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

| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|--------------------------------------------------------------------------------------|

| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|------------------------------------------------------------------------------------------|

| o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|---------------------------------------------------------------------------------------------|

----

| Title of Each Class              | Name of Each Exchange On Which Registered |
|----------------------------------|-------------------------------------------|
| Ordinary Shares, NIS 1 par value | Tel Aviv Stock Exchange                   |
| American Depositary Shares       | NASDAQ Global Market                      |

----

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

----

----

----

|                                                                                                                       |   |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Report of Independent Registered Public Accounting Firm                                                                    |   | F-1    |
| Consolidated Balance Sheets at December 31, 2010 and 2009                                                             |   | F-4    |
| Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008                            |   | F-6    |
| Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008 |   | F-7    |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008                            |   | F-8    |
| Notes to Consolidated Financial Statements                                                                                 |   | F-13   |

----

| Exhibit No. |   |                                                                                                                                                                                                                                         |   |   |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|        |   |                                                                                                                                                                                                                                         |   |   |
| 1.1         |   | Memorandum of Association (1)                                                                                                                                                                                                                |   |   |
| 1.2         |   | Articles of Association as amended on December 28, 2005 (2)                                                                                                                                                                                  |   |   |
| 2.1         |   | Depositary Agreement by and among Formula Systems (1985) Ltd., Bank of New York Mellon and the holders of the American Depositary Shares of Formula Systems (1985) Ltd. (1)                                                                  |   |   |
| 4.1         |   | Form of Letter of Indemnification, dated December 28, 2005 (2)                                                                                                                                                                               |   |   |
| 4.2         |   | English translation of Formula Systems (1985) Ltd. Employees and Office Holders Share Option Plan (2008)(3)                                                                                                                                  |   |   |
| 8           |   | List of Subsidiaries*                                                                                                                                                                                                                        |   |   |
| 12.1        |   | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act**                                                                                                  |   |
| 13.1        |   | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |   |   |
| 15.1        |   | Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global *                                                                                                                                                        |   |
| 15.2        |   | Consent of Levy Cohen and Co. *                                                                                                                                                                                                              |   |   |
| 15.3        |   | Consent of Levy Cohen and Co. *                                                                                                                                                                                                              |   |   |
| 15.4        |   | Consent of Verstegen accountants en adviseurs*                                                                                                                                                                                               |   |   |
| 15.5        |   | Consent of KDA Audit Corporation*                                                                                                                                                                                                            |   |   |
| 15.6        |   | Consent of Maria Negyessy*                                                                                                                                                                                                                   |   |   |
| 15.7        |   | Consent of Ziv Haft, registered certified public accountants (Isr.) BDO member firm**                                                                                                                                                        |   |   |
| 15.8        |   | Letter dated June 14, 2011 of Ziv Haft, registered certified public accountants (Isr.) BDO member firm, required to be filed under Item 16F(a)(3) of this annual report**                                                               |   |   |

----

| By:    | /s/Guy Bernstein        | June 14, 2011 |
|--------|-------------------------|---------------|
|   | Guy Bernstein           | Date          |
|   | Chief Executive Officer |          |

----

| Exhibit No. |   |                                                                                                                                                                                                                                         |   |   |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|        |   |                                                                                                                                                                                                                                         |   |   |
| 1.1         |   | Memorandum of Association (1)                                                                                                                                                                                                                |   |   |
| 1.2         |   | Articles of Association as amended on December 28, 2005 (2)                                                                                                                                                                                  |   |   |
| 2.1         |   | Depositary Agreement by and among Formula Systems (1985) Ltd., Bank of New York Mellon and the holders of the American Depositary Shares of Formula Systems (1985) Ltd. (1)                                                                  |   |   |
| 4.1         |   | Form of Letter of Indemnification, dated December 28, 2005 (2)                                                                                                                                                                               |   |   |
| 4.2         |   | English translation of Formula Systems (1985) Ltd. Employees and Office Holders Share Option Plan (2008)(3)                                                                                                                                  |   |   |
| 8           |   | List of Subsidiaries*                                                                                                                                                                                                                        |   |   |
| 12.1        |   | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act**                                                                                                  |   |
| 13.1        |   | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/Rule 15d-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** |   |   |
| 15.1        |   | Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global *                                                                                                                                                        |   |
| 15.2        |   | Consent of Levy Cohen and Co. *                                                                                                                                                                                                              |   |   |
| 15.3        |   | Consent of Levy Cohen and Co. *                                                                                                                                                                                                              |   |   |
| 15.4        |   | Consent of Verstegen accountants en adviseurs*                                                                                                                                                                                               |   |   |
| 15.5        |   | Consent of KDA Audit Corporation*                                                                                                                                                                                                            |   |   |
| 15.6        |   | Consent of Maria Negyessy*                                                                                                                                                                                                                   |   |   |
| 15.7        |   | Consent of Ziv Haft, registered certified public accountants (Isr.) BDO member firm**                                                                                                                                                        |   |   |
| 15.8        |   | Letter dated June 14, 2011 of Ziv Haft, registered certified public accountants (Isr.) BDO member firm, required to be filed under Item 16F(a)(3) of this annual report**                                                               |   |   |

----

----

|                                                      |   | Page                  |
|-----------------------------------------------------------|--------|-----------------------|
|                                                      |   |                  |
| Report Of Independent Registered Public Accounting Firms: |   | F-2 - F-4        |
|                                                      |   |                  |
| Consolidated Financial Statements:                        |   |                  |
|                                                      |   |                  |
| Balance Sheets                                            |   | F-5 - F-6   |
|                                                      |   |                  |
| Statements of Income                                      |   | F-7                   |
|                                                      |   |                  |
| Statements of Changes in Shareholders' Equity             |   | F-8 - F-9   |
|                                                      |   |                  |
| Statements of Cash Flows                                  |   | F-10 - F-13 |
|                                                      |   |                  |
| Notes to Financial Statements                             |   | F-14 - F-63 |

----

----

|  | Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, Israel   Tel:  972 (3)6232525Fax: 972 (3)5622555www.ey.com/il |
|--|--------------------------------------------------------------------------------------------------------------------------------------------|

|             | /s/ Kost, Forer, Gabbay & Kasierer |
|------------------|---------------------------------------------|
| Tel-Aviv, Israel | KOST, FORER, GABBAY & KASIERER          |
| March 18, 2011   | A Member of Ernst & Young Global        |

----

|  | Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, Israel   Tel:  972 (3)6232525Fax: 972 (3)5622555www.ey.com/il |
|--|--------------------------------------------------------------------------------------------------------------------------------------------|

----

|  | Kost Forer Gabbay & Kasierer3 Aminadav St.Tel-Aviv 67067, Israel   Tel:  972 (3)6232525Fax: 972 (3)5622555www.ey.com/il |
|--|--------------------------------------------------------------------------------------------------------------------------------------------|

|             | /s/ Kost, Forer, Gabbay & Kasierer |
|------------------|---------------------------------------------|
| Tel-Aviv, Israel | KOST, FORER, GABBAY & KASIERER          |
| March 18, 2011   | A Member of Ernst & Young Global        |

----

----

|                                                                                                                                     |   | December 31, |    |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|---------|
|                                                                                                                                     |   | 2010         |    |   | 2009 |   |
|                                                                                                                                     |   |         |    |   |   |   |
| ASSETS                                                                                                                                   |   |         |    |   |   |   |
| CURRENT ASSETS:                                                                                                                          |   |         |    |   |   |   |
| Cash and cash equivalents                                                                                                                |   |         | 110,508 |   |   |   | 100,205 |   |
| Marketable securities (Note 4)                                                                                                           |   |         | 38,170  |   |   |   | 44,171 |   |
| Short-term deposits                                                                                                                      |   |         | 24      |   |   |   | 13,838 |   |
| Trade receivables (net of allowances for doubtful debts of $ 3,781 and $ 4,750 as of December 31, 2010 and 2009, respectively) |   |         | 154,366 |   |   |   | 130,237 |   |
| Other current assets (Note 16a)                                                                                                          |   |         | 23,140  |   |   |   | 22,448 |   |
| Inventories                                                                                                                              |   |         | 5,601   |   |   |   | 2,439 |   |
| Total assets attributed to discontinued operations                                                                                       |   |         | -       |   |   |   | 27 |   |
|                                                                                                                                     |   |         |    |   |   |   |   |   |
|                                                                                                                                     |   |         | 331,809 |   |   |   | 313,365 |   |
|                                                                                                                                     |   |         |    |   |   |   |   |   |
| LONG-TERM INVESTMENTS:                                                                                                                   |   |         |    |   |   |   |   |   |
| Marketable Securities (Note 4)                                                                                                           |   |         | 2,828   |   |   |   | 7,381 |   |
| Deferred taxes (Note 15b)                                                                                                                |   |         | 13,135  |   |   |   | 9,499 |   |
| Investments in affiliated company (Note 6)                                                                                               |   |         | 3,209   |   |   |   | 3,710 |   |
| Prepaid expenses and other assets                                                                                                        |   |         | 5,493   |   |   |   | 3,423 |   |
|                                                                                                                                     |   |         |    |   |   |   |   |   |
|                                                                                                                                     |   |         | 24,665  |   |   |   | 24,013 |   |
|                                                                                                                                     |   |         |    |   |   |   |   |   |
| SEVERANCE PAY FUND                                                                                                                       |   |         | 55,286  |   |   |   | 44,131 |   |
|                                                                                                                                     |   |         |    |   |   |   |   |   |
| PROPERTY, PLANTS AND EQUIPMENT, NET (Note 7)                                                                                             |   |         | 12,411  |   |   |   | 9,989 |   |
|                                                                                                                                     |   |         |    |   |   |   |   |   |
| NET INTANGIBLE ASSETS (Note 9)                                                                                                           |   |         | 33,101  |   |   |   | 27,534 |   |
|                                                                                                                                     |   |         |    |   |   |   |   |   |
| GOODWILL (Note 8)                                                                                                                        |   |         | 166,495 |   |   |   | 147,407 |   |
|                                                                                                                                     |   |         |    |   |   |   |   |   |
|                                                                                                                                     |   |         | 623,767 |   |   |   | 566,439 |   |

----

----

|                                                                                                                                                                                     |   | December 31, |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|---------|
|                                                                                                                                                                                     |   | 2010         |    |   | 2009 |   |
|                                                                                                                                                                                     |   |         |    |   |   |   |
| LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                                     |   |         |    |   |   |   |
| CURRENT LIABILITIES:                                                                                                                                                                     |   |         |    |   |   |   |
| Liabilities to banks (Note 16b)                                                                                                                                                          |   |         | 6,684   |   |   |   | 10,055 |   |
| Trade payables                                                                                                                                                                           |   |         | 53,177  |   |   |   | 43,777 |   |
| Deferred revenue                                                                                                                                                                         |   |         | 26,845  |   |   |   | 25,206 |   |
| Employees and payroll accrual                                                                                                                                                            |   |         | 40,704  |   |   |   | 32,029 |   |
| Other accounts payable (Note 16c)                                                                                                                                                        |   |         | 30,693  |   |   |   | 26,994 |   |
| Dividend payable                                                                                                                                                                         |   |         | -       |   |   |   | 6,694 |   |
| Liability in respect of business combinations                                                                                                                                            |   |         | 3,963   |   |   |   | 210 |   |
| Debentures (Note 11)                                                                                                                                                                     |   |         | 15,927  |   |   |   | 14,639 |   |
| Liabilities attributed to discontinued operations                                                                                                                                        |   |         | -       |   |   |   | 314 |   |
|                                                                                                                                                                                     |   |         |    |   |   |   |   |   |
|                                                                                                                                                                                     |   |         | 177,993 |   |   |   | 159,918 |   |
| LONG-TERM LIABILITIES:                                                                                                                                                                   |   |         |    |   |   |   |   |   |
| Debentures (Note 11)                                                                                                                                                                     |   |         | 31,854  |   |   |   | 43,918 |   |
| Deferred taxes (Note 15e)                                                                                                                                                                |   |         | 2,654   |   |   |   | 2,207 |   |
| Customer advances                                                                                                                                                                        |   |         | 3,520   |   |   |   | 1,116 |   |
| Liabilities to banks and others (Note 10)                                                                                                                                                |   |         | 3,154   |   |   |   | 8,556 |   |
| Liability in respect of business combinations                                                                                                                                            |   |         | 4,758   |   |   |   | 1,517 |   |
| Accrued severance pay                                                                                                                                                                    |   |         | 65,450  |   |   |   | 53,893 |   |
|                                                                                                                                                                                     |   |         |    |   |   |   |   |   |
|                                                                                                                                                                                     |   |         | 111,390 |   |   |   | 111,207 |   |
| COMMITMENTS AND CONTINGENCIES (Note 13)                                                                                                                                                  |   |         |    |   |   |   |   |   |
|                                                                                                                                                                                     |   |         |    |   |   |   |   |   |
| SHAREHOLDERS' EQUITY (Note 14):                                                                                                                                                          |   |         |    |   |   |   |   |   |
| Formula shareholders' equity:                                                                                                                                                            |   |         |    |   |   |   |   |   |
| Share capital - ordinary shares of NIS 1 par valueAuthorized - December 31, 2010 and 2009 - 25,000,000 shares; Issued: December 31, 2010 - 13,620,780 and 2009 - 13,224,780 shares) |   |         | 3,807   |   |   |   | 3,736 |   |
| Additional paid-in capital                                                                                                                                                               |   |         | 136,222 |   |   |   | 131,631 |   |
| Retained earnings                                                                                                                                                                        |   |         | 58,441  |   |   |   | 60,048 |   |
| Other accumulated comprehensive loss                                                                                                                                                     |   |         | (596    | ) |   |   | (7,115 | ) |
| Treasury shares (24,780 shares as of December 31, 2010 and 2009)                                                                                                                         |   |         | (259    | ) |   |   | (259 | ) |
|                                                                                                                                                                                     |   |         |    |   |   |   |   |   |
| Total Formula shareholders' equity                                                                                                                                                       |   |         | 197,615 |   |   |   | 188,041 |   |
| Non-controlling interests                                                                                                                                                                |   |         | 136,769 |   |   |   | 107,273 |   |
|                                                                                                                                                                                     |   |         |    |   |   |   |   |   |
| TOTAL SHAREHOLDERS' EQUITY                                                                                                                                                               |   |         | 334,384 |   |   |   | 295,314 |   |
|                                                                                                                                                                                     |   |         |    |   |   |   |   |   |
|                                                                                                                                                                                     |   |         | 623,767 |   |   |   | 566,439 |   |

----

----

|                                                                   |   | Year endedDecember 31, |    |
|------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                   |   | 2010                   |    |   | 2009 |   |   | 2008 |   |
| Revenues (Note 16g)                                                    |   |                   |    |   |   |   |   |   |   |
| Proprietary software products                                          |   |                   | 98,498  |   |   |   | 88,815 |   |   |   | 92,560 |   |
| Software services                                                      |   |                   | 451,196 |   |   |   | 380,575 |   |   |   | 410,683 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Total revenues                                                         |   |                   | 549,694 |   |   |   | 469,390 |   |   |   | 503,243 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Cost of revenues                                                       |   |                   |    |   |   |   |   |   |   |   |   |   |
| Proprietary software products                                          |   |                   | 46,297  |   |   |   | 43,057 |   |   |   | 43,246 |   |
| Software services                                                      |   |                   | 366,166 |   |   |   | 309,226 |   |   |   | 330,529 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Total cost of revenues                                                 |   |                   | 412,463 |   |   |   | 352,283 |   |   |   | 373,775 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Gross profit                                                           |   |                   | 137,231 |   |   |   | 117,107 |   |   |   | 129,468 |   |
| Research and development costs, net                                    |   |                   | 5,503   |   |   |   | 4,430 |   |   |   | 6,564 |   |
| Selling, general and administrative expenses                           |   |                   | 84,510  |   |   |   | 77,322 |   |   |   | 90,451 |   |
| Other expenses (income), net                                           |   |                   | 231     |   |   |   | (1,668 | ) |   |   | 580 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Operating income                                                       |   |                   | 46,987  |   |   |   | 37,023 |   |   |   | 31,873 |   |
| Financial expenses, net (Note 16d)                                     |   |                   | (4,371  | ) |   |   | (231 | ) |   |   | (5,908 | ) |
| Losses on realization of investments, net                              |   |                   | -       |   |   |   | - |   |   |   | (337 | ) |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Income before taxes on income                                          |   |                   | 42,616  |   |   |   | 36,792 |   |   |   | 25,628 |   |
| Taxes on income (Note 15)                                              |   |                   | (6,544  | ) |   |   | (8,305 | ) |   |   | (3,279 | ) |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
|                                                                   |   |                   | 36,072  |   |   |   | 28,487 |   |   |   | 22,349 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Equity in losses of affiliated company, net                            |   |                   | (1,070  | ) |   |   | (335 | ) |   |   | (216 | ) |
| Income from continuing operation                                       |   |                   | 35,002  |   |   |   | 28,152 |   |   |   | 22,133 |   |
| Net income from discontinued operations (Note 17d)                     |   |                   | -       |   |   |   | 4,878 |   |   |   | 555 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Net income                                                             |   |                   | 35,002  |   |   |   | 33,030 |   |   |   | 22,688 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Net income Attributable to non-controlling interests                   |   |                   | 16,623  |   |   |   | 13,954 |   |   |   | 10,819 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Net income attributable to Formula's shareholders                      |   |                   | 18,379  |   |   |   | 19,076 |   |   |   | 11,869 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Amount attributable to Formula's shareholders                          |   |                   |    |   |   |   |   |   |   |   |   |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Income from continuing operation                                       |   |                   | 18,379  |   |   |   | 14,198 |   |   |   | 11,314 |   |
| Income from discontinued operation                                     |   |                   | -       |   |   |   | 4,878 |   |   |   | 555 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
|                                                                   |   |                   | 18,379  |   |   |   | 19,076 |   |   |   | 11,869 |   |
| Earnings per share generated from continuing operation:                |   |                   |    |   |   |   |   |   |   |   |   |   |
| Basic                                                                  |   |                   | 1.37    |   |   |   | 1.08 |   |   |   | 0.84 |   |
| Diluted                                                                |   |                   | 1.36    |   |   |   | 1.04 |   |   |   | 0.84 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Earnings per share generated from discontinued operations:             |   |                   |    |   |   |   |   |   |   |   |   |   |
| Basic                                                                  |   |                   | -       |   |   |   | 0.37 |   |   |   | 0.04 |   |
| Diluted                                                                |   |                   | -       |   |   |   | 0.36 |   |   |   | 0.04 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Total earnings per share:                                              |   |                   |    |   |   |   |   |   |   |   |   |   |
| Basic                                                                  |   |                   | 1.37    |   |   |   | 1.44 |   |   |   | 0.88 |   |
| Diluted                                                                |   |                   | 1.36    |   |   |   | 1.40 |   |   |   | 0.88 |   |
|                                                                   |   |                   |    |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares outstanding in thousands (Note 16h): |   |                   |    |   |   |   |   |   |   |   |   |   |
| Basic                                                                  |   |                   | 13,382  |   |   |   | 13,200 |   |   |   | 13,200 |   |
| Diluted                                                                |   |                   | 13,523  |   |   |   | 13,564 |   |   |   | 13,200 |   |

----

----

|                                                                                                   |   |               |       |   |       |   |   |     |   |   | Accumulated   |   |   |         |    |   | Total          |   |   |        |   |
|--------------------------------------------------------------------------------------------------------|--------|--------------------|------------|--------|------------|--------|--------|----------|--------|--------|---------------|--------|--------|--------------|---------|--------|----------------|--------|--------|-------------|--------|
|                                                                                                   |   |               |       |   | Additional |   |   |     |   |   | other         |   |   | Cost of |    |   | Formula ' |   |   | Non-        |   |
|                                                                                                   |   | Share Capital |       |   | paid-in    |   |   | Retained |   |   | comprehensive |   |   | treasury     |    |   | shareholders'  |   |   | controlling |   |
|                                                                                                   |   | Number             |       |   | Amount     |   |   | capital  |   |   | earnings      |   |   | loss         |    |   | shares         |   |   | Equity      |   |   | interests |   |
|                                                                                                   |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   |   |        |   |   |   |   |
| Balance as of January 1, 2008                                                                          |   |               | 13,200,000 |   |       |   | 3,736  |     |   |   | 132,545       |   |   |         | 69,229  |   |           |   | (6,863 | )           |   |   | (259 | ) |   |   | 198,388 |   |   |   | 107,915 |   |
| Changes during 2008:                                                                                   |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   |   |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income                                                                                             |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | 11,869  |   |           |   | -      |        |   |   | - |   |   |   | 11,869 |   |   |   | 10,819 |   |
| Unrealized loss from available - for-sale securities, net                                              |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | (1,123 | )           |   |   | - |   |   |   | (1,123 | ) |   |   | (20 | ) |
| Adjustment for other than temporary impairment on marketable securities                                |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | 27     |        |   |   | - |   |   |   | 27 |   |   |   | 20 |   |
| Foreign Currency translation adjustments                                                               |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | 859    |        |   |   | - |   |   |   | 859 |   |   |   | 1,164 |   |
| Total comprehensive income                                                                             |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | 11,632 |   |   |   |   |   |
| Gain from issuance of shares to third party in a development stage entity                              |   |               | -          |   |       |   | -      |     |   |   | 43            |   |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | 43 |   |   |   | 43 |   |
| Stock Based Compensation expenses                                                                      |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | - |   |   |   | 1,161 |   |
| Changes in non-controlling interests due to holding changes                                            |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | - |   |   |   | (9,483 | ) |
| Exercise of employees stock options                                                                    |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | - |   |   |   | 1,426 |   |
| Dividend to Formulas'' shareholders and to non-controlling interests in subsidiaries                   |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | (40,126 | )      |           |   | -      |        |   |   | - |   |   |   | (40,126 | ) |   |   | (5,612 | ) |
|                                                                                                   |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   |   |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2008                                                                        |   |               | 13,200,000 |   |       |   | 3,736  |     |   |   | 132,588       |   |   |         | 40,972  |   |           |   | (7,100 | )           |   |   | (259 | ) |   |   | 169,937 |   |   |   | 107,433 |   |
| Changes during 2009:                                                                                   |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   |   |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Income                                                                                             |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | 19,076  |   |           |   | -      |        |   |   | - |   |   |   | 19,076 |   |   |   | 13,954 |   |
| Unrealized gain from derivative instruments, net                                                       |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | 3      |        |   |   | - |   |   |   | 3 |   |   |   | 2 |   |
| Unrealized gain (loss) from available - for-sale securities, net                                       |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | (66    | )           |   |   | - |   |   |   | (66 | ) |   |   | 74 |   |
| Other temporary impairment                                                                             |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   | (250   | )           |   |   |   |   |   |   | (250 | ) |   |   |   |   |
| Foreign Currency translation adjustments                                                               |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | 298    |        |   |   | - |   |   |   | 298 |   |   |   | 413 |   |
| Total comprehensive income                                                                             |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   |   |        |   |   |   |   |   |   | 19,061 |   |   |   |   |   |
| Stock Based Compensation expenses                                                                      |   |               | -          |   |       |   | -      |     |   |   | 308           |   |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | 308 |   |   |   | 1,333 |   |
| Non-controlling interests changes due to holding changes including exercise of employees stock options |   |               | -          |   |       |   | -      |     |   |   | (1,265        | )      |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | (1,265 | ) |   |   | (842 | ) |
| Dividend to non-controlling interests in subsidiaries                                                  |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | - |   |   |   | (15,094 | ) |
|                                                                                                   |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   |   |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2009                                                                        |   |               | 13,200,000 |   |       |   | 3,736  |     |   |   | 131,631       |   |   |         | 60,048  |   |           |   | (7,115 | )           |   |   | (259 | ) |   |   | 188,041 |   |   |   | 107,273 |   |

----

----

|                                                                                                   |   |               |       |   |       |   |   |     |   |   | Accumulated   |   |   |         |    |   | Total          |   |   |        |   |
|--------------------------------------------------------------------------------------------------------|--------|--------------------|------------|--------|------------|--------|--------|----------|--------|--------|---------------|--------|--------|--------------|---------|--------|----------------|--------|--------|-------------|--------|
|                                                                                                   |   |               |       |   | Additional |   |   |     |   |   | other         |   |   | Cost of |    |   | Formula ' |   |   | Non-        |   |
|                                                                                                   |   | Share Capital |       |   | paid-in    |   |   | Retained |   |   | comprehensive |   |   | treasury     |    |   | shareholders'  |   |   | controlling |   |
|                                                                                                   |   | Number             |       |   | Amount     |   |   | capital  |   |   | earnings      |   |   | loss         |    |   | shares         |   |   | Equity      |   |   | interests |   |
|                                                                                                   |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   |   |        |   |   |   |   |
| Changes during 2010:                                                                                   |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   |   |        |   |   |   |   |
| Net Income                                                                                             |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | 18,379  |   |           |   | -      |        |   |   | - |   |   |   | 18,379 |   |   |   | 16,623 |   |
| Unrealized gain from derivative instruments, net                                                       |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | 4      |        |   |   | - |   |   |   | 4 |   |   |   | 3 |   |
| Unrealized gain (loss) from available - for-sale securities, net                                       |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | 180    |        |   |   | - |   |   |   | 180 |   |   |   | (21 | ) |
| Realized gain from available-for-sale securities                                                       |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | 250    |        |   |   | - |   |   |   | 250 |   |   |   |   |   |
| Foreign Currency translation adjustments                                                               |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | -       |   |           |   | 6,085  |        |   |   | - |   |   |   | 6,085 |   |   |   | 4,793 |   |
| Total comprehensive income                                                                             |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   | 6,519  |        |   |   |   |   |   |   | 24,898 |   |   |   |   |   |
| Stock Based Compensation expenses                                                                      |   |               | -          |   |       |   | -      |     |   |   | 458           |   |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | 458 |   |   |   | 1,006 |   |
| Exercise of employees stock options                                                                    |   |               | 396,000    |   |       |   | 71     |     |   |   | (71           | )      |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | - |   |   |   | - |   |
| Non controlling interests changes due to holding changes including exercise of employees stock options |   |               |       |   |       |   |   |     |   |   | 6,258         |   |   |         | -       |   |           |   | -      |        |   |   | - |   |   |   | 6,258 |   |   |   | 16,068 |   |
| Acquisition of non-controlling interests                                                               |   |               |       |   |       |   |   |     |   |   | (2,054        | )      |   |         |    |   |           |   |   |        |   |   |   |   |   |   | (2,054 | ) |   |   | (1,711 | ) |
| Dividend to Formula's shareholders and to non-controlling interests in subsidiaries                    |   |               | -          |   |       |   | -      |     |   |   | -             |   |   |         | (19,986 | )      |           |   | -      |        |   |   |   |   |   |   | (19,986 | ) |   |   | (7,265 | ) |
|                                                                                                   |   |               |       |   |       |   |   |     |   |   |          |   |   |         |    |   |           |   |   |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of December 31, 2010                                                                        |   |               | 13,596,000 |   |       |   | 3,807  |     |   |   | 136,222       |   |   |         | 58,441  |   |           |   | (596   | )           |   |   | (259 | ) |   |   | 197,615 |   |   |   | 136,769 |   |

|                                                             |   | Year endedDecember 31, |   |
|------------------------------------------------------------------|--------|------------------------|--------|
|                                                             |   | 2010                   |   |   | 2009 |   |   | 2008 |   |
|                                                             |   |                   |   |   |   |   |   |   |   |
| Accumulated unrealized loss from available - for-sale securities |   |                   | (954   | ) |   |   | (1,384 | ) |   |   | (1,068 | ) |
| Accumulated currency translation adjustments                     |   |                   | 351    |   |   |   | (5,734 | ) |   |   | (6,032 | ) |
| Accumulated Unrealized gain from derivative instruments          |   |                   | 7      |   |   |   | 3 |   |   |   | - |   |
|                                                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Accumulated other comprehensive income (loss)                    |   |                   | 596    |   |   |   | (7,115 | ) |   |   | (7,100 | ) |

----

----

|                                                                                                  |   | Year endedDecember 31, |   |
|-------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                  |   | 2010                             |   |   | 2009 |   |   | 2008 |   |
|                                                                                                  |   |                             |   |   |   |   |   |   |   |
| Cash flows from operating activities:                                                                 |   |                             |   |   |   |   |   |   |   |
|                                                                                                  |   |                             |   |   |   |   |   |   |   |
| Net income                                                                                            |   |                             | 35,002 |   |   |   | 33,030 |   |   |   | 22,688 |   |
| Adjustments to reconcile net income  to net cash provided by operating activities:          |   |                             |   |   |   |   |   |   |   |   |   |   |
| Impairment and write down of other investments  and fixed assets                            |   |                             | -      |   |   |   | 59 |   |   |   | 502 |   |
| Impairment of available for sale marketable securities                                                |   |                             | 292    |   |   |   | 143 |   |   |   | - |   |
| Equity in losses of affiliated company                                                                |   |                             | 1,070  |   |   |   | 335 |   |   |   | 216 |   |
| Depreciation and amortization                                                                         |   |                             | 15,451 |   |   |   | 14,605 |   |   |   | 13,082 |   |
| Amortization of convertible debt discount, increase in value and current interest                     |   |                             | 1,728  |   |   |   | - |   |   |   | - |   |
| Increase (decrease)  in accrued severance pay, net                                          |   |                             | (148   | ) |   |   | (1,618 | ) |   |   | 4,984 |   |
| Gain from sale of operation and subsidiaries                                                          |   |                             | (146   | ) |   |   | (4,389 | ) |   |   | - |   |
| Loss (gain) from sale of property, plants and equipment                                               |   |                             | 1      |   |   |   | (2,219 | ) |   |   | (341 | ) |
| Loss (gain) on realization of shareholdings and operations                                            |   |                             | -      |   |   |   | - |   |   |   | 337 |   |
| Stock-based compensation expenses                                                                     |   |                             | 1,464  |   |   |   | 1,641 |   |   |   | 1,505 |   |
| Changes in financial liabilities, net                                                                 |   |                             | 325    |   |   |   | (202 | ) |   |   | 4,950 |   |
| Loss (gain) from repurchase of convertible debt, net                                                  |   |                             | -      |   |   |   | 2 |   |   |   | (218 | ) |
| Changes in value of long term loans and deposits, net                                                 |   |                             | 64     |   |   |   | (210 | ) |   |   | (129 | ) |
| Changes in deferred taxes, net                                                                        |   |                             | (3,355 | ) |   |   | 665 |   |   |   | (1,881 | ) |
| Change in liability in respect of business combinations                                               |   |                             | 265    |   |   |   | 458 |   |   |   | (558 | ) |
| Loss (gain) from sale and decrease (increase) in value of marketable securities classified as trading |   |                             | 630    |   |   |   | (2,609 | ) |   |   | 1,481 |   |
| Proceeds from derivatives                                                                             |   |                             | 2,423  |   |   |   | - |   |   |   | - |   |
|                                                                                                  |   |                             |   |   |   |   |   |   |   |   |   |   |
| Changes in operating assets and liabilities:                                                          |   |                             |   |   |   |   |   |   |   |   |   |   |
| Decrease (increase) in inventories                                                                    |   |                             | (3,007 | ) |   |   | 340 |   |   |   | 446 |   |
| Decrease (increase) in trade receivables                                                              |   |                             | (9,500 | ) |   |   | 13,057 |   |   |   | (8,241 | ) |
| Decrease (increase) in other accounts receivable                                                      |   |                             | (1,129 | ) |   |   | 12,478 |   |   |   | 3,914 |   |
| Increase (decrease)  in trade payables                                                      |   |                             | 5,666  |   |   |   | 1,604 |   |   |   | (2,602 | ) |
| Increase (decrease) in other accounts payable                                                         |   |                             | 925    |   |   |   | (12,875 | ) |   |   | 6,674 |   |
| Increase in customer advances                                                                         |   |                             | 5,351  |   |   |   | 1,345 |   |   |   | 575 |   |
|                                                                                                  |   |                             |   |   |   |   |   |   |   |   |   |   |
| Net cash provided by operating activities                                                             |   |                             | 53,372 |   |   |   | 55,640 |   |   |   | 47,384 |   |

----

----

|                                                                                         |   | Year endedDecember 31, |    |
|----------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                         |   | 2010                   |    |   | 2009 |   |   | 2008 |   |
|                                                                                         |   |                   |    |   |   |   |   |   |   |
| Cash flows from investing activities:                                                        |   |                   |    |   |   |   |   |   |   |
|                                                                                         |   |                   |    |   |   |   |   |   |   |
| Acquisition of newly-consolidated subsidiaries and activities (Appendix C)                   |   |                   | (13,975 | ) |   |   | (1,262 | ) |   |   | (13,633 | ) |
| Proceeds from realization of investment in previously-consolidated subsidiaries (Appendix D) |   |                   | -       |   |   |   | 3,482 |   |   |   | - |   |
| Proceeds from sale of activity in a consolidated company                                     |   |                   | 146     |   |   |   | 105 |   |   |   | - |   |
| Proceeds from sale of affiliates company                                                     |   |                   | -       |   |   |   | - |   |   |   | 150 |   |
| Proceeds from sale of subsidiary's operation                                                 |   |                   | -       |   |   |   | - |   |   |   | 15,506 |   |
| Changes in restrictions on short term deposit                                                |   |                   | -       |   |   |   | 4,040 |   |   |   | (4,040 | ) |
| Restricted short term deposit, net                                                           |   |                   | 400     |   |   |   | - |   |   |   | - |   |
| Purchase of property and equipment                                                           |   |                   | (5,348  | ) |   |   | (2,713 | ) |   |   | (4,055 | ) |
| Proceeds from (investment in) marketable securities, net                                     |   |                   | 12,246  |   |   |   | 3,064 |   |   |   | (6,795 | ) |
| Proceeds from sale of property, plants and equipment                                         |   |                   | 446     |   |   |   | 5,666 |   |   |   | 1,011 |   |
| Investment in and loans to affiliates and other companies                                    |   |                   | (1,160  | ) |   |   | - |   |   |   | (187 | ) |
| Other investments                                                                            |   |                   | (282    | ) |   |   | - |   |   |   | (756 | ) |
| Payments to former shareholders of consolidated company                                      |   |                   | (121    | ) |   |   | (6,455 | ) |   |   | (5,973 | ) |
| Changes in short term deposits, net                                                          |   |                   | 13,445  |   |   |   | (11,945 | ) |   |   | (1,659 | ) |
| Proceeds from long term bank deposits                                                        |   |                   | -       |   |   |   | 139 |   |   |   | 3,090 |   |
| Capitalization of software development and other costs                                       |   |                   | (9,186  | ) |   |   | (6,960 | ) |   |   | (6,683 | ) |
| Purchase of non-controlling interests in subsidiaries                                        |   |                   | -       |   |   |   | - |   |   |   | (16,983 | ) |
|                                                                                         |   |                   |    |   |   |   |   |   |   |   |   |   |
| Net cash used in investing activities                                                        |   |                   | (3,389  | ) |   |   | (12,839 | ) |   |   | (41,007 | ) |

----

----

|                                                               |   | Year ended December 31, |    |
|--------------------------------------------------------------------|--------|----------------------------------------|---------|
|                                                               |   | 2010                                   |    |   | 2009 |   |   | 2008 |   |
|                                                               |   |                                   |    |   |   |   |   |   |   |
| Cash flows from financing activities:                              |   |                                   |    |   |   |   |   |   |   |
|                                                               |   |                                   |    |   |   |   |   |   |   |
| Exercise of employees stock options in subsidiaries                |   |                                   | 1,850   |   |   |   | 1,224 |   |   |   | 876 |   |
| Dividend paid to non-controlling interests in subsidiaries         |   |                                   | (13,959 | ) |   |   | (8,400 | ) |   |   | (5,612 | ) |
| Dividend to Formula's shareholders                                 |   |                                   | (19,986 | ) |   |   | (29,964 | ) |   |   | (10,162 | ) |
| Short-term bank credit, net                                        |   |                                   | (229    | ) |   |   | (247 | ) |   |   | (15,151 | ) |
| Repayment of long-term loans from banks and others                 |   |                                   | (7,574  | ) |   |   | (8,616 | ) |   |   | (10,855 | ) |
| Receipt (payment) of short-term loans                              |   |                                   | (3,381  | ) |   |   | 1,580 |   |   |   | (750 | ) |
| Share issuance in a subsidiary to non-controlling interest, net    |   |                                   | 20,290  |   |   |   | - |   |   |   | - |   |
| Purchase of non-controlling interests                              |   |                                   | (3,768  | ) |   |   | (3,774 | ) |   |   | - |   |
| Proceeds from SWAP transactions                                    |   |                                   | -       |   |   |   | 1,061 |   |   |   | - |   |
| Repayment and repurchase of debenture                              |   |                                   | (15,927 | ) |   |   | (5,824 | ) |   |   | (18,128 | ) |
|                                                               |   |                                   |    |   |   |   |   |   |   |   |   |   |
| Net cash used in financing activities                              |   |                                   | (42,684 | ) |   |   | (52,960 | ) |   |   | (59,782 | ) |
|                                                               |   |                                   |    |   |   |   |   |   |   |   |   |   |
| Effect of exchange rate changes on cash and cash equivalents  |   |                                   | 3,004   |   |   |   | (238 | ) |   |   | 2,481 |   |
|                                                               |   |                                   |    |   |   |   |   |   |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents               |   |                                   | 10,303  |   |   |   | (10,397 | ) |   |   | (50,924 | ) |
| cash and cash equivalents at beginning of year(*)                  |   |                                   | 100,205 |   |   |   | 110,602 |   |   |   | 161,526 |   |
|                                                               |   |                                   |    |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents at end of year (*)                       |   |                                   | 110,508 |   |   |   | 100,205 |   |   |   | 110,602 |   |

----

----

|   |                                                                                        |   | Year endedDecember 31, |    |
|--------|---------------------------------------------------------------------------------------------|--------|------------------------|---------|
|   |                                                                                        |   | 2010                   |    |   | 2009 |   |   | 2008 |   |
|   |                                                                                        |   |                   |    |   |   |   |   |   |   |
| a.     | Supplemental cash flow information::                                                        |   |                   |    |   |   |   |   |   |   |
|   | Cash paid in respect of:                                                                    |   |                   |    |   |   |   |   |   |   |
|   | Interest                                                                                    |   |                   | 3,847   |   |   |   | 4,064 |   |   |   | 5,077 |   |
|   | Income tax                                                                                  |   |                   | 7,356   |   |   |   | 4,444 |   |   |   | 5,192 |   |
|   |                                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |
| b.     | Non-cash activities:                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |
|   | Dividend payable to Formula's shareholders and to non-controlling interests in subsidiaries |   |                   | -       |   |   |   | 6,694 |   |   |   | 29,964 |   |
|   | Assets retirement obligation                                                                |   |                   | -       |   |   |   | 275 |   |   |   | - |   |
|   | Receivables from sale of property                                                           |   |                   | -       |   |   |   | 450 |   |   |   | - |   |
|   |                                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |
| c.     | Acquisition of newly-consolidated subsidiaries and activities:                              |   |                   |    |   |   |   |   |   |   |   |   |   |
|   |                                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |
|   | Assets and liabilities of subsidiaries consolidated as of acquisition date:                 |   |                   |    |   |   |   |   |   |   |   |   |   |
|   | Working capital (other than cash and cash equivalents)                                      |   |                   | (3,341  | ) |   |   | - |   |   |   | (6,209 | ) |
|   | Property and equipment                                                                      |   |                   | (304    | ) |   |   | - |   |   |   | (543 | ) |
|   | Goodwill and intangible assets                                                              |   |                   | (18,040 | ) |   |   | (1,262 | ) |   |   | (15,845 | ) |
|   | Long-term liabilities                                                                       |   |                   | 5,199   |   |   |   | - |   |   |   | 395 |   |
|   | Other long term assets                                                                      |   |                   | 717     |   |   |   | - |   |   |   | - |   |
|   | Long term deferred tax liability                                                            |   |                   | (173    | ) |   |   | - |   |   |   | 1,771 |   |
|   | Liability to formerly shareholders                                                          |   |                   | -       |   |   |   | - |   |   |   | 6,723 |   |
|   | Non-controlling interests at acquisition date                                               |   |                   | 1,967   |   |   |   | - |   |   |   | 75 |   |
|   |                                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |
|   | Total                                                                                       |   |                   | (13,975 | ) |   |   | (1,262 | ) |   |   | (13,633 | ) |
|   |                                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |
| d.     | Proceeds from realization of investments in previously-consolidated subsidiaries:           |   |                   |    |   |   |   |   |   |   |   |   |   |
|   |                                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |
|   | Working capital (other than cash and cash equivalents)                                      |   |                   | -       |   |   |   | (2,259 | ) |   |   | - |   |
|   | Property and equipment                                                                      |   |                   | -       |   |   |   | 144 |   |   |   | - |   |
|   | Other assets, deferred expenses and long term payables                                      |   |                   | -       |   |   |   | 1,337 |   |   |   | - |   |
|   | Goodwill                                                                                    |   |                   | -       |   |   |   | 206 |   |   |   | - |   |
|   | Adjustment to other comprehensive (loss) gain                                               |   |                   | -       |   |   |   | (230 | ) |   |   | - |   |
|   | Gain from realization of investments in subsidiaries                                        |   |                   | -       |   |   |   | 4,284 |   |   |   |   |   |
|   |                                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |
|   | Total                                                                                       |   |                   | -       |   |   |   | 3,482 |   |   |   | - |   |

----

----

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

|   | a. | Formula Systems (1985) Ltd. ("Formula") was incorporated in Israel in 1985. Since 1991, Formula's shares have been traded on the Tel Aviv Stock Exchange ("TASE") and since 1997, through American Depositary Shares ("ADS") under the symbol FORTY on the Global Market in the United States ("NASDAQ"). Each ADS represents one ordinary share of Formula. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | The following table presents certain information regarding the control and ownership of Formula's significant subsidiaries, as of the dates indicated: |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                               |   | Percentage of ownershipand control |   |
|----------------------------------------------------|--------|------------------------------------|--------|
|                                               |   | December 31,                       |   |
|                                               |   | 2010                               |   |   | 2009 |   |
| Name of subsidiary                                 |   |                               |   |   |   |   |
|                                               |   |                               |   |   |   |   |
| Matrix IT Ltd. ("Matrix")                          |   |                               | 50.1   |   |   |   | 50.1 |   |
| Magic Software Enterprises Ltd. ("Magic")          |   |                               | 51.7   |   |   |   | 58.1 |   |
| Sapiens International Corporation N.V. ("Sapiens") |   |                               | 71.6   |   |   |   | 70.4 |   |

|   | a. | The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Use of estimates: |
|--------|----|-------------------|

----

----

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

|   | c. | Financial statements in U.S. dollars: |
|--------|----|---------------------------------------|

|   | d. | Principles of consolidation: |
|--------|----|------------------------------|

|   | e. | Cash equivalents: |
|--------|----|-------------------|

|   | f. | Short-term deposits: |
|--------|----|----------------------|

|   | g. | Marketable securities: |
|--------|----|------------------------|

----

----

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

----

----

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

|   | h. | Inventories: |
|--------|----|--------------|

|   | i. | Investments in affiliates: |
|--------|----|----------------------------|

|   | j. | Property, plant and equipment, net: |
|--------|----|-------------------------------------|

|                    |   | %                           |   |
|-------------------------|--------|-----------------------------|--------|
|                    |   |                        |   |
| Computers and equipment |   | 7-33 (mainly 33%) |   |
| Motor vehicles          |   | 15                          |   |
| Buildings               |   | 2-4                         |   |
| Leasehold improvements  |   | *-)                         |   |

|   | *) | Over the shorter of the term of the lease or the estimated useful life of the asset. |
|--------|----|--------------------------------------------------------------------------------------|

|   | k. | Intangible assets: |
|--------|----|--------------------|

|   | 1. | Software development costs: |
|--------|----|-----------------------------|

----

----

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

|   | 2. | Other intangible assets: |
|--------|----|--------------------------|

|                                                 |   | %         |
|------------------------------------------------------|--------|-----------|
|                                                 |   |      |
| Prepaid royalties                                    |   | 15 years  |
| Distribution rights                                  |   | 5 years   |
| Technology, usage rights and other intangible assets |   | 3-8 years |

|   | l. | Impairment of long-lived assets and intangible assets subject to amortization: |
|--------|----|--------------------------------------------------------------------------------|

----

----

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

|   | m. | Goodwill: |
|--------|----|-----------|

----

----

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

|   | n. | Business combinations: |
|--------|----|------------------------|

|   | o. | Variable interest entities: |
|--------|----|-----------------------------|

----

----

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

|   | p. | Severance pay: |
|--------|----|----------------|

|   | q. | Revenue Recognition: |
|--------|----|----------------------|

----

----

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

----

----

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

|   | r. | Provision for warranty: |
|--------|----|-------------------------|

|   | s. | Advertising costs: |
|--------|----|--------------------|

|   | t. | Income taxes: |
|--------|----|---------------|

----

----

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

|   | u. | Earnings per share: |
|--------|----|---------------------|

|   | v. | Treasury shares: |
|--------|----|------------------|

|   | w. | Concentration of credit risks: |
|--------|----|--------------------------------|

----

----

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

|   | x. | Share-based compensation: |
|--------|----|---------------------------|

----

----

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

|                                      |   | 2010          |   | 2009       |   | 2008      |
|-------------------------------------------|--------|---------------|--------|------------|--------|-----------|
|                                      |   |          |   |       |   |      |
| Dividend yield                            |   | 0%            |   | 0%         |   | 0%        |
| Expected volatility                       |   | 61.2% - 62.8% |   | 63%        |   | 56% - 65% |
| Risk-free interest rate                   |   | 2.53%-3.71%   |   | 2.73%-3.7% |   | 1.83%     |
| Expected forfeiture (employees)           |   | 9.7%          |   | 9.8%       |   | 11%       |
| Expected forfeiture (executives)          |   | 7.1%          |   | 7.5%       |   | 8%        |
| Contractual term of up to                 |   | 10 years      |   | 10 years   |   | 10 years  |
| Suboptimal exercise multiple (employees)  |   | 2.3           |   | 2.35       |   | 2.48      |
| Suboptimal exercise multiple (executives) |   | 3             |   | 3          |   | 3         |

|                    |   | Year ended December 31, |
|-------------------------|--------|----------------------------------------|
|                    |   | 2008                                   |   | 2009 |
|                    |   |                                   |   |   |
| Expected term           |   | 4.25 years                             |   | 4.25 years |
| Dividend yield          |   | 0%                                     |   | 0% |
| Expected volatility     |   | 78%                                    |   | 90%- 93% |
| Risk-free interest rate |   | 3%                                     |   | 1.8% - 2.5% |

|                     |   | Year endedDecember 31,2010 |
|--------------------------|--------|--------------------------------------|
|                     |   |                                 |
| Contractual life of      |   | 6 years                              |
| Expected exercise factor |   | 2.5                                  |
| Dividend yield           |   | 0%                                   |
| Expected volatility      |   | 65%-66%                              |
| Risk-free interest rate  |   | 2.3%-2.8%                            |

|                    |   | Year endedDecember 31,2008 |
|-------------------------|--------|--------------------------------------|
|                    |   |                                 |
| Expected life of        |   | 3 - 3.5 years                        |
| Dividend yield          |   | 50%                                  |
| Expected volatility     |   | 24% - 31%                            |
| Risk-free interest rate |   | 4.3%-5.3%                            |

----

----

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

|   | y. | Derivatives and Hedging: |
|--------|----|--------------------------|

|               |   | Forward contracts |   |
|--------------------|--------|------------------------|--------|
|               |   | Buy                    |   |   | Sell |   |
|               |   |                   |   |   |   |   |
| Euro               |   | $                      | 1,003  |   |   | $ | 1,015 |   |
| Japanese Yen       |   |                   | 1,066  |   |   |   | 1,106 |   |
| New Israeli Shekel |   |                   | 845    |   |   |   | 834 |   |
|               |   |                   |   |   |   |   |   |   |
|               |   | $                      | 2,914  |   |   | $ | 2,955 |   |

----

----

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

|   | z. | Comprehensive income (loss): |
|--------|----|------------------------------|

|   | aa. | Fair value measurement: |
|--------|-----|-------------------------|

|   | 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 (for example cash flow modeling inputs based on assumptions). |
|--------|-----------|---------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|   | ab. | Discontinued operations: |
|--------|-----|--------------------------|

|   | ac. | Reclassifications: |
|--------|-----|--------------------|

|   | ad. | Recently issued accounting pronouncements: |
|--------|-----|--------------------------------------------|

|   | 1.  | Adoption of New Accounting Standards during the period: |
|--------|----------|---------------------------------------------------------|

----

----

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

|   | 2.  | Recently issued accounting Standards: |
|--------|----------|---------------------------------------|

----

----

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

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

|   | a. | In 2008, Matrix purchased all the shares of TACT Computers and Systems Ltd. ("TACT") for an aggregate consideration of $ 12,500. In 2009, Matrix paid to the sellers an additional and final consideration of approximately $ 6,400. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Current assets                                |   |   | 9,615  |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Property and equipment                        |   |   | 299    |   |
| Goodwill                                      |   |   | 10,535 |   |
| Customer related intangible asset             |   |   | 1,884  |   |
|                                          |   |   |   |   |
| Total tangible and intangible assets acquired |   |   | 22,333 |   |
| Current liabilities                           |   |   | 8,465  |   |
|                                          |   |   |   |   |
| Other long-term liabilities                   |   |   | 1,372  |   |
|                                          |   |   |   |   |
| Total liabilities assumed                     |   |   | 9,837  |   |
|                                          |   |   |   |   |
| Net assets acquired                           |   |   | 12,496 |   |
|                                          |   |   |   |   |
| Cash paid                                     |   |   | 12,496 |   |

----

----

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

|   | b. | In October 2009, the Company completed the sale of 100% of its shares in its subsidiary, NextSource, for aggregate consideration of approximately $12,000, of which $ 8,000 was paid in cash and the remainder through the release of $ 4,000 bank deposits that were previously pledged in favor of banks to secure obligations of NextSource. The gain in the amount of approximately $ 4,300 was presented in the income statement as income from discontinued operation. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | On January 17, 2010, Magic, through its U.S subsidiary Fusion Solution LLC, completed the acquisition of a consulting and staffing services business of a U.S-based IT services company, for a total consideration of $ 13,683, of which $ 8,625 was paid upon closing and the remaining $ 5,058 is to be paid over a three year period, of which, $ 506 is contingent upon the acquired business meeting revenue goals, and $ 4,552 in deferred payments. The Company believes that sufficient probability to meet these goals exists. The Company classified both the deferred payment and contingent considerations as a liability as of the date of the transaction. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

| Working capital, including deferred tax liability |   |   | 3,925  |   |
|---------------------------------------------------|--------|--------|--------|--------|
| Fixed assets                                      |   |   | 54     |   |
| Goodwill                                          |   |   | 4,831  |   |
| Customer relationships                            |   |   | 4,873  |   |
|                                              |   |   |   |   |
| Total assets acquired                             |   |   | 13,683 |   |
|                                              |   |   |   |   |
| Total liabilities assumed                         |   |   | 5,058  |   |
|                                              |   |   |   |   |
| Net assets acquired                               |   |   | 8,625  |   |

|                                              |   | Year ended       |   |
|---------------------------------------------------|--------|-----------------------|--------|
|                                              |   | December 31,2009 |   |
|                                              |   | Unaudited             |   |
|                                              |   |                  |   |
| Total revenues                                    |   |                  | 79,137 |   |
|                                              |   |                  |   |   |
| Net income attributable to Formula's shareholders |   |                  | 7,948  |   |
|                                              |   |                  |   |   |
| Earnings per share                                |   |                  |   |   |
| Basic                                             |   |                  | 0.25   |   |
| Diluted                                           |   |                  | 0.25   |   |

----

----

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

|   | d. | In 2010, the Company's subsidiaries, Matrix, Magic and Sapiens, completed the acquisition of additional activities for an aggregate total consideration of $ 8,000, of which $ 2,000 is contingent upon the acquired activities meeting certain goals. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | e. | In 2010, the Company's subsidiaries, Matrix, Magic and Sapiens, completed the acquisition of additional businesses for an aggregate total consideration of $ 8,080, of which $ 1,800 is contingent upon the acquired businesses meeting certain goals. As of December 31, 2010, the fair value of the contingent consideration is $ 952. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a. | Composition: |
|--------|----|--------------|

|                          |   | Interest          |   |              |   |
|-------------------------------|--------|-------------------|--------|-------------------|--------|
|                          |   | rate              |   |              |   |   |   |   |
|                          |   | December 31, |   | December 31, |   |
|                          |   | 2010              |   | 2010              |   |   | 2009 |   |
|                          |   | %                 |   |              |   |   |   |   |
| Short-term:                   |   |              |   |              |   |   |   |   |
| Trading securities (1)        |   |              |   |              | 35,313 |   |   |   | 40,491 |   |
| Available-for-sale securities |   |              |   |              | 2,857  |   |   |   | 3,680 |   |
|                          |   |              |   |              |   |   |   |   |   |   |
| Total short-term securities   |   |              |   |              | 38,170 |   |   |   | 44,171 |   |
|                          |   |              |   |              |   |   |   |   |   |   |
| Long-term:                    |   |              |   |              |   |   |   |   |   |   |
| Auction rate security (2)     |   |              |   |              | 2,373  |   |   |   | 6,980 |   |
| Available-for-sale security   |   |              |   |              | 455    |   |   |   | 401 |   |
|                          |   |              |   |              |   |   |   |   |   |   |
| Total long-term securities    |   |              |   |              | 2,828  |   |   |   | 7,381 |   |

|   | (1) | The Company recognized trading gains in the amount of $ 2,276 and $ 1,362 during the years ended December 31, 2010 and 2009, respectively. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|   | (2) | The auction rate security's interest rates are reset through a "Dutch" auction each month. The monthly auctions historically have provided a liquid market for these securities. With the liquidity issues experienced in global credit and capital markets, the available for sale securities have experienced multiple failed auctions as the amount of securities submitted for sale has exceeded the amount of purchase orders. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | The following is a summary of marketable securities which are classified as available-for-sale: |
|--------|----|-------------------------------------------------------------------------------------------------|

|                                      |   | December 31, |   |
|------------------------------------------------|--------|-------------------|--------|
|                                           |   | 2010              |   |   | 2009 |   |
|                                           |   | Amortizedcost     |   |   | Unrealizedlosses |   |   | UnrealizedGains |   |   | Marketvalue |   |   | Amortizedcost |   |   | Unrealizedlosses |   |   | Unrealizedgains |   |   | Marketvalue |   |
|                                           |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale:                            |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                           |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Government bonds                               |   |              | 407    |   |   |   | - |   |   |   | 37 |   |   |   | 444 |   |   |   | 407 |   |   |   | - |   |   |   | 37 |   |   |   | 444 |   |
| Commercial bonds                               |   |              | 4,614  |   |   |   | 127 |   |   |   | 90 |   |   |   | 4,577 |   |   |   | 10,245 |   |   |   | 377 |   |   |   | 175 |   |   |   | 10,043 |   |
| Equity securities                              |   |              | 1,816  |   |   |   | 1,243 |   |   |   | 91 |   |   |   | 664 |   |   |   | 1,971 |   |   |   | 1,452 |   |   |   | 55 |   |   |   | 574 |   |
|                                           |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total available-for-sale marketable securities |   |              | 6,837  |   |   |   | 1,370 |   |   |   | 218 |   |   |   | 5,685 |   |   |   | 12,623 |   |   |   | 1,829 |   |   |   | 267 |   |   |   | 11,061 |   |

|   | c. | The amortized costs of available-for-sale debt securities at December 31, 2010, by contractual maturities, are shown below: |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------|

|                               |   |          |   |   | Unrealized gains (losses) |   |   |   |   |
|------------------------------------|--------|---------------|--------|--------|-------------------------------------|--------|--------|--------|--------|
|                               |   | Amortizedcost |   |   | Gains                               |   |   | Losses |   |   | Estimatedfair value |   |
|                               |   |          |   |   |                                |   |   |   |   |   |   |   |
| Due in one year or less            |   |          | 1,525  |   |                                |   | 40     |   |   |   | - |   |   |   | 1,565 |   |
| Due between one year to five years |   |          | 3,496  |   |                                |   | 214    |   |   |   | (127 | ) |   |   | 3,583 |   |
|                               |   |          |   |   |                                |   |   |   |   |   |   |   |   |   |   |   |
|                               |   |          | 5,021  |   |                                |   | 254    |   |   |   | (127 | ) |   |   | 5,148 |   |

----

----

| NOTE 5: - | FAIR VALUE MEASUREMENT |
|-----------|------------------------|

|                                         |   | Fair value measurements using input typeDecember 31, 2010 |   |
|----------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                         |   | Level 1                                                   |   |   | Level 2 |   |   | Level 3 |   |   | Total |   |
|                                         |   |                                                      |   |   |   |   |   |   |   |   |   |   |
| Assets:                                      |   |                                                      |   |   |   |   |   |   |   |   |   |   |
| Shares                                       |   |                                                      | 3,305  |   |   |   | - |   |   |   | - |   |   |   | 3,305 |   |
| Government and corporate debentures          |   |                                                      | 32,638 |   |   |   | 2,018 |   |   |   | - |   |   |   | 34,656 |   |
| Equity securities                            |   |                                                      | 664    |   |   |   | - |   |   |   | - |   |   |   | 664 |   |
| Available-for-sale long- term                |   |                                                      | -      |   |   |   | - |   |   |   | 2,373 |   |   |   | 2,373 |   |
|                                         |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total financials assets                      |   |                                                      | 36,607 |   |   |   | 2,018 |   |   |   | 2,373 |   |   |   | 40,998 |   |
|                                         |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                 |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency derivative contracts        |   |                                                      | -      |   |   |   | 40 |   |   |   | - |   |   |   | 40 |   |
| Put option contracts                         |   |                                                      | -      |   |   |   | - |   |   |   | 434 |   |   |   | 434 |   |
| Liability in respect of business combination |   |                                                      | -      |   |   |   | - |   |   |   | 5,481 |   |   |   | 5,481 |   |
|                                         |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total financials liabilities                 |   |                                                      | -      |   |   |   | 40 |   |   |   | 5,915 |   |   |   | 5,955 |   |

----

----

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

|                                         |   | Fair value measurements using input typeDecember 31, 2009 |   |
|----------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                         |   | Level 1                                                   |   |   | Level 2 |   |   | Level 3 |   |   | Total |   |
|                                         |   |                                                      |   |   |   |   |   |   |   |   |   |   |
| Assets:                                      |   |                                                      |   |   |   |   |   |   |   |   |   |   |
| Short-term deposits                          |   |                                                      | 13,838 |   |   |   | - |   |   |   | - |   |   |   | 13,838 |   |
| Shares                                       |   |                                                      | 868    |   |   |   | - |   |   |   | - |   |   |   | 868 |   |
| Government and corporate debentures          |   |                                                      | 40,262 |   |   |   | 2,868 |   |   |   | - |   |   |   | 43,130 |   |
| Derivative                                   |   |                                                      | -      |   |   |   | 2,302 |   |   |   | - |   |   |   | 2,302 |   |
| Equity security                              |   |                                                      | 173    |   |   |   | - |   |   |   | - |   |   |   | 173 |   |
| Corporate debentures-long term *)            |   |                                                      | 401    |   |   |   | 2,500 |   |   |   | 4,480 |   |   |   | 7,381 |   |
|                                         |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total financials assets                      |   |                                                      | 55,542 |   |   |   | 7,670 |   |   |   | 4,480 |   |   |   | 67,692 |   |
|                                         |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                 |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Put option contracts                         |   |                                                      | -      |   |   |   | - |   |   |   | 216 |   |   |   | 216 |   |
| Liability in respect of business combination |   |                                                      | -      |   |   |   | - |   |   |   | 2,964 |   |   |   | 2,964 |   |
|                                         |   |                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total financials liabilities                 |   |                                                      | -      |   |   |   | - |   |   |   | 3,180 |   |   |   | 3,180 |   |

|   | (*) | The available-for-sale securities with unquoted prices fair value was determined by a valuation. The fair value was based on a trinomial discount model employing assumptions that market participants would use in their estimates of fair value. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|                                         |   | December 31, |   |
|----------------------------------------------|--------|-------------------|--------|
|                                         |   | 2010              |   |   | 2009 |   |
|                                         |   |              |   |   |   |   |
| Carrying value as of January 1          |   |              | 4,480  |   |   |   | 5,000 |   |
| Sale of financial assets   *) |   |              | (2,107 | ) |   |   | - |   |
| Net changes in fair value                    |   |              | -      |   |   |   | (250 | ) |
| Impairment:                                  |   |              |   |   |   |   |   |   |
| Impairment to credit loss                    |   |              | -      |   |   |   | (143 | ) |
| Impairment to non-credit loss                |   |              | -      |   |   |   | (127 | ) |
|                                         |   |              |   |   |   |   |   |   |
| Carrying value as of December 31        |   |              | 2,373  |   |   |   | 4,480 |   |

|   | *) | The proceed from the sale of the financial assets in 2010 was $ 2,268 |
|--------|----|----------------------------------------------------------------------------|

| NOTE 6:- | INVESTMENTS IN AFFILIATED COMPANY |
|----------|-----------------------------------|

|   | a. | Group's share of the associates' statement of financial position based on the interests therein at reporting date: |
|--------|----|--------------------------------------------------------------------------------------------------------------------|

|                   |   | December 31, |   |
|------------------------|--------|--------------|--------|
|                   |   | 2010         |   |   | 2009 |   |
|                   |   |         |   |   |   |   |
| Current assets         |   |         | 2,360  |   |   |   | 2,642 |   |
| Noncurrent assets      |   |         | 1,026  |   |   |   | 1,243 |   |
| Current liabilities    |   |         | 981    |   |   |   | 547 |   |
| Noncurrent liabilities |   |         | 11     |   |   |   | 77 |   |
|                   |   |         | 2,394  |   |   |   | 3,261 |   |
|                   |   |         |   |   |   |   |   |   |
| Other investments      |   |         | 815    |   |   |   | 449 |   |
|                   |   |         |   |   |   |   |   |   |
|                   |   |         | 3,209  |   |   |   | 3,710 |   |

|   | b. | Group's share of the associates' statement of operation based on the interests therein during the year: |
|--------|----|---------------------------------------------------------------------------------------------------------|

|     |   | Year endedDecember 31, |   |
|----------|--------|----------------------------------|--------|
|     |   | 2010                             |   |   | 2009 |   |
|     |   |                             |   |   |   |   |
| Revenues |   |                             | 6,592  |   |   |   | 7,996 |   |
| Loss     |   |                             | 1,070  |   |   |   | 335 |   |

----

----

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

|                      |   | December 31, |   |
|---------------------------|--------|--------------|--------|
|                      |   | 2010         |   |   | 2009 |   |
| Cost:                     |   |         |   |   |   |   |
| Computers and equipment   |   |         | 48,615 |   |   |   | 43,735 |   |
| Motor vehicles            |   |         | 732    |   |   |   | 572 |   |
| Buildings                 |   |         | 3,552  |   |   |   | 3,210 |   |
| Leasehold improvements    |   |         | 8,045  |   |   |   | 6,057 |   |
|                      |   |         |   |   |   |   |   |   |
|                      |   |         | 60,944 |   |   |   | 53,574 |   |
| Accumulated depreciation: |   |         |   |   |   |   |   |   |
| Computers and equipment   |   |         | 41,382 |   |   |   | 37,476 |   |
| Motor vehicles            |   |         | 573    |   |   |   | 412 |   |
| Buildings                 |   |         | 1,749  |   |   |   | 1,493 |   |
| Leasehold improvements    |   |         | 4,829  |   |   |   | 4,204 |   |
|                      |   |         |   |   |   |   |   |   |
|                      |   |         | 48,533 |   |   |   | 43,585 |   |
|                      |   |         |   |   |   |   |   |   |
| Depreciated cost          |   |         | 12,411 |   |   |   | 9,989 |   |

| NOTE 8:- | GOODWILL |
|----------|----------|

|                                                                           |   |   |    |
|--------------------------------------------------------------------------------|--------|--------|---------|
| Balance as of  January 1, 2009                                       |   |   | 144,005 |   |
|                                                                           |   |   |    |   |
| Additions due to past contingent consideration related to past acquisitions *) |   |   | 2,773   |   |
| Foreign currency translation adjustments                                       |   |   | 629     |   |
|                                                                           |   |   |    |   |
| Balance as of December 31, 2009                                                |   |   | 147,407 |   |
|                                                                           |   |   |    |   |
| Acquisition of newly-consolidated subsidiaries                                 |   |   | 12,622  |   |
| Additions due to past contingent consideration related to past acquisitions *) |   |   | 669     |   |
| Foreign currency translation adjustments                                       |   |   | 5,797   |   |
|                                                                           |   |   |    |   |
| Balance as of December 31, 2010                                                |   |   | 166,495 |   |

|   | *) | Acquisitions occurring prior to January 1, 2009 were accounted for using the purchase method of accounting in accordance with prior GAAP (SFAS 141 "Business Combination"). |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 9:- | INTANGIBLE ASSETS, NET |
|----------|------------------------|

|   |   |                                          |   | December 31, |    |
|--------|--------|-----------------------------------------------|--------|-------------------|---------|
|   |   |                                          |   | 2010              |    |   | 2009 |   |
|   |   |                                          |   |              |    |   |   |   |
| a.     |   | Original amounts:                             |   |              |    |   |   |   |
|   |   | Capitalized software development costs        |   |              | 94,292  |   |   |   | 82,298 |   |
|   |   | Other intangibles                             |   |              | 12,511  |   |   |   | 11,577 |   |
|   |   | Customer relationship and acquired technology |   |              | 7,546   |   |   |   | 1,907 |   |
|   |   |                                          |   |              |    |   |   |   |   |   |
|   |   |                                          |   |              | 114,349 |   |   |   | 95,782 |   |
|   |   |                                          |   |              |    |   |   |   |   |   |
|   |   | Accumulated amortization:                     |   |              |    |   |   |   |   |   |
|   |   | Capitalized software development costs        |   |              | 69,303  |   |   |   | 57,697 |   |
|   |   | Other intangibles                             |   |              | 9,396   |   |   |   | 8,644 |   |
|   |   | Customer relationship and acquired technology |   |              | 2,549   |   |   |   | 1,907 |   |
|   |   |                                          |   |              |    |   |   |   |   |   |
|   |   |                                          |   |              | 81,248  |   |   |   | 68,248 |   |
|   |   |                                          |   |              |    |   |   |   |   |   |
|   |   | Total                                         |   |              | 33,101  |   |   |   | 27,534 |   |

|   | b. | Amortized expenses totaled $ 11,400, $ 9,800 and $ 8,100 for the years ended December 31, 2010, 2009 and 2008, respectively. As for impairment of software development cost, see Note 2k. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Estimated intangible assets amortization for the years ended: |
|--------|----|---------------------------------------------------------------|

| December 31,   |   |   |   |
|---------------------|--------|--------|--------|
|                |   |   |   |
| 2011                |   |   | 10,411 |   |
| 2012                |   |   | 8,522  |   |
| 2013                |   |   | 5,749  |   |
| 2014                |   |   | 3,691  |   |
| 2015                |   |   | 2,505  |   |
| 2016 and thereafter |   |   | 2,223  |   |
|                |   |   |   |   |
| Total               |   |   | 33,101 |   |

----

----

| NOTE 10:- | LIABILITIES TO BANKS AND OTHERS |
|-----------|---------------------------------|

|   | a. | Composition: |
|--------|----|--------------|

|   |   | December31, 2010 |   | Linkage basis       |   | Long-termliabilities        |   |   | Currentmaturities     |   |   | Total long-term liabilitiesnet of currentmaturities |   |   | Total long-term liabilitiesnet of currentmaturities |   |
|--------|--------|-----------------------|--------|--------------------------|--------|-----------------------------|--------|--------|-----------------------|--------|--------|-------------------------------------------------------------------------|--------|--------|-------------------------------------------------------------------------|--------|
|   |   | Interestrate          |   |                     |   | December 31, 2010 |   |   | December 31,2009 |   |
|   |   | %                     |   |                     |   |                        |   |   |                  |   |
|   |   |                  |   |                     |   |                        |   |   |                  |   |   |                                                                    |   |   |                                                                    |   |
|   |   | 4-6                   |   | NIS– Israeli Prime |   |                        | 9,152  |   |                  |   | 6,148  |                                                                    |   |   | 3,004                                                                   |   |   |   | 8,530 |   |
|   |   |                  |   |                     | Other  |                        |   | 159    |                  |   |   | 9                                                                       |   |   |                                                                    | 150    |   |   |   | 26 |   |
|   |   |                  |   |                     |   |                        |   |   |                  |   |   |                                                                    |   |   |                                                                    |   |   |   |   |   |   |
| Total  |   |                  |   |                     |   |                        |   | 9,311  |                  |   |   | 6,157                                                                   |   |   |                                                                    | 3,154  |   |   |   | 8,556 |   |

|   | b. | Maturity dates: |
|--------|----|-----------------|

|                            |   | December 31, |   |
|---------------------------------|--------|-------------------|--------|
|                            |   | 2010              |   |   | 2009 |   |
|                            |   |              |   |   |   |   |
| First year (current maturities) |   |              | 6,157  |   |   |   | 6,840 |   |
| Second year                     |   |              | 3,006  |   |   |   | 5,940 |   |
| Third year                      |   |              | 148    |   |   |   | 2,616 |   |
|                            |   |              |   |   |   |   |   |   |
| Total                           |   |              | 9,311  |   |   |   | 15,396 |   |

|   | c. | For details of liens, guarantees and credit facilities see Note 13. |
|--------|----|---------------------------------------------------------------------|

| NOTE 11:- | DEBENTURES |
|-----------|------------|

|   | a. | Comprised as follows: |
|--------|----|-----------------------|

|                                    |   |    |   |     |   |   | December 31, |   |
|-----------------------------------------|--------|---------|--------|----------|--------|--------|--------------|--------|
|                                    |   |    |   | Interest |   |   | 2010         |   |   | 2009 |   |
|                                    |   | Linkage |   | rate     |   |   |         |   |
|                                    |   |    |   |     |   |   |         |   |   |   |   |
| Non-convertible Debentures (b)          |   | CPI     |   |     | 5.15   | %      |         |   | 47,781 |   |   |   | 58,557 |   |
|                                    |   |    |   |     |   |   |         |   |   |   |   |   |   |   |
| Less - current maturities of debentures |   |    |   |     |   |   |         |   | (15,927 | ) |   |   | (14,639 | ) |
|                                    |   |    |   |     |   |   |         |   |   |   |   |   |   |   |
| Total                                   |   |    |   |     |   |   |         |   | 31,854 |   |   |   | 43,918 |   |

----

----

| NOTE 11:- | DEBENTURES (Cont.) |
|-----------|--------------------|

|   | b. | Non-convertible debentures: |
|--------|----|-----------------------------|

| NOTE 12:- | EMPLOYEE OPTION PLANS |
|-----------|-----------------------|

|   | a. | In March 2008, Formula's shareholders approved the adoption of Formula's 2008 Employee and Officer Share Option Plan, referred to as "the plan". Pursuant to the plan, the Company may grant from time to time to the Company's and its subsidiaries' employees and officers (which are not Formula's controlling shareholders) options to purchase up to 400,000 Ordinary shares of Formula. The plan is administered by the Company's board of directors or by an option committee to be appointed by the board.  The plan provides that options may be granted, from time to time, to such grantees to be determined by the board or the option committee, at an exercise price and under such terms to be determined at their sole and absolute discretion. Options may be granted under the plan through January 2018. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 12:- | EMPLOYEE OPTION PLANS (Cont.) |
|-----------|-------------------------------|

|   | b. | The Company's subsidiaries granted options to their employees to purchase shares in the respective companies. The options were mainly granted during the years 1999-2010. In general, the options expire 7-10 years after grant. For further information with respect to expenses relating to the benefit to the employees, and additional disclosure required by ASC 718, see Note 2w. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | The following table sets forth the total stock-based compensation expense resulting from stock options included in the consolidated statements of income. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                   |   | Year ended December 31, |   |
|----------------------------------------|--------|----------------------------------------|--------|
|                                   |   | 2010                                   |   |   | 2009 |   |   | 2008 |   |
|                                   |   |                                   |   |   |   |   |   |   |   |
| Cost of revenues                       |   |                                   | 2      |   |   |   | 2 |   |   |   | 20 |   |
| Research and development expenses      |   |                                   | 61     |   |   |   | 26 |   |   |   | 13 |   |
| Selling and marketing expenses         |   |                                   | 75     |   |   |   | 32 |   |   |   | 112 |   |
| General and administrative expenses    |   |                                   | 1,326  |   |   |   | 1,581 |   |   |   | 1,360 |   |
|                                   |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Total stock-based compensation expense |   |                                   | 1,464  |   |   |   | 1,641 |   |   |   | 1,505 |   |

|                                          |   | Number ofoptions |      |   | Weightedaverageexerciseprice |   | Weightedaverageremainingcontractualterm |   | Aggregateintrinsicvalue |   |
|----------------------------------------------------|--------|-----------------------|-----------|--------|------------------------------|--------|-----------------------------------------|--------|-------------------------|--------|
|                                               |   |                  |      |   | $                            |   | Years                                   |   | $                       |   |
| Options outstanding at the beginning of the year   |   |                  | 1,927,199 |   |                         |   | 2.28                                    |   |                    |   |   |   |   |
| Granted                                            |   |                  | 498,000   |   |                         |   | 1.44                                    |   |                    |   |   |   |   |
| Exercised                                          |   |                  | (685,564  | )      |                         |   | 1.95                                    |   |                    |   |   |   |   |
| Forfeited                                          |   |                  | (75,447   | )      |                         |   | 5.59                                    |   |                    |   |   |   |   |
|                                               |   |                  |      |   |                         |   |                                    |   |                    |   |   |   |   |
| Outstanding at the end of the year                 |   |                  | 1,664,188 |   |                         |   | 2.02                                    |   | 6.49                    |   |   | 6,928 |   |
|                                               |   |                  |      |   |                         |   |                                    |   |                    |   |   |   |   |
| Vested and expected to vest at the end of the year |   |                  | 1,583,891 |   |                         |   | 2.06                                    |   | 6.36                    |   |   | 3,352 |   |
|                                               |   |                  |      |   |                         |   |                                    |   |                    |   |   |   |   |
| Exercisable at the end of the year                 |   |                  | 933,688   |   |                         |   | 2.59                                    |   | 4.48                    |   |   | 6,528 |   |

----

----

| NOTE 12: - | EMPLOYEE OPTION PLANS (Cont.) |
|------------|-------------------------------|

|                                               |   | Number ofoptions |       |   | Weightedaverageexerciseprice |   |   | Weightedaverageremainingcontractualterm |   |   | Aggregateintrinsicvalue |   |
|----------------------------------------------------|--------|-----------------------|------------|--------|------------------------------|--------|--------|-----------------------------------------|--------|--------|-------------------------|--------|
|                                               |   |                  |       |   | $                            |   |   | Years                                   |   |   | $                       |   |
|                                               |   |                  |       |   |                         |   |   |                                    |   |   |                    |   |
| Options outstanding at the beginning of the year   |   |                  | 2,171,463  |   |                         |   | 3.23   |                                    |   |   |                    |   |   |   |
| Granted                                            |   |                  | -          |   |                         |   | -      |                                    |   |   |                    |   |   |   |
| Exercised                                          |   |                  | (2,027,798 | )      |                         |   | 3.18   |                                    |   |   |                    |   |   |   |
| Forfeited                                          |   |                  | -          |   |                         |   | -      |                                    |   |   |                    |   |   |   |
|                                               |   |                  |       |   |                         |   |   |                                    |   |   |                    |   |   |   |
| Outstanding at the end of the year                 |   |                  | 143,665    |   |                         |   | 3.23   |                                    |   |   | 0.916                   |   |   |   | 381 |   |
|                                               |   |                  |       |   |                         |   |   |                                    |   |   |                    |   |   |   |   |   |
| Vested and expected to vest at the end of the year |   |                  | 143,665    |   |                         |   | 3.23   |                                    |   |   | 0.916                   |   |   |   | 381 |   |
|                                               |   |                  |       |   |                         |   |   |                                    |   |   |                    |   |   |   |   |   |
| Exercisable at the end of the year                 |   |                  | 143,665    |   |                         |   | 3.23   |                                    |   |   |                    |   |   |   | 381 |   |

----

----

| NOTE 12:- | EMPLOYEE OPTION PLANS (Cont.) |
|-----------|-------------------------------|

|                                                                |   | Number ofoptions |      |   | Weightedaverageexerciseprice |   |   | Weightedaverageremainingcontractualterm |   |   | Aggregateintrinsicvalue |   |
|---------------------------------------------------------------------|--------|-----------------------|-----------|--------|------------------------------|--------|--------|-----------------------------------------|--------|--------|-------------------------|--------|
|                                                                |   |                  |      |   | $                            |   |   | Years                                   |   |   | $                       |   |
|                                                                |   |                  |      |   |                         |   |   |                                    |   |   |                    |   |
| Options outstanding at the beginning of the year                    |   |                  | 2,306,963 |   |                         |   | 2.16   |                                    |   |   | 5.23                    |   |   |   |   |
|                                                                |   |                  |      |   |                         |   |   |                                    |   |   |                    |   |   |   |   |
| Granted                                                             |   |                  | 789,000   |   |                         |   | 1.92   |                                    |   |   | 5.2                     |   |   |   |   |
| Exercised                                                           |   |                  | (17,282   | )      |                         |   | 1.39   |                                    |   |   | -                       |   |   |   |   |
| Forfeited                                                           |   |                  | (132,909  | )      |                         |   | 12.24  |                                    |   |   | 0.38                    |   |   |   |   |
|                                                                |   |                  |      |   |                         |   |   |                                    |   |   |                    |   |   |   |   |
| Options outstanding at the end of the year                          |   |                  | 2,945,772 |   |                         |   | 1.65   |                                    |   |   | 4.7                     |   |   |   | 2,026 |   |
|                                                                |   |                  |      |   |                         |   |   |                                    |   |   |                    |   |   |   |   |   |
| Vested and expected to vest at   the end of the year |   |                  | 2,888,634 |   |                         |   | 1.64   |                                    |   |   | 4.69                    |   |   |   | 1,956 |   |
|                                                                |   |                  |      |   |                         |   |   |                                    |   |   |                    |   |   |   |   |   |
| Exercisable at the end of the year                                  |   |                  | 1,803,004 |   |                         |   | 1.58   |                                    |   |   | 4.56                    |   |   |   | 1,394 |   |

----

----

| NOTE 13:- | COMMITMENTS AND CONTINGENCIES |
|-----------|-------------------------------|

|   | a. | Commitments: |
|--------|----|--------------|

|   | b. | Liens: |
|--------|----|--------|

|   | c. | Guarantees: |
|--------|----|-------------|

|   | 1. | Subsidiaries have provided bank guarantees aggregating to approximately $ 15,300 as security for the performance of various contracts with customers. If the subsidiaries were to breach certain terms of such contracts, the customers could demand that the banks providing the guarantees pay amounts claimed to be due. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Subsidiaries have provided bank guarantees aggregating to $ 3,200 as security for rent to be paid for their offices. If the subsidiaries were to breach certain terms of their lease, the lessee could demand that the banks providing the guarantees pay amounts claimed to be due. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | In connection with Matrix' credit facilities agreements with various financial institutions and in connection with non-convertible debentures, Matrix committed to the following: |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | To maintain certain financial ratios. Matrix meet the financial ratios as of December 31, 2010 and 2009.. |
|--------|----|-----------------------------------------------------------------------------------------------------------|

|   | 2. | Not to grant a security interest in all or substantially all of their respective assets. |
|--------|----|------------------------------------------------------------------------------------------|

|   | 3. | Matrix committed to not to distribute dividends that will cause its equity to be less than NIS 275,000 (approximately $ 80,000). As of December 31, 2010, the Matrix' equity is approximately NIS 551,000 ($ 160,000). |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 13:- | COMMITMENTS AND CONTINGENCIES (Cont.) |
|-----------|---------------------------------------|

|   | e. | Legal proceedings: |
|--------|----|--------------------|

|   | 1. | In 2010, a former customer of Sapiens filed a claim in the arbitration court in Warsaw, Poland against Sapiens, claiming an amount of approximately €3,400 ((approximately $ 4,750) for damages caused by Sapiens in the project for such former customer more than two years ago. Sapiens does not accept the claim and based on the consultations with its legal counsel, believes that it has a reasonable defense. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | In February 2010, a U.S. company filed a lawsuit against Magic and one of its subsidiaries claiming an alleged breach by Magic and the subsidiary of its intellectual property rights in connection with one of Magic’s products. No monetary damage was claimed. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | In August 2009, a software company filed a lawsuit in arbitration against Magic Software, claiming an alleged breach of a non-disclosure agreement between the parties. The plaintiffs are seeking damages in the amount of approximately $13.7 million. Closing summaries have not yet been submitted in the proceedings with respect to the amount of damages, and therefore, at this time Magic Software is not able to estimate the amount of damages and no provision has been made for the arbitration. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | In addition, other lawsuits have been filed against the Company's subsidiaries in the ordinary course of business. The Company applied ASC 450, "Contingencies", and recorded a provision where it was appropriate. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | f. | Lease commitments: |
|--------|----|--------------------|

|                |   |   |   |
|---------------------|--------|--------|--------|
| 2011                |   |   | 21,189 |   |
| 2012                |   |   | 19,301 |   |
| 2013                |   |   | 13,190 |   |
| 2014                |   |   | 5,423  |   |
| 2015 and thereafter |   |   | 2,343  |   |
|                |   |   |   |   |
|                |   |   | 61,446 |   |

----

----

| NOTE 14:- | EQUITY |
|-----------|--------|

|                                       |   | December 31, 2010 |       |   | December 31, 2009 |   |
|--------------------------------------------|--------|-----------------------------|------------|--------|-----------------------------|--------|
|                                       |   | Authorized                  |       |   | Issued                      |   |   | Outstanding |   |   | Authorized |   |   | Issued |   |   | Outstanding |   |
|                                       |   |                        |       |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ordinary shares, NIS 1 par value each |   |                        | 25,000,000 |   |                        |   | 13,620,780 |   |   |   | 13,596,000 |   |   |   | 25,000,000 |   |   |   | 13,224,780 |   |   |   | 13,200,000 |   |

|   | 1. | Formula's shares are traded on the TASE and its ADS, each representing one Ordinary share of NIS 1 par value, on the NASDAQ. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Formula holds 24,780 of its Ordinary shares. |
|--------|----|----------------------------------------------|

|   | 3. | In 2008, the Company paid a dividend of approximately $ 10,000 and declared a dividend of approximately $ 30,000 which paid in January 2009. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4. | In April 2010, the Company declared on dividend of approximately $20,000 and paid approximately $ 10,000 of it. |
|--------|----|-----------------------------------------------------------------------------------------------------------------|

|   | 5. | For Employee and Officer Share Option Plan, see Note 12. |
|--------|----|----------------------------------------------------------|

|   | 6. | In December 2010, Magic consummated a private placement of ordinary shares and warrants with several institutional and private investors for aggregate gross proceeds of $23,000 (excluding finders' fees and transaction expenses).  If the warrants are exercised in full, Magic will receive additional proceeds of approximately $9,400. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| NOTE 15:- | INCOME TAXES |
|-----------|--------------|

|   | a. | Tax laws in Israel: |
|--------|----|---------------------|

|   | 1. | Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 ("the Law"): |
|--------|----|----------------------------------------------------------------------------------------------------|

----

----

| NOTE 15:- | INCOME TAXES (Cont.) |
|-----------|----------------------|

|   | 2. | Tax benefits under the Law for the Encouragement of Industry (Taxation), 1969: |
|--------|----|--------------------------------------------------------------------------------|

----

----

| NOTE 15:- | INCOME TAXES (Cont.) |
|-----------|----------------------|

|   | 3. | Tax rates applicable to income in Israel: |
|--------|----|-------------------------------------------|

|   | b. | Subsidiaries outside Israel: |
|--------|----|------------------------------|

|   | c. | Cumulative tax losses: |
|--------|----|------------------------|

----

----

| NOTE 15:- | INCOME TAXES (Cont.) |
|-----------|----------------------|

|   | d. | Income tax assessments: |
|--------|----|-------------------------|

----

----

| NOTE 15:- | INCOME TAXES (Cont.) |
|-----------|----------------------|

|   | e. | Deferred taxes: |
|--------|----|-----------------|

|   | 1. | Composition: |
|--------|----|--------------|

|                                                           |   | December 31, |    |
|----------------------------------------------------------------|--------|--------------|---------|
|                                                           |   | 2010         |    |   | 2009 |   |
|                                                           |   |         |    |   |   |   |
| Net operating losses carried forward                           |   |         | 43,120  |   |   |   | 38,663 |   |
| Allowances and reserves                                        |   |         | 3,219   |   |   |   | 1,006 |   |
| Differences in measurement basis (cash basis for tax purposes) |   |         | (2,159  | ) |   |   | (2,907 | ) |
|                                                           |   |         |    |   |   |   |   |   |
|                                                           |   |         | 44,180  |   |   |   | 36,762 |   |
| Valuation allowance                                            |   |         | (29,173 | ) |   |   | (25,735 | ) |
|                                                           |   |         |    |   |   |   |   |   |
| Total                                                          |   |         | 15,007  |   |   |   | 11,027 |   |

|   | 2. | Presentation in balance sheets: |
|--------|----|---------------------------------|

|                     |   | December 31, |   |
|--------------------------|--------|--------------|--------|
|                     |   | 2010         |   |   | 2009 |   |
|                     |   |         |   |   |   |   |
| Other current assets     |   |         | 4,526  |   |   |   | 3,735 |   |
| Other non-current assets |   |         | 13,135 |   |   |   | 9,499 |   |
| Long-term liabilities    |   |         | (2,654 | ) |   |   | (2,207 | ) |
|                     |   |         |   |   |   |   |   |   |
|                     |   |         | 15,007 |   |   |   | 11,027 |   |

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

|     |   | Year ended December 31, |   |
|----------|--------|----------------------------------------|--------|
|     |   | 2010                                   |   |   | 2009 |   |   | 2008 |   |
|     |   |                                   |   |   |   |   |   |   |   |
| Domestic |   |                                   | 31,153 |   |   |   | 24,762 |   |   |   | 17,900 |   |
| Foreign  |   |                                   | 11,463 |   |   |   | 12,030 |   |   |   | 7,728 |   |
|     |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Total    |   |                                   | 42,616 |   |   |   | 36,792 |   |   |   | 25,628 |   |

----

----

| NOTE 15:- | INCOME TAXES (Cont.) |
|-----------|----------------------|

|   | g. | Income taxes included in the statements of operations: |
|--------|----|--------------------------------------------------------|

|                |   | Year endedDecember 31, |   |
|---------------------|--------|------------------------|--------|
|                |   | 2010                   |   |   | 2009 |   |   | 2008 |   |
|                |   |                   |   |   |   |   |   |   |   |
| Current taxes:      |   |                   |   |   |   |   |   |   |   |
|                |   |                   |   |   |   |   |   |   |   |
| Domestic            |   |                   | 8,149  |   |   |   | 7,002 |   |   |   | 3,896 |   |
| Foreign             |   |                   | 1,750  |   |   |   | 819 |   |   |   | 1,264 |   |
|                |   |                   |   |   |   |   |   |   |   |   |   |   |
|                |   |                   | 9,899  |   |   |   | 7,821 |   |   |   | 5,160 |   |
|                |   |                   |   |   |   |   |   |   |   |   |   |   |
| Deferred taxes:     |   |                   |   |   |   |   |   |   |   |   |   |   |
|                |   |                   |   |   |   |   |   |   |   |   |   |   |
| Domestic            |   |                   | (4,004 | ) |   |   | 1,359 |   |   |   | (2,012 | ) |
| Foreign             |   |                   | 649    |   |   |   | (875 | ) |   |   | 131 |   |
|                |   |                   |   |   |   |   |   |   |   |   |   |   |
| Deferred taxes, net |   |                   | (3,355 | ) |   |   | 484 |   |   |   | (1,881 | ) |
|                |   |                   |   |   |   |   |   |   |   |   |   |   |
| Taxes on income     |   |                   | 6,544  |   |   |   | 8,305 |   |   |   | 3,279 |   |

----

----

| NOTE 15:- | INCOME TAXES (Cont.) |
|-----------|----------------------|

|   | h. | Theoretical tax: |
|--------|----|------------------|

|                                                                                                                         |   | Year endedDecember 31, |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                         |   | 2010                   |   |   | 2009 |   |   | 2008 |   |
|                                                                                                                         |   |                   |   |
|                                                                                                                         |   |                   |   |   |   |   |   |   |   |
| Income before income taxes, as per the statement of operations                                                               |   |                   | 42,616 |   |   |   | 36,792 |   |   |   | 25,628 |   |
|                                                                                                                         |   |                   |   |   |   |   |   |   |   |   |   |   |
| Statutory tax rate in Israel                                                                                                 |   |                   | 25     | % |   |   | 26 | % |   |   | 27 | % |
|                                                                                                                         |   |                   |   |   |   |   |   |   |   |   |   |   |
| Theoretical tax expense                                                                                                      |   |                   | 10,654 |   |   |   | 9,566 |   |   |   | 6,920 |   |
| Reconciliation:                                                                                                              |   |                   |   |   |   |   |   |   |   |   |   |   |
| Non-deductible expenses                                                                                                      |   |                   | 238    |   |   |   | 441 |   |   |   | 193 |   |
| Tax-exempt income change in tax rate and reduced tax rates in companies which have Approved Enterprises                      |   |                   | 631    |   |   |   | 425 |   |   |   | 8 |   |
| Deferred taxes on losses (utilization of losses) and temporary differences for which a valuation allowance was provided, net |   |                   | (3,438 | ) |   |   | 627 |   |   |   | (3,034 | ) |
| Prior year losses and temporary differences for which deferred taxes were recorded, net                                      |   |                   | (3,231 | ) |   |   | (2,979 | ) |   |   | - |   |
| Taxes in respect of prior years                                                                                              |   |                   | 735    |   |   |   | 118 |   |   |   | (907 | ) |
| Other                                                                                                                        |   |                   | 955    |   |   |   | 107 |   |   |   | 99 |   |
|                                                                                                                         |   |                   |   |   |   |   |   |   |   |   |   |   |
| Income taxes as per the statement of operations                                                                              |   |                   | 6,544  |   |   |   | 8,305 |   |   |   | 3,279 |   |
|                                                                                                                         |   |                   |   |   |   |   |   |   |   |   |   |   |
| Effective tax rate - in %                                                                                                    |   |                   | 15.4   | % |   |   | 22.6 | % |   |   | 12.8 | % |

|   | i. | Uncertain tax positions: |
|--------|----|--------------------------|

----

----

| NOTE 15:- | INCOME TAXES (Cont.) |
|-----------|----------------------|

| Balance as of January 1, 2009                                                                         |   |   | 756    |   |
|-------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
|                                                                                                  |   |   |   |   |
| Reductions related to settlement of tax matters                                                       |   |   | (229   | )      |
| Increase related to current year  tax positions                                             |   |   | 142    |   |
| Addition of interest related to the unrecognized tax liabilities from   previous years |   |   | 10     |   |
|                                                                                                  |   |   |   |   |
| Balance as of December 31, 2009                                                                       |   |   | 679    |   |
|                                                                                                  |   |   |   |   |
| Increase related to current year tax positions                                                        |   |   | 915    |   |
| Addition of interest related to the unrecognized tax liabilities from previous years                  |   |   | 512    |   |
|                                                                                                  |   |   |   |   |
| Balance as of December 31, 2010                                                                       |   |   | 2,106  |   |

| NOTE 16:- | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION |
|-----------|-----------------------------------------------|

|   | a. | Other current assets: |
|--------|----|-----------------------|

|                                        |   | December 31, |   |
|---------------------------------------------|--------|-------------------|--------|
|                                        |   | 2010              |   |   | 2009 |   |
|                                        |   |              |   |   |   |   |
| Government departments                      |   |              | 6,424  |   |   |   | 5,726 |   |
| Employees (1)                               |   |              | 356    |   |   |   | 355 |   |
| Prepaid expenses and advances to suppliers  |   |              | 9,495  |   |   |   | 7,544 |   |
| Deferred taxes                              |   |              | 4,526  |   |   |   | 3,735 |   |
| Advanced payments due to M&A activities |   |              | 1,160  |   |   |   | - |   |
| Debtors from sale of fixed assets           |   |              | -      |   |   |   | 1,306 |   |
| Derivatives                                 |   |              | -      |   |   |   | 2,292 |   |
| Other                                       |   |              | 1,179  |   |   |   | 1,490 |   |
|                                        |   |              |   |   |   |   |   |   |
| Total                                       |   |              | 23,140 |   |   |   | 22,448 |   |

|   | (1) | Some of these balances are linked to the CPI, and bear interest at an annual rate of 4%. |
|--------|-----|------------------------------------------------------------------------------------------|

----

----

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

|   | b. | Liabilities to Banks: |
|--------|----|-----------------------|

|                                                           |   | December 31,  |   |     |   | December 31, |   |
|----------------------------------------------------------------|--------|--------------------|--------|----------|--------|-------------------|--------|
|                                                           |   | 2010               |   |     |   | 2010              |   |   | 2009 |   |
|                                                           |   | Interest rate |   | Linkage  |   |              |   |
|                                                           |   | %                  |   | basis    |   |              |   |   |   |   |
|                                                           |   |               |   |     |   |              |   |   |   |   |
| Bank credit                                                    |   |  4%-6%        |   | Unlinked |   |              | 527    |   |   |   | 36 |   |
| Short-term bank loans                                          |   | Prime+2%           |   | Unlinked |   |              | -      |   |   |   | 3,179 |   |
| Current maturities of long-term loans from banks (see Note 10) |   |               |   |     |   |              | 6,157  |   |   |   | 6,840 |   |
|                                                           |   |               |   |     |   |              |   |   |   |   |   |   |
| Total                                                          |   |               |   |     |   |              | 6,684  |   |   |   | 10,055 |   |

|   | c. | Other accounts payable: |
|--------|----|-------------------------|

|                                           |   | December 31, |   |
|------------------------------------------------|--------|-------------------|--------|
|                                           |   | 2010              |   |   | 2009 |   |
|                                           |   |              |   |
| Government institutions                        |   |              | 20,260 |   |   |   | 12,558 |   |
| Customer advances                              |   |              | 280    |   |   |   | 5,631 |   |
| Accrued expenses and other current liabilities |   |              | 10,153 |   |   |   | 8,805 |   |
|                                           |   |              |   |   |   |   |   |   |
| Total                                          |   |              | 30,693 |   |   |   | 26,994 |   |

|   | d. | Financial expenses, net: |
|--------|----|--------------------------|

|                                                    |   | Year ended December 31, |   |
|---------------------------------------------------------|--------|----------------------------------------|--------|
|                                                    |   | 2010                                   |   |   | 2009 |   |   | 2008 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |
| Financial income                                        |   |                                   | 1,062  |   |   |   | 4,160 |   |   |   | 8,951 |   |
| Financial costs related to long-term debt               |   |                                   | (5,029 | ) |   |   | (5,982 | ) |   |   | (8,781 | ) |
| Financial costs related to short-term credit and others |   |                                   | (2,527 | ) |   |   | (2,590 | ) |   |   | (4,597 | ) |
| Gain (loss) from marketable securities, net (1) (2)     |   |                                   | 2,123  |   |   |   | 4,181 |   |   |   | (1,481 | ) |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Total                                                   |   |                                   | (4,371 | ) |   |   | (231 | ) |   |   | (5,908 | ) |

|   | (1) | Includes gains (losses) from trading securities still held by the Company for the years 2010, 2009 and 2008 in the amounts of $ 2,276, $ 1,362 and $ (1,530) respectively. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | Includes impairment of available-for-sale marketable securities for 2010 and 2009 of $ 153 and $ 143, respectively due to credit loss (see Note 4). |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

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

|   | e. | Other expenses, net: |
|--------|----|----------------------|

|                                         |   | Year ended December 31, |   |
|----------------------------------------------|--------|----------------------------------------|--------|
|                                         |   | 2010                                   |   |   | 2009 |   |   | 2008 |   |
|                                         |   |                                   |   |   |   |   |   |   |   |
| Gain on sale of fixed assets, net            |   |                                   | -      |   |   |   | 247 |   |   |   | 341 |   |
| Impairment in value of cost-based investment |   |                                   | -      |   |   |   | (59 | ) |   |   | (502 | ) |
| Other                                        |   |                                   | (231   | ) |   |   | 1,480 |   |   |   | (419 | ) |
|                                         |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Total                                        |   |                                   | (231   | ) |   |   | 1,668 |   |   |   | (580 | ) |

|   | f. | Operating segments: |
|--------|----|---------------------|

----

----

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

----

----

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

|                                   |   | Software |    |   |                                    |   |   |   |   |
|----------------------------------------|--------|----------|---------|--------|-----------------------------------------|--------|--------|--------|--------|
|                                   |   | Services |    |   | Proprietary Software Products |   |   | Total  |   |
|                                   |   | Matrix   |    |   | Sapiens                                 |   |   | Magic  |   |   |   |   |
|                                   |   |     |    |   |                                    |   |   |   |   |   |   |   |
| Revenues:                              |   |     |    |   |                                    |   |   |   |   |   |   |   |
| 2010                                   |   |     | 409,272 |   |                                    |   | 52,235 |   |   |   | 88,578 |   |   |   | 550,085 |   |
| 2009                                   |   |     | 368,498 |   |                                    |   | 45,698 |   |   |   | 55,350 |   |   |   | 469,546 |   |
| 2008                                   |   |     | 397,925 |   |                                    |   | 43,534 |   |   |   | 61,980 |   |   |   | 503,439 |   |
|                                   |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Inter-segment sales:                   |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| 2010                                   |   |     | 391     |   |                                    |   | -      |   |   |   | - |   |   |   | 391 |   |
| 2009                                   |   |     | 153     |   |                                    |   | 3      |   |   |   | - |   |   |   | 156 |   |
| 2008                                   |   |     | 135     |   |                                    |   | -      |   |   |   | 61 |   |   |   | 196 |   |
|                                   |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Operating income:                      |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| 2010                                   |   |     | 31,412  |   |                                    |   | 6,476  |   |   |   | 9,099 |   |   |   | 46,987 |   |
| 2009                                   |   |     | 26,014  |   |                                    |   | 5,087  |   |   |   | 5,922 |   |   |   | 37,023 |   |
| 2008                                   |   |     | 25,502  |   |                                    |   | 2,430  |   |   |   | 3,941 |   |   |   | 31,873 |   |
|                                   |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Financial income (expenses):           |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| 2010                                   |   |     | (3,819  | )      |                                    |   | (201   | )      |   |   | (351 | ) |   |   | (4,371 | ) |
| 2009                                   |   |     | 377     |   |                                    |   | 262    |   |   |   | (870 | ) |   |   | (231 | ) |
| 2008                                   |   |     | (4,648  | )      |                                    |   | (2,012 | )      |   |   | 752 |   |   |   | (5,908 | ) |
|                                   |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Net income from continuing operations: |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| 2010                                   |   |     | 9,189   |   |                                    |   | 4,129  |   |   |   | 5,061 |   |   |   | 18,379 |   |
| 2009                                   |   |     | 8,197   |   |                                    |   | 2,703  |   |   |   | 3,298 |   |   |   | 14,198 |   |
| 2008                                   |   |     | 9,190   |   |                                    |   | (1     | )      |   |   | 2,125 |   |   |   | 11,314 |   |

|                                    |   | Software |    |   |                                    |   |   |   |   |
|-----------------------------------------|--------|----------|---------|--------|-----------------------------------------|--------|--------|--------|--------|
|                                    |   | Services |    |   | Proprietary Software Products |   |   | Total  |   |
|                                    |   | Matrix   |    |   | Sapiens                                 |   |   | Magic  |   |   |   |   |
|                                    |   |     |    |   |                                    |   |   |   |   |   |   |   |
| Identifiable assets including goodwill: |   |     |    |   |                                    |   |   |   |   |   |   |   |
| 2010                                    |   |     | 404,175 |   |                                    |   | 68,394 |   |   |   | 118,818 |   |   |   | 591,387 |   |
| 2009                                    |   |     | 370,206 |   |                                    |   | 59,196 |   |   |   | 93,441 |   |   |   | 522,843 |   |
|                                    |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Identifiable liabilities:               |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| 2010                                    |   |     | 183,342 |   |                                    |   | 22,130 |   |   |   | 22,386 |   |   |   | 227,858 |   |
| 2009                                    |   |     | 148,641 |   |                                    |   | 20,822 |   |   |   | 32,332 |   |   |   | 201,795 |   |
|                                    |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization:          |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| 2010                                    |   |     | 4,235   |   |                                    |   | 6,647  |   |   |   | 4,569 |   |   |   | 15,451 |   |
| 2009                                    |   |     | 3,568   |   |                                    |   | 5,369  |   |   |   | 4,600 |   |   |   | 13,807 |   |
| 2008                                    |   |     | 3,646   |   |                                    |   | 5,142  |   |   |   | 3,629 |   |   |   | 12,417 |   |
|                                    |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| Investments in segment assets:          |   |     |    |   |                                    |   |   |   |   |   |   |   |   |   |   |   |
| 2010                                    |   |     | 4,103   |   |                                    |   | 662    |   |   |   | 583 |   |   |   | 5,348 |   |
| 2009                                    |   |     | 1,799   |   |                                    |   | 326    |   |   |   | 580 |   |   |   | 2,705 |   |
| 2008                                    |   |     | 2,481   |   |                                    |   | 769    |   |   |   | 738 |   |   |   | 3,988 |   |

----

----

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

|                                     |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|                                     |   |   |    |   |   |   |    |   |   |
| Revenues:                                |   |   |    |   |   |   |    |   |   |
| Revenues as above                        |   |   | 550,085 |   |   |   | 469,546 |   |   |   | 503,439 |   |
| Less inter-segment transactions     |   |   | (391    | )      |   |   | (156    | )      |   |   | (196 | ) |
|                                     |   |   |    |   |   |   |    |   |   |   |   |   |
| Revenues as per statements of operations |   |   | 549,694 |   |   |   | 469,390 |   |   |   | 503,243 |   |

|                                                                            |   | 2010   |    |   | 2009   |   |
|---------------------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
| Identifiable assets:                                                            |   |   |    |   |   |   |
| Total assets of operating segments                                              |   |   | 591,387 |   |   |   | 522,843 |   |
| Assets not identifiable to a particular segment                                 |   |   | 44,477  |   |   |   | 64,753 |   |
| Elimination of inter-segment assets and other                                   |   |   | (12,097 | )      |   |   | (21,184 | ) |
|                                                                            |   |   |    |   |   |   |   |   |
| Total assets from continuing operations as per consolidated balance sheets      |   |   | 623,767 |   |   |   | 566,412 |   |
|                                                                            |   |   |    |   |   |   |   |   |
| Identifiable liabilities:                                                       |   |   |    |   |   |   |   |   |
| Total liabilities of operating segments                                         |   |   | 227,858 |   |   |   | 201,795 |   |
| Liabilities not identifiable to a particular segment                            |   |   | 76,456  |   |   |   | 93,032 |   |
| Elimination of inter-segment liabilities and other                              |   |   | (14,931 | )      |   |   | (24,016 | ) |
|                                                                            |   |   |    |   |   |   |   |   |
| Total liabilities from continuing operations as per consolidated balance sheets |   |   | 289,383 |   |   |   | 270,811 |   |

|   | g. | Geographical information: |
|--------|----|---------------------------|

|   | 1. | The Company's long-lived assets are as follows: |
|--------|----|-------------------------------------------------|

|          |   | December 31, |    |
|---------------|--------|-------------------|---------|
|          |   | 2010              |    |   | 2009 |   |
|          |   |              |    |   |   |   |
| Israel        |   |              | 125,734 |   |   |   | 115,466 |   |
| United States |   |              | 20,156  |   |   |   | 5,245 |   |
| Europe        |   |              | 10,108  |   |   |   | 10,143 |   |
| Japan         |   |              | 6,506   |   |   |   | 5,826 |   |
| Other         |   |              | 4,228   |   |   |   | 1,727 |   |
|          |   |              |    |   |   |   |   |   |
| Total         |   |              | 166,732 |   |   |   | 138,407 |   |

----

----

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

|   | 2. | Revenues: |
|--------|----|-----------|

|           |   | Year ended December 31, |    |
|----------------|--------|----------------------------------------|---------|
|           |   | 2010                                   |    |   | 2009 |   |   | 2008 |   |
|           |   |                                   |    |   |   |   |   |   |   |
| Israel         |   |                                   | 412,922 |   |   |   | 368,230 |   |   |   | 393,391 |   |
| International: |   |                                   |    |   |   |   |   |   |   |   |   |   |
| United States  |   |                                   | 73,075  |   |   |   | 38,862 |   |   |   | 47,098 |   |
| Other          |   |                                   | 63,697  |   |   |   | 62,298 |   |   |   | 62,754 |   |
|           |   |                                   |    |   |   |   |   |   |   |   |   |   |
| Total          |   |                                   | 549,694 |   |   |   | 469,390 |   |   |   | 503,243 |   |

|   | h. | Earnings per share: |
|--------|----|---------------------|

|                                                                     |   | Year ended December 31, |   |
|--------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                     |   | 2010                                   |   |   | 2009 |   |   | 2008 |   |
|                                                                     |   |                                   |   |   |   |   |   |   |   |
| Amount for basic earnings per share - income available to shareholders   |   |                                   | 18,379 |   |   |   | 14,198 |   |   |   | 11,314 |   |
| Effect of dilutive securities of subsidiaries                            |   |                                   | -      |   |   |   | - |   |   |   | - |   |
|                                                                     |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Amount for diluted earnings per share - income available to shareholders |   |                                   | 18,379 |   |   |   | 14,198 |   |   |   | 11,314 |   |
|                                                                     |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding                                      |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Denominator for basic net earnings per share                             |   |                                   | 13,382 |   |   |   | 13,200 |   |   |   | 13,200 |   |
| Effect of dilutive securities                                            |   |                                   | 141    |   |   |   | 364 |   |   |   | - |   |
|                                                                     |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Denominator for diluted net earnings per share                           |   |                                   | 13,523 |   |   |   | 13,564 |   |   |   | 13,200 |   |
|                                                                     |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Basic net earnings per share from continuing operations                  |   |                                   | 1.37   |   |   |   | 1.08 |   |   |   | 0.84 |   |
|                                                                     |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Diluted net earnings per share from continuing operations                |   |                                   | 1.36   |   |   |   | 1.04 |   |   |   | 0.84 |   |

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| NOTE 17: - | DISCONTINUED OPERATIONS |
|------------|-------------------------|

|   | a. | On June 20, 2007, the Company completed the sale of its entire shareholdings in BluePhoenix. BluePhoenix met the definition of a component under ASC 360. Accordingly, the results of operations of BluePhoenix have been classified as discontinued operations in the statement of income and prior periods results have been reclassified accordingly. In addition, comparative data of the assets and liabilities attributed to the discontinued operations have been reclassified in the balance sheet. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | In 2007, Magic disposed of two of its subsidiaries (AAOD and Magic Italy). Both subsidiaries met the definition of a component under ASC 360. Accordingly, the results of operations of these subsidiaries and businesses and the gain resulting from the disposals have been classified as discontinued operations in the statement of income and prior periods results have been reclassified accordingly. In addition, comparative data of the assets and liabilities attributed to the discontinued operations have been reclassified in the balance sheet. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | On October 22, 2009, the Company completed the sale of its entire shareholdings in NextSource. The results of operations of NextSource have been classified as discontinued operations in the statement of income and prior periods results have been reclassified accordingly. In addition, comparative data of the assets and liabilities attributed to the discontinued operations have been reclassified in the balance sheet. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d. | The following is the composition of discontinued operations (including capital gains): |
|--------|----|----------------------------------------------------------------------------------------|

|                                         |   | Year ended December 31, |   |
|----------------------------------------------|--------|----------------------------------------|--------|
|                                         |   | 2010                                   |   |   | 2009 |   |   | 2008 |   |
|                                         |   |                                   |   |   |   |   |   |   |   |
| Revenues                                     |   |                                   | -      |   |   |   | 64,328 |   |   |   | 87,564 |   |
| Cost of revenues                             |   |                                   | -      |   |   |   | 57,996 |   |   |   | 78,488 |   |
|                                         |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                 |   |                                   | -      |   |   |   | 6,332 |   |   |   | 9,076 |   |
| Research and development costs, net          |   |                                   | -      |   |   |   | - |   |   |   | - |   |
| Selling, general and administrative expenses |   |                                   | -      |   |   |   | 5,647 |   |   |   | 8,156 |   |
|                                         |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Operating income                             |   |                                   | -      |   |   |   | 685 |   |   |   | 920 |   |
| Financial expenses, net                      |   |                                   | -      |   |   |   | (55 | ) |   |   | (100 | ) |
| Capital gains on sale of shareholdings, net  |   |                                   | -      |   |   |   | 4,284 |   |   |   | - |   |
|                                         |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Income before income taxes                   |   |                                   | -      |   |   |   | 4,914 |   |   |   | 820 |   |
| Taxes on income                              |   |                                   | -      |   |   |   | 36 |   |   |   | 265 |   |
|                                         |   |                                   |   |   |   |   |   |   |   |   |   |   |
|                                         |   |                                   | -      |   |   |   | 4,878 |   |   |   | 555 |   |
| Equity in losses of affiliates, net          |   |                                   | -      |   |   |   | - |   |   |   | - |   |
|                                         |   |                                   |   |   |   |   |   |   |   |   |   |   |
| Net income                                   |   |                                   | -      |   |   |   | 4,878 |   |   |   | 555 |   |

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| NOTE 18: - | SUBSEQUENT EVENT |
|------------|------------------|

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