Deferred tax liability, net |  |                                  | -      |   |            |   | (1,068 | )        | 
|                            |  |                                  |        |   |            |   |        |          | 
|Net assets acquired         |  | $                                | 9,021  |   |            | $ | (88    | )        | 



| | c. | On February 26, 2013, the Company purchased Pilat Europe Limited Ltd. and Pilat (North America)
Inc. which provides custom human capital management solutions, for a total consideration of $ 1,233. The Company believes
the acquisition will broaden its application product portfolio, customer base and strengthen its presence in numerous global markets.
Acquisition related costs were immaterial.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The acquisition was accounted for by the purchase method. The results of operations of these entities
were included in the consolidated financial statements of the Company commencing March 1, 2013.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following
table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:



|Net assets            |  | $ | 490   | 
|--------------------- |  | - | ----- | 
|Intangible assets     |  |   | 715   | 
|                      |  |   |       | 
|Total assets acquired |  | $ | 1,205 | 



| | d. | On May 16, 2013, the Company purchased Valinor Ltd, a consulting company specializing in project
and product consultation, installation and implementation of databases for a total consideration of $ 1,618, of which $ 339
was paid upon closing, $ 339 was paid in November 2013, $340 paid on May 25, 2014, and $ 600 is contingently payable
upon the business meeting certain operational targets in 2013 and 2014. The amount related to operational targets of 2013 was paid
in September 2014. On December 2013 the company increased the total consideration according to 2013 results by $230 recorded in
the Company’s statement of operations. The Company believes the acquisition will broaden its professional service offering
to its existing and new customers in the fields of projects and product consultation and installation and implementation of databases.
Acquisition related costs were immaterial.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-30









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)





| | NOTE 3:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE
OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



The acquisition
was accounted for by the purchase method.

The results of
operations of these entities were included in the consolidated financial statements of the Company commencing May 15, 2013.



The following
table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:



|Net assets            |  | $ | 119   | 
|--------------------- |  | - | ----- | 
|Intangible assets     |  |   | 464   | 
|Goodwill              |  |   | 1,035 | 
|                      |  |   |       | 
|Total assets acquired |  | $ | 1,618 | 



| | e. | On May 30, 2013, the Company purchased Dario Solutions IT Ltd, a consulting company
specializing in integration services of Microsoft products in enterprise IT environments for a total consideration of $ 3,723,
of which $ 1,100 was paid upon closing, $ 906 is to be paid by February 28, 2014 and the remaining $ 1,717 is contingently
payable upon the business meeting certain operational targets in 2013, 2014 and 2015. The amount related to operational targets
of 2013 was paid in September 2014. On September 2014 the company decreased the total consideration according to 2014 results
by $997 recorded in the Company’s statement of operations. The company believes the acquisition will complement the company’s’
professional services offering to its existing and new customers in the field of software integration and advanced on target IT
solutions for large and mid- range customers. Acquisition related costs were immaterial.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The acquisition
was accounted for by the purchase method.



The results of
operations of these entities were included in the consolidated financial statements of the Company commencing June 1, 2013.



The following
table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:



|Net Assets            |  | $ | 371   | 
|--------------------- |  | - | ----- | 
|Intangible assets     |  |   | 707   | 
|Goodwill              |  |   | 2,645 | 
|                      |  |   |       | 
|Total assets acquired |  | $ | 3,723 | 



F-31









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



| | NOTE 3:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND SALE
OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------





| | f. | On November 11, 2013 the Company acquired the operations of Allstates Technical Services, LLC,
a US-based full-service provider of consulting and staffing solutions for IT, Engineering and Telecom personnel, for a total consideration
of $10,963. The company believes the acquisition will broadens its existing US footprint and adds leading Fortune 500 companies
to its customer base, making an important contribution to its growth strategy in the IT professional services operating segment.
The results of operations were included in the consolidated financial statements of the Company commencing November 11, 2013.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following
table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:



|Net Assets            |  | $ | 3,063  | 
|--------------------- |  | - | ------ | 
|Intangible assets     |  |   | 2,874  | 
|Goodwill              |  |   | 5,026  | 
|                      |  |   |        | 
|Total assets acquired |  | $ | 10,963 | 



| | g. | In addition, the Company acquired additional activities during the years ended December 31, 2013
and 2014, whose influence on the financial statements of the Company was immaterial, for a total consideration of $ 0.9 million
and $ 0.7 million, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h. | On October 1, 2014 the Company acquired the operations Formula Telecom Solutions Ltd. (FTS), an
Israel-based software vendor, for a total consideration of $5,800. FTS specializes in the development, sale, service and support
of Business Support Systems (BSS), including convergent charging, billing, customer management, policy control and payment software
solutions for the telecommunications. The Company believes the acquisition will broaden its professional service offering to its
existing and new customers in the fields of Business Support Systems, including convergent charging, billing, customer management
and policy control. Acquisition related costs were immaterial. The acquisition was accounted for by the purchase method.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The results
of operations were included in the consolidated financial statements of the Company commencing October 1, 2014.



The following
table summarizes the estimated fair values of the assets acquired and liabilities at the date of acquisition:



|Net Assets            |  | $ | (57   | )
|--------------------- |  | - | ----- | -
|Intangible assets     |  |   | 2,951 |  
|Goodwill              |  |   | 2,906 |  
|                      |  |   |       |  
|Total assets acquired |  | $ | 5,800 |  





F-32









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



| | NOTE 4:- | MARKETABLE SECURITIES
| | -------- | ---------------------



The Group invests
in marketable debt and equity securities, which are classified as available-for-sale. The following is a summary of marketable
securities:



|                                              |  | December
    31, |    
|--------------------------------------------- |  | ---------------- | ---
|                                              |  | 2013             |    
|                                              |  | Amortized
cost   |    
|Available-for-sale:                           |  |                  |    
|                                              |  |                  |    
|Governmental
    bonds                        |  | $                | 407
|Commercial bonds                              |  |                  | 190
|Equity
    funds                              |  |                  | 119
|                                              |  |                  |    
|Totalavailable-for-sale marketable securities |  | $                | 716



Marketable
securities with contractual maturities from one to three years are as follows:



|                               |  |                |       |  | Unrealized gains (losses) |   |   |        | 
|------------------------------ |  | -------------- | ----- |  | ------------------------- | - | - | ------ | 
|                               |  | Amortized cost |       |  | Gains                     |   |   | Losses | 
|Due between one to three years |  | $              | 6,219 |  |                           | $ | - |        | 
|                               |  |                |       |  |                           |   |   |        | 
|                               |  | $              | 6,219 |  |                           | $ | - |        | 



Marketable
securities with contractual maturities from three to five years are as follows:



|                                |  |                |       |  | Unrealized gains (losses) |   |   |        | 
|------------------------------- |  | -------------- | ----- |  | ------------------------- | - | - | ------ | 
|                                |  | Amortized cost |       |  | Gains                     |   |   | Losses | 
|Due between three to five years |  | $              | 5,697 |  |                           | $ | - |        | 
|                                |  |                |       |  |                           |   |   |        | 
|                                |  | $              | 5,697 |  |                           | $ | - |        | 



The following
is the change in the other comprehensive income of available-for-sale securities during 2013:



|                                                                                      |  | Other comprehensive income |    
|------------------------------------------------------------------------------------- |  | -------------------------- | ---
|                                                                                      |  |                            |    
|Other comprehensive income from available-for-sale securities as of January 1, 2013   |  | $                          | 173
|                                                                                      |  |                            |    
|Unrealized loss from available-for-sale securities                                    |  |                            | (35
|                                                                                      |  |                            |    
|Other comprehensive income from available-for-sale securities as of December 31, 2013 |  | $                          | 138





F-33









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



| | NOTE 4:- | MARKETABLE SECURITIES (Cont.)
| | -------- | -----------------------------



The following
is the change in the other comprehensive income of available-for-sale securities during 2014:



|                                                                                      |  | Other comprehensive income |     
|------------------------------------------------------------------------------------- |  | -------------------------- | ----
|                                                                                      |  |                            |     
|Other comprehensive income from available-for-sale securities as of January 1, 2014   |  | $                          | 138 
|                                                                                      |  |                            |     
|Unrealized losses from available-for-sale securities                                  |  |                            | (259
|                                                                                      |  |                            |     
|Other comprehensive income from available-for-sale securities as of December 31, 2014 |  | $                          | (121



| | NOTE 5:- | FAIR VALUE
                                         MEASUREMENTS
| | -------- | ----------------------------------------------------------------



In accordance
with ASC 820, the Company measures its investment in marketable securities and foreign currency derivative contracts at fair value.
Generally marketable securities are classified within Level 1, this is because these assets are valued using quoted prices in active
markets. Foreign currency derivative contracts and certain corporate bonds are classified within Level 2 as the valuation inputs
are based on quoted prices and market observable data of similar instruments.



Contingent consideration
is classified within Level 3. The Company values the Level 3 contingent consideration using discounted cash flow of the expected
future payments, whose inputs include interest rate.



The Company's
financial assets measured at fair value on a recurring basis, excluding accrued interest components, consisted of the following
types of instruments as of the following dates:



|                             |  | December 31, 2013                        |    
|---------------------------- |  | ---------------------------------------- | ---
|                             |  | Fair value measurements using input type |    
|                             |  | Level 1                                  |    
|Assets:                      |  |                                          |    
|Government bonds             |  | $                                        | 410
|Corporate bonds              |  |                                          | -  
|Equity fund                  |  |                                          | 229
|                             |  |                                          |    
|Total financial assets       |  | $                                        | 639
|                             |  |                                          |    
|Liabilities:                 |  |                                          |    
|Contingent consideration     |  | $                                        | -  
|                             |  |                                          |    
|Total financials liabilities |  | $                                        | -  



F-34







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)





| | NOTE 5:- | FAIR VALUE MEASUREMENTS (Cont.)
| | -------- | -------------------------------





|                             |  | December 31, 2014                        |    
|---------------------------- |  | ---------------------------------------- | ---
|                             |  | Fair value measurements using input type |    
|                             |  | Level 1                                  |    
|Assets:                      |  |                                          |    
|Corporate bonds              |  | $                                        | -  
|Equity fund                  |  |                                          | 231
|                             |  |                                          |    
|Total financial assets       |  | $                                        | 231
|                             |  |                                          |    
|Liabilities:                 |  |                                          |    
|Contingent consideration     |  | $                                        | -  
|                             |  |                                          |    
|Total financials liabilities |  | $                                        | -  



Fair value
measurements using significant unobservable inputs (Level 3):



|                                                 |  | December 31, |      
|------------------------------------------------ |  | ------------ | -----
|                                                 |  | 2013         |      
|                                                 |  |              |      
|Opening balance                                  |  | $            | 1,942
|Increase in contingent consideration             |  |              | 2,459
|Payment in contingent consideration              |  |              | (750 
|Change in fair value of contingent consideration |  |              | -    
|Amortization of interest                         |  |              | 330  
|                                                 |  |              |      
|Closing balance                                  |  | $            | 3,981



| | NOTE 6:- | OTHER ACCOUNTS
                                         RECEIVABLE AND PREPAID EXPENSES
| | -------- | ---------------------------------------------------------------------------------------



|                         |  | December 31, |      
|------------------------ |  | ------------ | -----
|                         |  | 2013         |      
|                         |  |              |      
|Prepaid expenses         |  | $            | 1,156
|Government authorities   |  |              | 862  
|Deferred tax assets, net |  |              | 1,949
|Restricted deposits      |  |              | 289  
|Related parties          |  |              | 92   
|Other                    |  |              | 861  
|                         |  |              |      
|                         |  | $            | 5,209



F-35









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



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



|                                   |  | December 31, |       
|---------------------------------- |  | ------------ | ------
|                                   |  | 2013         |       
|Cost:                              |  |              |       
|                                   |  |              |       
|Leasehold improvements             |  | $            | 546   
|Computers and peripheral equipment |  |              | 10,106
|Office furniture and equipment     |  |              | 2,639 
|Motor vehicles                     |  |              | 98    
|Software                           |  |              | 1,962 
|                                   |  |              |       
|                                   |  |              | 15,351
|Accumulated depreciation:          |  |              |       
|                                   |  |              |       
|Leasehold improvements             |  |              | 288   
|Computers and peripheral equipment |  |              | 9,657 
|Office furniture and equipment     |  |              | 1,947 
|Motor vehicles                     |  |              | 68    
|Software                           |  |              | 1,618 
|                                   |  |              |       
|                                   |  |              | 13,578
|                                   |  |              |       
|Depreciated cost                   |  | $            | 1,773 



Depreciation expenses
amounted to $ 757, $ 656 and $ 675 for the years ended December 31, 2012, 2013 and 2014, respectively.



| | NOTE 8:- | INTANGIBLE
                                         ASSETS
| | -------- | ----------------------------------------------------------



| | a. | Intangible
assets:
| | -- | ------------------



|                                  |  | December 31, |       
|--------------------------------- |  | ------------ | ------
|                                  |  | 2013         |       
|Original amounts:                 |  |              |       
|                                  |  |              |       
|Capitalized software costs        |  | $            | 59,069
|Customer relationships            |  |              | 23,843
|Backlog and non-compete agreement |  |              | 1,554 
|Acquired technology               |  |              | 3,112 
|                                  |  |              |       
|                                  |  |              | 87,578
|Accumulated amortization:         |  |              |       
|                                  |  |              |       
|Capitalized software costs        |  |              | 45,075
|Customer relationships            |  |              | 8,895 
|Backlog and non-compete agreement |  |              | 630   
|Acquired technology               |  |              | 429   
|                                  |  |              |       
|                                  |  |              | 55,029
|                                  |  |              |       
|Intangible assets, net            |  | $            | 32,549



F-36







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)





| | NOTE 8:- | INTANGIBLE
                                         ASSETS (Cont.)
| | -------- | ------------------------------------------------------------------





| | b. | Amortization expenses amounted to $ 6,687, $ 7,724 and $ 7,919 for the years ended December 31,
2012, 2013 and 2014, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



| | c. | The estimated future amortization expense of intangible assets as of December 31, 2014 is as follows:
| | -- | -----------------------------------------------------------------------------------------------------



|2015                |  |   | 8,230  | 
|------------------- |  | - | ------ | 
|2016                |  |   | 7,140  | 
|2017                |  |   | 5,764  | 
|2018                |  |   | 4,383  | 
|2019                |  |   | 3,043  | 
|2020 and thereafter |  |   | 3,983  | 
|                    |  |   |        | 
|                    |  | $ | 32,543 | 







| | NOTE 9:- | GOODWILL
| | -------- | --------



Changes in the
carrying amount of goodwill for the years ended December 31, 2013 and 2014 according to the Company's reporting units are as follows
(see also 16):



|                                         |  | IT professional services |        |   | Software services |   |        | Total | 
|---------------------------------------- |  | ------------------------ | ------ | - | ----------------- | - | ------ | ----- | 
|                                         |  |                          |        |   |                   |   |        |       | 
|As of January 1, 2013                    |  | $                        | 18,036 |   |                   | $ | 26,627 |       | 
|                                         |  |                          |        |   |                   |   |        |       | 
|Business combination                     |  |                          | 9,007  |   |                   |   | 1,036  |       | 
|Classifications                          |  |                          | 430    |   |                   |   | -      |       | 
|Foreign currency translation adjustments |  |                          | 1,022  |   |                   |   | (845   | )     | 
|                                         |  |                          |        |   |                   |   |        |       | 
|As of December 31, 2013                  |  |                          | 28,495 |   |                   |   | 26,818 |       | 
|                                         |  |                          |        |   |                   |   |        |       | 
|Business combination                     |  |                          | -      |   |                   |   | 3,664  |       | 
|Classifications                          |  |                          | -      |   |                   |   | (496   | )     | 
|Foreign currency translation adjustments |  |                          | (1,906 | ) |                   |   | (1,085 | )     | 
|                                         |  |                          |        |   |                   |   |        |       | 
|As of December 31, 2014                  |  |                          | 26,589 |   |                   |   | 28,901 |       | 



The Company performed
an annual impairment tests as of December 31, of each of 2012, 2013 and 2014 and did not identify any impairment losses (see Note
2).

F-37







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)





| | NOTE 10:- | ACCRUED
                                         EXPENSES AND OTHER ACCOUNTS PAYABLE
| | --------- | ------------------------------------------------------------------------------------



|                                                         |  | December 31, |       
|-------------------------------------------------------- |  | ------------ | ------
|                                                         |  | 2013         |       
|                                                         |  |              |       
|Employees and payroll accruals                           |  | $            | 6,675 
|Accrued expenses                                         |  |              | 2,925 
|Deferred and contingent payments related to acquisitions |  |              | 4,167 
|Government authorities                                   |  |              | 2,495 
|Other                                                    |  |              | 675   
|                                                         |  |              |       
|                                                         |  | $            | 16,937



| | NOTE 11:- | LONG TERM
                                         DEBT
| | --------- | -------------------------------------------------------



|                                                             |  | Interest rate as of December 31, |           |  | December 31, |  
|------------------------------------------------------------ |  | -------------------------------- | --------- |  | ------------ | -
|                                                             |  | 2014                             |           |  | 2013         |  
|                                                             |  |                                  |           |  |              |  
|                                                             |  |                                  | %         |  |              |  
|Loans from banks in USD(1)                                   |  |                                  | 3.7%      |  |              | $
|Loan from banks and other in NIS                             |  |                                  | 4.1%-5.9% |  |              |  
|Other long term debt                                         |  |                                  |           |  |              |  
|                                                             |  |                                  |           |  |              |  
|Less – Current maturities (included under “short-term debt”) |  |                                  |           |  |              |  
|                                                             |  |                                  |           |  |              |  
|                                                             |  |                                  |           |  |              | $



| | (1) | Loan from a US bank, received on November 2013 in the amount
of $3,000, paid monthly in equal payment, for a period of 36 months bearing interest of Libor+3.5%. The loan agreement contains
various covenants which require us to maintain certain financial ratios. The Company has met the financial ratios as of December
31, 2013. During 2014 the company repaid the loan.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | On November 2013, the Company entered into a credit line agreement
with a U.S. bank, under which the bank provides the Company with a credit line of $3 million for a period of three years. As of
December 31, 2014, the Company had drawn down an amount of approximately $2.8 million from the credit line, which is subject to
interest equal to the Prime Rate in effect from time to time, plus 3% per annum; provided that the interest rate in effect on any
day shall not be less than 6.0% per annum. In relation to this credit line, the Company is obliged by the bank to comply with certain
financial covenants, as defined in the agreement. As of December 31, 2014, the Company was in full compliance with the financial
covenants. During January 2015 the company fully repaid the credit line.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-38









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



| | NOTE 12:- | TAXES ON
                                         INCOME
| | --------- | --------------------------------------------------------



| | a. | Israeli taxation:
| | -- | -----------------



| | 1. | Corporate tax rate in Israel:
| | -- | -----------------------------



Taxable income
of Israeli companies is subject to tax at the rate of 25% in 2012, 25% in 2013 and 26.5% in 2014.





| | 2. | Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 ("the
Law"):
| | -- | --------------------------------------------------------------------------------------------------



Certain production
and development facilities of the Company have been granted "Approved Enterprise" status pursuant to the Law, which provides
certain tax benefits to its investment programs including tax exemptions and reduced tax rates. Income not eligible for Approved
Enterprise benefits is taxed at regular rates.



In the event
of distribution of dividends from the said tax-exempt income, the amount distributed will be subject to corporate tax at the rate
ordinarily applicable to the Approved Enterprise's income.



The entitlement
to the above benefits is conditional upon the fulfilling of the conditions stipulated by the Laws and regulations. Should they
fail to meet such requirements in the future, income attributable to its Approved Enterprise programs could be subject to the statutory
Israeli corporate tax rate and they could be required to refund a portion of the tax benefits already received, with respect to
such programs. As of December 31, 2014, management believes that the Company's Israeli subsidiaries are in compliance with all
the conditions required by the Law.



Effective January
1, 2011, the Knesset enacted the Law for Economic Policy for 2011 and 2012 (Amended Legislation), and among other things, amended
the Law, ("the Amendment"). According to the Amendment, the benefit tracks in the Investment Law were modified and a
flat tax rate applies to the Company's entire preferred income. The Company will be able to opt to apply (the waiver is non-recourse)
the Amendment and from then on it will be subject to the amended tax rates as follows: 2014 - 16%. As of December 31, 2014, the
Company has not applied for this amendment. The profits of these “Industrial Companies” will be freely distributable
as dividends, subject to a withholding tax of 20% (on distribution commencing January 1, 2014) or lower, under an applicable tax
treaty.



The Company and
certain of its Israeli subsidiaries intend to apply the new incentives regime under the Amendment to their industrial activity
in Israel starting in 2014 and believes it will qualify as an “Beneficiary Company” under the Amendment.



F-39







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



| | NOTE 12:- | TAXES ON
                                         INCOME (Cont.)
| | --------- | ----------------------------------------------------------------





| | 3. | The Company's Israeli entities have received final tax assessments for their Israeli tax return
filings through the year 2010.
| | -- | ------------------------------------------------------------------------------------------------------------------------------



| | 4. | Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:
| | -- | ---------------------------------------------------------------------------



The Company
qualifies as an Industrial Company within the meaning of the Law for the Encouragement of Industry (Taxes), 1969 (the "Industrial
Encouragement Law"). The Industrial Encouragement Law defines an "Industrial Company" as a company that is resident
in Israel and that derives at least 90% of its income in any tax year, other than income from defense loans, capital gains, interest
and dividends, from an enterprise whose major activity in a given tax year is industrial production. Under the Industrial Encouragement
Law, the Company is entitled to amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes
as well as accelerated depreciation rates on equipment and buildings.

Eligibility
for the benefits under the Industrial Encouragement Law is not subject to receipt of prior approval from any governmental authority.



| | b. | Non-Israeli subsidiaries:
| | -- | -------------------------



Non-Israeli subsidiaries are taxed
according to the tax laws in their respective domiciles of residence. If earnings are distributed to Israel in the form of dividends
or otherwise, the Company may be subject to additional Israeli income taxes (subject to an adjustment for foreign tax credits)
and foreign withholding taxes.



The amount of the Company cash
and cash equivalents that are currently held outside of Israel that would be subject to income taxes if distributed as dividends
is $21.2 million. However, a determination of the amount of the unrecognized deferred tax liability for temporary difference related
to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity of the structure of our group
of subsidiaries for tax purposes and the difficulty of projecting the amount of future tax liability



| | c. | Net operating loss carryforwards:
| | -- | ---------------------------------



As of December
31, 2014, the Company and its Israeli subsidiaries had operating loss carryforwards of $ 15,929, which can be carried forward
and offset against taxable income in the future for an indefinite period.



The Company's
subsidiaries in Europe had estimated total available tax loss carryforwards of $ 4,999 as of December 31, 2014, to offset
against future taxable income.



The Company's
subsidiaries in the U.S. had estimated total available tax loss carryforwards of $ 427 as of December 31, 2014, which can
be carried forward and offset against taxable income for a period of up to 20 years, from the year the loss was incurred.



F-40











|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)





| | NOTE 12:- | TAXES ON
                                         INCOME (Cont.)
| | --------- | ----------------------------------------------------------------



Utilization of
U.S. net operating losses may be subject to substantial annual limitations due to the "change in ownership" provisions
("annual limitations") of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result
in the expiration of net operating losses before utilization.



| | d. | Income before taxes on income:
| | -- | ------------------------------



|         |  | Year ended December 31, |       
|-------- |  | ----------------------- | ------
|         |  | 2012                    |       
|         |  |                         |       
|Domestic |  | $                       | 10,462
|Foreign  |  |                         | 6,092 
|         |  |                         |       
|         |  | $                       | 16,554



| | e. | Taxes on income:
| | -- | ----------------



Taxes on income
(tax benefit) consist of the following:

|                              |  | Year ended December 31, |       
|----------------------------- |  | ----------------------- | ------
|                              |  | 2012                    |       
|Current:                      |  |                         |       
|                              |  |                         |       
|Domestic                      |  | $                       | (1,291
|Foreign                       |  |                         | 302   
|                              |  |                         |       
|                              |  |                         | (989  
|Deferred taxes:               |  |                         |       
|                              |  |                         |       
|Domestic                      |  |                         | 414   
|Foreign                       |  |                         | 669   
|                              |  |                         |       
|                              |  |                         | 1,083 
|                              |  |                         |       
|Taxes on income (tax benefit) |  | $                       | 94    



F-41







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)





| | NOTE 12:- | TAXES ON
                                         INCOME (Cont.)
| | --------- | ----------------------------------------------------------------



| | f. | Deferred tax assets and liabilities:
| | -- | ------------------------------------



Deferred taxes
reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of the Company and its subsidiaries deferred tax
assets are as follows:



|                                               |  | December 31, |       
|---------------------------------------------- |  | ------------ | ------
|                                               |  | 2013         |       
|                                               |  |              |       
|Net operating loss carryforwards               |  | $            | 5,293 
|Allowances, reserves and intangible assets     |  |              | 1,207 
|                                               |  |              |       
|Deferred tax assets before valuation allowance |  |              | 6,500 
|Less - valuation allowance                     |  |              | (1,154
|                                               |  |              |       
|Deferred tax assets                            |  |              | 5,346 
|Capitalized software costs                     |  |              | (1,723
|                                               |  |              |       
|Deferred tax assets, net                       |  | $            | 3,623 



|                       |  | December 31, |      
|---------------------- |  | ------------ | -----
|                       |  | 2013         |      
|                       |  |              |      
|Current tax assets     |  | $            | 1,949
|Non-current tax assets |  |              | 1,674
|                       |  |              |      
|Deferred tax assets    |  | $            | 3,623



Current taxes
are included under other accounts receivable and prepaid expenses.



Significant components
of the Company and its subsidiaries deferred tax liability are as follows:



|                             |  | December 31, |      
|---------------------------- |  | ------------ | -----
|                             |  | 2013         |      
|                             |  |              |      
|Current tax liabilities      |  | $            | 2,567
|Non-current tax liabilities  |  |              | 2,204
|                             |  |              |      
|Net deferred tax liabilities |  | $            | 4,771



Both current deferred tax liabilities
and long term deferred tax liabilities are in respect of acquired intangible assets.

F-42









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)





| | NOTE 12:- | TAXES ON
                                         INCOME (Cont.)
| | --------- | ----------------------------------------------------------------



| | g. | Reconciliation of the theoretical tax expense to the actual tax expense:
| | -- | ------------------------------------------------------------------------



Reconciling items
between the 2012, 2013 and 2014 statutory tax rate (25%, 25% and 26.5%, respectively) of the Company and the effective tax rate
is presented in the following table:



|                                                                                     |  | Year ended December 31, |       
|------------------------------------------------------------------------------------ |  | ----------------------- | ------
|                                                                                     |  | 2012                    |       
|                                                                                     |  |                         |       
|Income before taxes, as reported in the consolidated statements of income            |  | $                       | 16,554
|                                                                                     |  |                         |       
|Statutory tax rate                                                                   |  |                         | 25    
|                                                                                     |  |                         |       
|Theoretical tax expenses on the above amount at the Israeli statutory tax rate       |  | $                       | 4,139 
|Tax adjustment in respect of different tax rates                                     |  |                         | 444   
|Deferred taxes on losses for which full valuation allowance was provided in the past |  |                         | 651   
|Changes in valuation allowance                                                       |  |                         | (2,003
|Tax benefits in respect of prior years, net                                          |  |                         | (1,126
|Nondeductible expenses                                                               |  |                         | 20    
|Uncertain tax position and other differences                                         |  |                         | (2,031
|                                                                                     |  |                         |       
|Income tax (tax benefit)                                                             |  | $                       | 94    



| | *) | In 2012, the Company reversed its write-off of tax prepayment advances from prior years since the
Company believes the utilization of the prepayments is more-likely-than not in the near future.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | **) | This amount is mainly comprised of tax provisions reversal due to statute of limitation of prior
years' tax assessments amounting to $1,270.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------



F-43









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)





| | NOTE 12:- | TAXES ON
                                         INCOME (Cont.)
| | --------- | ----------------------------------------------------------------



| | h. | The Company applies ASC 740, "Income Taxes" with regards to tax uncertainties. During
the years ended December 31, 2012, 2013 and 2014, the Company recorded $ 219, $ 2,811 and $ 156 of tax income, respectively,
as a result of this application.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A reconciliation
of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:

|                                                     |  |   |        |  
|---------------------------------------------------- |  | - | ------ | -
|Gross unrecognized tax benefits at January 1, 2012   |  | $ | 3,528  |  
|                                                     |  |   |        |  
|Increase in tax positions taken in prior years       |  |   | 270    |  
|                                                     |  |   |        |  
|Decrease in tax positions taken in prior years       |  |   | (489   | )
|                                                     |  |   |        |  
|Gross unrecognized tax benefits at December 31, 2012 |  |   | 3,309  |  
|Increase in tax positions taken in prior years       |  |   | -      |  
|                                                     |  |   |        |  
|Decrease in tax positions taken in prior years       |  |   | (2,811 | )
|                                                     |  |   |        |  
|Gross unrecognized tax benefits at December 31, 2013 |  |   | 498    |  
|                                                     |  |   |        |  
|Increase in tax positions taken in prior years       |  |   | -      |  
|                                                     |  |   |        |  
|Decrease in tax positions taken in prior years       |  |   | (156   | )
|                                                     |  |   |        |  
|Gross unrecognized tax benefits at December 31, 2014 |  | $ | 342    |  



As of December
31, 2014, the entire amount of unrecognized tax benefit could affect the Company's income tax provision and the effective tax rate.



| | NOTE 13:- | EQUITY
| | --------- | ------



| | a. | The ordinary shares of the Company are listed on the NASDAQ Global Select Market in the United
States and are traded on the Tel-Aviv Stock Exchange in Israel.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Issuance of ordinary shares:
| | -- | ----------------------------



On December 23,
2010, the Company issued 3,287,616 ordinary shares at a price of $ 6.5 per share and in a total amount of $ 20,290 net
of issuance expenses. The shares were issued to institutional investors in a private placement. In addition, certain of the purchasers
received warrants to purchase up to an aggregate of 1,134,231 ordinary shares at an exercise price of $ 8.26 per share. 
The warrants are exercisable as of six months from the date of issuance, have a term of three years, and the exercise price is
subject to future adjustment for various events, such as stock splits or dividend distributions. Following the Company's dividend
distribution and in respect to warrants issuance agreement. The warrants expired on June 2014.



F-44







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



| | NOTE 13:- | EQUITY
                                         (Cont.)
| | --------- | -------------------------------------------------------



| | c. | Stock Option Plans:
| | -- | -------------------



Under the Company's
2007 Stock Option Plan, as amended ("the Plan"), options may be granted to employees, officers, directors and consultants
of the Company and its subsidiaries. Pursuant to the 2007 Stock Option Plan, the Company reserved for issuance 1,500,000 ordinary
shares. In 2012, the Company increased the amount of ordinary shares reserved for issuance by additional 1,000,000 ordinary shares
in connection with the 2007 Stock Option Plan (mentioned above). As of December 31, 2014, an aggregate of 1,001,563 ordinary shares
of the Company are available for future grants under the Plan. Each option granted under the Plan is exercisable for a period of
ten years from the date of the grant of the option. The 2007 Plan will expire on August 1, 2017.



The exercise
price for each option is determined by the Board of Directors and set forth in the Company's award agreement. Unless determined
otherwise by the Board of Directors, the option exercise price shall be equal to or higher than the share market price at the grant
date. The options generally vest over 3-4 years. Any option that is forfeited or canceled before expiration becomes available for
future grants under the Plans.



A summary of
employee option activity under the Plans as of December 31, 2014 and changes during the year ended December 31, 2014 are as follows:



|                                                 |  | Number of options |          |   | Weighted average exercise
 price |   |      | Weighted average remaining contractual term (in years) |  |  | Aggregate intrinsic value | 
|------------------------------------------------ |  | ----------------- | -------- | - | -------------------------------- | - | ---- | ------------------------------------------------------ |  |  | ------------------------- | 
|                                                 |  |                   |          |   |                                  |   |      |                                                        |  |  |                           | 
|Outstanding at January 1, 2014                   |  |                   | 703,110  |   |                                  | $ | 3.16 |                                                        |  |  | 6.68                      | 
|Granted                                          |  |                   | 155,000  |   |                                  | $ | 7.47 |                                                        |  |  |                           | 
|Exercised                                        |  |                   | (115,721 | ) |                                  | $ | 1.86 |                                                        |  |  |                           | 
|Forfeited                                        |  |                   | (3,500   | ) |                                  | $ | 4.00 |                                                        |  |  |                           | 
|                                                 |  |                   |          |   |                                  |   |      |                                                        |  |  |                           | 
|Outstanding at December 31, 2014                 |  |                   | 738,889  |   |                                  | $ | 4.26 |                                                        |  |  | 6.42                      | 
|                                                 |  |                   |          |   |                                  |   |      |                                                        |  |  |                           | 
|Exercisable at December 31, 2014                 |  |                   | 448,639  |   |                                  | $ | 2.95 |                                                        |  |  | 5.03                      | 
|                                                 |  |                   |          |   |                                  |   |      |                                                        |  |  |                           | 
|Vested and expected to vest at December 31, 2014 |  |                   | 738,889  |   |                                  | $ | 4.26 |                                                        |  |  | 6.42                      | 



The weighted-average
grant-date fair value of options granted during the years ended December 31, 2012, 2013 and 2014 was $4, $ 6 and $ 3.76, respectively.
The aggregate intrinsic value in the table above represents the total intrinsic value that would have been received by the option
holders had all option holders exercised their options on December 31, 2014. This amount is changed based on the market value
of the Company's ordinary shares. Total intrinsic value of options exercised during the years ended December 31, 2012, 2013
and 2014 was $ 572, $ 529 and $ 741, respectively. As of December 31, 2014, there was $ 646 of unrecognized compensation cost related
to non-vested share-based compensation arrangements granted under the Plans. This cost is expected to be recognized over a period
of approximately three years.



F-45









|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



| | NOTE 13:- | EQUITY
                                         (Cont.)
| | --------- | -------------------------------------------------------



The options
outstanding as of December 31, 2014, have been separated into ranges of exercise price categories, as follows:



|Exercise price |  | Options outstanding |         |  | Weighted average remaining contractual life (years) |  |      | Weighted average exercise price |  |   | Options exercisable |  |  | Weighted average exercise price of exercisable options |        
|-------------- |  | ------------------- | ------- |  | --------------------------------------------------- |  | ---- | ------------------------------- |  | - | ------------------- |  |  | ------------------------------------------------------ | -------
|In $           |  |                     |         |  |                                                     |  |      |                                 |  |   |                     |  |  |                                                        |        
|0-1            |  |                     | 4,000   |  |                                                     |  | 4.24 |                                 |  | $ | -                   |  |  |                                                        | 4,000  
|1.01-2         |  |                     | 69,200  |  |                                                     |  | 1.85 |                                 |  | $ | 1.20                |  |  |                                                        | 69,200 
|2.01-3         |  |                     | 173,667 |  |                                                     |  | 4.80 |                                 |  | $ | 2.30                |  |  |                                                        | 173,667
|3.01-4         |  |                     | 252,022 |  |                                                     |  | 6.12 |                                 |  | $ | 3.96                |  |  |                                                        | 180,522
|4.01-5         |  |                     | -       |  |                                                     |  | -    |                                 |  | $ | -                   |  |  |                                                        | -      
|5.01-6         |  |                     | 85,000  |  |                                                     |  | 8.61 |                                 |  | $ | 6.00                |  |  |                                                        | 21,250 
|6.01-7         |  |                     | 75,000  |  |                                                     |  | 9.87 |                                 |  | $ | 6.89                |  |  |                                                        | -      
|7.01-8         |  |                     | -       |  |                                                     |  | -    |                                 |  | $ | -                   |  |  |                                                        | -      
|8.01-9         |  |                     | 80,000  |  |                                                     |  | 9.36 |                                 |  | $ | 8.01                |  |  |                                                        | -      
|               |  |                     |         |  |                                                     |  |      |                                 |  |   |                     |  |  |                                                        |        
|               |  |                     | 738,889 |  |                                                     |  | 6.42 |                                 |  | $ | 4.26                |  |  |                                                        | 448,639



d.       Accumulated
other comprehensive income:



|                                                                               |  | December 31, |     
|------------------------------------------------------------------------------ |  | ------------ | ----
|                                                                               |  | 2012         |     
|                                                                               |  |              |     
|Accumulated realized and unrealized gain on available-for-sale securities, net |  | $            | 173 
|Accumulated foreign currency translation adjustments                           |  |              | (776
|Accumulated unrealized gain (loss) on derivative instruments, net              |  |              | 17  
|                                                                               |  |              |     
|Total other comprehensive income                                               |  | $            | (586





| | e. | On September 4, 2012, the Company's Board of Directors adopted a dividend distribution policy,
subject to any applicable law. According to this policy, each year the Company will distribute a dividend of up to 50% of its annual
distributable profits. It is possible that the Board of Directors will decide, subject to the conditions stated above, to declare
additional dividend distributions. The Company's Board of Directors may at its discretion and at any time, change, whether as a
result of a one-time decision or a change in policy, the rate of dividend distributions and/or not to distribute a dividend, all
at its discretion.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







F-46













|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



NOTE
13:-     EQUITY (Cont.)



In respect to
the policy mentioned above, on September 10, 2012 and on February 14, 2013 , the Company declared a dividend distribution of $ 0.10
per share ($ 3,661 in the aggregate) and $ 0.12 per share ($ 4,397 in the aggregate) which were paid on October 17, 2012 and
on March 14, 2013, respectively. On August 12, 2013 the Company declared a dividend distribution of $ 0.09 per share ($ 3,390
in the aggregate) which was paid on September 3, 2013. On February 18, 2014, the Company declared a dividend distribution of $ 0.12
per share ($ 4,468 in the aggregate) which was paid on March 14, 2014. On August 19, 2014 the Company declared a dividend distribution
of $ 0.095 per share ($ 4,195 in the aggregate) which was paid on September 4, 2014. On February 4, 2015, the Company declared
a dividend distribution of $ 0.081 per share (see also note 18).



| | f. | On November 2014, a Company's subsidiary granted one of its executive options exercisable for 1,167
ordinary shares in its subsidiary. The options are vested in equal quarterly installments, over a four year period that commences
in January 1, 2013 and concludes in March 31, 2016, if meeting a certain operational margin during 2013, 2014 and 2015. The exercise
price of the options is NIS 1 per share.  Total fair value of the grant was calculated based on the Company subsidiary’s
fair value on the grant date and totaled NIS 5,910 thousand (NIS 5 thousand per share).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE
14:-     SELECTED STATEMENTS OF INCOME DATA



| | a. | Research and development costs, net:
| | -- | ------------------------------------



|                                  |  | Year ended December 31, |       
|--------------------------------- |  | ----------------------- | ------
|                                  |  | 2012                    |       
|                                  |  |                         |       
|Total costs                       |  | $                       | 7,916 
|Less - capitalized software costs |  |                         | (4,969
|                                  |  |                         |       
|Research and development, net     |  | $                       | 2,947 



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



|Interest income net of bank charges                                      |  | $ | 20  |   |  | $ | (170 | ) |  | $ | (156   | )
|------------------------------------------------------------------------ |  | - | --- | - |  | - | ---- | - |  | - | ------ | -
|Interest expenses related to liabilities in connection with acquisitions |  |   | (48 | ) |  |   | (407 | ) |  |   | (152   | )
|Interest income from debt instruments                                    |  |   | 49  |   |  |   | 46   |   |  |   | 91     |  
|Loss arising from foreign currency translation and other                 |  |   | (11 | ) |  |   | (153 | ) |  |   | (1,569 | )
|                                                                         |  |   |     |   |  |   |      |   |  |   |        |  
|Financial income(expenses), net                                          |  | $ | 10  |   |  | $ | (684 | ) |  | $ | (1,786 | )



F-47







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



NOTE
15:-     COMMITMENTS AND CONTINGENCIES



| | a. | Lease commitments:
| | -- | ------------------



Certain of the
motor vehicles, facilities and equipment of the Company and its subsidiaries are rented under long-term operating lease agreements.
Future minimum lease commitments under non-cancelable operating leases as of December 31, 2014, are as follows:





|2015                |  | $ | 1,798 | 
|------------------- |  | - | ----- | 
|2016                |  |   | 773   | 
|2017                |  |   | 578   | 
|2018 and thereafter |  |   | 583   | 
|                    |  |   |       | 
|                    |  | $ | 3,732 | 



Rent expenses
for the years ended December 31, 2012, 2013 and 2014 were approximately $ 1,701, $ 1,911 and $ 1,736, respectively.



The Company leases
motor vehicles under a cancelable lease agreement. The Company has an option to be released from this lease agreement, which may
result in penalties in a maximum amount of $ 147.



The Company currently
occupies approximately 59,546 square feet of space based on a lease agreement expiring in December, 2014. The Company has an option
to terminate the lease agreement in Israel and India upon six months prior written notice.



The aggregated
amount of lease commitment for the next 6 months in Israel and India mentioned above is approximately $ 259.



| | b. | Guarantees and Collaterals:
| | -- | ---------------------------



The Company and certain of its
subsidiaries have provided three of their clients with performance bank guarantees totaling $ 295, which are linked to the
New Israeli Shekels, all of which will be terminated during 2015 and 2016.



Several of the Company’s
subsidiaries have pledged their accounts receivables to a financial institution, with respect to a US dollar loan received in 2013
(see also note 11).



| | c. | From time to time, the Company and/or its subsidiaries are subject to legal, administrative and
regulatory proceedings, claims, demands and investigations in the ordinary course of business, including claims with respect to
intellectual property, contracts, employment and other matters. The Company accrues a liability when it is both probable that a
liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the
determination of probability and the determination as to whether a loss is reasonably estimable. These accruals are reviewed and
adjusted to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events
pertaining to a particular matter.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-48







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



NOTE
15:-     COMMITMENTS AND CONTINGENCIES (Cont.)



Lawsuits have
been brought against the Company in the ordinary course of business. The Company intends to defend itself vigorously against those
lawsuits.



| | 1. | In August 2009, a software company and one of its owners filed
an arbitration proceeding against the company and one of its subsidiaries, claiming an alleged breach of a non-disclosure agreement
between the parties. The plaintiffs sought damages in the amount of approximately NIS 52 million (approximately $15 million). The
arbitrator determined that both the company and its subsidiary breached the non-disclosure agreement. In January 2015 the arbitrator
rendered his ruling and determined that the company should pay damages to the plaintiffs. The company financial results of
operations include a net impact of $1.6 million resulting from the arbitration. The company is considering its options following
this ruling.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------









| | 2. | In addition to the above mentioned legal proceedings, the Company
is also involved in various legal proceedings arising in the normal course of its business. Based upon the advice of counsel, the
Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE
16:-     NET EARNINGS PER SHARE



The following
table sets forth the computation of basic and diluted net earnings per share:



|                                                                                                |  | Year ended December 31, |           
|----------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                                |  | 2012                    |           
|                                                                                                |  |                         |           
|Numerator for basic and diluted earnings per share - net income available to Magic shareholders |  | $                       | 16,183    
|                                                                                                |  |                         |           
|Weighted average ordinary shares outstanding:                                                   |  |                         |           
|                                                                                                |  |                         |           
|Denominator for basic net earnings per share                                                    |  |                         | 36,502,264
|Effect of dilutive securities                                                                   |  |                         | 605,406   
|                                                                                                |  |                         |           
|Denominator for diluted net earnings per share                                                  |  |                         | 37,107,670
|                                                                                                |  |                         |           
|Basic and diluted earnings per share                                                            |  | $                       | 0.44      



F-49







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



NOTE
17:-     SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS



| | a. | The Company reports its results on the basis of two reportable business segments: software services
(which include proprietary and none proprietary software technology) and IT professional services.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company evaluates
segment performance based on revenues and operating income of each segment. The accounting policies of the operating segments are
the same as those described in the summary of significant accounting policies. This data is presented in accordance with ASC 280,
"Segment Reporting."



Headquarters'
general and administrative costs have not been allocated between the different segments.



Software
services



The Company develops
markets, sells and supports a proprietary and none proprietary application platform, software applications, business and process
integration solutions and related services.



IT professional
services



The Company offers
advanced and flexible IT services in the areas of infrastructure design and delivery, application development, technology planning
and implementation services, communications services and solutions, as well as supplemental staffing services.



There are no
significant transactions between the two segments.



| | b. | The following is information about reported segment results of operation:
| | -- | -------------------------------------------------------------------------



|                                |  | Software services |        |  | IT professional services |   |        | Unallocated expense |  |   | Total  |  
|------------------------------- |  | ----------------- | ------ |  | ------------------------ | - | ------ | ------------------- |  | - | ------ | -
|2012                            |  |                   |        |  |                          |   |        |                     |  |   |        |  
|                                |  |                   |        |  |                          |   |        |                     |  |   |        |  
|Total revenues                  |  | $                 | 65,410 |  |                          | $ | 60,970 |                     |  | $ | -      |  
|Expenses                        |  |                   | 50,497 |  |                          |   | 55,456 |                     |  |   | 4,019  |  
|                                |  |                   |        |  |                          |   |        |                     |  |   |        |  
|Segment operating income (loss) |  | $                 | 14,913 |  |                          | $ | 5,514  |                     |  | $ | (4,019 | )
|                                |  |                   |        |  |                          |   |        |                     |  |   |        |  
|Depreciation and amortization   |  | $                 | 5,937  |  |                          | $ | 1,182  |                     |  | $ | 344    |  



F-50







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



NOTE
17:-     SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)





|                                |  | Software services |        |  | IT professional services |   |        | Unallocated expense |  |   | Total  |  
|------------------------------- |  | ----------------- | ------ |  | ------------------------ | - | ------ | ------------------- |  | - | ------ | -
|2013                            |  |                   |        |  |                          |   |        |                     |  |   |        |  
|                                |  |                   |        |  |                          |   |        |                     |  |   |        |  
|Total revenues                  |  | $                 | 67,453 |  |                          | $ | 77,505 |                     |  | $ | -      |  
|Expenses                        |  |                   | 53,164 |  |                          |   | 68,846 |                     |  |   | 3,821  |  
|                                |  |                   |        |  |                          |   |        |                     |  |   |        |  
|Segment operating income (loss) |  | $                 | 14,289 |  |                          | $ | 8,659  |                     |  | $ | (3,821 | )
|                                |  |                   |        |  |                          |   |        |                     |  |   |        |  
|Depreciation and amortization   |  | $                 | 5,917  |  |                          | $ | 2,210  |                     |  | $ | 253    |  
|                                |  |                   |        |  |                          |   |        |                     |  |   |        |  
|2014                            |  |                   |        |  |                          |   |        |                     |  |   |        |  
|                                |  |                   |        |  |                          |   |        |                     |  |   |        |  
|Total revenues                  |  | $                 | 69,861 |  |                          | $ | 94,443 |                     |  | $ | -      |  
|Expenses                        |  |                   | 54,464 |  |                          |   | 84,873 |                     |  |   | 4,241  |  
|                                |  |                   |        |  |                          |   |        |                     |  |   |        |  
|Segment operating income (loss) |  | $                 | 15,397 |  |                          | $ | 9,570  |                     |  | $ | (4,241 | )
|                                |  |                   |        |  |                          |   |        |                     |  |   |        |  
|Depreciation and amortization   |  | $                 | 6,065  |  |                          | $ | 2,263  |                     |  | $ | 266    |  





| | c. | The Company's business is divided into the following geographic areas: Israel, Europe, the United
States, Japan and other regions. Total revenues are attributed to geographic areas based on the location of the customers.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following
table presents total revenues classified according to geographical destination for the years ended December 31, 2012, 2013 and
2014:



|              |  | Year ended December 31, |        
|------------- |  | ----------------------- | -------
|              |  | 2012                    |        
|              |  |                         |        
|Israel        |  | $                       | 11,561 
|Europe        |  |                         | 29,139 
|United States |  |                         | 64,591 
|Japan         |  |                         | 12,661 
|Other         |  |                         | 8,428  
|              |  |                         |        
|              |  | $                       | 126,380



F-51







|MAGIC SOFTWARE ENTERPRISES LTD.                            
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|U.S. dollars in thousands (except share and per share data)



NOTE
17:-     SEGMENT GEOGRAPHICAL INFORMATION AND MAJOR CUSTOMERS (Cont.)



| | d. | The Company's long-lived assets are located as follows:
| | -- | -------------------------------------------------------



|              |  | December 31, |       
|------------- |  | ------------ | ------
|              |  | 2013         |       
|              |  |              |       
|Israel        |  | $            | 54,656
|Europe        |  |              | 3,117 
|United States |  |              | 23,287
|Japan         |  |              | 5,180 
|Other         |  |              | 3,395 
|              |  |              |       
|              |  | $            | 89,634



| | e. | The Company does not allocate its assets to its reportable segments; accordingly, asset information
by reportable segments is not presented.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------



| | f. | In 2012, 2013 and 2014, the Company had one customer, included in the IT professional services
segment, which accounted for 19%, 13% and 10% of the group revenues, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE
18:-     SUBSEQUENT EVENTS



| | a. | On February 25, 2015 the Company entered into a definitive agreement to acquire a 70% stake, with
an option to increase the holding to 100%, in an Israeli-based company specializes in software professional services for mainframes
and complex large-scale environments. The acquisition is subject to the fulfillment of certain conditions defined in the acquisition
agreement.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | On February 4, 2015, the Company declared a dividend distribution of $ 0.081 per share ($
3,582 in the aggregate) which will be paid on March 11, 2015. The dividend distribution relates to the Company's earnings in the
second half of 2014.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-52







|MAGIC SOFTWARE ENTERPRISES LTD.              
|---------------------------------------------
|AND ITS SUBSIDIARIES                         
|APPENDIX TO CONSOLIDATED FINANCIAL STATEMENTS



DETAILS OF SUBSIDIARIES AND AFFILIATE



Details of the percentage of control of the
share capital and voting rights of subsidiaries and an affiliate as of December 31, 2014:



|Name of Company                                                        |  | Percentage of ownership 
and control |      |  | Place of incorporation
|---------------------------------------------------------------------- |  | ------------------------------------ | ---- |  | ----------------------
|                                                                       |  | %                                    |      |  |                       
|                                                                       |  |                                      |      |  |                       
|Magic Software Japan K.K.                                              |  |                                      | 100  |  |                       
|Magic Software Enterprises Inc.                                        |  |                                      | 100  |  |                       
|Magic Software Enterprises (UK) Ltd.                                   |  |                                      | 100  |  |                       
|Hermes Logistics Technologies Limited.                                 |  |                                      | 100  |  |                       
|Magic Software Enterprises Spain Ltd.                                  |  |                                      | 100  |  |                       
|Coretech Consulting Group Inc.                                         |  |                                      | 100  |  |                       
|Coretech Consulting Group LLC.                                         |  |                                      | 100  |  |                       
|Fusion Solutions LLC.                                                  |  |                                      | 100  |  |                       
|Xsell Resources Inc.                                                   |  |                                      | 100  |  |                       
|Magic Software Enterprises (Israel) Ltd.                               |  |                                      | 100  |  |                       
|Magic Software Enterprises Netherlands B.V.                            |  |                                      | 100  |  |                       
|Magic Software Enterprises France                                      |  |                                      | 100  |  |                       
|Magic Beheer B.V.                                                      |  |                                      | 100  |  |                       
|Magic Benelux B.V.                                                     |  |                                      | 100  |  |                       
|Magic Software Enterprises GMBH                                        |  |                                      | 100  |  |                       
|Magic Software Enterprises India Pvt. Ltd.                             |  |                                      | 100  |  |                       
|Onyx Magyarorszag Szsoftverhaz .                                       |  |                                      | 100  |  |                       
|Magix Integration (Proprietary) Ltd                                    |  |                                      | 100  |  |                       
|Appbuilder Solutions Ltd                                               |  |                                      | 100  |  |                       
|Complete Business Solutions Ltd                                        |  |                                      | 96.3 |  |                       
|Comm-IT Technology Solutions Ltd                                       |  |                                      | 80   |  |                       
|Comm-IT Software Ltd                                                   |  |                                      | 100  |  |                       
|Comm-IT Embedded Ltd (shares held by Comm-IT Technology Solutions Ltd. |  |                                      | 50.1 |  |                       
|Pilat (North America), Inc                                             |  |                                      | 100  |  |                       
|Pilat Europe Ltd                                                       |  |                                      | 100  |  |                       
|Valinor Ltd                                                            |  |                                      | 100  |  |                       
|Dario Solutions IT Ltd                                                 |  |                                      | 100  |  |                       
|BridgeQuest Labs, Inc                                                  |  |                                      | 100  |  |                       
|BridgeQuest, Inc                                                       |  |                                      | 100  |  |                       
|Allstates Consulting Services LLC                                      |  |                                      | 100  |  |                       
|Formula Telecom Solutions, Ltd                                         |  |                                      | 100  |  |                       
|FTS Bulgaria (FTS Global Ltd.)                                         |  |                                      | 100  |  |                       
|DataMind Technologies Ltd                                              |  |                                      | 80   |  |                       



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



F-53













|37 Broadhurst Gardens, London NW6 3QT | Tel: 020 - 7624 2251 Fax: 020 - 7372 2328
|------------------------------------- | -----------------------------------------
|                                      | E - mail: lc@levy-cohen.co.uk            










To the Board of Directors
and Shareholders of



Magic Software Enterprises (UK) Limited



We have
audited the accompanying balance sheet of Magic Software Enterprises (UK) Limited (the “Company”) as of December
31, 2014 and 2013, and the related profit and loss account and changes in shareholders’ equity for each of the three
years in the period ended December 31, 2014. 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 audit.



We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
and 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,
the financial statements referred to above present fairly, in all material respects, the financial position of the Company at December
31, 2013 and 2012, and the related profit and loss account and changes in shareholders’ equity for each of the three years
in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.



Yours sincerely,

LEVY COHEN & CO.



|                                  |                 
|--------------------------------- | ----------------
|Registered Auditors and Certified |                 
|Public Accountants                |                 
|                                  | January 29, 2015












|J. Cohen C.P.A. (ISR)
        R. Shahmoon ACA | Registered to carry out audit work in the UK by The Institute of Chartered Accountants in England and Wales. Details about our audit registration can be viewed at www.auditregister.org.uk under reference no. C008178288.
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-54











|37 Broadhurst Gardens, London NW6 3QT | Tel: 020 - 7624 2251 Fax: 020 - 7372 2328
|------------------------------------- | -----------------------------------------
|                                      | E - mail: lc@levy-cohen.co.uk            












To the Board of Directors and Shareholders
of



Hermes Logistics Technologies Limited



We have audited
the accompanying balance sheet of Hermes Logistics Technologies Limited (the “Company”) as of December 31, 2014 and
2013, and the related profit and loss account and changes in shareholders’ equity for each of the three years in the period
ended December 31, 2014. 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 audit.



We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits
included consideration ofinternal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and 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, the financial statements referred to above present fairly, in all material respects, the
financial position of the Company at December 31, 2014 and 2013, and the related profit and loss account and changes in
shareholders’ equity for each of the three years in the period ended December 31, 2014, in conformity with U.S.
generally accepted accounting principles.



Yours sincerely,

LEVY COHEN & CO.



|                                  |               
|--------------------------------- | --------------
|Registered Auditors and Certified |               
|Public Accountants                |               
|                                  | March 13, 2015












|J. Cohen C.P.A. (ISR)
        R. Shahmoon ACA | Registered to carry out audit work in the UK by The Institute of Chartered Accountants in England and Wales. Details about our audit registration can be viewed at www.auditregister.org.uk under reference no. C008178288.
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-55







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of Directors and Shareholders
of

Magic Software Japan K. K.



We have audited the accompanying
balance sheets of Magic Software Japan K.K. (the "Company”) as of December 31, 2013 and 2014, and the related statements
of operations and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.



We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31,
2013 and 2014, and the related statements of operations and cash flows for each of the three years in the period ended December
31, 2014 in conformity with accounting principles generally accepted inthe United States of America.



|Tokyo, Japan     |                      
|---------------- | ---------------------
|January 28, 2015 |                      
|                 | KDA Audit Corporation



F-56