UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM
20-F



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

OR



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

For the fiscal year ended December
31, 2016

OR



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

For the transition period from __________
to ___________



OR

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

Date of event requiring
this shell company report ______________



Commission File Number: 000-29442



FORMULA SYSTEMS (1985) LTD.

(Exact Name of Registrant as Specified in
Its Charter
and translation of Registrant’s name into English)



Israel

(Jurisdiction of Incorporation or Organization)



5 Haplada Street, Or Yehuda 60218,
Israel

(Address of Principal Executive Offices)



Asaf Berenstin; 5 Haplada Street,
Or Yehuda 60218, Israel

Tel: 972 3 5389487, Fax: 972 3 5389645

(Name, Telephone, E-mail and/or Facsimile
Number and Address of Company Contact Person)










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



|Title of Each Class                              | Name of Each Exchange On Which Registered
|------------------------------------------------ | -----------------------------------------
|American Depositary Shares, each                 | NASDAQ Global Select Market              
|representing one Ordinary Share, NIS 1 par value |                                          



Securities registered or to be registered pursuant to Section
12(g) of the Act: None



Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None



Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period covered by the annual report:

As of December 31, 2016, the registrant had 14,728,782
outstanding ordinary shares, NIS 1 par value, of which 197,485 were represented by American Depositary Shares.



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

Yes  ̈
No x



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

Yes  ̈
No x



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

Yes x
No  ̈



Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).

Yes x
No  ̈



Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.



|Large accelerated filer  ̈ | Accelerated filer x      
|------------------------- | -------------------------
|Non-accelerated filer  ̈   | Emerging Growth Company  ̈



If an emerging growth company that prepares
its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a)
of the Exchange Act.  ̈



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



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



If “Other” has been checked in response to the
previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ̈
Item 18  ̈



If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ̈
No x











TABLE OF CONTENTS



|PART I                                                                               
|-------------------------------------------------------------------------------------
|PART I                                                                               
|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                      
|ITEM 3. KEY INFORMATION                                                              
|ITEM 4. INFORMATION ON THE COMPANY                                                   
|ITEM 4A. UNRESOLVED STAFF COMMENTS                                                   
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            
|ITEM 8. FINANCIAL INFORMATION                                                        
|ITEM 9. THE OFFER AND LISTING                                                        
|ITEM 10. ADDITIONAL INFORMATION                                                      
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                      
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                             
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|ITEM 15. CONTROLS AND PROCEDURES                                                     
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                           
|ITEM 16B. CODE OF ETHICS                                                             
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                     
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                 
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS     
|ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT                               
|ITEM 16G. CORPORATE GOVERNANCE                                                       
|ITEM 17. FINANCIAL STATEMENTS                                                        
|ITEM 18. FINANCIAL STATEMENTS                                                        
|ITEM 19. EXHIBITS                                                                    



2







INTRODUCTION



This annual report on Form 20-F contains
various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended,
with respect to our business, financial condition and results of operations. Such forward-looking statements reflect our current
view with respect to future events and financial results. Statements which use the terms “anticipate,” “believe,”
“expect,” “plan,” “intend,” “estimate” and similar expressions are intended to
identify forward looking statements. We remind readers that forward-looking statements are merely predictions and therefore inherently
subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance,
levels of activity, or our achievements, or industry results, to be materially different from any future results, performance,
levels of activity, or our achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law,
including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any
forward looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof. We have
attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section
that appears in Item 3D. “Key Information - Risk Factors.”



Our consolidated financial statements
appearing in this annual report are prepared in U.S. dollars and in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board, or IFRS. All references in this annual report to “dollars”
or “$” are to U.S. dollars and all references in this annual report to “NIS” are to New Israeli Shekels.
References to the Israeli CPI refer to the Israeli consumer price index.



Statements made in this annual report
concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and
are not complete descriptions of all of their terms. If we filed any of these documents as an exhibit to this annual report or
to any previous filling with the Securities and Exchange Commission, or the SEC, you may read the document itself for a complete
recitation of its terms.



As used in this annual report, references
to “we,” “our,” “ours” and “us” refer to Formula Systems (1985) Ltd. and its investees,
unless otherwise indicated. References to “Formula” refer to Formula Systems (1985) Ltd. alone. Our operations are
currently conducted through our subsidiaries –, Matrix IT Ltd., or Matrix, Sapiens International Corporation N.V., or Sapiens,
Magic Software Enterprises Ltd., or Magic Software, Michpal Micro Computers (1983) Ltd., or Michpal, following our acquisition
of Michpal on January 3, 2017 and InSync Staffing Solutions, Inc., or InSync and our affiliated company TSG Advanced IT Systems,
Ltd., or TSG. following our acquisition of a 50% share interest in TSG on May 9, 2016.



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



3







PART I



ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS



Not applicable.



ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE



Not applicable.



ITEM 3. KEY INFORMATION



| | A. | Selected Financial Data
| | -- | -----------------------



The following tables present selected consolidated financial data as of the dates and for each of the
periods indicated. The consolidated financial statements for the year ended December 31, 2016 are the first we have prepared in
accordance with IFRS. The date of transition to IFRS is January 1, 2015. For periods up to and including the year ended December
31, 2015, we prepared our consolidated financial statements in accordance with United States generally accepted accounting principles,
or U.S. GAAP. Accordingly, we have prepared financial statements that comply with IFRS applicable as of December 31, 2016, together
with the comparative period data for the year ended December 31, 2015 and as of January 1, 2015. An explanation of the principal
adjustments made in restating the U.S. GAAP financial statements, including the statement of financial position as of January 1,
2015 and the financial statements for the year ended December 31, 2015, is provided in note 21 to our consolidated financial statements
included elsewhere in this annual report.



Pursuant to the transitional relief granted by the SEC in respect of the first-time adoption of IFRS,
we have only provided financial statements and financial information for two fiscal years ended December 31, 2016 in this annual
report as presented under IFRS. The selected financial information as of January 1, 2015 and as of and for the years ended December
31, 2015 and 2016 set forth below should be read in conjunction with, and is qualified in its entirety by reference to “Item
5. Operating and Financial Review and Prospects” and our audited consolidated financial statements and the notes thereto
included in this annual report.



|                                                                   |  | Year ended                                        |           
|------------------------------------------------------------------ |  | ------------------------------------------------- | ----------
|                                                                   |  | December 31,                                      |           
|                                                                   |  | 2015                                              |           
|                                                                   |  | U.S. dollars in thousands (except per share data) |           
|Revenues                                                           |  |                                                   | 973,194   
|Cost of revenues                                                   |  |                                                   | 741,270   
|                                                                   |  |                                                   |           
|Gross profit                                                       |  |                                                   | 231,924   
|Research and development costs, net                                |  |                                                   | 15,123    
|Selling, marketing, general and administrative expenses            |  |                                                   | 140,935   
|                                                                   |  |                                                   |           
|Operating income                                                   |  |                                                   | 75,866    
|Financial expenses                                                 |  |                                                   | (14,955   
|Financial income                                                   |  |                                                   | 5,422     
|Group's share of earnings of companiesaccounted for at equity, net |  |                                                   | 5         
|                                                                   |  |                                                   |           
|Income before taxes on income                                      |  |                                                   | 66,338    
|Taxes on income                                                    |  |                                                   | 15,984    
|Net income                                                         |  |                                                   | 50,354    
|Redeemable non-controlling interests                               |  |                                                   | 864       
|Net income attributable to non-controlling interests               |  |                                                   | 29,661    
|                                                                   |  |                                                   |           
|Net income attributable to equity holders of the Company           |  |                                                   | 19,829    
|                                                                   |  |                                                   |           
|Earnings per share (basic)                                         |  |                                                   | 1.41      
|Earnings per share (diluted)                                       |  |                                                   | 1.35      
|                                                                   |  |                                                   |           
|Number of shares used in computing earnings per share (basic)      |  |                                                   | 14,071,210
|Number of shares used in computing earnings per share (diluted)    |  |                                                   | 14,665,365



4







Statements of Financial Position:



|                                    |  | January 1                   |           |  | December 31, | 
|----------------------------------- |  | --------------------------- | --------- |  | ------------ | 
|                                    |  | 2015                        |           |  | 2015         | 
|                                    |  | (U.S. Dollars in thousands) |          
|Total current assets                |  | $                           | 486,643   |  |              | 
|                                    |  |                             |           |  |              | 
|Total long-term investments         |  |                             | 62,922    |  |              | 
|                                    |  |                             |           |  |              | 
|PROPERTY, PLANTS AND EQUIPMENT, NET |  |                             | 22,111    |  |              | 
|                                    |  |                             |           |  |              | 
|NET INTANGIBLE ASSETS AND GOODWILL  |  |                             | 534,219   |  |              | 
|                                    |  |                             |           |  |              | 
|TOTAL ASSETS                        |  |                             | 1,105,895 |  |              | 
|                                    |  |                             |           |  |              | 
|Total current liabilities           |  |                             | 256,340   |  |              | 
|                                    |  |                             |           |  |              | 
|Total long-term liabilities         |  |                             | 157,255   |  |              | 
|                                    |  |                             |           |  |              | 
|Total equity                        |  |                             | 692,300   |  |              | 
|                                    |  |                             |           |  |              | 
|TOTAL LIABILITIES AND EQUITY        |  |                             | 1,105,895 |  |              | 



Dividends





In December 2016, Formula declared a cash
dividend to its shareholders, which was paid in January 2017, of $0.48 per share. The aggregate amount distributed by Formula was
approximately $7.1 million.



In June 2016, Formula declared a cash dividend
to its shareholders, which was paid in July 2016, of $0.34 per share. The aggregate amount distributed by Formula was approximately
$5.0 million.



5









In January 2016, Formula declared a cash
dividend to its shareholders, which was paid in February 2016, of $0.34 per share. The aggregate amount distributed by Formula
was approximately $5.0 million.



In June 2015, Formula declared a cash dividend to its shareholders, which was paid in August 2015, of
$0.34 per share. The aggregate amount distributed by Formula was approximately $5.0 million.



Cash dividends may be declared and paid
in NIS or dollars. Dividends to the holders of Formula’s American Depositary Shares, or ADSs, are paid by the depositary
of the ADSs, for the benefit of owners of ADSs. If a dividend is declared and paid in NIS in Israel, the NIS amount is converted
into, and paid out in, dollars by the depositary of the ADSs.



| | B. | Capitalization and Indebtedness
| | -- | -------------------------------



Not applicable.



| | C. | Reasons for the Offer and Use of Proceeds
| | -- | -----------------------------------------



Not applicable.



| | D. | Risk Factors
| | -- | ------------



Our business prospects, operating results
and financial condition could be seriously harmed due to any of the following risks. Additional risks and uncertainties that we
are not aware of or that we currently believe are immaterial may also adversely affect our business prospects, financial condition,
and results of operations. The trading prices of our ordinary shares and ADSs could decline due to any of these risks, and you
may lose all or part of your investment.



Risks Related to Our Business and Our
Industry







Rapid technological changes may adversely
affect the market acceptance of our products and services, and our business, results of operations and financial condition could
be adversely affected.





We compete in markets that are characterized by rapid technological changes. Other companies are also
seeking to offer software solutions and other products and services in our markets, including enterprise mobility solutions, digital
transformation solutions. big data, advance analytics solutions, internet-related solutions, such as cloud computing and complementary
services and business solutions for the insurance and financial services industry. These companies may develop technological or
business model innovations or offer services in the markets that we seek to address that are, or are perceived to be, equivalent
or superior to our products and services. Furthermore, many of our smaller competitors have been acquired and may be acquired in
the future by larger competitors, which provides such smaller competitors with greater resources and potentially a larger client
base for which they can develop solutions. Our customers or potential customers may prefer suppliers that are larger than us, are
better known in the market or that have a greater global reach.



In addition, our customers’ business
models may change in ways that we do not anticipate and these changes could reduce or eliminate our customers’ needs for
our products and services. Our operating results depend on our ability to adapt to market changes and develop and introduce new
products and services into existing and emerging markets. For example, we and some of our competitors have developed systems to
allow customers to outsource certain of their systems to external providers (known as BPO). We are seeking to partner with BPO
providers, but there can be no assurance that such BPO providers will adopt our solutions rather than those of our competitors.
Determinations by current and potential customers to use BPO providers that do not use our solutions may result in the loss of
such customers and limit our ability to gain new customers.



6







The introduction of new technologies, devices
and business models could render existing products and services obsolete and unmarketable and could exert price pressures on our
products and services. Our future success will depend upon our ability to address the increasingly sophisticated needs of our customers
by:



| | · | Supporting existing and emerging hardware, software, databases and networking platforms; and
| | - | --------------------------------------------------------------------------------------------

| | · | Developing and introducing new and enhanced software development technology and applications that
keep pace with such technological developments, emerging new product markets and changing customer requirements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Adapting to evolving technologies can
require substantial financial investments, distract management and adversely affect the demand for our existing products and services.



Adapting to evolving technologies may require
us to invest a significant amount of resources, time and attention into the development, integration, support and marketing of
products and services that work with or utilize those technologies. For example, the acceptance and growth of cloud computing,
enterprise mobility, security and cyber and digital are examples of rapid technological changes which we have adapted into our
products, packaged software solution and software services offerings. Developing and implementing cloud computing, enterprise mobility,
security and cyber and digital into certain of our software solution models and software services offerings required us to make
substantial investments and required significant attention from our management to refine our business strategies to include the
delivery of these solutions. As the market continues to adopt new technologies, we expect to continue to make substantial investments
in our software solutions, system integrations and professional services related to these changing technologies. Even if we succeed
in adapting to a new technology by developing attractive products and services and successfully bringing them to market, there
is no assurance that the new product or service will have a positive impact on our financial performance and could even result
in lower revenue, lower margins and higher costs and therefore could negatively impact our financial performance.



Unfavorable national and global economic
conditions could adversely affect our business, operating results and financial condition.



During periods of slowing economic activity
our customers may reduce their demand for our products, technology and software services, which would reduce our sales, and our
business, operating results and financial condition may be adversely affected. Economies throughout the world currently face a
number of challenges, including threatened sovereign defaults, credit downgrades, restricted credit for businesses and consumers
and potentially falling demand for a variety of products and services. Notwithstanding the improving economic conditions in some
of our markets, many companies are still cutting back expenditures or delaying plans to add additional personnel or systems. Any
further worsening of global economic conditions could result in longer sales cycles, slower adoption of new technologies and increased
price competition for our products and services. We could also be exposed to credit risk and payment delinquencies on our accounts
receivable, which are not covered by collateral. Any of these events would likely harm our business, operating results and financial
condition.



These developments, or the perception that any of them could occur, could have a material adverse effect
on global economic conditions and the stability of global financial markets, and could significantly reduce global market liquidity
and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange
rates and credit ratings may be especially subject to increased market volatility.



In June 2016, a majority of voters in the
United Kingdom elected to withdraw from the European Union in a national referendum (Brexit). The referendum was advisory, and
the terms of any withdrawal are subject to a negotiation period that could continue for a few years after the government of the
United Kingdom formally initiates a withdrawal process. Nevertheless, the referendum has created significant uncertainty about
the future relationship between the United Kingdom and the European Union, and has given rise to calls for certain regions within
the United Kingdom to preserve their place in the European Union by separating from the United Kingdom as well as for the governments
of other EU member states to consider withdrawal.



In the United States, the new Trump Administration
has called for substantial change to fiscal, tax and trade policies that may adversely affect our business. We cannot predict the
impact, if any, of these changes to our business. However, it is possible that these changes could adversely affect our business.



7







If global economic and market conditions,
or economic conditions in the United States, Europe or Asia or other key markets, remain uncertain or weaken further, our business,
operating results and financial condition may be adversely affected.



Our development cycles are lengthy,
we may not have the resources available to complete development of new, enhanced or modified, solutions and we may incur significant
expenses before we generate revenues, if any, from our solutions.



Because our solutions are complex and require rigorous testing,
development cycles can be lengthy, taking us up to two years to develop and introduce new, enhanced or modified solutions. Moreover,
development projects can be technically challenging and expensive. The nature of these development cycles may cause us to experience
delays between the time we incur expenses associated with research and development and the time we generate revenues, if any, from
such expenses. Furthermore, we may invest substantial resources in the development of solutions that do not achieve market acceptance
or commercial success. We may also not have sufficient funds or other resources to make the required investments in product development.
Even where we succeed in our sales efforts and obtain new orders from customers, the complexity involved in delivering certain
of our solutions to such customers makes it more difficult for us to consummate delivery in a timely manner and to recognize revenue
and maximize profitability. Failure to deliver our solutions in a timely manner could result in order cancellations, damage our
reputation and require us to indemnify our customers. Any of these risks relating to our lengthy and expensive development cycle
could have a material adverse effect on our business, financial conditions and results of operations.



Our sales cycle is variable, depends
upon many factors outside our control, and could cause us to expend significant time and resources prior to earning associated
revenues.



The typical sales cycle for certain of our solutions and services
is lengthy and unpredictable, requires pre-purchase evaluation by a significant number of persons in our customers’ organizations,
and often involves a significant operational decision by our customers. Our sales efforts involve educating our customers and industry
analysts about the use and benefits of our products and services, including the technical capabilities of our products and the
potential cost savings achievable by organizations deploying our solutions or utilize our services. Customers typically undertake
a significant evaluation process, which frequently involves not only our products, but also those of our competitors and can result
in a lengthy sales cycle with little or no control over any delays encountered by us. We spend substantial time, effort and money
in our sales efforts without any assurance that such efforts will produce any sales.



Investment in highly skilled research and development and customer support personnel is critical to our
ability to develop and enhance our software solutions and support our customers, but an increase in such investment may reduce
our profitability.



As providers of software solutions that rely upon technological advancements, we rely heavily on our research
and development activities to remain competitive. We consequently highly depend on the ability to attract, train, motivate and
retain highly skilled information technology professionals for our research and development team, particularly individuals with
knowledge and experience in the insurance, healthcare and defense industries. Because our software solutions are highly complex
and are generally used by our customers to perform critical business functions, we also depend heavily on other skilled technology
professionals to provide ongoing support to our customers. Skilled technology professionals are often in high demand and short
supply. If we are unable to hire or retain qualified research and development personnel and other technology professionals to develop,
implement and modify our software solutions, we may be unable to meet the needs of our customers. Even if we succeed in retaining
the necessary skilled personnel in our research and development and customer support efforts, our investment in our personnel and
product development might increase our costs of operations and thereby reduce our profitability, unless compensated through increased
revenues. Given the highly competitive industry in which we operate, we may not succeed in increasing our revenues in line with
our increasing investments in our personnel and research and development efforts.



Furthermore, if we seek to expand the marketing
and offering of our products into new territories, it would require the retention of new, additional skilled personnel with knowledge
of the particular market and applicable regulatory regime. Such skilled personnel may not be available at a reasonable cost relative
to the additional revenues that we expect to generate in those territories, or may not be available at all.



8







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



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



| | · | longer operating histories;
| | - | ---------------------------



| | · | closer proximity to future markets;
| | - | -----------------------------------



| | · | greater financial, technical, marketing and other
resources;
| | - | ------------------------------------------------------------



| | · | cheaper costs, including labor cost;
| | - | ------------------------------------



| | · | political leverage;
| | - | -------------------



| | · | greater name recognition;
| | - | -------------------------



| | · | well-established relationships with our current and
potential clients; and
| | - | --------------------------------------------------------------------------



| | · | a broader range of products and services.
| | - | -----------------------------------------



Both Matrix’s and Magic Software’s principal domestic competitors in the Israeli market are
Israeli IT services companies and systems integrators, the largest of which are Hilan Ltd., Malam-Team,
One-1, Taldor Computer Systems, (Aman, the Elad Group, Yael, SQLink, Emet, LogOn, HMS and OfficeSoft. Matrix’s competitors
in the United States market include many companies who provide similar services to those offered by Matrix, as well as providers
of offshore services. In some cases, Matrix competes with IBM, Accenture and the Big-4 accounting firms. Matrix’s international
competitors in the Israeli market include Microsoft, IBM, HP, Oracle and CA. These international competitors often use local subcontractors
to provide personnel for contracts performed in Israel. Most of these international entities are also business partners of Matrix.
Competitors with respect to infrastructure solutions include HP, Lenovo and Dell. With respect to cloud services, competitors include
All Cloud, DoIT, Google, Microsoft and Amazon Web Services. Matrix’s competitors with respect to training are the training
centers of the Technion, IITC, HackerU, Ness Technologies and Sela.



With respect to Magic Software’s
application development solutions, Magic Software competes in the application platform, SOA architecture and enterprise mobility
markets. Among its current competitors are Kony, IBM, Microsoft, Adobe, Oracle, SAP Sybase, OutSystems and Pegasystems. With respect
to Magic Software’s integration solutions, Magic Software competes in the integration platform market. Among its current
competitors are IBM, Informatica, TIBCO, MuleSoft, Jitterbit, Talend and Software AG.



There are several similar products in the market which utilize the model driven architecture, or MDA,
approach utilized by Magic Software’s application development solutions. The market for this type of platform is highly competitive.
Companies such as CA and IBM have tools that compete directly with those of Magic Software. Furthermore, new development paradigms
have become very popular in IT software development and developers today have many alternatives.



The telecom BSS domain in which Magic Software operates through its wholly owned FTS subsidiary is a highly
competitive market in which FTS competes based on product quality, service quality, timeliness of delivery and pricing. Within
the global billing, charging and policy control market, FTS principally competes against global IT providers and the in-house IT
departments of telecommunications operators. Among the competitors focused on this market are Amdocs, Ericsson, Comverse, NetCracker
Technology, CSG Systems, Redknee Solutions and Oracle Communications.



There are also a number of smaller or
regional telecom BSS competitors who compete on a regional or domestic market level. These tend to be smaller players, and may
include companies such as Comarch, Mind CTI, Tecnotree, Cerillion, Openet and Elitcore, among others.



9







Sapiens’ competitors in the market
for insurance solutions differ based on the size, geography and line of business in which it operates. Some of its competitors
offer a full suite of services, while others only offer one module; some operate in specific (domestic) geographies, while others
operate on a global basis. In addition, delivery models vary, with some competitors keeping delivery in-house, or using IT outsourcing
(ITO) or business process outsourcing (BPO).



Examples of Sapiens’ primary competitors
are:



| | · | Global software providers with their own IP;
| | - | --------------------------------------------

| | · | Local/domestic software vendors with their own IP, operating in a designated geographic market and/or within a designated segment
of the insurance industry;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | BPO providers who offer end-to-end outsourcing of insurance carriers business, including core software administration (although
BPO providers want to buy comprehensive software platforms to serve as part of the BPO proposition from vendors and may seek to
purchase Sapiens’ solutions for this purpose); and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Internal IT departments, who often prefer to develop solutions in-house.
| | - | ------------------------------------------------------------------------



With respect to Sapiens DECISION, we believe
that Sapiens is considered a pioneer in this disruptive market landscape. Since the introduction of Sapiens innovative approach
to enterprise architecture to the market, Sapiens has identified only a small number of potential competitors.



These competitors may be able to respond
more quickly to new or emerging technologies or changes in customer requirements. They may also benefit from greater purchasing
economies, offer more aggressive product and service pricing or devote greater resources to the promotion of their products and
services. Current and potential competitors have established or may establish cooperative relationships among themselves or with
third parties to increase such competitors’ ability to successfully market their tools and services. We also expect that
competition will increase as a result of continued consolidation within the industry. Our further penetration of international
markets may likewise cause us to face additional competition. As a result, we cannot assure you that the products and solutions
that we offer will compete successfully with those of our competitors.



We may be unable to differentiate our
tools and services from those of our competitors or successfully develop and introduce new tools and services that are less costly
than, or superior to, those of our competitors. This could have a material adverse effect on our ability to compete.



Furthermore, several software development
centers in Israel and worldwide offer software development services at lower prices than we do. Due to the intense competition
in the markets in which we operate, software products and services prices may fluctuate significantly. As a result, we may have
to reduce the prices of our products, which in turn, may adversely affect our revenues and the gross margins for our products.



As some of our revenues are derived
from the Israeli government sector, including defense, healthcare, education and finance, a reduction of government spending in
Israel on IT services may reduce our revenues and profitability; and any delay in the annual budget approval process may negatively
impact our cash flows.



We perform work for a wide range of Israeli
governmental agencies and related subcontractors. Any reduction in total Israeli government spending for political or economic
reasons may reduce our revenues and profitability. In addition, the government of Israel has experienced significant delays in
the approval of its annual budget in recent years. Such delays in the future could negatively affect our cash flows by delaying
the receipt of payments from the government of Israel for services performed.



TSG, our jointly-controlled investee together with Israel Aerospace Industries Ltd. or IAI, derives
most of its revenues directly or indirectly from government agencies, mainly the Israeli Ministry of Defense (IMOD) and authorities
of various countries, pursuant to contracts awarded to it under defense and homeland security-related programs. The funding of
these programs could be reduced or eliminated due to numerous factors, including geo-political events and macro-economic conditions
that are beyond our control. Reduction or elimination of government spending under our contracts would cause a negative effect
on TSG’s revenues, results of operations, cash flow and financial condition. Furthermore, the Israeli government may reduce
its expenditures for defense items or change its defense priorities in the coming years. In addition, the Israeli defense budget
may be adversely affected if there is a reduction in U.S. foreign military assistance.



10







We recently began preparing our consolidated financial statements
in accordance with IFRS and, as a result, some of our financial data are not easily comparable from period to period.



On January 1, 2016, we began preparing our consolidated financial statements in accordance with IFRS.
Prior to the year ended December 31, 2016, we prepared our consolidated financial statements only in accordance with U.S. GAAP.
Therefore, our financial data as of and for the years ended December 31, 2013, 2014 and 2015, which was presented in prior year’s
annual report on Form 20-F, was derived from our annual audited consolidated financial statements which were prepared in accordance
with U.S. GAAP. Because IFRS differs in certain significant respects from U.S. GAAP, in particular with respect to the results
of our subsidiaries, all of which are consolidated with our results under IFRS, the U.S. GAAP financial information presented in
prior years is not directly comparable to our IFRS financial information in this annual report. The lack of comparability of our
financial data may make it difficult to gain a full and accurate understanding of our operations and financial condition in periods
prior to 2015. For further information, please see Note 21 to our consolidated financial statements included in Item 18 of this
annual report.



Our clients’ complex regulatory
requirements may increase our costs, which could negatively impact our profits.



Some of our clients, particularly those
in the financial services, life sciences, healthcare and defense verticals, are subject to complex and constantly changing regulatory
requirements. On occasion, these regulatory requirements change unpredictably. These regulations may increase our potential liabilities
if our services are found to contribute to a failure by our clients to comply with the requirements applicable to them and may
increase compliance costs as regulatory requirements increase or change. These increased costs could negatively impact our profits.



With respect to certain of our defense
sector command and control software solutions which are developed and offered by our jointly controlled investee, TSG, we depend
on governmental approval of our exports.



Our international sales, as well as our
international procurement of skilled human resources, technology and components, related to our command and control software solutions,
depends largely on export license approvals from the governments of Israel, the U.S. and other countries. If we fail to obtain
material approvals in the future, or if material approvals previously obtained are revoked or expire and are not renewed, our ability
to sell our products and services to overseas customers and our ability to obtain goods and services essential to TSG’s business
could be interrupted, resulting in a material adverse effect on TSG’s business, revenues, assets, liabilities and results
of operations.



If existing customers are not satisfied with our solutions and services and either do not make subsequent
purchases from us or do not continue using our solutions and services, or if our relationships with our largest customers are impaired,
our revenue could be negatively affected.



We depend heavily on repeat product and service revenues from
our base of existing customers. For example, five of Sapiens’ customers accounted for, in the aggregate, 32% and 34% of its
revenues in the years ended December 31, 2015 and 2016, respectively. If our existing customers are not satisfied with our solutions
and services, they may not enter into new project contracts with us or continue using our technologies. A significant decline in
our revenue stream from existing customers would have a material adverse effect on our business, results of operations and financial
condition.



Our business involves long-term, large
projects, some of which are fixed-price projects that involve uncertainties, such as estimated project costs and profit margins,
and which can therefore adversely affect our results of operations.



Our business is characterized by certain
relatively large projects or engagements that can have a significant impact on our total revenue and cost of revenue from quarter
to quarter. A high percentage of our expenses, particularly employee compensation, are relatively fixed. Therefore, a variation
in the timing of the initiation, progress or completion of projects or engagements can cause significant variations in operating
results from quarter to quarter.



11







This is particularly the case on fixed-price
contracts. Some of our solutions and services are sold as fixed-price projects with delivery requirements spanning more than one
year. As certain of our projects can be highly complex, we may not be able to accurately estimate our actual costs of completing
a fixed-price project. If our actual cost-to-completion of these projects exceeds significantly the estimated costs, we could experience
a loss on the related contracts, which would have a material adverse effect on our results of operations, financial position and
cash flow.



Similarly, delays in executing client contracts
(whether fixed price or not) may affect our revenue and cause our operating results to vary widely. Certain of our solutions are
delivered over periods of time ranging from several months to a few years. Payment terms are generally based on periodic payments
or on the achievement of milestones. Any delays in payment or in the achievement of milestones may have a material adverse effect
on our results of operations, financial position or cash flows.



If our customers terminate contracted
projects or choose not to retain us for additional projects, our revenues and profitability may be negatively affected.



Our software services customers typically
retain us on a non-exclusive basis. Many of our customer contracts, including those that are on a fixed price and timeframe basis,
can be terminated by the customer with or without cause upon 90 days’ notice or less, and generally without termination-related
penalties. Additionally, our contracts with customers are typically limited to discrete projects without any commitment to a specific
volume of business or future work and may involve multiple stages. In addition, the increased breadth of our service offerings
may result in larger and more complex projects for our customers that require us to devote resources to more thoroughly understand
their operations. Despite these efforts, our customers may choose not to retain us for additional stages or may cancel or delay
planned or existing engagements due to any number of factors, including:



| | · | financial difficulties;
| | - | -----------------------



| | · | a change in strategic priorities;
| | - | ---------------------------------



| | · | demand for price reductions; and
| | - | --------------------------------



| | · | a decision to utilize in-house IT capacity or work with our competitors.
| | - | ------------------------------------------------------------------------



These potential terminations, cancellations
or delays in planned or existing engagements could make it difficult for us to use our personnel efficiently and may negatively
impact our revenues and profitability.



We may be liable to our clients for
damages caused by a violation of intellectual property rights, the disclosure of other confidential information, including personally
identifiable information, system failures, errors or unsatisfactory performance of services, and our insurance policies may not
be sufficient to cover these damages.



We often have access to, and are required
to collect and store, sensitive or confidential client information, including personally identifiable information. Some of our
client agreements do not limit our potential liability for breaches of confidentiality, infringement indemnity and certain other
matters. Furthermore, breaches of confidentiality may entitle the aggrieved party to equitable remedies, including injunctive relief.
If any person, including any of our employees and subcontractors, penetrates our network security or misappropriates sensitive
or confidential client information, including personally identifiable information, we could be subject to significant liability
from our clients or from our clients’ customers for breaching contractual confidentiality provisions or privacy laws. Despite
measures we take to protect the intellectual property and other confidential information or personally identifiable information
of our clients, unauthorized parties, including our employees and subcontractors, may attempt to misappropriate certain intellectual
property rights that are proprietary to our clients or otherwise breach our clients’ confidences. Unauthorized disclosure
of sensitive or confidential client information, including personally identifiable information, or a violation of intellectual
property rights, whether through employee misconduct, breach of our computer systems, systems failure or otherwise, may subject
us to liabilities, damage our reputation and cause us to lose clients.



12







Many of our contracts involve projects
that are critical to the operations of our clients’ businesses and provide benefits to our clients that may be difficult
to quantify. Any failure in a client’s system or any breach of security could result in a claim for substantial damages against
us, regardless of our responsibility for such failure. Furthermore, any errors by our employees in the performance of services
for a client, or poor execution of such services, could result in a client terminating our engagement and seeking damages from
us.



In addition, while we have taken steps
to protect the confidential information that we have access to, including confidential information we may obtain through usage
of our cloud-based services, our security measures may be breached. If a cyber-attack or other security incident were to result
in unauthorized access to or modification of our customers’ data or our own data or our IT systems or in disruption of the
services we provide to our customers, or if our products or services are perceived as having security vulnerabilities, we could
suffer significant damage to our business and reputation.



Although we attempt to limit our contractual
liability for consequential damages in rendering our services, these limitations on liability may not apply in all circumstances,
may be unenforceable in some cases, or may be insufficient to protect us from liability for damages. There may be instances when
liabilities for damages are greater than the insurance coverage we hold and we will have to internalize those losses, damages and
liabilities not covered by our insurance.



Changes in privacy regulations may impose
additional costs and liabilities on us, limit our use of information, and adversely affect our business.



Personal privacy has become a significant issue in the United States, Europe, and many other countries
where we operate. Many government agencies and industry regulators continue to impose new restrictions and modify existing requirements
about the collection, use, and disclosure of personal information. Changes to laws or regulations affecting privacy and security
may impose additional liabilities and costs on us and may limit our use of such information in providing our services to customers.
If we were required to change our business activities, revise or eliminate services or products, or implement burdensome compliance
measures, our business and results of operations may be harmed. Additionally, we may be subject to regulatory enforcement actions
resulting in fines, penalties, and potential litigation if we fail to comply with applicable privacy laws and regulations.



If we fail to locate, successfully compete
for and consummate suitable acquisitions and investments, we may be unable to grow or maintain our market share.



As we consider it as a significant part
of our business strategy to pursue acquisitions and other initiatives in order to expand our product or services offerings or otherwise
enhance our market position and strategic strengths, we intend to pursue acquisitions of, and investments in, other businesses,
particularly businesses offering products, technologies and services that are complementary to ours and are suitable for integration
into our business. We cannot assure you that we will be able to locate suitable potential acquisition or investment opportunities
in Israel or internationally, or if we do identify suitable candidates, that at the conclusion of related discussions and negotiations,
we will be able to consummate the acquisitions or investments on terms which are favorable to us. If and when acquisition or investment
opportunities arise, we expect to compete for these opportunities with other established and well-capitalized entities and we cannot
guarantee that we will succeed in such competition on terms which remain favorable to us. If we fail to consummate further acquisitions
or investments in the future, our ability to grow or to even maintain our market share may be harmed.



Any future acquisitions of, or investments
in, companies or technologies, especially those located outside of Israel, may distract our management, disrupt our business and
may be difficult to finance on favorable terms.



As described above, it is a significant part of our strategy to pursue acquisitions of, and investments
in, companies offering products, technologies and services in
order to expand our product offerings or services or otherwise enhance our market position and strategic strengths. In the past
three years we made a number of acquisitions, including:



13







In April 2014, Formula acquired InSync
Staffing Solutions, Inc., a U.S. based full-service provider of consulting and staffing solutions for IT, engineering and other
professional staff (i.e. accounting and finance, administrative, customer service, healthcare, human resources, manufacturing,
marketing/sales, and operations). The total consideration paid by Formula was $4.0 million.



In May 2016, Formula and IAI each acquired
50% of TSG, which had been a subsidiary and the military arm of Ness Technologies, which is engaged in the fields of command and
control systems, intelligence, homeland security and cyber-security. Each of Formula and IAI acquired 50% of TSG and each paid
a purchase price of $25.8 million (subject to certain adjustments). For further information, please see Note 4(i)(a) to our consolidated
financial statements included in Item 18 of this annual report.



In January 2017, Formula acquired all of
the share capital of Michpal, an Israeli-based company that develops, sells and supports a proprietary on-premise payroll software
solution for processing traditional payroll stubs to Israeli enterprise and payroll service providers. Formula paid a purchase
price of $22.1 million. For further information, please see Note 20(i) to our consolidated financial statements included in Item
18 of this annual report..



In August 2014, our subsidiary Sapiens
acquired Knowledge Partners International LLC, or KPI and the assets of The Decision Model Licensing LLC, or TDML. KPI is a leader
in decision management consultancy, services and training and through TDML owns certain patents used as part of Sapiens’
Decision solution. The total consideration was $2.1 million in cash and 57,000 ordinary shares of Sapiens Software Solutions (Decision)
Ltd., or Sapiens Decision, the subsidiary of Sapiens which holds all of the interests in KPI, reflecting 3% of the outstanding
shares of Sapiens Decision. In addition, one of the shareholders of KPI received 88,500 restricted shares of Sapiens Decision (of
which 29,500 vested during each of the years ended December 31, 2015 and 2016) plus $450,000 in cash, subject to certain performance
criteria. The agreements for the foregoing acquisitions included, among other things, certain put and call options relating to
the Sapiens Decision shares issued upon consummation of the transaction and certain other benefits payable upon the occurrence
of certain conditions. For further information, please see Note 4(ii)(b) to our consolidated financial statements included in Item
18 of this annual report.



In May 2015, Sapiens acquired IBEXI Solutions
Private Limited, or IBEXI, an India-based provider of insurance solutions and services, which services 18 insurers in both the
P&C and L&P markets throughout Southeast Asia. The total purchase price in this acquisition was approximately $4.8 million,
which was paid in cash by Sapiens at the closing, and which is subject to adjustment based on certain future criteria. For further
information, please see Note 4(ii)(c) to our consolidated financial statements included in Item 18 of this annual report.



In August 2015, Sapiens acquired Insseco,
a Poland-based software and services provider for the insurance market, from Asseco, the controlling shareholder of Formula, which
helped Sapiens to establish a strong presence in the Polish insurance market. Sapiens paid approximately $9.1 million in cash for
Insseco, subject to upwards adjustment based on its achieving future revenue goals. For further information, please see Note 4(ii)(a)
to our consolidated financial statements included in Item 18 of this annual report.



In the third quarter of 2016, Sapiens acquired
Maximum Processing Inc., or MaxPro. MaxPro is the provider of the Stingray System, a P&C insurance administration suite targeted
towards the tier 4-5 U.S. market, as well as managing general agents, or MGAs, third-party administrators, or TPAs, and insurance
brokers. Sapiens paid $4.3 million in cash for this acquisition (including $1.5 million that Sapiens placed in escrow at the closing).
The seller also has the right to receive performance based payments of up to $3.1 million relating to achievements of revenue and
profitability goals over three years (2016, 2017, 2018), which are also subject to continued employment. For further information,
please see Note 4(ii)(d) to our consolidated financial statements included in Item 18 of this annual report.



In the third quarter of 2016, Sapiens acquired
4Sight Business Intelligence Inc., or 4Sight, a provider of business intelligence reports. 4Sight offers insurance-specific business
intelligence, or BI, solutions, including 4SightBI, a P&C-specific, off-the-shelf business intelligence (BI) product. Sapiens
paid $330,000 in cash for this acquisition. In addition, the seller of 4Sight may receive additional performance-based payments
of up to $2.2 million relating to achievements of revenue and profitability goals over three years (2016, 2017, 2018), which are
also subject to continued employment. For further information, please see Note 4(ii)(e) to our consolidated financial statements
included in Item 18 of this annual report.



14







In the first quarter of 2017, Sapiens acquired
StoneRiver, a provider of a wide range of technology solutions and services to insurance carriers, agents, and broker-dealers,
whose product groups encompass front-office, policy, claim, rating, underwriting, billing, and reinsurance solutions for all major
business lines. The acquisition is expected to enable Sapiens to expand the range of solutions and services that Sapiens offers
in North America. Sapiens paid approximately $100 million in cash, subject to certain adjustments based on working capital, transaction
expenses, unpaid debt and certain litigation matters. For further information, please see Note 20(ii) to our consolidated financial
statements included in Item 18 of this annual report.



In April 2015 Magic Software acquired a
70% interest in Comblack IT Ltd., an Israeli-based company that specializes in software professional and outsource management services
for mainframes and complex large-scale environments, for a total consideration of $1.8 million, of which $ 1.5 million was
paid upon closing and $ 0.3 million was contingent upon the acquired business meeting certain operational targets in 2015.
Magic Software and the seller hold mutual call and put options, respectively, for the remaining 30% interest in the Comblack. In
March 2016, Magic Software paid the seller the remaining contingent payments for meeting 2015 operational targets. For further
information, please see Note 4(iii)(b) to our consolidated financial statements included in Item 18 of this annual report.



In June 2015, Magic Software acquired a
70% interest in Infinigy Solutions LLC, a US-based services company focused on expanding the development and implementation of
technical solutions throughout the telecommunications industry with offices over the US, providing nationwide coverage and support
for wireless engineering, deployment services, surveying, environmental service and project management, for a total consideration
of $6.5 million, of which $ 5.6 was paid upon closing and $ 0.9 million is contingent upon the acquired business meeting
certain operational targets in 2016 and 2017. In July 2016, Magic Software paid the seller $ 0.5 million with respect to the acquired
business meeting certain of its 2016 operational targets. Magic Software and the seller hold mutual Call and Put options respectively
for the remaining 30% interest in the company. For further information, please see Note 4(iii)(c) to our consolidated financial
statements included in Item 18 of this annual report.



In July 2016, Magic Software acquired a 60% equity interest in Roshtov Software Industries Ltd, the developer
of the Clicks development platform, which is used in the design and management of patient-file oriented software solutions for
managed care and large-scale healthcare providers. The aggregate purchase price for the 60% interest was approximately $ 20.6 million
in cash and Magic Software and the seller hold mutual call and put options, respectively, for the remaining 40% interest in Roshtov.
For further information, please see Note 4(iii)(d) to our consolidated financial statements included in Item 18 of this annual
report.



In October 2016, Magic Software acquired
the entire share interests in Shavit Software (2009) Ltd., an Israeli-based company that specializes in software professional and
outsourced management services, for a total consideration of $ 6.8 million, of which $ 4.7 was paid upon closing, $ 1.6 million
was allocated to a deferred payment which is due in 2018 and $ 0.5 million is contingent upon the acquired business meeting certain
operational targets in 2017, 2018 and 2019. For further information, please see Note 4(iii)(e) to our consolidated financial statements
included in Item 18 of this annual report.



In January 2015, Matrix acquired 75% of
the share capital of SeeV Solutions Ltd in total consideration of $1.2 million. SeeV, an Israeli based company, specialized in
permanent placement of employees in start-ups and high-tech companies. In addition, the purchaser and the seller hold mutual call
and put options respectively for the remaining 25% interest in SeeV valued at $ 0.4 million. For further information, please see
Note 4(iv)(a) to our consolidated financial statements included in Item 18 of this annual report.



In April 2015, Xtivia Inc. (a wholly owned
subsidiary of Matrix) completed the acquisition of all of the outstanding shares of Hydus Inc. in total consideration of $ 2.5
million. Hydus Inc. is a U.S based consulting firm specializing in software services in the field of Enterprise Information Management,
or EIM. In addition, the sellers may be eligible for future consideration, valued at $ 1.7 million as of December 31, 2016, subject
to obtaining accumulated operating income targets during three years (not exceeding Hydus operating income). For further information,
please see Note 4(iv)(c) to our consolidated financial statements included in Item 18 of this annual report.



15







In May 2015, Matrix completed the acquisition
of all of the outstanding shares of Ono Apps Ltd., an Israeli based service provider specializing in mobile applications development
services, for total consideration of NIS 4.6 million (approximately $ 1.2 million). In addition, the sellers may be eligible for
future consideration, valued at $ 0.3 million, subject to obtaining accumulated operating income targets during three years commencing
on January 1, 2016, not exceeding NIS 5.0 million (approximately $ 1.3 million). For further information, please see Note 4(iv)(d)
to our consolidated financial statements included in Item 18 of this annual report.



In March 2016, Matrix acquired 60% of the
share capital of Programa Logistics System Ltd., an Israeli provider of advisory services and design and development of solutions
in supply chain, production and logistics. Matrix paid NIS 7.3 million (approximately $ 1.9 million). In addition, the sellers
may be eligible for future consideration, valued at $ NIS 1.1 million (approximately $ 0.3 million) as of December 31, 2016, subject
to obtaining accumulated operating income targets over a three year period. Matrix and the seller hold mutual call and put options,
respectively, for the remaining 40% interest in Programa. For further information, please see Note 4(iv)(e) to our consolidated
financial statements included in Item 18 of this annual report.



In October 2016, Matrix acquired 60% of
the share capital of Network Infrastructure Technologies Inc., a provider of IT help desk services for the healthcare industry.
Matrix paid $6.7 million. Matrix and the seller hold mutual call and put options, respectively, for the remainder of the shares.
In addition, the seller is eligible for future consideration, valued at $ 0.7 million, subject to obtaining accumulated operating
income targets over a three year period. For further information, please see Note 4(iv)(f) to our consolidated financial statements
included in Item 18 of this annual report.



In November 2016, Matrix acquired 55%
of the share capital of Second to None Solutions Inc., a certified distributor of IBM products to U.S federal and enterprise customers.
Matrix paid $0.3 million. Matrix and the seller hold mutual call and put options, respectively, for the remainder of the shares.
In addition, the seller is eligible for future consideration, valued at $ 0.5 million as of December 31, 2016, subject to obtaining
accumulated operating income targets over a three year period. For further information, please see Note 4(iv)(g) to our consolidated
financial statements included in Item 18 of this annual report.



In December 2016, Matrix acquired 85% of the share capital of Aviv Management Engineering Systems Ltd.,
a company engaged in management and project consulting, focusing in four areas of expertise: environmental planning, project management,
urban and physical planning and management consulting. Matrix paid NIS 19.7 million (approximately $ 5.1 million). Matrix and the
seller hold mutual call and put options, respectively, for the remainder of the shares. In addition, the seller is eligible for
future consideration, valued at NIS 1.5 million (approximately $ 0.4 million), subject to obtaining accumulated operating income
targets over a three year period. For further information, please see Note 4(iv)(h) to our consolidated financial statements included
in Item 18 of this annual report.



During the years ended December 31, 2015
and 2016, Formula and its subsidiaries and affiliates completed additional acquisitions for a total cash consideration of approximately$
1.9 million and $8.9 million, respectively and increased during 2015 their share interest in two existing subsidiaries and one
affiliate for total consideration of $ 2.3 million. These acquisitions generally enhance our technologies, product and services
offerings. Pro forma results of operations for these acquisitions have not been presented because they are not material to the
consolidated results of operations, either individually or in the aggregate. For further information, please see Note 4(iii)(f)
and Note 4(iv)(b) to our consolidated financial statements included in Item 18 of this annual report.



Mergers and acquisitions of companies are
inherently risky and subject to many factors outside of our control and no assurance can be given that our future acquisitions
will be successful and will not adversely affect our business, operating results, or financial condition. Failure to manage and
successfully integrate acquisitions could materially harm our business and operating results. Prior acquisitions have resulted
in a wide range of outcomes, from successful introduction of new products and technologies to a failure to do so. Even when an
acquired company has previously developed and marketed products, there can be no assurance that new product enhancements will be
made in a timely manner or that pre-acquisition due diligence will have identified all possible issues that might arise with respect
to such products. If we acquire other businesses, we may face difficulties, including:



16







| | · | Difficulties in integrating the operations, systems, technologies, products, and personnel of the acquired businesses or enterprises;
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| | · | Diversion of management’s attention from normal daily operations of the business and the challenges of managing larger
and more widespread operations resulting from acquisitions;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Potential difficulties in completing projects associated with in-process research and development;
| | - | --------------------------------------------------------------------------------------------------

| | · | Difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets
have stronger market positions;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Insufficient revenue to offset increased expenses associated with acquisitions; and
| | - | -----------------------------------------------------------------------------------

| | · | The potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire
following and continuing after announcement of acquisition plans.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Furthermore, we may not be able to retain
the key employees that may be necessary to operate the businesses we acquired and may acquire and we may not be able to timely
attract new skilled employees and management to replace them. An acquisition may also involve accounting charges and/or amortization
of significant amounts of intangible assets, which would adversely affect our ability to achieve and maintain profitability. These
difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect
our results of operations.



Any acquisition or investment in a company located outside of
Israel poses additional risks, including risks related to the monitoring of a management team from a great distance and the need
to integrate a potentially different business culture. Our failure to successfully integrate such a newly acquired business or
such an investment could harm our business.



We may furthermore need to raise capital in connection with any such acquisition or investment, which
we would likely seek via public or private equity or debt offerings. For example, we issued $58.3 million (net of issuance expenses)
of secured debentures, or Series A Secured Debentures, and convertible debentures, or Series B Convertible Debentures as part of
a public offering in Israel in September 2015. In addition, in March 2014, Magic Software consummated a public offering in which
it received net proceeds of $ 54.7 million. Furthermore, Sapiens (via its wholly-owned subsidiary, Sapiens Americas Corporation,
or the Borrower) entered into a $40 million secured credit agreement with HSBC Bank USA, National Association in connection with,
and as financing for, Sapiens’ acquisition of Stone River. The issuance of equity securities pursuant to any such financing
could be dilutive to our existing shareholders. The issuance of equity securities by any of our investees pursuant to any such
financing could be dilutive to our existing interest in these investees. If we raise funds through debt offerings, we may be pressured
in serving such debt. If we use cash or debt financing, our financial liquidity will be reduced, the holders of our debt may have
claims on our assets ahead of holders of our ordinary shares and our business operations may be restricted by the terms of any
debt. Our ability to raise capital in this manner also depends upon market and other conditions, many of which are beyond our control.
Due to unfavorable conditions, we could be required to seek alternative financing methods, such as bank financings, which involve
borrowing money on terms that are not favorable to us. Difficulties in raising equity capital or obtaining debt financing on favorable
terms, or the unavailability of financing, including bank borrowings, may hinder our ability to implement our strategy for selective
acquisitions and investments.



If we fail to manage our growth, our business could be disrupted
and our profitability will likely decline.



We have experienced rapid growth during the last five years, through acquisitions and organic growth.
The number of our employees increased over the last five years from approximately 7,666 as of December 31, 2011 to approximately
13,572 as of December 31, 2016 (including our affiliated company TSG) and may increase further as we aim to enhance our businesses.
This increase may significantly strain our management and other operational and financial resources. In particular, continued headcount
growth increases the integration challenges involved in:



| | · | recruiting, training and retaining skilled technical, marketing and management personnel;
| | - | -----------------------------------------------------------------------------------------

| | · | maintaining high quality standards;
| | - | -----------------------------------

| | · | preserving our corporate culture, values and entrepreneurial environment;
| | - | -------------------------------------------------------------------------

| | · | developing and improving our internal administrative infrastructure, particularly our financial, operational, communications
and other internal controls; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | maintaining high levels of client satisfaction.
| | - | -----------------------------------------------



17







The rapid execution necessary to exploit
the market for our business model requires an effective planning and management process. Our systems, procedures or controls may
not be adequate to support the growth in our operations, and our management may not be able to achieve the rapid execution necessary
to exploit the market for our business model. Our future operating results will also depend on our ability to expand our development,
sales and marketing organizations. If we are unable to manage growth effectively, our profitability will likely decline.



The increasing amount of intangible
assets and goodwill recorded on our balance sheet may lead to significant impairment charges in the future.



We regularly review our long-lived assets,
including identifiable intangible assets and goodwill, for impairment. Goodwill and indefinite life intangible assets are subject
to impairment review at least annually. Other long-lived assets are reviewed when there is an indication that impairment may have
occurred. The amount of goodwill and identifiable intangible assets on our consolidated balance sheet was $534 million, $545.7
million and $627.6 million as of December 31, 2014, 2015 and 2016, respectively, as a result of our acquisitions, and may increase
further following future acquisitions. Impairment testing under IFRS may lead to further impairment charges in the future. Any
significant impairment charges could have a material adverse effect on our results of operations.



During the years ended December 31, 2015
and 2016, no impairment was required for any of our cash generating units and no impairment losses were identified for these intangible
assets and software products.



Our and our investees’ credit
facility agreements with banks and other financial institutions and our Series A Secured Debentures and Series B Convertible Debentures
are subject to a number of restrictive covenants which, if breached, could result in acceleration of our obligation to repay our
debt.



Inthe context of our and our
investees engagements with banks and other financial institutions for receiving various credit facilities and under the terms governing
our Series A Secured Debentures and Series B Convertible Debentures, we have undertaken to maintain a number of conditions and
limitations on the manner in which we can operate our business, including limitations on our ability to distribute dividends, incur
debt and sell or acquire assets. These credit facilities agreements also contain various covenants which require us to maintain
certain financial ratios related to shareholders’ equity, total rate of debt and liabilities, minimum outstanding balance
of total cash and short-term investments and operating results that are customary for companies of comparable size and the risk
that we may not be able to maintain in the future the rating level assigned to the Notes. These limitations and covenants may force
us to pursue less than optimal business strategies or forego business arrangements which could have been financially advantageous
to us and, by extension, to our shareholders. In addition, we have secured a credit facility and our Series A Secured Debentures
with certain of the shares of Formula’s publicly held subsidiaries Matrix, Sapiens and Magic Software. With respect to our
subsidiaries, Sapiens has a $40 million secured credit agreement with HSBC Bank USA, National Association. A breach of the restrictive
covenants could result in the acceleration of our obligations to repay our or our subsidiaries’ debt.



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



We intend to continue to focus our efforts on selling proprietary software solutions and services in international
markets and to devote significant resources to these efforts to expand our international operations as part of our growth strategy.
If we are unable to continue achieving market acceptance for our solutions or continue to successfully penetrate international
markets, our business will be harmed. In 2015 and 2016, we received approximately 41% and 40% of our consolidated revenues, respectively,
from customers located outside of Israel (including but not limited to the United States, Europe, Japan, Asia-Pacific, India and
South Africa). The expansion of our existing operations and entry into additional international markets will require significant
management attention and financial resources which could adversely affect our business.



Our current international operation and
our plans to further expand our international operations subjects us to many risks inherent to international business activities,
including:



| | · | Limitations and disruptions resulting from the imposition of government controls;
| | - | ---------------------------------------------------------------------------------



| | · | Compliance with a wide variety of foreign regulatory standards;
| | - | ---------------------------------------------------------------



18







| | · | Compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly in emerging market countries;
| | - | -------------------------------------------------------------------------------------------------------------------------------



| | · | Import and export license requirements, tariffs, taxes and other trade barriers;
| | - | --------------------------------------------------------------------------------



| | · | Political, social and economic instability abroad, terrorist attacks and security concerns in general.;
| | - | -------------------------------------------------------------------------------------------------------



| | · | Trade restrictions;
| | - | -------------------



| | · | Changes in tariffs;
| | - | -------------------



| | · | Increased exposure to fluctuations in foreign currency exchange rates;
| | - | ----------------------------------------------------------------------



| | · | Complexity in our tax planning, and increased exposure to changes in tax regulations in various jurisdictions in which we operate, which could adversely affect our operating results and limit our ability to conduct effective tax planning;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Increased financial accounting and reporting requirements and complexities;
| | - | ---------------------------------------------------------------------------



| | · | Weaker protection of intellectual property rights in some countries;
| | - | --------------------------------------------------------------------



| | · | Greater difficulty in safeguarding intellectual property;
| | - | ---------------------------------------------------------



| | · | Increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                  
| | · | Longer payment cycles and difficulties in enforcing contracts and collecting accounts receivable;                                
| |   |                                                                                                                                  
| | · | The need to localize our products and licensing programs for international customers;                                            



As we continue to expand our business globally,
our success will depend, to a large extent, on our ability to anticipate and effectively manage these and other risks associated
with our international operations. Any of these risks could harm our international operations and reduce our international sales,
adversely affecting our business, results of operations, financial condition and growth prospects.



Errors or defects in our software solutions
could inevitably arise and would harm our profitability and our reputation with customers, and could even give rise to liability
claims against us.



The quality of our solutions, including
new, modified or enhanced versions thereof, is critical to our success. Since certain of our software solutions are complex, they
may contain errors that cannot be detected at any point in their testing phase. While we continually test all our software solutions
for errors or defects and work with customers our partners and end-users (who occasionally participate in our beta-testing of certain
programs) to identify and correct them, errors in our technology may be found in the future. Testing for errors or defects is complicated
because it is difficult to simulate the breadth of operating systems, user applications and computing environments that our customers
use or in the applications developed with our technology. Errors or defects in our technology have resulted in terminated work
orders and could result in delayed or lost revenue, diversion of development resources and increased services, termination of work
orders, damage to our brand and warranty and insurance costs in the future. In addition, time-consuming implementations may also
increase the number of services personnel we must allocate to each customer, thereby increasing our costs and adversely affecting
our business, results of operations and financial condition.



19







In addition, since our customers rely on
our solutions to operate, monitor and improve the performance of their business processes or to develop or integrate their business
applications, they are sensitive to potential disruptions that may be caused by the use of, or any defects in, our software. As
a result, we may be subject to claims for damages related to software errors in the future. Liability claims could require us to
spend significant time and money in litigation or to pay significant damages. Regardless of whether we prevail, diversion of key
employees’ time and attention from our business, the incurrence of substantial expenses and potential damage to our reputation
might result. While the terms of our standard sales contracts typically limit our exposure to potential liability claims and we
carry errors and omissions insurance against such claims, there can be no assurance that such insurance will continue to be available
on acceptable terms, if at all, or that such insurance will provide us with adequate protection against any such claims. A significant
liability claim against us could have a material adverse effect on our business, results of operations and financial position.
Accordingly, the adverse consequences of, and expenses related to, failures, errors and defects could have a material adverse effect
on our business, operating results, and financial condition.



Failure to meet customer expectations
with respect to the implementation and use of our solutions or damage caused by our solutions to our customers’ information
systems could result in negative publicity, reduced sales and diversion of resources, may cause the cancellation of our contracts
and may subject us to liability claims, all of which would harm our business, results of operations, financial condition and growth
prospects.



We generally provide our customers with
upfront estimates regarding the duration, budget and costs associated with the implementation of our products. Implementation of
some of our solutions is complex and meeting the anticipated duration, budget and costs often depends on factors relating to our
customers or their other vendors. We may not meet the upfront estimates and expectations of our customers for the implementation
of products as a result of our products’ capabilities or service engagements by us, our system integrator partners or our
customers' IT employees. Consequently, if we fail to meet upfront estimates and the expectations of our customers for the implementation
of our products, our reputation could be harmed, which could adversely affect our ability to attract new customers and sell additional
products and services to existing customers.



For example, subsequent
to the balance sheet date, Sapiens received a letter from one of its significant customers, in which the customer alleged that
Sapiens has materially breached a software development project agreement between them. After carefully examining the customer’s
allegations Sapiens informed the customer that it has not materially breached any of its obligations under the agreement and that
the customer itself has materially breached the agreement. As a result of the foregoing work on the project has been halted and
Sapiens currently does not expect to generate any further revenues from such customer in 2017. While Sapiens believes that this
does not have an impact on its financial statements for the year ended December 31, 2016 it may have an adverse effect on Sapiens’
results of operations in 2017.



In addition, some of the products and software
services that we provide involve key aspects of customers’ information systems and may be considered critical to the operations
of our clients’ businesses. As a result, our customers have a greater sensitivity to failures in these systems than do customers
of other software products generally. In addition, our exposure to legal liability may be increased in the case of contracts in
which we become more involved in our clients’ operations. If a customer’s system fails during or following the provision
of products or services by us, or if we fail to provide customers with proper support for our software products or do so in an
untimely manner, we are exposed to the risks of cancellation of our contract with the customer and a legal claim for substantial
damages being filed against us, regardless of whether or not we are responsible for the failure. While we typically strive to include
provisions designed to limit our exposure to legal claims relating to our services and the solutions we develop, these provisions
may not adequately protect us or may not be enforceable in all cases. The general liability insurance coverage that we maintain,
including coverage for errors and omissions, is subject to important exclusions and limitations. We cannot be certain that this
coverage will continue to be available on reasonable terms or will be available in sufficient amounts to cover one or more large
claims, or that the insurer will not disclaim coverage as to any future claim. A successful assertion of one or more large claims
against us that exceeds our available insurance coverage or changes in our insurance policies, including premium increases or the
imposition of large deductible or co-insurance requirements, could adversely affect our profitability.



Incorrect or improper use of our products
or our failure to properly train customers on how to implement or utilize our products could result in customer dissatisfaction
and negatively affect our business, results of operations, financial condition and growth prospects.



Certain of our software solutions are complex and are deployed
in a wide variety of network environments. The proper use of these solutions requires training of the customer. If these solutions
are not used correctly or as intended, inadequate performance may result.



20







Additionally, our customers or third-party partners may incorrectly
implement or use our solutions. Our solutions may also be intentionally misused or abused by customers or their employees or third
parties who are able to access or use our solutions. Similarly, our solutions are sometimes installed or maintained by customers
or third parties with smaller or less qualified IT departments, potentially resulting in sub-optimal installation and, consequently,
performance that is less than the level anticipated by the customer. Because our customers rely on our software, services and maintenance
support to manage a wide range of operations, the incorrect or improper use of our solutions, our failure to properly train customers
on how to efficiently and effectively use our solutions, or our failure to properly provide implementation or maintenance services
to our customers has resulted in terminated work orders and may result in termination of work orders, negative publicity or legal
claims against us in the future. Also, as we continue to expand our customer base, any failure by us to properly provide these
services will likely result in lost opportunities for follow-on sales of our software and services.



In addition, if there is substantial turnover of customer personnel
responsible for implementation and use of our products, or if customer personnel are not well trained in the use of our products,
customers may defer the deployment of our products, may deploy them in a more limited manner than originally anticipated or may
not deploy them at all. Further, if there is substantial turnover of the customer personnel responsible for implementation and
use of our products, our ability to make additional sales may be substantially limited.



Any unauthorized, and potentially improper,
actions of our personnel could adversely affect our business, operating results and financial condition.



The recognition of our revenue depends
on, among other things, the terms negotiated in our contracts with our customers. Our personnel may act outside of their authority
and negotiate additional terms without our knowledge. We have implemented policies to help prevent and discourage such conduct,
but there can be no assurance that such policies will be followed. For instance, in the event that our sales personnel negotiate
terms that do not appear in the contract and of which we are unaware, whether such additional terms are written or verbal, we could
be prevented from recognizing revenue in accordance with our plans. Furthermore, depending on when we learn of unauthorized actions
and the size of the transactions involved, we may have to restate revenue for a previously reported period, which would seriously
harm our business, operating results and financial condition.



If existing customers do not make subsequent
purchases from us and continue using our solutions and services or if our relationships with our largest customers are impaired,
our revenue and profitability could be negatively affected



The loss of any of our major customers
or a decrease or delay in orders or anticipated spending by such customers could reduce our revenues and profitability, due to
our reliance on such customers. Our customers could also engage in business combinations, which could increase their size, reduce
their demand for our products and solutions as they recognize synergies or rationalize assets, and increase or decrease the portion
of our total sales concentration with respect to any single customer.



For example, five customers of Sapiens
(together with its subsidiaries) accounted for, in the aggregate, 32% and 34% of Sapiens’ consolidated revenues in 2015 and
2016, respectively (or 6% and 7%, of our consolidated revenues, in each of the respective years). In addition, Magic Software’s
(together with its subsidiaries) five largest customers accounted for, in the aggregate, 26% and 18% of its revenues in 2015 and
2016, respectively (or 5% and 3%, of our consolidated revenues, in each of the respective years). One significant customer of TSG
accounted for approximately 40%of its revenues in 2015 and 2016
(or 2% of our consolidated revenues, in each of the respective years). One significant customer of InSync accounted
for approximately 21%of its revenues in 2016 (or 1% of our consolidated revenues in 2016).



There can be no assurance that the existing
customers of our significant subsidiaries and affiliates will enter into new project contracts with us or that they will continue
using our technologies and IT services. A significant decline in our revenue stream from existing customers would have an adverse
effect on our operating results.



21







There may be consolidation in the markets
and industries in which we operate, which could reduce the use of our products and services and adversely affect our revenues.



Mergers or consolidations among our customers
could reduce the number of our customers and potential customers. This could adversely affect our revenues even if these events
do not reduce the aggregate number of customers or the activities of the consolidated entities. If our customers merge with or
are acquired by other entities that are not our customers, or that use fewer of our products and services, they may discontinue
or reduce their use of our products and services. Any of these developments could materially and adversely affect our results of
operations and cash flows. Furthermore, as the number of companies in the defense industry has decreased in recent years, the market
share of some prime contractors has increased. Some of these companies are vertically integrated with in-house capabilities similar
to ours in certain areas. Thus, at times we could be seeking business from certain of these prime contractors, while at other times
we could be in competition with some of them. Failure to maintain good business relations with these major contractors could negatively
impact TSG’s business which focuses on the defense market.



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



Except for our joint control in TSG, we currently have effective control under IFRS 10 in each of our
other investees, despite the lack of absolute majority of voting power in each of Magic Software and Sapiens. As a result of our
effective control in these investees as of December 31, 2016, we consolidated their financial results with ours throughout the
period covered by the financial statements included in Item 18 of this annual report. Prior to our transition to reporting under
IFRS, we would consolidate investees in which we held an equity interest only if we held a controlling interest in those companies.
Under IFRS 10, we may consolidate entities in which we have effective control. For further information, please see Note 2(2) to
our consolidated financial statements included in Item 18 of this annual report



Although it is our board of directors’
strategy to maintain effective control over our directly held investees, if we are unable to continue maintaining effective control
over one or more of our public subsidiaries as a result of equity issuances to third parties that are unaffiliated with us or otherwise,
we would cease to consolidate the operating results of those subsidiaries, based on relevant accounting guidelines. This, in turn,
could result in significant fluctuations of our consolidated operating results.



Risks Related to our Intellectual Property



Assertions by third parties of infringement
or other violation by us of their intellectual property rights could result in significant costs and substantially harm our business
and results of operations.



The software industry is characterized
by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual
property rights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks
and trade secrets, which they may use to assert claims against us. From time to time, third parties, including certain of these
leading companies, may assert patent, copyright, trademark or other intellectual property claims against us, our customers and
partners, and those from whom we license technology and intellectual property.



Although we believe that our products and
services do not infringe upon the intellectual property rights of third parties, we cannot assure you that third parties will not
assert infringement or misappropriation claims against us with respect to current or future products or services, or that any such
assertions will not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable
to use certain intellectual property. We cannot assure you that we are not infringing or otherwise violating any third party intellectual
property rights. Infringement assertions from third parties may involve patent holding companies or other patent owners who have
no relevant product revenues, and therefore our own issued and pending patents may provide little or no deterrence to these patent
owners in bringing intellectual property rights claims against us.



22







Any intellectual property infringement
or misappropriation claim or assertion against us, our customers or partners, and those from whom we license technology and intellectual
property could have a material adverse effect on our business, financial condition, reputation and competitive position regardless
of the validity or outcome. If we are forced to defend against any infringement or misappropriation claims, whether they are with
or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial
resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially
including treble damages and attorneys’ fees, if we are found to have willfully infringed on a party’s intellectual
property; cease making, licensing or using our products or services that are alleged to infringe or misappropriate the intellectual
property of others; expend additional development resources to redesign our products or services; enter into potentially unfavorable
royalty or license agreements in order to obtain the right to use necessary technologies or works; and to indemnify our partners,
customers, and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable
to us, or at all, and may require significant royalty payments and other expenditures. Any of these events could seriously harm
our business, results of operations and financial condition. In addition, any lawsuits regarding intellectual property rights,
regardless of their success, could be expensive to resolve and divert the time and attention of our management and technical personnel.



Although we apply measures to protect
our intellectual property rights and our source code, there can be no assurance that the measures that we employ to do so will
be successful.



Our success and ability to compete depend
in large part upon our ability to protect our proprietary technology. In accordance with industry practice, since we have no registered
patents on our software solutions technologies, we rely on a combination of trade secret and copyright and intellectual property
laws and confidentiality, non-disclosure and assignment-of-inventions agreements to protect our proprietary technology. We believe
that due to the dynamic nature of the computer and software industries, copyright protection is less significant than factors such
as the knowledge and experience of our management and personnel, the frequency of product enhancements and the timeliness and quality
of our support services. We seek to protect the source code of our products as trade secret information and as unpublished copyright
works. We also rely on security and copy protection features in our proprietary software. We distribute our products under software
license agreements that grant customers a personal, non-transferable license to use our products and contain terms and conditions
prohibiting the unauthorized reproduction or transfer of our products. In addition, while we attempt to protect trade secrets and
other proprietary information through non-disclosure agreements with employees, consultants and distributors, not all of our employees
have signed invention assignment agreements. Although we intend to protect our rights vigorously, there can be no assurance that
these measures will be successful. Our failure to protect our rights, or the improper use of our products by others without licensing
them from us could have a material adverse effect on our results of operations and financial condition.



We and our customers rely on technology
and intellectual property of third parties, the loss of which could limit the functionality of our products and disrupt our business.



We use technology and intellectual property
licensed from unaffiliated third parties in certain of our products, and we may license additional third-party technology and intellectual
property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that
could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available
on commercially reasonable terms, or at all. The loss of the right to license and distribute this third party technology could
limit the functionality of our products and might require us to redesign our products.



Further, although we believe that there
are currently adequate replacements for the third-party technology and intellectual property we presently use and distribute, the
loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected
products until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our
business would be disrupted if any technology and intellectual property we license from others or functional equivalents of this
software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we
would be required either to attempt to redesign our products to function with technology and intellectual property available from
other parties or to develop these components ourselves, which would result in increased costs and could result in delays in product
sales and the release of new product offerings. Alternatively, we might be forced to limit the features available in affected products.
Any of these results could harm our business and impact our results of operations.



23







Some of our software services and technologies
may use “open source” software, which may restrict how we use or distribute our services or require that we release
the source code of certain products subject to those licenses.



Some of our services and technologies may
incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNU General
Public License and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open source
software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide
warranties or controls on origin of the software. Additionally, open source licenses typically require that source code subject
to the license be made available to the public and that any modifications or derivative works to open source software continue
to be licensed under open source licenses. These open source licenses typically mandate that proprietary software, when combined
in specific ways with open source software, become subject to the open source license. If we combine our proprietary software with
open source software, we could be required to release the source code of our proprietary software.



We take steps to ensure that our proprietary
software is not combined with, and does not incorporate, open source software in ways that would require our proprietary software
to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which these
licenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers
to design our proprietary technologies, and although we take steps to prevent our programmers from including open source software
in the technologies and software code that they design, write and modify, we do not exercise complete control over the development
efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into our proprietary
products and technologies or that they will not do so in the future. In the event that portions of our proprietary technology are
determined to be subject to an open source license, we could be required to publicly release the affected portions of our source
code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which
could reduce or eliminate the value of our services and technologies and materially and adversely affect our business, results
of operations and prospects.



We could be required to provide the
source code of our products to our customers.



Some of our customers have the right to require the source code
of certain of our products to be deposited into a source code escrow. Under certain circumstances, our source code could be released
to our customers. The conditions triggering the release of our source code vary by customer. A release of our source code would
give our customers access to our trade secrets and other proprietary and confidential information which could harm our business,
results of operations and financial condition.



Breaches of network or information technology
security, natural disasters or terrorist attacks could have an adverse effect on our business.



Cyber attacks or other breaches of network
or IT security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our systems and operations.
We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber attacks, malware, computer
viruses and other means of unauthorized access.  While we maintain insurance coverage for some of these events, the potential
liabilities associated with these events could exceed the insurance coverage we maintain.  Our inability to operate our facilities
as a result of such events, even for a limited period of time, may result in significant expenses or loss of market share to other
competitors for our application platforms as well as in the process and business integration technologies and IT services market.
In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or IT security
could result in damage to our reputation. A failure to protect the privacy of customer and employee confidential data against breaches
of network or IT security could result in damage to our reputation. To date, we have not been subject to cyber attacks or other
cyber incidents which, individually or in the aggregate, resulted in a material impact to our operations or financial condition.



24







Maintaining the security of our products,
computers and networks is a critical issue for us and our customers. Security researchers, criminal hackers and other third parties
regularly develop new techniques to penetrate computer and network security measures. In addition, hackers also develop and deploy
viruses, worms and other malicious software programs, some of which may be specifically designed to attack our products, systems,
computers or networks. Additionally, outside parties may attempt to fraudulently induce our employees or users of our products
to disclose sensitive information in order to gain access to our data or our customers’ data. These potential breaches of
our security measures and the accidental loss, inadvertent disclosure or unauthorized dissemination of proprietary information
or sensitive, personal or confidential data about us, our employees or our customers, including the potential loss or disclosure
of such information or data as a result of hacking, fraud, trickery or other forms of deception, could expose us, our employees,
our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability
or fines for us, damage our brand and reputation or otherwise harm our business.



Risks Related to our Traded Securities



There is limited trading volume for
our ADSs and ordinary shares, which reduces liquidity for our shareholders, and may furthermore cause the stock price to be volatile,
all of which may lead to losses by investors.



There has historically been limited trading
volume for our ADSs and ordinary shares, respectively, both on the NASDAQ Global Select Market and the TASE, such that trading
has still not reached the level that enables shareholders to freely sell their shares in substantial quantities on an ongoing basis
and thereby readily achieve liquidity for their investment. As a further result of the limited volume, our ordinary shares have
experienced significant market price volatility in the past and may experience significant market price and volume fluctuations
in the future, in response to factors such as announcements of developments related to our investees businesses, announcements
by competitors of our investees, quarterly fluctuations in our financial results and general conditions in the industry in which
we through our investees compete.



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



The stock market in general has experienced
during recent years extreme price and volume fluctuations. The market prices of securities of technology companies have been extremely
volatile, and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of
those companies. These broad market fluctuations have affected and are expected to continue to affect the market price of our ordinary
shares and ADSs.



The high and low closing market price of
our ordinary shares traded on the Tel Aviv Stock Exchange, or the TASE, under the symbol “FORTY,” and the high and
low closing market price of our ADSs traded on the NASDAQ Global Select Market under the symbol “FORTY,” during each
of the last five years, are summarized in the table below:



|     |  | NASDAQ |       |  | Tel Aviv Stock Exchange* | 
|---- |  | ------ | ----- |  | ------------------------ | 
|     |  | In US$ |       |  | In NIS                   | 
|Year |  | High   |       |  | Low                      | 
|2016 |  |        | 42.17 |  |                          | 
|2015 |  |        | 35.00 |  |                          | 
|2014 |  |        | 33.79 |  |                          | 
|2013 |  |        | 26.64 |  |                          | 
|2012 |  |        | 17.88 |  |                          | 








* The U.S. dollar price of our ordinary shares on the Tel Aviv
Stock Exchange was determined by dividing the price of an ordinary share in NIS by the representative exchange rate of the NIS
against the U.S. dollar as reported by the Bank of Israel on the same date.



The market price of our ordinary shares
and ADSs may fluctuate substantially due to a variety of factors,	including:



25







| | · | any actual or anticipated fluctuations in our or our
competitors’ quarterly revenues and operating	results;
| | - | -----------------------------------------------------------------------------------------------------------



| | · | industry trends and changes;
| | - | ----------------------------



| | · | changes in expectations as to our future financial
performance, including financial estimates by	securities analysts and investors;
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| | · | public announcements concerning us or our competitors;
| | - | ------------------------------------------------------



| | · | results of integrating investments and acquisitions;
| | - | ----------------------------------------------------



| | · | the introduction or market acceptance of new service offerings
by us or our competitors;
| | - | ----------------------------------------------------------------------------------------



| | · | changes in product pricing policies by us or our competitors;
| | - | -------------------------------------------------------------



| | · | public announcements concerning distribution of dividends
and payment of dividends;
| | - | -----------------------------------------------------------------------------------



| | · | the public’s response to our press releases, our other public announcements and our filings with the Securities and
                                                                                      Exchange Commission and the Israeli Securities Authority;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | changes in accounting principles;
| | - | ---------------------------------



| | · | sales of our shares by existing shareholders;
| | - | ---------------------------------------------



| | · | the loss of any of our key personnel;
| | - | -------------------------------------



| | · | other events or factors in any of the markets in which we operate, including those resulting from war, incidents of
                                                                                      terrorism, natural disasters or responses to such events; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | general trends of the stock markets.
| | - | ------------------------------------



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



Significant fluctuations in our annual
and quarterly results, which make it difficult for investors to make reliable period-to-period comparisons, may also contribute
to volatility in the market price of our ordinary shares and American Depositary Shares.



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



| | · | general global economic conditions;
| | - | -----------------------------------



| | · | acquisitions and dispositions;
| | - | ------------------------------



| | · | the size, time and recognition of revenue from significant
contracts;
| | - | ---------------------------------------------------------------------



| | · | timing of product releases or enhancements;
| | - | -------------------------------------------



| | · | timing of contracts;
| | - | --------------------



| | · | timing of completion of specified milestones and delays
in implementation;
| | - | --------------------------------------------------------------------------



| | · | changes in the proportion of service and license revenues;
| | - | ----------------------------------------------------------



| | · | price and product competition;
| | - | ------------------------------



| | · | market acceptance of our new products, applications
and services;
| | - | -----------------------------------------------------------------



| | · | increases in selling and marketing expenses, as well
as other operating expenses;
| | - | ---------------------------------------------------------------------------------



| | · | currency fluctuations; and
| | - | --------------------------



26







| | · | consolidation of our customers.
| | - | -------------------------------



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



The market prices of our ordinary
share and ADSs may be adversely affected if the market prices of our publicly traded investees decrease.



A significant portion of our assets is
comprised of equity securities of directly held publicly traded companies. Our publicly traded investees are currently Matrix,
Sapiens and Magic Software. The share prices of these publicly traded companies have been extremely volatile, and have been subject
to fluctuations due to market conditions and other factors which are often unrelated to operating results and which are beyond
our control. Fluctuations in the market price and valuations of our holdings in these companies may affect the market’s valuation
of the price of our ordinary shares and ADSs and may also thereby impact our results of operations. If the value of our assets
decreases significantly as a result of a decrease in the value of our interest in our publicly traded investees, our business,
operating results and financial condition may be materially and adversely affected and the market price of our ordinary shares
and ADSs may also fall as a result.



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



Formula's ordinary shares are traded on the TASE and our ADSs are traded on the NASDAQ Global Select Market.
Trading in our ordinary shares and ADSs on these markets takes place in different currencies (dollars on the NASDAQ Global Select
Market and NIS on the TASE), and at different times (resulting from different time zones, different weekly trading days and different
public holidays in the United States and Israel). The trading prices of our ordinary shares and ADSs on these two markets may differ
due to these and other factors (see the risk factor titled “The
market price of our ordinary shares and American Depositary Shares may be volatile and you may not be able to resell your shares
at or above the price you paid, or at all” above for an example thereof). On the other hand, any decrease in the trading
price of our ordinary shares or ADSs, as applicable, on one of these markets could likely affect— and cause a decrease in—
the trading price on the other market.



Our largest shareholder, Asseco Poland
S.A., can significantly influence the outcome of matters that require shareholder approval.



Asseco Poland S.A., or Asseco, owns approximately 46.3% of our outstanding ordinary shares (which excludes
shares that we have repurchased that lack voting rights and shares subject to restrictions that are voted in proportion to the
votes of our other shares). Therefore, Asseco can significantly influence the outcome of those matters requiring shareholder approval,
including the election of directors and approval of significant corporate transactions. This voting power may have the effect of
delaying or preventing a change in control which may otherwise be favorable to our minority shareholders. In addition, potential
conflicts of interest may arise in the event that we or any of our investees enters into any agreements or transactions with affiliates
of Asseco. Although Israeli law imposes certain procedures (including shareholder approval) for approval of certain related party
transactions, we cannot assure you that these procedures will eliminate the possible detrimental effects of these conflicts of
interest. If certain transactions are not approved in accordance with required procedures under applicable Israeli law, these transactions
may be void or voidable.



27







If we are unable to maintain effective
internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, the reliability of
our financial statements may be questioned and our share price may suffer.



The Sarbanes-Oxley Act of 2002 imposes
certain duties on us and on our executives and directors. To comply with this statute, we are required to document and test our
internal control over financial reporting, our management is required to assess and issue a report concerning our internal control
over financial reporting and our independent registered public accounting firm must issue an attestation report on our internal
control procedures. Our efforts to comply with these requirements have resulted in increased general and administrative expenses
and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant
resources. We may identify material weaknesses or significant deficiencies in our assessments of our internal control over financial
reporting. Failure to maintain effective internal control over financial reporting could result in investigation or sanctions by
regulatory authorities, and could adversely affect our operating results, investor confidence in our reported financial information
and the market price of our ordinary shares.



Risks Relating to Operations in Israel



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



We are incorporated under the laws of, and our headquarters and principal research and development facilities
are located in, the State of Israel, and approximately 59% and 60% of our consolidated revenues in 2015 and 2016, respectively
were generated from the Israeli market. As a result, we are directly influenced by the political, economic and military conditions
affecting Israel. In addition, several countries still restrict business with Israel and with companies doing business in Israel.
These political, economic and military conditions in Israel, and business restrictions, could have a material adverse effect on
our business, financial condition, results of operations and future growth.



In recent years, there have been hostilities
between Israel and Hezbollah in Lebanon and Hamas in the Gaza strip, both of which resulted in rockets being fired into Israel
causing casualties and disruption of economic activities. Most recently, in July 2014, an armed conflict commenced between Israel
and Hamas. In addition, Israel faces threats from more distant neighbors, in particular, Iran. Also, since 2011, riots and uprisings
in several countries in the Middle East and neighboring regions have led to severe political instability in several neighboring
states and to a decline in the regional security situation. Such instability may affect the local and global economy, could negatively
affect business conditions and, therefore, could adversely affect our operations. To date, these matters have not had any material
effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are
outside our control and there can be no assurance that these matters will not negatively affect our business, financial condition
and results of operations in the future.



Some of our employees in Israel are obligated
to perform military reserve duty, currently consisting of approximately 30 days of service annually (or more for reserves officers
or non-officers with certain expertise). Additionally, they are subject to being called to active duty at any time upon the outbreak
of hostilities. While we have operated effectively under these requirements, no assessment can be made as to the full impact of
such requirements on our business or work force and no prediction can be made as to the effect on us of any expansion of such obligations.



The tax benefits that will be available
to certain of our Israeli subsidiaries and our Israeli affiliate will require us to continue to meet various conditions and may
be terminated or reduced in the future, which could increase our costs and taxes.



Some of our Israeli investees have been
granted “Approved Enterprise” and “Benefited Enterprise” status, which provide certain benefits, including
tax exemptions and reduced tax rates under the Israeli Law for the Encouragement of Capital Investments, 1959, referred to as the
Investment Law. Income not eligible for Approved Enterprise and Benefited Enterprise benefits is taxed at the regular corporate
tax rate (26.5% for 2015, 25% in 2016, and is currently set at 24% for 2017 and 23% for 2018 and thereafter).



28







In the event of distribution of dividends
in these subsidiaries from said tax-exempt income, the amount distributed will be subject to corporate tax in respect of the amount
of the distributed dividend (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute the
dividend) at the corporate tax rate which would have been applicable if such income had not been tax-exempted. Tax-exempt income
generated under the Approved/Benefited Enterprise program will be subject to taxes upon dividend distribution (which includes the
repurchase of the Company's shares) or liquidation.



The entitlement to the above benefits is
conditional upon the continuous fulfillment of the conditions stipulated by the Investment Law and applicable regulations. Should
the Israeli investees fail to meet such requirements in the future, income attributable to the Approved Enterprise and Benefited
Enterprise programs would be subject to the statutory Israeli corporate tax rate and they will be required to refund a portion
of the tax benefits already received, including interest and CPI linkage or other monetary penalty, with respect to such programs.
As of December 31, 2016, we believe that certain of our Israeli investees are in compliance with all of the conditions required
by the Investment Law.



Fluctuations in foreign currency values
may affect our business and results of operations.



Due to our extensive operations and sales in Israel, most of our revenues and expenses from our IT services
are denominated in NIS. For financial reporting purposes,
we translate all non-U.S. dollar denominated transactions into dollars in accordance with IFRS. Therefore, we are exposed to the
risk that a devaluation of the NIS relative to the dollar will reduce our revenue growth rate in dollar terms. On the other hand,
a significant portion of our revenues from proprietary software products and related services is currently denominated in other
currencies, particularly the Euro, Japanese Yen and British Pound, while a substantial portion of our expenses relating to the
proprietary software products and related services, principally salaries and related personnel expenses, is denominated in NIS.
As a result, the depreciation of the Euro, Japanese Yen and British Pound relative to the U.S. dollar reduces our dollar recorded
revenues from sales of our proprietary software products and related services that are denominated in those currencies and thereby
harms our results of operations. In addition, the appreciation of the NIS relative to the dollar increases the dollar recorded
value of expenses that we incur in NIS in respect of such proprietary software products sales, and, therefore, could adversely
affect our results of operations and harm our competitive position in the markets. The depreciation (appreciation) of the dollar
in relation to the NIS (based on the change in the exchange rate reported by the Bank of Israel from the start to the conclusion
of each year) amounted to (0.3)% and 1.5% for the years ended December 31, 2015 and 2016, respectively. Deflation in Israel further
increases the dollar cost of our NIS-based operating expenses and adversely impact the profits that we realize from our proprietary
software products sales. The Israeli rate of deflation amounted to 1% and 0.2% for the years ended December 31, 2015 and 2016,
respectively. We have engaged and may continue in the future to engage in certain hedging transactions, to decrease the risk of
financial exposure from fluctuations in the exchange rate of the non-dollar currency forecasted cash flows. However, we cannot
assure you that these measures will adequately protect us from the material adverse effects described above. For additional information
relating to the exchange rates between different relevant currencies, see “Item 5. Operating and Financial Review and Prospects—Overview—Our
Functional and Reporting Currency.”



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



We are organized under the laws of the
State of Israel. All of our executive officers and directors are nonresidents of the United States, and a substantial portion of
our assets and the assets of these persons are located outside of the United States. Therefore, it may be difficult to:



| | · | effect service of process within the United States on us or any of our executive officers or directors;
| | - | -------------------------------------------------------------------------------------------------------

| | · | enforce court judgments obtained in the United States including those predicated upon the civil
liability provisions of the United States federal securities laws, against us or against any of our executive officers or directors,
in the United States or Israel; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | bring an original action in an Israeli court against us or against any of our executive officers
or directors to enforce liabilities based upon the United States federal securities laws.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29







Israeli courts may refuse to hear a claim
based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which to bring
such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law
is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact
by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli
law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated
with enforcing a judgment against us in Israel, an investor may not be able to collect any damages awarded by either a U.S. or
foreign court.



Provisions of Israeli law may delay,
prevent or make difficult an acquisition of us, which could prevent a change of control and therefore depress the price of our
shares.



The Israeli Companies Law, 1999 regulates
that mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions
involving directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders. These
provisions of Israeli corporate and tax law may have the effect of delaying, preventing or complicating a merger with, or other
acquisition of, us. This could cause our ordinary shares to trade at prices below the price for which third parties might be willing
to pay to gain control of us. Third parties who are otherwise willing to pay a premium over prevailing market prices to gain control
of us may be unable or unwilling to do so because of these provisions of Israeli law.



Curacao law makes it more difficult
for Sapiens to enter into a change of control transaction in which its is acquired and Formula would be paid a premium on the
shares that it holds in Sapiens.



Sapiens’ status as a Curacao company
makes it more challenging (compared to Israel and various US states) to consummate a change of control transaction in which Sapiens
is acquired and its shareholders benefit economically via the payment of a premium on their shares relative to the then-current
market price. Under Curacao law, there is no legal basis for a reverse triangular merger, a commonly-utilized transaction structure
for the acquisition of publicly traded companies such as Sapiens, in which shareholders receive cash. Curacao law allows for the
acquisition of a publicly traded company such as Sapiens for cash through a tender offer, provided that the offeror acquires at
least 95% of the company's issued and outstanding share capital (which 95% threshold may be reduced under certain circumstances
to 90% or 80% in case of a pre-wired asset sale), following which the offeror can purchase the remaining shares subject to court
approval and possibly the exercise of certain dissenters' rights. Since Curacao law does not permit a cash merger and due to the
challenges in obtaining such level of acceptance of the tender offer, a potential buyer might need to use different structures
to acquire Sapiens, e.g. migrating the company to another jurisdiction that allows for a cash merger as a means to acquire publicly
traded companies; however, such process may be very time-consuming and could therefore prevent such a transaction from occurring.
An additional option under Curacao law is a sale of assets, which is likely to be generally less efficient to Sapiens’ shareholders
from a tax perspective. Each of the foregoing limitations or disadvantages of effecting an acquisition of Sapiens or its assets
in which shareholders realize a premium could furthermore adversely impact the market price of Sapiens shares and therefore our
shares in an ongoing manner.



Your
rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities
of shareholders under U.S. law.



We are incorporated under
Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, amended
and restated articles of association, which we sometimes refer to as our articles, and Israeli law. These rights and responsibilities
differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder
of an Israeli company has a duty to act in good faith in exercising the rights thereof and fulfilling the obligations thereof toward
the company and other shareholders and to refrain from abusing the power thereof in the company, including, among other things,
in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder
votes at the general meeting with respect to, among other things, amendments to a company’s articles of association, increases
in a company’s authorized share capital, mergers and acquisitions and transactions involving interests of officers, directors
or other interested parties which require the shareholders’ approval. In addition, a controlling shareholder of an Israeli
company or a shareholder who knows that he or she possesses the power to determine the outcome of a vote at a meeting of our shareholders,
or who has, by virtue of the company’s articles of association, the power to appoint or prevent the appointment of an office
holder in the company, or any other power with respect to the company, has a duty of fairness toward the company. The Companies
Law does not establish criteria for determining whether or not a shareholder has acted in good faith.



Sapiens was formed
under the laws of Curaçao and the rights of shareholders under Curaçao law differ from those under U.S. law and
Israeli law, therefore, you may have fewer protections as a shareholder.



Sapiens’ corporate affairs
are governed by its articles of association, the Civil Code of Curaçao and the civil law of Curaçao. The rights
of shareholders to take legal action against Sapiens’ directors, actions by minority shareholders and the fiduciary responsibilities
of our directors under Curaçao law are to a large extent governed by the Civil Code of Curaçao, the civil law of
Curaçao and applicable case law. The rights of shareholders and the fiduciary responsibilities of Sapiens’ directors
under Curaçao law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions
in the U.S. and in Israel In particular, Curaçao has a less developed body of securities laws as compared to the U.S.,
and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. In addition,
Curaçao law does not generally distinguish between public and private companies, and some of the protections and safeguards
(such as statutory pre-emption rights, except to the extent that they are expressly provided for in the Articles) that investors
may expect to find in relation to a public company are not provided for under Curaçao law. As a result of all of the above,
holders of Sapiens common shares, such as Formula, may have more difficulty in protecting their interests in the face of actions
taken by Sapiens’ management, directors or major shareholders than they would as shareholders of a U.S. or Israeli company.





As a foreign private
issuer whose ADSs are listed on the NASDAQ Global Select Market, we may follow certain home country corporate governance practices
instead of certain NASDAQ requirements.



As a foreign private issuer whose ADSs
are listed on the NASDAQ Global Select Market, we are permitted to follow certain home country corporate governance practices instead
of certain requirements of the Listing Rules of the NASDAQ Stock Market. A foreign private issuer that elects to follow a home
country practice instead of such requirements must submit to NASDAQ in advance a written statement from independent counsel in
such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws.
In addition, a foreign private issuer must disclose in its annual reports filed with the SEC or on its website, each such requirement
that it does not follow and describe the home country practice followed by the issuer in lieu of any such requirement. In keeping
with these leniencies, we have elected to follow home country practice with regard to, among other things, composition of our board
of directors, director nomination procedure, compensation of officers, quorum at shareholders’ meetings and timing of our
annual shareholders’ meetings. We have furthermore elected to follow our home country law, in lieu of those rules of the
NASDAQ Stock Market that require that we obtain shareholder approval for certain dilutive events, such as for the establishment
or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain
transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions
of the stock or assets of another company. Accordingly, our shareholders and ADS holders may not be afforded the same protection
as provided under NASDAQ’s corporate governance rules.



30







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



Generally, if for any taxable year, after
applying certain look-through rules, 75% or more of our gross income is passive income, or at least 50% of the value of our assets
are held for the production of, or produce, passive income, we may be characterized as a passive foreign investment company, or
PFIC, for U.S. federal income tax purposes. Passive income for these purposes generally includes, among other things, certain dividends,
interest, royalties, rental and gains from commodities and securities transactions and from the sale or exchange of property that
gives rise to passive income. This characterization could result in adverse U.S. tax consequences to our shareholders who are U.S.
taxpayers, including having gain realized on the sale of our ordinary shares or ADSs being treated as ordinary income rather than
capital gain income, and could result in punitive interest charges being applied to such sales proceeds. Rules similar to those
applicable to dispositions apply to amounts treated as “excess distributions.”



We believe that we were not a PFIC in 2016
but may be classified as such in 2017. Since a PFIC status is only determined as of the end of the taxable year and is dependent
on a number of factors, therefore, there can be no assurance that we will not become a PFIC for the year ending December 31, 2017
or in a future taxable year. Rules similar to those applicable to gains derived from the disposition of our ordinary shares or
ADSs also apply to certain “excess distributions.” A decline in the value of our ordinary shares or ADSs could result
in our company being classified as a PFIC. U.S .investors should consult with their own tax advisors with respect to the U.S. tax
consequences of investing in our ordinary shares or ADSs. For a discussion of how we might be characterized as a PFIC and related
tax consequences, see “Item 10. Additional Information—Taxation—United States Federal Income Tax Considerations.”



ITEM 4. INFORMATION ON THE COMPANY



A.	History and Development of the
Company



Both our legal name and our commercial
name is Formula Systems (1985) Ltd. We were incorporated in Israel on April 2, 1985. We maintain our principal executive offices
at 5 Haplada Street, Or Yehuda 60218, Israel and our telephone number is 011-972-3-5389487. Our agent in the United States is Corporation
Service Company and its address is 2711 Centerville Road, Suite 400, Wilmington, DE 19808. In 1991, we completed the initial public
offering of our ordinary shares on the TASE. In October 1997, we completed the listing of our ADSs on the NASDAQ Global Market.
As of January 3, 2011 our ADSs have been listed on the NASDAQ Global Select Market.



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



In November 2010, Emblaze Ltd., our former
controlling shareholder, sold its controlling stake in us to Asseco Poland SA, a Polish IT company listed on the Warsaw Stock Exchange.
Asseco currently beneficially owns 46.3% of our issued and outstanding ordinary shares (which excludes shares that we have repurchased
that lack voting rights and shares subject to restrictions that are voted in proportion to the votes of our other shares).



We have adopted a strategy of seeking to create positive economic
impact and long-term value for our investors and the companies we invest in. We believe that this strategy provides us with capital
to support the growth of our interest in our remaining subsidiaries, as well as provide us the opportunity to pursue new acquisitions
of, and investments in, other businesses, particularly businesses offering products, technologies and services that are complementary
to ours and are suitable for integration into our business therefore increasing value for our shareholders (and ADS holders). We
expect to continue to develop and enhance the products, services and solutions of our investees, and to continue to pursue additional
acquisitions of, or investments in, companies that provide IT services and proprietary software solutions.



31







Capital Expenditures and Divestitures



Our principal
investment and divestiture activities and related financing activities since the start of our 2014 fiscal year are described below.
For additional information relating to our investment, divestiture and financing activities during 2015 and 2016, see “Item
5. Operating and Financial Review and Prospects— Liquidity and Capital Resources.”



Changes in our percentage ownership of Sapiens.
As of January 1, 2014, our percentage interest in Sapiens was 48.6%. We purchased additional shares in 2014 which
resulted in our percentage interest increasing to 50.2% as of December 31, 2014. As of December 31, 2015, due to exercises of
options by employees of Sapiens, Formula’s direct interest in Sapiens outstanding common shares again was diluted to 49.13%.
Formula’s interest in Sapiens common shares is currently 48.85%. Pursuant to our acquisitions of Sapiens common shares,
we have invested an aggregate of $11.9 million and $0.4 million in 2014 and 2015, respectively and there were no such purchases
in 2016. The sources of such funds have been our working capital and loans from financial institutions.





Changes in our percentage
ownership of Magic Software. As of January 1, 2014, we held 51.6% of Magic Software’s outstanding share capital. In
March 2014, Magic Software issued 6,900,000 of its ordinary shares in a follow-on public offering, of which we purchased
700,000 ordinary shares. As a result, our beneficial ownership percentage in Magic Software decreased to 45.0%. We purchased
additional shares in 2015 and 2016, which resulted in our current percentage interest increasing to 47.3%. Pursuant to our
acquisitions of Magic Software’s ordinary shares, we have invested an aggregate of $6.6 million, $3.7 million and $2.7
million in 2014, 2015 and 2016, respectively. The sources of such funds have been our working capital, loans from financial
institutions and our publicly traded Series A and Series B debentures.



Changes in our percentage
ownership of Matrix. During 2014, 2015 and
2016, we have increased our investment in Matrix, acquiring additional ordinary shares of Matrix in private transactions that
have raised our beneficial ownership to 50.2%, 50.04% and 50.01% of Matrix outstanding share capital as of December 31, 2014,
2015 and 2016, respectively. Pursuant to our acquisitions of Matrix ordinary shares, we have invested an aggregate of $1.3
million and $0.2 million in 2014 and 2016 respectively and there were no such purchases in 2015. The source of such funds has
been our working capital loans from financial institutions and our publicly traded Series A and Series B
debentures.



Acquisition of TSG.In May 2016,
Formula and IAI each acquired 50% of TSG each, a subsidiary and the military arm of Ness Technologies, which is engaged in the
fields of command and control systems, intelligence, homeland security and cybersecurity. Each of Formula and IAI paid a purchase
price of $25.8 million (subject to certain adjustments).



Acquisition of Michpal.In January
2017, Formula acquired all of the share capital of Michpal, an Israeli-based company that develops, sells and support a proprietary
on-premise payroll software solution for processing traditional payroll stubs to Israeli enterprise and payroll service providers.
Formula paid a purchase price of $22.1 million. For further information, please see Note 20(i) to our consolidated financial statements
included in Item 18 of this annual report.



Acquisition of Roshtov.In July 2016, Magic Software acquired a 60% equity interest in Roshtov Software Industries Ltd, the developer of the Clicks development
platform, which is used in the design and management of patient-file oriented software solutions for managed care and large-scale
healthcare providers. The aggregate purchase price for the 60% interest was approximately $ 21 million in cash and Magic Software
and the seller hold mutual call and put options, respectively, for the remaining 40% interest in Roshtov. For further information,
please see Note 4(iii)(d) to our consolidated financial statements included in Item 18 of this annual report.



Acquisition of StoneRiver. In the
first quarter of 2017, Sapiens acquired StoneRiver, a provider of a wide range of technology solutions and services to insurance
carriers, agents, and broker-dealers, whose product groups encompass front-office, policy, claim, rating, underwriting, billing,
and reinsurance solutions for all major business lines. The acquisition will enable Sapiens to expand the range of solutions and
services that Sapiens offers in North America. Sapiens paid approximately $100 million in cash, subject to certain adjustments
based on working capital, transaction expenses, unpaid debt and certain litigation matters. For further information, please see
Note 20(ii) to our consolidated financial statements included in Item 18 of this annual report



32







Acquisition of Programa. In March
2016, Matrix acquired 60% of the share capital of Programa Logistics System Ltd., an Israeli provider of advisory services and
design and development of solutions in supply chain, production and logistics. Matrix paid NIS 7.3 million (approximately $ 1.9
million). In addition, the sellers may be eligible for future consideration, valued at $ NIS 1.1 million (approximately $ 0.3 million)
as of December 31, 2016, subject to obtaining accumulated operating income targets over a three year period. Matrix and the seller
hold mutual call and put options, respectively, for the remaining 40% interest in Programa. For further information, please see
Note 4(iv)(e) to our consolidated financial statements included in Item 18 of this annual report.



Acquisition of Network Infrastructure
Technologies. In October 2016, Matrix acquired 60% of the share capital of Network Infrastructure Technologies Inc., a provider
of IT help desk services for the healthcare industry. Matrix paid $6.7 million. Matrix has an option to buy and the seller has
an option to sell the remainder of the shares to Matrix. In addition, the seller is eligible for future consideration, valued at
$ 0.7 million, subject to obtaining accumulated operating income targets over a three year period. For further information, please
see Note 4(iv)(f) to our consolidated financial statements included in Item 18 of this annual report.



Acquisition of Second to None Solutions.
In November 2016, Matrix acquired 55% of the share capital of Second to None Solutions Inc., a certified distributer of IBM products
to U.S federal and enterprise customers. Matrix paid $0.3 million. Matrix has an option to buy the remainder of the shares and
the seller has an option to sell the remainder of the shares to Matrix. In addition, the seller is eligible for future consideration,
valued at $ 0.5 million as of December 31, 2016, subject to obtaining accumulated operating income targets over a three year period.
For further information, please see Note 4(iv)(g) to our consolidated financial statements included in Item 18 of this annual report.



Acquisition of Aviv. In December
2016, Matrix acquired 85% of the share capital of Aviv Management Engineering Systems Ltd., a company engaged in management and
project consulting, focusing in four areas of expertise: environmental planning, project management, urban and physical planning
and management consulting. Matrix paid NIS 19.7 million (approximately $ 5.1 million). Matrix has an option to buy the remainder
of the shares and the seller has an option to sell the remainder of the shares to Matrix. In addition, the seller is eligible for
future consideration, valued at NIS 1.6 million (approximately $ 0.4 million) , subject to obtaining accumulated operating income
targets over a three year period. For further information, please see Note 4(iv)(h) to our consolidated financial statements included
in Item 18 of this annual report.



Acqusition of MaxPro. In the third
quarter of 2016, Sapiens acquired Maximum Processing Inc., or MaxPro. MaxPro is the provider of the Stingray System, a P&C
insurance administration suite targeted towards the tier 4-5 U.S. market, as well as managing general agents, or MGAs, third-party
administrators, or TPAs, and insurance brokers. Sapiens paid $4.3 million in cash for this acquisition (including $1.5 million
that Sapiens placed in escrow at the closing). The seller also has the right to receive performance based payments of up to $3.1
million relating to achievements of revenue and profitability goals over three years (2016, 2017, 2018), which are also subject
to continued employment. For further information, please see Note 4(ii)(d) to our consolidated financial statements included in
Item 18 of this annual report.



Acquisition of 4Sight. In the third
quarter of 2016, Sapiens acquired 4Sight Business Intelligence Inc., or 4Sight, a provider of business intelligence reports. 4Sight
offers insurance-specific business intelligence, or BI, solutions, including 4SightBI, a P&C-specific, off-the-shelf business
intelligence (BI) product. Sapiens paid $330,000 in cash for this acquisition. In addition, the seller of 4Sight may receive additional
performance-based payments of up to $2.6 million relating to achievements of revenue and profitability goals over three years (2016,
2017, 2018), which are also subject to continued employment.



Acquisition of Shavit. In October
2016, Magic Software acquired the entire share interests in Shavit Software (2009) Ltd., an Israeli-based company that specializes
in software professional and outsourced management services, for a total consideration of $ 6.8 million, of which $ 4.7 was
paid upon closing, $ 1.6 million was allocated to a deferred payment which is due in 2018 and $ 0.5 million is contingent upon
the acquired business meeting certain operational targets in 2017, 2018 and 2019. For further information, please see Note 4(iii)(e)
to our consolidated financial statements included in Item 18 of this annual report.



33







During the year ended December 31, 2016,
Formula and its subsidiaries and affiliates completed several additional acquisitions for a total cash consideration of approximately
$8.9 million. These acquisitions generally enhance our technologies, product and services offerings. Pro forma results of operations
for these acquisitions have not been presented because they are not material to the consolidated results of operations, either
individually or in the aggregate. For further information, please see Note 4(iii)(f) and Note 4(iv)(b) to our consolidated financial
statements included in Item 18 of this annual report.



Acquisition of Ibexi by Sapiens.
In May 2015, Sapiens acquired IBEXI Solutions Private Limited (“IBEXI”), an India-based provider of insurance solutions
and services, which services 18 insurers in both the P&C and L&P markets throughout Southeast Asia. The total purchase
price in this acquisition was approximately $4.8 million, which was paid in cash by Sapiens at the closing, and which is subject
to adjustment based on certain future criteria. For further information, please see Note 4(ii)(c) to our consolidated financial
statements included in Item 18 of this annual report.



Acquisition of Insseco
by Sapiens. In August 2015, Sapiens acquired Insseco,
a Poland-based software and services provider for the insurance market, from Asseco, the controlling shareholder of Formula, which
helped Sapiens to establish a strong presence in the Polish insurance market. Sapiens paid approximately $9.1 million in cash
for Insseco, subject to upwards adjustment based on its achieving future revenue goals. For further information, please see Note
4(ii)(a) to our consolidated financial statements included in Item 18 of this annual report.



Acquisition of Comblack IT by
Magic Software. In April 2015 Magic Software acquired a 70% interest in Comblack IT Ltd., an Israeli-based company that specializes
in software professional and outsource management services for mainframes and complex large-scale environments, for a total consideration
of $1.8 million, of which $ 1.5 million was paid upon closing and $ 0.3 million was contingent upon the acquired business
meeting certain operational targets in 2015. Magic Software and the seller hold mutual call and put options, respectively, for
the remaining 30% interest in the company. In March 2016, Magic Software paid the seller the remaining contingent payments for
meeting 2015 operational targets. For further information, please see Note 4(iii)(b) to our consolidated financial statements included
in Item 18 of this annual report.



Acquisition of InfingySolutions by Magic Software. In June 2015, Magic Software acquired
a 70% interest in Infinigy Solutions LLC, a US-based services company focused on expanding the development and implementation
of technical solutions throughout the telecommunications industry with offices over the US, providing nationwide coverage and
support for wireless engineering, deployment services, surveying, environmental service and project management, for a total consideration
of $6.5 million, of which $ 5.6 was paid upon closing and $ 0.9 million is contingent upon the acquired business meeting
certain operational targets in 2016 and 2017. In July 2016, Magic Software paid the seller $ 0.5 million with respect to the acquired
business meeting certain of its 2016 operational targets. Magic Software and the seller hold mutual call and put options, respectively,
for the remaining 30% interest in the company. For further information, please see Note 4(iii)(c) to our consolidated financial
statements included in Item 18 of this annual report.



Acquisition of Hydus Solutions
by Matrix. In April 2015, Xtivia Inc. (a wholly owned subsidiary of Matrix) completed the acquisition of all of the outstanding
shares of Hydus Inc. in total consideration of $ 2.5 million. Hydus Inc. is a U.S based consulting firm specializing in software
services in the field of Enterprise Information Management, or EIM. In addition, the sellers may be eligible for future consideration,
valued at $ 1.7 million as of December 31, 2016, subject to obtaining accumulated operating income targets during three years (not
exceeding Hydus operating income). For further information, please see Note 4(iv)(c) to our consolidated financial statements included
in Item 18 of this annual report.



Acquisition of Onno Appsby Matrix.In May 2015, Matrix completed the acquisition of
all of the outstanding shares of Onno Apps Ltd., an Israeli based service provider specializing in mobile applications development
services, for total consideration of NIS 4.6 million (approximately $ 1.2 million). In addition, the sellers may be eligible for
future consideration, valued at $ 0.3 million, subject to obtaining accumulated operating income targets during three years commencing
on January 1, 2016, not exceeding NIS 5.0 million (approximately $ 1.3 million). For further information, please see Note 4(iv)(d)
to our consolidated financial statements included in Item 18 of this annual report.



34







During the year ended December 31, 2015,
Formula and its subsidiaries and affiliates completed additional acquisitions for a total cash consideration of approximately 1.9
million and increased their share interest in two existing subsidiaries and one affiliate for total consideration of $ 2.3 million.
These acquisitions generally enhance our technologies, product and services offerings. Pro forma results of operations for these
acquisitions have not been presented because they are not material to the consolidated results of operations, either individually
or in the aggregate. For further information, please see Note 4(iii)(f) and Note 4(iv)(b) to our consolidated financial statements
included in Item 18 of this annual report.



Acquisition of InSync Staffing Solutions
Inc.In April 2014, Formula acquired all of the interests in InSync Staffing LLC, a U.S.-based full service provider of staffing
solutions for IT, engineering and other professional staff. We recorded a capital expenditure of $4.0 million in respect of this
acquisition.



Acquisition of a software vendor by
Magic Software. In October 2014, Magic Software acquired 100% of Formula Telecom Solutions Ltd., or FTS, an Israeli based
software vendor. FTS specializes in the development, sale, service and support of business support systems, or BSS, including convergent
charging, billing, customer management, policy control and payment software solutions for the telecommunications, content, Machine
to Machine/Internet of Things or M2M/IoT, payment and other industries. FTS has a track record of successful implementation of
many projects in Western and Eastern Europe, Asia and Africa.



Acquisition of Knowledge Partners International
LLC.On August 1, 2014, Sapiens acquired Knowledge Partners International LLC, or KPI, and the assets of The Decision Model
Licensing LLC, or TDML, for total consideration of $2.1 million in cash and 57,000 ordinary shares of Sapiens Decision, Sapiens’
subsidiary which holds all of the interests in KPI (representing 3% of Sapiens Decision’s issued and outstanding ordinary
shares immediately prior to closing). In addition, one of the shareholders of KPI received 88,500 restricted shares of Sapiens
Decision plus $450,000 in cash, subject to certain performance criteria. The agreements for the foregoing acquisitions included,
among other things, certain put and call options relating to the Sapiens Decision shares issued upon consummation of the transaction
and certain other benefits payable upon the occurrence of certain conditions.



Acquisition of Hoshen Eliav Ltd.
During January 2014, Matrix purchased 100% of the share capital of Hoshen Eliav Ltd. from its former shareholders in consideration
of approximately $1.3 million in cash and contingent consideration estimated at approximately $0.2 million subject to the achievement
of the gross profit goals in the next three years. The company focuses on providing consulting to security companies.



Acquisition of Top Q (Aqua) Software
Ltd.During March 2014, Matrix purchased 100% of the share capital of Top Q (Aqua) Software Ltd. from its former shareholders
in consideration of approximately $1.2 million in cash and contingent consideration based on the achievement of a gross profit
goal. The company is engaged in software testing and specializes in automated testing.



Acquisition of Managware Ltd. On October 2, 2014, Matrix
purchased 100% of the share capital of Managware Ltd. from its former shareholders in consideration of approximately $1.5 million
in cash, contingent consideration of $0.7 million paid at the closing and contingent consideration payable in the future subject
to the Managware’s results for the years 2015 to 2017 and contingent upon the continued employment of the former shareholder
of Managware. Managware is engaged in the marketing of software and provides other services.



| | B. | Business Overview
| | -- | -----------------



General



We are a global software solutions and IT professional services
holdings company that is principally engaged through our directly held investees in providing proprietary and non-proprietary software
solutions and IT professional services, software product marketing and support, computer infrastructure and integration solutions
and learning and integration. We deliver our solutions in over 50 countries worldwide to customers with complex IT services needs,
including a number of “Fortune 1000” companies.



35







Except for providing our investees with
our management, technical expertise and marketing experience to help them create a consecutive positive economic impact and long-term
value, and direct their overall strategy through our active involvement, we do not conduct independent operations at our parent
company level. Following our transition to IFRS during 2016, we consolidate the results of all of the entities in which Formula
holds an equity interest, other than our equity investee TSG



We operate through our subsidiaries: Matrix, Sapiens, Magic Software, InSync and, as of January 2017,
Michpal and through our equity investee TSG (since May 2016). The following is a description of the areas of our business activity:



IT Services



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



Proprietary Software Solutions



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



The Formula Group



Formula
is the parent company of investees, which, as noted above, we refer to collectively (together with Formula) as the Formula Group.
As of December 31, 2016, we held 90% of the shares of InSync, a 50.0% controlling interest in Matrix, a 48.9% interest in Sapiens,
a 47.3% interest in Magic Software and a 50% interest in TSG through our equity holdings. In addition, as of January 3, 2017, we
hold the entire share capital of Michpal. We have effective control of each of the companies in the Formula Group other than TSG
for purposes of consolidation under IFRS. We provide all our investees with our management, technical expertise and marketing experience
to help them create a positive economic impact and long-term value.



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



| | · | strategic planning;
| | - | -------------------



| | · | marketing policies;
| | - | -------------------



| | · | senior management recruitment;
| | - | ------------------------------



| | · | investment and budget policy; and
| | - | ---------------------------------



| | · | financing policies.
| | - | -------------------



36







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



| | · | transfer of technology and expertise;
| | - | -------------------------------------



| | · | leveling of human resources demand;
| | - | -----------------------------------



| | · | combining skills for specific projects;
| | - | ---------------------------------------



| | · | formation of critical mass for large projects; and
| | - | --------------------------------------------------



| | · | marketing and selling the Formula Group’s products and services to its collective customer
base.
| | - | ------------------------------------------------------------------------------------------------



We, through investees, offer a wide range
of integrated software solutions and IT professional services, such as implementation and integration projects of computing and
software, outsourcing, software project management, software development, IT managed services, software testing and QA, , depending
on specific needs of the customer and depending on the subject expertise necessary professional all case by case basis, and design,
develop and market proprietary software solutions for sale in selected niche markets, both in Israel and worldwide.



Our Subsidiaries



Matrix



Matrix IT Ltd. is Israel’s leading IT services company as demonstrated in recent research reports
of the Israeli IT market, published by the research companies IDC and STKI. Matrix employs approximately 8,250 software, hardware,
integration and training personnel, which provide advanced IT services to hundreds of customers in the Israeli market. Matrix executes
some of the largest IT projects in Israel. It develops and implements leading technologies, software solutions and products. Matrix
provides infrastructure and consulting services, outsourcing, offshore, near-shore, training and assimilation services. Matrix
represents and markets leading software vendors. Among its customers are most of the leading Israeli organizations and companies
in the industry, retail, banking and finances, education and academe, Hi-tech and ISVs, telecom, defense, health and the government/public sectors.
Matrix is traded on the Tel Aviv Stock Exchange.



The solutions, services and products supplied
by Matrix are designed to improve Matrix’s customers’ competitive capabilities, by providing a response to their unique
IT needs in all levels of their operations.



Areas of Operation



Matrix operates through its directly and
indirectly held subsidiaries in the following principal areas:



| | - | Software solutions and services in Israel.
| | - | ------------------------------------------

| | - | Software solutions and services in the United States.
| | - | -----------------------------------------------------

| | - | Computer infrastructure and integration solutions.
| | - | --------------------------------------------------

| | - | Software product marketing and support.
| | - | ---------------------------------------

| | - | Learning and integration.
| | - | -------------------------



Software solutions and services in Israel:Matrix’s primary activities in this area include development of software systems and services, including integration
projects of systems and software, outsourcing, management of software projects, software development, testing of developed technology,
quality assurance and software services. The scope of work invested in each element varies from one customer to the other. In 2016,
under this line of business, Matrix recorded revenues of approximately $ 403 million, compared to $ 363 million in 2015, an increase
of about 11.1%. Operating income was approximately $ 20.2 million in 2016, compared to $ 18.8 million in 2015, an increase
of about 7.6%.



Software solutions and services in the
United States: Matrix provides solutions and expert services mainly in the area of governance risk and compliance (“GRC”),
including activities in the following areas: risk management, fraud management, anti-money laundering, and regulatory compliance
security in these areas all through its subsidiary Matrix-IFS. Matrix also provides solutions and technological services in the
areas of portals, BI (Business Intelligence), DBA (Database Administration), CRM (Customer Relations Management) and EIM (Enterprise
Information Management). This sector also include IT help desk services for healthcare and software distribution services. In 2016,
under this line of business, Matrix recorded revenues of approximately $ 74.6 million, compared to $69.5 million in 2015, an increase
of about 7.4%. Operating income in 2016 was approximately $ 11.8 million, compared to $ 11.2 million in 2015, an increase
of about 5.5%. Activity in the U.S accounts for about 11% of revenues of the company and for about 26% of the operating income,
because of higher operating gross margin in the U.S.



37







Computer infrastructure and integration
solutions:Matrix activities in this area consist of: (i) providing computer and telecommunication infrastructure solutions;
(ii) selling and marketing computer equipment, licenses and peripherals to enterprises together with services; and (iii) selling
and marketing cloud based solutions (under the “CloudZone” division) and services relating to databases and “big
data” (under the “DataZone” division). Amongst Matrix infrastructure and integration solutions included are solutions
of IBM, Oracle Red Hat, Boomi and others. In 2016, under this line of business, Matrix recorded revenues of approximately $ 109.0
million, compared to $83.7 million in 2015, an increase of about 30.1%. Operating income in 2016 was approximately $ 4.7 million,
compared to $ 3.5 million in 2015, an increase of about 34.3%



Software product marketing and support:Matrix activities in this area include marketing and support for various software products (mainly originated outside of Israel)
and providing professional support for these products to customers, including marketing and upgrade maintenance of software products.
In 2016, under this line of business, Matrix recorded revenues of approximately $ 35.3 million, compared to $ 34.9 million in 2015,
an increase of about 1.2%. Operating income in 2016 was approximately $ 5.1 million, the same as in 2015.



Learning and integration:Matrix’s
activities in this area consist of operating a network of training centers which provide advances courses for high-tech professionals,
courses for developers and professional training, and soft skills and management training, and providing training and instructions
with respect to computer systems. In 2016, under this line of business, Matrix recorded revenues of approximately $ 41.1 million,
compared to $ 35.9 million in 2015, an increase of about 14.3%. Operating income in 2016 was approximately $ 3.7 million, compared
to $ 2.7 million in 2015, an increase of about 38.1%.



Matrix provides solutions, services and
products primarily to the following market sectors (or verticals): banking and finance, high-tech and startups, industry and retail,
government and the public sector, defense, healthcare, and education and academia.



Matrix offers to each
market sector a broad range of solutions and services, customized for the specific needs of that sector. Matrix operates dedicated
departments, each of which specializes in a particular sector. Each such department supplies customers in that sector with a products
and services offering providing a response to most of its IT requirements, based on an in-depth business understanding of the challenges
which are typical to that sector. Matrix established a separate division for each particular market sector, which manages the operations
relating to that sector.



Specialization in the various sectors is
reflected in the applications, professional and marketing aspects of each sector. Accordingly, the professional and marketing infrastructure
required to support each market sector is developed to address such sector’s specific needs.



In addition to the five sector-based areas
of operations, Matrix operates three horizontal divisions providing specialist services for all of the different sectors of operations
as follows:



| | · | Expertise centers – Matrix operates about 20 “expertise centers” (“Centers
of Excellence”), in areas such as: Cloud Computing, Internet of Things (IOT), Digital, User Experience, Mobility (Mobile
Technology), Analytical BI and Big Data, DevOps, Service Oriented Architecture (SOA), Customer Relations Management (CRM), Enterprise
Resource Planning (ERP), eXtended Relationship Management (XRM), Open Source and Security & Cyber. These expertise centers
are based on business vertical concept, which is targeted to yield significant added value to the company’s customers, including:
group of professionals that are focused and have expertise in the related technologies, hands-on experience and expertise in the
related technologies, methodologies, and best practices; and strategic management consulting center that provides customers with
diverse consultation services on topics such as organization, strategy, complex project management in areas such as environmental
planning, transportation and chain of supply, business development and technological development.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



38







| | · | Matrix Global - Quality assurance and related professional
services under an offshore/”nearshore” model.
| | - | --------------------------------------------------------------------------------------------------------



In
the context of its offshore/”nearshore”
activities, Matrix conducts IT-related activities, including content development, quality assurance, maintenance, customer call
center services indexing and related activities that are performed in a specific region or country where such activities can be
conducted most inexpensively. Matrix offers its enterprise customers these types of solutions, whether via its “nearshore”
Talpiot project, via its offshore solutions that are based on its development centers in Bulgaria and Macedonia or via back-office
and call center services through Babcom Centers Ltd. (a company located in the Galilee, housing thousands of educated and skillful
men and women interested in developing a career near their homes). Periods of economic cautiousness (such as the present time)
provide an added incentive for these types of inexpensive economic solutions. This trend is likely to expand Matrix’s operations
in these areas in the context of its “Matrix Global” activities.



Matrix’s customers include large
and medium size enterprises in Israel, including commercial banks, loan and mortgage banks, telecommunications services providers,
cellular operators, credit card companies, leasing companies, insurance companies, security agencies, hi-tech companies and startups,
the Israeli Defense Forces and government ministries and public agencies and media and publishing entities. Approximately 60% of
Matrix customers in the software solutions and services business segment in Israel are in business relations with it for more than
ten years and 25% of them are between five to ten years.



Sapiens



Sapiens International Corporation N.V. is a leading global provider of software solutions for the insurance
industry, with a growing presence in the financial services sector. Sapiens’ extensive expertise in the insurance industry
is reflected in its innovative software suites, solutions and services for providers of Property & Casualty/General Insurance,
or P&C, and Life, Annuities & Pensions, or L&P, insurance. Sapiens’ offerings enable its customers to effectively
manage their core business functions, including policy administration, claims management and billing. Sapiens also supplies core
record-keeping software solutions for providers of retirement services and a complete offering for reinsurance providers. Additionally,
Sapiens offers a decision management platform that enables its customers to quickly deploy business logic and comply with policies
and regulations across their organizations and its digital
suite facilitates an end-to-end, holistic and seamless digital experience for agents, customers and assorted insurance personnel.
Sapiens’ solutions, which possess modern, modular architecture and are digital-ready, empower customers to respond to evolving
market needs and regulatory changes, while improving the efficiency of their core operations. These enhancements increase revenues
and reduce costs.



Sapiens operates in the traditional core
insurance and financial services markets. Its history of working closely with insurance and financial services providers results
in a deep understanding of these markets and their needs. Its target market includes both insurance carriers using legacy systems
and those using new technologies and financial services providers. We believe that Sapiens current total addressable market for
core insurance software solutions is approximately $30 billion, which we expect to grow as a result of insurance carriers’
and financial institutions’ need to spend on modern software solutions from external providers to address the operational
challenges presented by the inefficiency of their legacy core systems. Legacy systems possess technical and functional limitations
that adversely impact carriers’ ability to swiftly launch new, innovative products that satisfy their customers’ changing
needs and preferences. By slowing down carriers’ business and geographic expansion, legacy systems create operational inefficiencies
that are translated into increased business risk and financial costs.



Sapiens customers are operating in a dynamic and changing regulatory
environment. Often their legacy systems simply do not support new regulatory requirements and put carriers at risk of non-compliance.
We believe these challenges will accelerate the shift from spending on legacy systems to new vendor software solutions, and the
shift from reliance on in-house development to external vendors.



Sapiens offering is comprised primarily
of (1) software solutions for the insurance industry with a growing presence in the financial services sector and (2) global services
including project delivery and implementation of its solutions.





39







Sapiens offers its
insurance customers a range of packaged software solutions that are:



| | · | Comprehensive and function-rich, supporting generic insurance
standards, regulations and processes by providing field-proven functionality and best practices.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Customizableto easily match Sapiens’ customers’
specific business requirements. Sapiens’ flexible architecture and configurable structure allows quick functionality augmentation
that permits its platform to be used across different markets, unique business requirements and regulatory regimes, utilizing its
knowledge and extensive insurance best practices.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Service-oriented architecture (“SOA”)-basedto
provide easy integration to any external application under any technology, allowing streamlined connectivity to all satellite applications
and enhancing the digital experience and omni-channel distribution (while maintaining total platform independence and system reliability).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Digital, revealing their history and anticipating their future needs, while facilitating easy communication across preferred
interaction channels and devices.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Component-based and scalable,allowing customers to deploy
the solutions in a phased and modular approach, reducing risk and destruction to the business, while supporting the growth plans
and cost efficiency of the organization.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sapiens’
packaged software solutions enable:



| | · | Rapid deployment of new insurance products,via configurable
software, which creates a competitive advantage in all of the insurance markets served by Sapiens.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Improvement of operational efficiency and reduction of risk,by
providing full insurance process automation, with configurable workflows, audit and control, streamlined insurance practices and
simple integration and maintenance.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Reduction of overhead for IT maintenancethrough easy-to-integrate
solutions with flexible and modern architecture, resulting in lower costs for ongoing maintenance, modifications, additions and
integration.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Enhanced
                                         omni-channel distribution and focus on the customers,through event-driven architecture,
                                         proactive client management approach, rapid access to all levels of data and a holistic
                                         view of clients and distributors.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Various
                                         deployment models –from an on-premise deployment approach to cloud and hosted
                                         solutions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Support
                                         of digitalization –digitalization holds massive potential for insurers and
                                         financial services institutions, if they manage to efficiently digitalize their operations,
                                         support omni-channel distribution and ensure that agents and customers are able to access
                                         real-time, accurate data at any time and from anywhere – including tablets and
                                         mobile devices.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Many large organizations, particularly
in the financial services market, must comply with complex regulations. They operate in highly competitive markets that require
quick responses. Business logic drives most of the financial services transactions and is the backbone of an organization’s
policies and strategies, and its ability to successfully operate. To operate efficiently, business owners must assume ownership
of the business logic and possess the ability to define and modify it; standardize it; and reuse it across the organization. Today,
business logic is defined by business owners and compliance officers, but IT departments translate the requirements into code.
This process raises several key challenges: the result does not always accurately reflect the business requirements; the new requirements
might conflict with, or override, previous requirements; and the entire process is not fully audited. These gaps often create
an inefficient and risk-exposed organization. Sapiens DECISION, allows business professionals to design, simulate, implement,
change and analyze the business logic that drives financial operations and compliance in a business-friendly format and environment.
Sapiens’ platform facilitates the swift deployment of new or changed business logic that originates from regulatory updates
or market changes, reduces costs and improves efficiency by shortening the software development lifecycle. This platform empowers
the organization’s business users as they manage their business strategy, rules and logic by using business terms rather
than programming language



40







Sapiens Solution Offerings



Sapiens solutions are based on advanced,
modern architectures that are specifically designed to satisfy its customers’ needs. These solutions are integrated, modular
and component-based, and include scalable product suites supporting various lines of business. By using Sapiens’ solutions,
carriers can support new sales channels, including mobile and social, reduce time to market for new product launches, and lower
total cost of ownership. Additionally, Sapiens significantly invest in research and development to ensure that its software solutions
employ new technology, are compatible with the needs of its clients and are easy to use. As a result, its products maintain a leadership
position, as recognized by top industry analysts, such as Celent and Ovum, for their levels of both technology and functionality



Sapiens Life, Pension and Annuity Solutions



Sapiens ALIS for Life, Pension and Annuities:Sapiens ALIS is a comprehensive software solution for individual, group and worksite insurance products. It provides comprehensive
support for the complete policy lifecycle of all life insurance products from quotation and illustrations, through underwriting,
insurance billing and servicing up to the claims management and exit processing.



Sapiens ALIS is a modular system and its functional components
include all the components necessary for insurers to manage their business. Sapiens ALIS allows insurance carriers to manage their
entire core business on a single platform and to integrate Sapiens ALIS with other systems for the completion of a specific activity
or domain. In addition, Sapiens ALIS provides a set of digital capabilities to its customers, including an advanced analytics solution,
a consumer and agent portal, personalized video capabilities and a customer engagement platform These capabilities increase customer
touch-points and generate actionable insights. Sapiens has partnered with Microsoft Azure to offer its Sapiens ALIS policy administration
system and accompanying services over private and public clouds.



Sapiens Retirement Services:Byleveraging assets it has built from its Sapiens ALIS offering, Sapiens has also developed Sapiens Retirement: a modern, end-to-end
packaged software solution that manages record-keeping for defined contribution record-keeping providers. Sapiens Retirement Services
Platform is a next-generation, defined contribution platform that enables record-keepers to secure and retain profitable plans
by offering the efficiency, flexibility and end-to-end governance required for success in today’s market. Designed by leading
industry experts, Sapiens Retirement Services supports a wide range of plan types – 401(k), 403(b) and 457 – from micro
to mega plans, and the associated plan variations, including ERISA, Non-ERISA, Safe Harbor, Taft Hartley and others.



Sapiens Closed Books: Sapiens Closed Books is a solution
for life and pension insurance companies that enables them to efficiently and more effectively administer policies and claims relating
to closed books of business (products that are no longer open to new business, but must still be administered). An industry leading
and proven system, Sapiens Closed Books was designed to deliver solutions to legacy portfolio challenges, while significantly cutting
the costs that are commonly associated with legacy platforms. Sapiens Closed Books provides a full, end-to-end legacy portfolio-focused
system that is capable of dealing with missing data, old legislation and a wide range of product types. The Sapiens Closed Books
model ensures that benefits are realized in a controlled and low risk manner, via best practices and proven industry experience.



Sapiens INSIGHT:Sapiens INSIGHT is offered uniquely
in the Israeli market, enabling life and pension carriers in Israel to handle a wide range of activities and regulations that are
unique to the Israeli market.



Sapiens Property and Casualty/General Insurance Solutions



Sapiens IDIT:Sapiens IDIT is a component-based software
solution, addressing the specific needs of general insurance carriers for traditional insurance, direct insurance, bancassurance
and brokers markets, primarily in EMEA and Asia-Pacific.



41







Sapiens IDIT integrates multiple front
office and back office processes, including insurance product design, the quote and buy process, policy administration, underwriting,
call center and remote users and partners, backed by fully secured internet-based capabilities. By providing a full set of components,
Sapiens IDIT supports insurance carriers’ core operations lifecycle – from inception, to renewal and claims. The solution
includes modular software components that can be customized to match specific insurance business requirements, while providing
pre-configured functionality. On top of the functional modules, Sapiens IDIT provides a set of digital solutions and services to
its customers, including an advanced analytics solution, a consumer and agent portal, personalized video capabilities and cloud
offerings and services. These capabilities accelerate and automate responses, and reduce costs.



Sapiens Stingray.
Sapiens Stingray is a modular browser-based, property and casualty policy administration solution for Policy (quoting, rating
and issuance), Billing, Claims and Reinsurance administration. Sapiens Stingray includes complete customer and agent portals as
well as an imaging system. Additionally, Stingray has statistical bureau reporting, DMV, Credit Card, General Ledger, Comparative
Raters, CLUE, Business Intelligence, reporting and many other third party insurance related interfaces.



Sapiens Reinsurance. Sapiens Reinsurance
is a comprehensive business and accounting solution designed to support the entire range of reinsurance contracts and activities,
both ceded and assumed, for all lines of business. This software product provides both insurers and reinsurers superior handling
of all reinsurance activities and in-depth accounting functionality on a single platform. By incorporating fully automated functions
adapted conveniently for its customers’ business procedures, Sapiens Reinsurance provides flexible and full financial control
of its customers’ reinsurance processes, including full support for all auditing requirements and statutory compliance.



Sapiens Insight.Insight for P&C
is a software solution used by carriers that works on IBM System z (mainframe) and System i platforms. Insight for P&C has
been customized to meet specific business demands at the insurer level and regulatory needs at the state level.



Sapiens Digital Suite



Sapiens INTELLIGENCE. Sapiens INTELLIGENCE is a modular,
highly innovative business intelligence solution specifically designed for the insurance market. Based on the advanced technology
of SAP’s analytics platform, Sapiens INTELLIGENCE is an important component of the industry-leading Sapiens’ portfolio
and is comprised of two integral elements: SmartStore, which is a centralized data hub for all insurance reporting and analytics,
and InfoMaster, which is a set of analytical applications, offering a wide range of data visualization and analysis capabilities
through reporting, dashboards and data discovery.



Sapiens PORTAL. The Sapiens PORTAL
is pre-integrated with Sapiens ALIS and Sapiens IDIT. The Sapiens PORTAL was specifically designed to address insurers’ needs,
guided by Sapiens’ three decades of industry experience. Two key segments are addressed by the Sapiens PORTAL. The PORTAL
for Consumers is a direct-to-consumer application that enables customers to buy policies, view the status of their policies and
accounts, issue claims and conduct many other transactions that save insurers time and reduce costs. The PORTAL for Agents empowers
the agent with full lifecycle enablement, including the ability to manage their pipeline, sell policies to their consumers and
provide top-level customer service in real time.



Sapiens Business Decision Management Solutions



Sapiens DECISION is a business decision
management solution that consistently enforces business logic across all enterprise applications. Organizations use it to track,
verify and ensure that every decision is based on the most up-to-date rules and policies. The solution is powered by The Decision
Model®, a widely adopted decision management methodology, for which Sapiens owns a number of patents. Organizations are undergoing
a paradigm shift in the way they approach change, by replacing conventional policy and process management with a growing discipline
called decision management. Decision management bridges the gap between business and IT, by enabling business users to rapidly
frame requirements in formal business models that can be easily understood by all stakeholders. This ensures that the business
logic is complete, internally consistent and accurate, and does not replicate existing logic.



42







Sapiens DECISION allows the reusability
and governance of business logic across all business divisions and software applications, using any rules engine or business process
management system, and integrating seamlessly with the BRM or BPM system that the organization has in place.



Sapiens is currently focusing on the development
and marketing of Sapiens DECISION in the financial services market in North America and Western Europe, and is in the process of
building best practices to be used mostly by mortgage banking, retail banking and investment banking. Sapiens also intends to develop
and market Sapiens DECISION for the insurance industry and leverage its industry knowledge and close relationships with its existing
customers and partners.



Technology Based Solutions



Sapiens eMerge:
Sapiens eMerge is a rules-based, model-driven architecture that enables the creation of tailor-made, mission-critical core enterprise
applications with little or no coding. Sapiens’ technology is intended to allow customers to meet complex and unique requirements
using a robust development platform.



Sapiens' Global Services



Sapiens’ services modernize and automate
processes for insurance providers and financial institutions around the globe, helping to create greater organizational efficiencies,
reduce costs and provide a better end user experience. Built on a solid foundation of insurance domain expertise, proven technology
and a heritage of successful deployments, Sapiens assists clients in identifying and eliminating IT barriers to achieve business
objectives. Benefits include:



| | · | Project Delivery Experience. More than 30 years
of field-proven project delivery of core system solutions, based on best practices and accumulated experience.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Customer Integration: Sapiens helps its customers
deploy modern solutions, while expertly integrating these solutions with their legacy environments that must be supported.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Global Presence: Insurance and technology domain
experts are available worldwide to provide professional services.
| | - | ------------------------------------------------------------------------------------------------------------------



Sapiens’ service teams possess strong
technology skills and industry expertise. The level of service and business understanding they provide contributes to the long
term success of its customers. This helps Sapiens develop strategic relationships with its customers, enhances information exchange
and deepens its understanding of the needs of companies within the industry.



Through its service teams, Sapiens provides
a wide scope of services and consultancy around its core solutions, both in the stage of the initial project implementation stage,
as well as ongoing additional services. Many of its customers also use its services and expertise on an ongoing basis to assist
them with various aspects of daily maintenance, ongoing system administration and the addition of new solution enhancements.



In addition to its market-leading products
across P&C and L&P, Sapiens possess consulting and implementation capabilities, which they use to customize their products
and design the solution that best meets their customers’ requirements. We believe that Sapiens customers do business with
them not only because of their leading products, but also due to their complementary service offerings, which enhance their products
and enable clients to maximize the value derived from their solutions. We believe that this approach lowers the risks for their
clients, as they transition to a new system, and at the same time provides them with the functionality they desire.



Most of Sapiens’ clients elect to
enter into an ongoing maintenance and support contract with Sapiens. The terms of such a contract are usually twelve months and
are renewed every year. A maintenance contract entitles the customer to technology upgrades (when made generally available) and
technical support. Sapiens also offers introductory and advanced classes and training programs available at its offices and customer
sites.



Sapiens also partners with several system
integration consulting firms to achieve scalable, cost-effective implementations for our customers. Sapiens has developed an efficient,
repeatable methodology that is closely aligned with the unique capabilities of its solutions.



43







Sales and Marketing



Sapiens currently serve more than 200 customers globally, including some of the world’s largest
global insurance carriers and financial institutions. Sapiens customer base is diversified across insurance providers, including
life, pensions and annuities; property and casualty insurers; and retirement services providers. Sapiens has been able to successfully
maintain these customers due to their broad product portfolio geared toward addressing the needs of these industries. In addition,
their business decision management platform is applicable across the financial services industry, including a wide range of financial
institutions, and offers an opportunity for further diversification in other markets.



Sapiens main sales channel is direct sales,
with a small portion of partner sales. Sapiens sales team is dispersed across its regional offices in North America, the United
Kingdom, Belgium, France, Israel, Australia, India, Poland and Japan. The direct sales force is geared to large organizations within
the insurance and financial services industry.



In 2016, Sapiens
continued to significantly invest in Sapiens target regions – North America, UK and Europe – and its sales, presales,
domain experts and marketing personnel.



As part of Sapiens sales process, Sapiens
typically sells a package that includes license, implementation, customization and integration services, and training services.
All of Sapiens clients for whom it has deployed its solutions elect to enter into an ongoing maintenance and support contract with
us. Sapiens aims to expand its distribution model to include more channel partners and system integrators, but intends to maintain
the direct sales model as its prime distribution channel.



Sapiens works together
with standards providers – such as ACORD, MISMO and SPARK – to further enrich Sapiens’ offerings and provide
its customers with comprehensive and innovative solutions that address the entire breadth of their business needs.



Geographically, Sapiens derived 34.4%,
21.7%, 16.4%, 13.5% and 14.0% of their revenue from North America, the United Kingdom, the rest of Europe, Israel and the Asia-Pacific
region, respectively, in the year ended December 31, 2016, and 33.0%, 22.9%, 17.7%, 15.3% and 11.0%, respectively, in the year
ended December 31, 2015.



Magic Software



Magic Software Enterprises Ltd. is a global
provider of (i) proprietary application development and business process integration platforms; (ii) selected packaged vertical
software solutions, as well as (iii) a vendor of software services and IT outsourcing services. Magic Software’s software
technology is used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications quickly
and cost effectively. In addition, Magic Software’s technology enables enterprises to accelerate the process of delivering
business solutions that meet current and future needs and allow customers to dramatically improve their business performance and
return on investment. With respect to software services and IT outsourcing services, Magic Software offers a complete portfolio
of professional services in the areas of infrastructure design and delivery, application development, technology consulting, planning
and implementation services, support services and supplemental outsourcing services. In addition, Magic Software offers a variety
of proprietary comprehensive packaged software solutions through certain of its subsidiaries for (i) revenue management and monetization
solutions in mobile, wireline, broadband and mobile virtual network operator/enabler, or MVNO/E, (ii) enterprise management system
for both hubs and traditional air cargo ground handling operations from physical handling and cargo documentation through customs,
seamless electronic data exchange, or EDI communications, dangerous goods, special handling, track and trace, security to billing;
(iii) enterprise human capital management, or HCM, solutions, to facilitate the collection, analysis and interpretation of quality
data about people, their jobs and their performance, to enhance HCM decision making, (iv) comprehensive systems for managing broadcast
channels in the area of TV broadcast management through cloud-based on demand service or on premise solutions and (vi) enterprise-wide
and fully integrated medical platform (“Clicks”), specializing in the design and management of patient-file oriented
software solutions for managed care and large-scale health care providers. This platform allows providers to securely access an
individual’s electronic health record at the point of care, and it organizes and proactively delivers information with potentially
real time feedback to meet the specific needs of physicians, nurses, laboratory technicians, pharmacists, front- and back-office
professionals and consumers.



44







Based on Magic Software’s technological capabilities, its software solutions enable customers to
respond to the rapidly-evolving market needs and regulatory changes, while improving the efficiency of their core operations. Magic
Software has approximately 1,700 employees and operates through a network of over 3,000 independent software vendors, who we refer
to as Magic Software Providers, or MSPs, and hundreds of system integrators, distributors, resellers, and consulting and OEM partners.
Thousands of enterprises in approximately 50 countries use Magic Software’s products and services.



Magic
Software’s software technology platforms consist of:



| | · | Magic xpa, an application platform for developing
and deploying business applications,
| | - | --------------------------------------------------------------------------------------

| | · | AppBuilder Application Platform, an application platform
for building, deploying, and maintaining high-end, mainframe-grade business applications and;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Magic xpi, a platform for application integration.
| | - | --------------------------------------------------



These software solutions enable Magic Software’s
customers to improve their business performance and return on investment by supporting the cost-effective and rapid delivery and
integration of business applications, systems and databases. Using its products, enterprises and MSPs can achieve fast time-to-market
by rapidly building integrated solutions and deploying them in multiple environments while leveraging existing IT resources. In
addition, Magic Software’s software solutions are scalable and platform-agnostic, enabling its customers to build software
applications by specifying their business logic requirements in a high-level language rather than in computer code, and to benefit
from seamless platform upgrades and cross-platform functionality without the need to re-write their applications. Magic Software’s
platforms also support the development of mobile applications that can be deployed on a variety of smartphones and tablets, and
in a cloud environment. In addition, Magic Software continuously evolves its platforms to include the latest technologies to meet
the demands of its customers and the markets in which they operate.



Magic Software’s software solutions
enable enterprises to accelerate the planning, development, deployment and integration of on-premise, mobile and cloud business
applications that can be rapidly customized to meet current and future needs. Magic Software’s software solutions and complementary
professional services empower customers to dramatically improve their business performance and return on investment by enabling
the cost-effective and rapid delivery, integration and mobilization of business applications, systems and databases. Magic Software’s
technology and solutions are especially in demand when time-to-market considerations are critical, budgets are tight, and integration
is required with multiple platforms or applications, databases or existing systems and business processes, as well as for the RIA
and SaaS applications. Magic Software’s technology also provides the option to deploy its software capabilities in the cloud,
hosted in a web services cloud computing environment. We believe these capabilities provide organizations with a faster deployment
path and lower total cost of ownership.



Development communities are facing high
complexity, cost and extended pay-back periods in order to deliver cloud, RIAs, mobile and SaaS applications. Magic xpa, AppBuilder
and Magic xpi provide MSPs with the ability to rapidly build integrated applications in a more productive manner, deploy them in
multiple modes and architectures as needed, lower IT maintenance costs and speed time-to-market. Magic Software’s technology
based solutions are comprehensive and industry proven. These technologies can be applied to the entire software development market,
from the implementation of micro-vertical solutions, through tactical application renovation and process automation solutions,
to enterprise spanning SOA migrations and composite applications initiatives. Unlike most competing platforms, we offer a coherent
and unified toolset based on the same proven metadata driven and rules-based declarative technology. Metadata platforms consist
of pre-compiled and pre-written technical and administrative functions, which are essentially ready-made business application coding
that enables developers to bypass the intensive technical code-writing stage of application development and integration, concentrate
on building the correct logic for their apps and move quickly and efficiently to deployment. Through the use of metadata-driven
platforms such as Magic xpa, AppBuilder and Magic xpi, software vendors and enterprise customers can experience unprecedented cost
savings through fast and easy implementation and reduced project risk.



45







Magic Software’s software technology
solutions include application platforms for developing and deploying specialized and high-end large-scale business applications
and an integration platform that allows the integration and interoperability of diverse solutions, applications and systems in
a quick and efficient manner. These solutions enable Magic Software’s customers to improve their business performance and
return on investment by supporting the affordable and rapid delivery and integration of business applications, systems and databases.
Using Magic Software’s software solutions, enterprises and independent software vendors, or ISVs, can accelerate time-to-market
by rapidly building integrated solutions, deploying them in multiple environments while leveraging existing IT resources. In addition,
Magic Software’s solutions are scalable and platform-agnostic, enabling customers to build solutions by specifying their
business logic requirements in a commonly used language rather than in computer code, and to benefit from seamless platform upgrades
and cross-platform functionality without the need to re-write applications. Magic Software’s technology also enables future-proof
protection and supports current market trends such as the development of mobile applications that can be deployed on a variety
of smartphones and tablets, and cloud environments.



In addition, Magic Software also offers
a variety of vertical-targeted products that are focused on the needs and requirements of specific growing markets. Certain of
these products were developed utilizing our application development platform.



Magic Software’s vertical software
solutions include:



| | · | Clicks,
a proprietary comprehensive core software solution for medical record information management systems, used in the design and management
of patient-files for managed care and large-scale healthcare providers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | LeapTM,
a proprietary comprehensive core software solution for Business Support Systems, or BSS, including convergent charging, billing,
customer management, policy control and payment software solutions for the telecommunications, content, and other industries;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Hermes Solution, a proprietary, state-of-the-art,
packaged software solution for managing air cargo ground handling, delivered on a licensed or fully hosted basis ;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | HR Pulse, a customizable single-tenant SaaS
tool that helps organizations to monitor employee performance, progress and potential through a menu of templates that can create
new HCM solutions, complement existing processes, and/or integrate with legacy HR systems already in use by organizations, and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | MBS Solution, a proprietary comprehensive core
system for managing TV broadcast channels.
| | - | -----------------------------------------------------------------------------------------



In addition, Magic Software provides a
broad range of advanced IT software professional services and IT outsourcing services in the areas of infrastructure design and
delivery, end-to-end application development, technology planning and implementation services, as well as supplemental outsourcing
and outsourcing services to a wide variety of companies, including Fortune 1000 companies. The technical personnel Magic Software
provides generally supplement in-house capabilities of its customers. Magic Software has extensive and proven experience with virtually
all types of telecom infrastructure technologies in wireless and wire-line as well as in the areas of infrastructure design and
delivery, application development, project management, technology planning and implementation services.



Magic Software Platforms



Magic xpa Application
Platform, Magic Software’s metadata driven application platform, provides a simple, code-free and cost-effective
development and deployment environment that lets organizations and MSPs quickly create user-friendly, enterprise-grade, multi-channel
mobile and desktop business apps that employ the latest advanced functionalities and technologies. The Magic xpa Application Platform,
formerly named uniPaaS, was first released in 2008 and is an evolution of the original eDeveloper product a graphical, rules-based
and event-driven framework that offered a pre-compiled engine for database business tasks and a wide variety of generic runtime
services and functions which was released in 2001.



46







Magic Software has continually
enhanced its Magic xpa application platform to respond to major market trends such as the growing demand for cloud based offerings
including Rich Internet Applications (RIA), mobile applications and SaaS. Accordingly, Magic Software has added new functionalities
and extensions to its application platform, with the objective of enabling the development of RIA, SaaS, mobile and cloud enabled
applications. SaaS is a business and technical model for delivering software applications, similar to a phone or cable TV model,
in which the software applications are installed and hosted in dedicated data centers and users subscribe to these centers and
use the applications over an internet connection. This model requires the ability to deliver RIA. Magic xpa is a comprehensive
RIA platform. It uses a single development paradigm that handles all ends of the application development and deployment process
including client and server partitioning and the inter-communicating layers.



Magic xpa offers customers the
power to choose how they deploy their applications, whether full client or web; on-premise or on-demand; in the cloud or behind
the corporate firewall; software or mobile or SaaS; global or local. The Magic xpa Application Platform complies with event driven
and service oriented architectural principles. By offering technology transparency, this product allows customers to focus on their
business requirements rather than technological means. The Magic xpa single development paradigm significantly reduces the time
and costs associated with the development and deployment of cloud-based applications, including RIAs, mobile and SaaS. In addition,
application owners can leverage their initial investment when moving from full client mode to cloud mode, and modify these choices
as the situation requires. Enterprises can use cloud based Magic xpa applications in a SaaS model and still maintain their databases
in the privacy of their own data centers. It also supports most hardware and operating system environments such as Windows, Unix,
Linux and AS/400, as well as multiple databases and is interoperable with .NET and Java technologies.



Magic xpa can be applied to
the full range of software development, from the implementation of micro-vertical solutions, through tactical application modernization
and process automation solutions, to enterprise spanning SOA migrations and composite applications initiatives. Unlike most competing
platforms, Magic Software offers a coherent and unified toolset based on the same proven metadata driven and rules based declarative
technology, resulting in increased cost savings through fast and easy implementation and reduced project risk.



In March 2016, we released Magic
xpa version 3.1 of our Magic xpa Application Platform, incorporating feedback from the field to bring our customers additional
value in terms of simplifying app modernization, accelerating enterprise mobile app development and maximizing end user adoption.
This release included end user customization capabilities, an enhanced UI, and a new Upgrade Manager.



In November 2016, we released
Magic xpa version 3.2. The Magic xpa 3.2 release included new Windows 10 mobile client and iOS 10 support for expanded mobile options;
UX and productivity improvements; a Web Services Gateway providing support for n-tiered application architecture; a new Compare
and Merge Tool; improvements to the Upgrade Manager utility and additional backward compatibility features.



During 2016, Magic xpa was listed
in three of Gartner’s Market Guide Reports for: Rapid Mobile App Development Tools; Application Platforms and High Productivity
Development Tools. In addition, Magic xpa was listed in Forrester’s Vendor Landscape, “The Fractured Fertile Terrain
of Low Code Application Platforms.



AppBuilder Application
Platform is a development environment used for managing, maintaining and reusing complicated applications needed by large
businesses. It provides the infrastructure for enterprises worldwide, across several industries, with applications running millions
of transactions daily on legacy systems. Enterprises using AppBuilder can build, deploy and maintain large-scale custom-built business
applications for years without being dependent on any particular technology. The AppBuilder deployment environments include IBM
mainframe, Unix, Linux and Windows. AppBuilder is intended to increase productivity and agility in the creation and deployment
of enterprise class computing.



AppBuilder follows the 4GL development
paradigm to help enterprises focus on the business needs and definition and overlook technical hurdles. AppBuilder developers define
the business roles and prior to deployment the code is generated from the development environment to the required run time environment.
Several large MSPs have utilized AppBuilder to build state of the art applications that are deployed through many large customers.



47







AppBuilder implements a model
driven architecture approach to application development. It provides the ability to design an application at the business modeling
level and generate forward to an application. AppBuilder has a platform-independent, business-rules language that enables generation
to multiple platforms. It is possible to generate the client part of an application as Java and the server part as COBOL. As businesses
change, the server part can be generated as Java without changing the application logic. Only a simple configuration option needs
to be changed.



In 2016, AppBuilder launched
the next generation of its group repository tool, the Versioned Group Repository (VGRE). AppBuilder VGRE is aimed at mid-size development
projects, runs on Microsoft Windows Server platform and enables AppBuilder enterprise customers to parallel support for multiple
application releases, called branches, and access to the full history of individual objects. This includes comparisons as well
as version manipulation features like merge. VGRE is an extension to the existing repository portfolio with full backward compatibility
including well known features like impact analysis, security, upload/download, migrations, rebuilds, remote preparation and others.



Magic xpi Integration Platform is a graphical,
wizard-based code-free solution delivering fast and simple integration and orchestration of business processes and applications.
Magic xpi allows businesses to more easily view, access, and leverage their mission-critical information, delivering true enterprise
application integration, or EAI, business process management, or BPM, and SOA infrastructure. Increasing the usability
and life span of existing legacy and other IT systems, Magic xpi allows fast EAI, development and customization of diverse applications,
systems and databases, assuring rapid return on invested capital and time-to-market, increased profitability and customer satisfaction.



Magic xpi allows the integration
and interoperability of diverse solutions, including legacy applications, in a quick and efficient manner. Magic Software has entered
into agreements with additional system integrators, consultancies and service providers, who acquired Magic xpi skills and offer
Magic xpi licenses and related services to their customers. Magic Software also offers special editions of Magic xpi with optimized
and certified connectors for specific enterprise application vendor ecosystems, such as SAP, Oracle JD Edwards, Microsoft SharePoint
and Salesforce.com. These special editions contain specific features and pricing tailored for these market sectors.



In 2015, Magic xpi was awarded the Integrate 2015 award for
Top Innovator for Integration Middleware



In June 2016, Magic Software
released version 4.5 of our Magic xpi Integration Platform, designed to make digital transformation and IoT projects easier. Magic
xpi 4.5 included a fresh Microsoft® Visual Studio®-based UI with enhanced productivity features, expanded out-of-the-box
connectivity including an MQTT adapter, and a Connector Builder that lets users quickly build their own full-featured reusable
connectors. Magic xpi 4.5 had expanded connectivity capabilities and robust in-memory computing architecture to help the execution
of business-critical digital transformation and IOT projects.



In March 2017, Magic Software
released Magic xpi version 4.6 with enhancements including a New ServiceMax connector for quick and easy connectivity with ServiceMax,
a New OData client connector for easy connectivity to ecosystems exposing services via this open standardized protocol, a SAP Business
One connector verified for SAP Business One HANA and support for additional services and new and improved functionalities to our
existing MS Dynamics CRM connector:



Magic Software - vertical-software
solutions



| | · | Clicks.
Magic Software markets ClicksTM through its Roshtov subsidiary, which has three decades of proven experience based on its
proprietary comprehensive core software solution for medical record information management systems, used in the design and management
of patient-file for managed care and large-scale healthcare providers. The platform, which can be tailor-made to the specific
needs of the healthcare providers is connected to the clinical, administrative and financial data base system, residing at the
provider’s central computer, and allows immediate analysis of complex data with potentially real-time feedback to meet the
specific needs of physicians, nurses, laboratory technicians, pharmacists, front- and back-office professionals and consumers.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48







All
of our clients that buy or subscribe to our Clicks software solutions also enter into software support agreements with us for maintenance
and support of their medical record management systems. In addition to immediate software support in the event of problems, these
agreements allow clients to access new releases covered by support agreements. In addition, each client has 12-hour access, six
days a week (6 hours on Friday) to the applicable call-center support teams.



Roshtov’s
employs a team of 30 research and development specialists that together with its clients create a future where the health care
system works to improve the well-being of individuals and communities. Roshtov’s proven ability to innovate has led to what
we believe to be an industry leading architectures and a breadth and depth of solutions and services.



There
are four healthcare service providers in Israel, two of which account for 77% of the Israeli market. Clicks serves two of Israel’s
largest healthcare service providers since the early 1990’s: Maccabi Healthcare Services and Clalit.



| | · | Leap.
Magic Software markets LeapTM through its FTS subsidiary, which has over 20 years of BSS experience, based on dozens of projects
delivered to customers worldwide. Magic Software implementsrevenue management and monetization solutions in mobile,
wireline, broadband, MVNO/E, payments, e-commerce, M2M / Internet of Things, mobile money, cable, cloud and content marketsunder the brand name ofLeapTM.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



FTS
works with telecommunications, content and payment service providers globally to help them manage complex
transactions and relationships with greater flexibility and independence. Analyzing transactions from a business standpoint, FTS
offers end-to-end and add-on telecom billing, charging, policy control and payments solutions to customers worldwide, and services
both growing and major providers.



FTS
targets mid to lower level tier service providers, supporting their BSS needs with end-to-end, turnkey billing and other BSS projects.
In addition, FTS offers upper-tiers of service providers with BSS and monetization solutions for specific needs, including policy
control and charging solutions, M2M billing, billing for content services, MVNE/MVNO billing, mobile money software solutions,
payment and mobile financial services solutions and others.



FTS’s solutions
are delivered via cloud, on-premises or in a fully managed-services mode and are backed by FTS’s Israel and Bulgaria-based
experienced professional services support team.



| | · | HR Pulse.
HR Pulse, which is now in its 10th release,
is a proprietary platform that creates and customizes software applications for HCM, with the goal to combine technology with
effective processes, to facilitate the collection, analysis and interpretation of quality data about people, their jobs and their
performance, to enhance HCM decision making, resulting in increased organizational efficiency and effectiveness. HR Pulse addresses
four distinct functional areas with the ability to also work as one consolidated system:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | Performance and goal management
| | - | -------------------------------

| | § | Development management
| | - | ----------------------

| | § | Talent management and succession planning
| | - | -----------------------------------------

| | § | Compensation and merit review
| | - | -----------------------------



Magic
Software’s offering includes customizable HCM SaaS Solutions that provides a menu of templates that can be used to
affordably and expeditiously create customized HCM solutions for companies.  The HR Pulse platform promotes the building and
implementation of solutions that address broader business challenges as well. Such
offerings include 360 degree feedback, employee surveys, leadership and management development, coaching and job evaluation.



49







| | · | Hermes.Hermes Air Cargo Management System is a proprietary, state-of-the-art, packaged software solution for managing air cargo ground
handling. Hermes software covers all aspects of cargo handling, from physical handling and cargo documentation through customs,
seamless EDI communications, dangerous goods and special handling, tracking and tracing, security and billing. Over the last 10
years Hermes systems have been implemented in over 70 terminals on five continents, providing efficient and accurate handling
of more than 5 million tons of freight annually. Customers benefit through faster processing and more accurate billing, reporting
and ultimately enhanced revenue. Customers include independent ground handlers, airlines with a cargo arm, hubs belonging to an
individual airline or those catering to a number of airlines transiting cargo to additional destinations. The Hermes solution
is delivered on a licensed or fully hosted basis. Hermes recently supplemented its offering with the Hermes Business Intelligence
(HBI) solution, adding unprecedented data analysis capabilities and management-decision support tools.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Product Related Services



Professional Services.
Magic Software offers fee-based consulting services in connection with installation assurance, application audits and performance
enhancement, application migration and application prototyping and design. Consulting services are aimed at generating both additional
revenues and ensuring successful implementation of Magic xpa, Appbuilder, Magic xpi and Enterprise Mobility projects through knowledge
transfer. As part of management efforts to focus on license sales, our goal is to provide such activities as a complementary service
to our customers and partners. We believe that the availability of effective consulting services is an important factor in achieving
widespread market acceptance.



Services are offered
as separately purchased add-on packages or as part of an overall software development and deployment technology framework. Over
the last several years, Magic Software has built upon its established global presence to form business alliances with MSPs who
use Magic Software technology to develop solutions for their customers, and with distributors to deliver successful solutions in
focused market sectors.



Maintenance. Magic Software
offers its customers annual maintenance contracts providing for unspecified upgrades and new versions and enhancements for its
products on a when-and-if-available basis for an annual fee.



Customer Support. Magic
Software offers an online support system for the MSPs, providing them with the ability to instantaneously enter, confirm and track
support requests via the Internet. This system supports MSPs and end-users worldwide. As part of this online support, Magic Software
offers a Support Knowledge Base tool providing the full range of technical notes and other documentation including technical
papers, product information, most answers to most common customer queries and known issues that have already been reported.



Training. Magic Software conducts
formal and organized training on its development tools. Magic Software develops courses, pertaining to its principal products,
Magic xpa and Magic xpi, and provides trainer and student guidebooks. Course materials are available both in traditional, classroom
courses and as web-based training modules, which can be downloaded and studied at a student’s own pace and location. The
courses and course materials are designed to accelerate the learning process, using an intensive technical curriculum in an atmosphere
conducive to productive training.



Magic Software - IT Services



Magic Software’s IT services offerings
consist of a variety of professional services that can be grouped into integration and other IT services. Magic Software’s
integration services include:



| | · | Infrastructure analysis, design and delivery
- management of complex, tailor-made projects and telecom infrastructure projects in wireless and wire-line as well as IT consulting
services, mainly for the defense and public sectors.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Technology consulting and implementation services
-planning and execution of end-to-end, large-scale, complex solutions in networking, cyber security, command & control
and high performance transaction systems.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



50







| | · | Application development – Magic Software
specializes in end-to-end projects that feature an array of technologies, from development and implementation of concepts for
startups to overall responsibility for the development of systems for large enterprises. Magic Software’s development services
include development of on-premise, mobile and cloud applications as well as Embedded and real time software development.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



With more
than 250 experts and more than 500 projects gone live in a variety of advanced technologies in the U.S., Europe and Israel, we
have developed significant expertise and accumulated vast experience in integration projects.
Such projects are typically more complex and require a high level of industry knowledge and
highly skilled professionals. Our integration expertise, as well as our global reach allows us to deliver comprehensive, value
added services to our customers. Our IT services customers include major global telecoms,
OEMs and engineering, furnish and installation service companies.



Strategic Consulting and
Outsourcing Services



Magic Software provides a broad
range of IT consulting services in the areas of infrastructure design and delivery, application development, technology planning
and implementation services, as well as supplemental outsourcing services. Magic Software’s wholly-owned subsidiaries, Fusion
Solutions LLC, Xsell Resources Inc., Allstates Consulting Services LLC, the Comm-IT Group, Infinigy Solutions LLC., Comblack Ltd.
and Shavit Software (2009) Ltd. provide advanced IT consulting and outsourcing services to a wide variety of companies including
Fortune 1000 companies. Magic Software’s technical personnel generally supplement the in-house capabilities of its customers.
Their approach is to make available a broad range of technical personnel to meet the requirements of our customers rather than
focusing on specific specialized areas. Magic Software have extensive knowledge of and have worked with virtually all types of
wireless and wireline telecom infrastructure technologies as well as in the areas of infrastructure design and delivery, application
development, project management, technology planning and implementation services. Magic Software consulting partners come from
a wide range of industries, including finance, insurance, government, health care, logistics, manufacturing, media, retail and
telecommunications. With an experienced team of recruiters in the telecom and IT areas and with a substantial and a growing database
of telecom talent, we can rapidly respond to a wide range of requirements with well qualified candidates. Their customer list includes
major global telecoms, OEMs and engineering, furnish and installation service companies. We have built long-term relationships
with our customers by providing expert telecom talent. We provide individual consultants for contract and contract-to-hire assignments
as well as candidates for full time placement. In addition, we configure teams of technical consultants for assigned projects at
our customers’ sites.



Sales, Marketing and Distribution



Magic Software sells its solutions globally
through its own direct sales representatives and offices and through a broad sales distribution network, including independent
country distributors, independent service vendors that use our technology to develop and sell solutions to their customers, and
system integrators. Magic Software also offers software maintenance, support, training, and consulting services in connection with
its products and vertical software solutions, thus aiding the successful implementation of projects and assuring successful operation
of the platforms once installed. Magic Software sells its integration solutions to customers using specific popular software applications,
such as SAP, Salesforce.com, IBM i (AS/400), Oracle JD Edwards, Microsoft SharePoint, Microsoft Dynamics, SugarCRM or other eco-systems.
As such, Magic Software enjoys a well-diversified client base across geographies and industries including oil & gas companies,
telecommunications groups, financial institutions, industrial companies, public institutions and international agencies.



As of December 31, 2016, Magic software
had approximately 133 sales personnel including a team of sales engineers who provide pre-sale technical support, presentations
and demonstrations in order to support their sales force.



Direct Sales. For Magic xpa and
AppBuilder, Magic Software’s direct sales force pursues software solution providers and enterprise accounts. Magic Software
sales personnel carry out strategic sales with a direct approach to decision makers, managing a constantly monitored consultative
type of sales cycle. Magic xpi is mostly sold through indirect channels and through Magic Software ecosystem business relationships,
but they have some direct customers with integration needs.



51







Indirect Sales. Magic Software maintains
an indirect sales channel, through their ecosystem business relationships, as well as through system integrators, value added distributors
and resellers, OEM partners, as well as consultancies and service providers. Magic Software maintain an indirect sales channel
for Magic xpa through MSPs and system integrators, who use their application and integration platforms to develop and deploy different
applications for sale to their end-user customers.



Distributors. In general, Magic
Software distributes its products through regional non-exclusive distributors in those countries where it does not have a sales
office. A regional distributor is typically a software marketing organization with the capability to add value with consulting,
training and support. Distributors that are also MSPs are generally responsible for the implementation of both their application
platform and business and process integration suite and localization into their native languages. The distributors also translate
Magic Software’s marketing literature and technical documentation. Distributors must undergo our program of sales and technical
training. Marketing, sales, training, consulting, product and customer support are provided by the local distributor. Magic Software
are available for backup support for the distributor and for end-users. In coordination with the local subsidiaries and distributors,
Magic Software also provide sales support for large and multinational accounts. Magic Software has 44 distributors in Europe, Latin
America and Asia, many of whom are also MSPs.



VARs. In general, Magic Software
resell its products through VARs that extend their capabilities with our offerings. These include SAP VARs.



Michpal



Michpal, an Israeli registered company,
is a developer of proprietary, on-premise payroll software solution for processing traditional payroll stubs to Israeli enterprises
and payroll service providers. Michpal also developed several complementary modules such as attendance reporting, which are sold
to its customers for additional fees. As of December 31, 2016, Michpal serves approximately 8,000 customers, most of which are
long-term customers.



As part of its payroll software solution
Michpal allows the preparation of employee paychecks, pay statements, supporting journals, summaries, and management reports and
supports monthly and year-end regulatory and legislative payroll tax statements and other forms such as payroll social and income
taxes, to its clients and their employees. In addition, Michpal enables its clients to connect to certain major enterprise resource
planning (“ERP”) applications with a certified connector



InSync



InSync is a US based national supplier
of employees to Vendor Management Systems (VMS) Workforce Management Program accounts. InSync specializes in providing professionals
in the following areas; Accounting and Finance, Administrative, Customer Service, Clinical, Scientific and Healthcare, Engineering,
Manufacturing and Operations, Human Resources, IT Technology, LI/MFG, and Marketing and Sales. With an experienced team of IT recruiters,
InSync can rapidly respond to a wide range of requirements with well qualified candidates. InSync currently supports more than
30 VMS program customers with employees in over 40 states.



Our Affiliated Company



TSG



TSG
is a global high technology company engaged inhigh-end technical solutions for protecting the safety of national borders,
improving data gathering mechanisms, and enhancing communications channels for military, homeland security and civilian organizations.



52







TSG
operates primarily in the defense and homeland security arenas. The nature of military and homeland security actions in recent
years, including low intensity conflicts and ongoing terrorist activities, as well as budgetary pressures to focus on leaner but
more technically advanced forces, have caused a shift in the defense and homeland security priorities formanyof TSG’s major customers. As a result, TSG believes there is a continued demand in the areas of command, control, communications,
computer and intelligence (C4I) systems, intelligence, surveillance and reconnaissance (ISR) systems, intelligence gathering systems,
border and perimeter security systems, cyber-defense systems. There is also a continuing demand for cost effective logistic support
and training and simulation services. TSG believes that its synergistic approach of finding solutions that combine elements of
its various activities positions it to meet evolving customer requirements in many of these areas.



TSG tailors and adapts its technologies,
integration skills, market knowledge and operationally-proven systems to each customer’s individual requirements in both
existing and new platforms. By upgrading existing platforms with advanced technologies, TSG provides customers with cost-effective
solutions, and its customers are able to improve their technological and operational capabilities within limited budgets.



TSG markets its systems and products either
as a prime contractor or as a subcontractor to various governments and defense and homeland security contractors worldwide. In
Israel, TSG sells its defense, intelligence and homeland security systems and products mainly to the IMOD, which procures all equipment
for the Israeli Defense Force (IDF).



TSG’s offerings include:



Command & Control Solutions



TSG offers sophisticated and
innovative command and control solutions that support military and civilian sectors on land, air and sea. TSG provides a variety
of Command & Control solutions ranging from strategic battlefield management to tactical and special operations forces. TSG
systems cover all echelons of management, from national and regional levels down to the operational and tactical levels. Its systems
are field proven and used by military forces, security services and public safety organizations worldwide.



Intelligence, Surveillance and Knowledge
Management Solutions



TSG Intelligence solutions for security
agencies and defense forces meet the demand for accurate and timely intelligence, based on multiple sources and sensors. TSG unique
technologies cover the entire life-cycle of intelligence from acquisition to fusion, analysis, distribution, target management
and more. TSG’s Knowledge Management solutions provide public sector bodies with the capacity to effectively manage their
organizational data, support decision making and follow-up.



Telecommunication & IT Management
Solutions



TSG has extensive experience in developing and integrating telecommunications
and IT solutions and tools such as Operations Support Systems (OSS), Contact Centers, Back Office Optimization and Value-Added
Services (VAS) that are tailored to meet the requirements of multiple applications. Leveraging deep know-how in telecommunications,
TSG provides wide-ranging offering suitable for public and private sector organizations.



Cyber Security Solutions & Services:



TSG provides cutting-edge security services
and solutions to government and private sectors including secure critical infrastructure and financial institutions in cyber space.
TSG cyber solutions, Cyber Security Center (CSC), Security Training, Security Investigations and Security Engineering support the
establishment of a safe, secure and reliable work environment and cover, among other things, Security Engineering, Digital Forensics,
Computer emergency response teams (CERT), Mobile Security, and Training.



53







Homeland Security Solutions (HLS)



TSG's field proven homeland security solutions maximize safety
and security while minimizing threats. TSG provide its clients with paramount technologies ranging from emergency management and
Chemical, biological, radiological and nuclear defense (CBRN) systems, to rescue & special operations and smart and safe city
solutions.



Supporting Tools:



TSG offers a variety of supporting
system and solutions, providing dynamic and customizable field proven applications for in the following verticals:



| | · | Facility Management
| | - | -------------------



| | · | Recording and Debriefing systems
| | - | --------------------------------



| | · | Trainers and Simulators
| | - | -----------------------



| | · | Mapping Engines
| | - | ---------------



Geographical Distribution of Revenues



The following table summarizes our revenues classified by geographic
regions of our customers, for the periods indicated:



|               |  | Year
endedDecember 31, |        
|-------------- |  | ---------------------- | -------
|               |  | 2015                   |        
|               |  |                        |        
|Israel         |  | $                      | 570,614
|International: |  |                        |        
|United States  |  |                        | 252,526
|Europe         |  |                        | 112,169
|Japan          |  |                        | 30,009 
|Other          |  |                        | 7,876  
|               |  |                        |        
|Total          |  | $                      | 973,194



Competition



The markets for the IT products and services
we offer are rapidly evolving, highly competitive and fragmented, and, in some cases, present only low barriers to entry, with
frequent new product introductions, and mergers and acquisitions. Our ability to compete successfully in IT services markets depends
on a number of factors, like breadth of service offerings, sales and marketing efforts, service, pricing, and quality and reliability
of services. The principal competitive factors affecting the market for the proprietary software solutions include product performance
and reliability, product functionality, availability of experienced personnel, price, ability to respond in a timely manner to
changing customer needs, ease of use, training and quality of support.



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



| | · | longer operating histories;
| | - | ---------------------------



| | · | greater financial, technical, marketing and other
resources;
| | - | ------------------------------------------------------------



| | · | greater name recognition;
| | - | -------------------------



| | · | well-established relationships with our current and
potential clients; and
| | - | --------------------------------------------------------------------------



| | · | a broader range of products and services.
| | - | -----------------------------------------



54







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



Matrix’s
principal competitors in the domestic Israeli market are Israeli IT services companies and systems integrators, the largest of
which are Hilan Ltd., Malam-Team, One-1, Taldor Computer Systems, ( Aman, the Elad Group,
Yael, SQLink, Emet, LogOn, HMS and OfficeSoft. Matrix’s competitors in the United States market include many companies who
provide similar services to those of Matrix, as well as providers of offshore services. In
some cases, Matrix competes with IBM, Accenture and the Big-4 accounting firms. Matrix’s international competitors in the
Israeli marketplace include Microsoft, IBM, HP, Oracle and CA. These international competitors often use local subcontractors to
provide personnel for contracts performed in Israel. Most of these international entities are also business partners of Matrix.
Competitors with respect to infrastructure solutions include HP, Lenovo and Dell. With respect to cloud services, competitors include
All Cloud, DoIT, Google, Microsoft and Amazon Web Services. Matrix competitors with respect to training are the training centers
of the Technion, IITC, HackerU, Ness Technologies and Sela.



Sapiens’ competitors in the market
for insurance solutions differ based on the size, geography and line of business in which it operates. Some of its competitors
offer a full suite of services, while others only offer one module; some operate in specific (domestic) geographies, while others
operate on a global basis. In addition, delivery models vary, with some competitors keeping delivery in-house, or using IT outsourcing
(ITO) or business process outsourcing (BPO).



Examples of Sapiens’ primary competitors
are:



| | · | Global software providers with their own IP;
| | - | --------------------------------------------

| | · | Local/domestic software vendors with their own IP,
operating in a designated geographic market and/or within a designated segment of the insurance industry;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | BPO providers who offer end-to-end outsourcing of
insurance carriers business, including core software administration (although BPO providers want to buy comprehensive software
platforms to serve as part of the BPO proposition from vendors and may seek to purchase Sapiens’ solutions for this purpose);
and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Internal IT departments, who often prefer to develop
solutions in-house.
| | - | ------------------------------------------------------------------------



With respect to Sapiens DECISION, we believe that Sapiens is considered a pioneer in this disruptive market
landscape. Since the introduction of Sapiens innovative approach to enterprise architecture to the market, Sapiens has identified
only a small number of potential competitors.



With respect to Magic xpa, Magic Software
competes in the application platform, SOA architecture and enterprise mobility markets. Among its current competitors are Kony,
IBM, Microsoft, Adobe, Oracle, SAP Sybase, OutSystems, Uniface, Progress Software, Mendix, Salesforce and Pegasystems. With respect
to Magic xpi, Magic Software competes in the integration platform market. Among its current competitors are IBM, Informatica, TIBCO,
MuleSoft, Jitterbit, Talend and Software AG.



There are several similar products in
the market utilizing the model driven architecture, or MDA, approach utilized by Magic Software’s AppBuilder. The market
for this type of platform is highly competitive. Companies such as CA and IBM have tools that compete directly with AppBuilder.
Furthermore, new development paradigms have become very popular in IT software development and developers today have many alternatives.



55







The telecom BSS domain in which Magic
Software operates through its wholly owned FTS subsidiary is a highly competitive market in which FTS competes based on product
quality, service quality, timeliness in delivery and pricing. Within the global billing, charging and policy control market, FTS
principally competes against global IT providers and the in-house IT departments of telecommunications operators. Among the competitors
focused on this market are Amdocs, Ericsson, Comverse, NetCracker Technology, CSG Systems, Redknee Solutions and Oracle Communications.



There are also a number of smaller or
regional telecom BSS competitors who compete on a regional or domestic market level. These tend to be smaller players, and may
include companies such as Comarch, Mind CTI, Tecnotree, Cerillion, Openet and Elitcore, among others.



With respect to Michpal, the market in
which we operate is very fragmented and among our current competitors in the Israeli market in which we operate are mainly Hilan,
MalamTeam, Tamal, Synel, Oketz systems and others.



Seasonality



Even though not significantly
reflected in our financial results, traditionally, the first and third quarters of the fiscal year have tended to be slower quarters
for some of our subsidiaries and our affiliated companies and the industries in which they operate. The first quarter usually reflects
a decline following a highly active fourth quarter during which companies seek to complete transactions and projects and utilize
budgets before the end of the fiscal year. The relatively slower third quarter reflects reduced activities during the summer months
in many of the regions where our customers are located.



In addition, our quarterly results are also influenced by the
number of working days in each period. In Israel, for example, during the Jewish holidays period (typically at the end of the third
quarter and beginning of the fourth quarter or at the end of the first quarter and beginning of the second quarter), when the number
of working days is lower, we tend to see a decrease in our revenues which may impact our quarterly results. Following are the number
of standard working hours in each quarter in the Israeli market which accounts for approximately 60% of our annual revenues:



|     |  | 1st quarter |       |   | 2nd quarter |  |       | 3rd quarter |  |  | 4th quarter |  
|---- |  | ----------- | ----- | - | ----------- |  | ----- | ----------- |  |  | ----------- | -
|     |  |             |       |   |             |  |       |             |  |  |             |  
|2016 |  |             | 585.5 |   |             |  | 559.5 |             |  |  | 585.0       |  
|     |  |             |       |   |             |  |       |             |  |  |             |  
|2017 |  |             | 585.0 |   |             |  | 532.5 |             |  |  | 571.5       |  
|     |  |             |       |   |             |  |       |             |  |  |             |  
|2016 |  |             | 25.5  | % |             |  | 24.8  | %           |  |  | 24.0        | %
|     |  |             |       |   |             |  |       |             |  |  |             |  
|2017 |  |             | 24.9  | % |             |  | 23.0  | %           |  |  | 25.2        | %



In 2016, the second and fourth quarters
were negatively impacted by the reduced billable hours as a result of the Jewish holiday periods while the fourth quarter was significantly
stronger. In 2017, we expect seasonality due to the Jewish holiday periods to impact the second and third quarters.



Raw Materials



Generally, we are not dependent on raw
materials or on a single source of supply. We manage our inventory according
to project requirements. In some projects, specific major subcontractors are designated by the customer. Raw
materials used by us are generally available from a range of suppliers internationally, and the prices of such materials are generally
not subject to significant volatility.



56







Software Development



The software industry is generally characterized
by rapid technological developments, evolving industry standards and customer requirements, and frequent innovations. In order
to maintain technological leadership, we engage in ongoing software development activity through our investees, aimed both at introducing
new commercially viable products addressing the needs of our customers on a timely basis, as well as enhancing and customizing
existing products and services. This effort includes introducing new supported programming languages and database management systems;
improving functionality and flexibility; and enhancing ease of use. We work closely with current and potential end-users, our strategic
partners and leaders in certain industry segments to identify market needs and define appropriate product enhancements and specifications.



Intellectual Property Rights



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



With respect to our defense sector activities,
the IMOD usually retains specific rights to technologies and inventions resulting from our performance under Israeli government
contracts. This generally includes the right to disclose the information to third parties, including other defense contractors
that may be our competitors. Consistent with common practice in the defense industry, a majority of TSG’s revenues in 2016
was dependent on products incorporating technology that a government customer may disclose to third parties. When the Israeli government
funds research and development, it usually acquires rights to data and inventions. We often may retain a non-exclusive license
for such inventions. The Israeli government usually is entitled to receive royalties on export sales in relation to sales resulting
from government financed development. However, if only the product is purchased without development effort, we normally retain
the principal rights to the technology. Subject to applicable law, regulations and contract requirements, TSG attempts to maintain
its intellectual property rights and provide customers with the right to use the technology only for the specific project under
contract



Regulatory Impact



The global financial services industry
served by Sapiens, Matrix and Michpal is heavily subject to government and market regulation, which is constantly changing. Financial
services companies must comply with regulations such as the Sarbanes-Oxley Act, Solvency II, Retail Distribution Review (known
as RDR) in the United Kingdom, the Dodd-Frank Act and other directives regarding transparency. In addition, many individual countries
have increased supervision over local financial services companies. For example, in Europe, regulators have been very active, motivated
by past financial crises and the need for pension restructuring. Distribution of insurance policies is being optimized with the
increasing use of Bank Assurance (selling of insurance through a bank’s established distribution channels), supermarkets
and kiosks (insurance stands). Increased activity such as that in Europe would generally tend to have a positive impact on the
demand for our software solutions and services; nevertheless, insurers are cautiously approaching spending increases, and while
many companies have not taken proactive steps to replace their software solutions in recent years, many of them are now looking
for innovative, modern replacements to meet the regulatory changes.



57







Matrix’s IT business is generally
positively affected by regulatory reform and other regulatory changes with respect to banking, insurance and telecommunications
in Israel, as such reforms and changes create demand for specific IT solutions, often in a set, short time frame. In particular,
regulation on large financial institutions operating in the Israeli financial market is continuously increasing, as a means of
reducing the risk associated with the activities of such financial institutions and increasing transparency and increases the demand
for Matrix’s solutions for entities that become subject to such supervision. Banks’ entry into the sphere of offering
advice with respect to pension, insurance and other financial products has also generated demand for Matrix’s IT solutions,
given the increased supervision of the Israeli Securities Authority that is triggered by such activities, although the pace at
which such demand has grown has been relatively slower. Enhanced disclosure requirements for banks and financial institutions in
the Israeli market such as the new adjustments published with respect to the required capital liquidity of Banks in Israel have
also been generating demand for new IT solutions that Matrix offers. Matrix’s business is also affected by changes in regulations
of the U.S Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Commodity Futures Trading Commission,
the National Futures Association, the Federal Energy Regulatory Commission, with respect to requirements relating to Know Your
Customer, Customer Identification Programs, Anti-Money Laundering and Fraud Prevention.



In recent years, there has been greater
focus on core banking issues, and today a number of banks are in the process of undergoing a gradual examination / replacement
of the traditional core systems. The financial market is also facing significant changes and opportunities for the IT market in
light of the Strum Reform and its implications for the banking market, credit card companies and other relevant players in the
financial market. In the insurance industry, there is a delay in decision making based on the prolonged selling process of some
of the companies, and in light of the worsening of the capital adequacy ratios and actuarial reserves that are required by regulators
and which affect the profitability of the companies, their ability to distribute a dividend or allocate budgets for IT investments
as in the past.



With respect to our defense sector activities,
we operate under laws, regulations and administrative rules governing defense and other government contracts, mainly in Israel.
Some of these carry major penalty provisions for non-compliance, including disqualification from participating in future contracts.
In addition, our participation in governmental procurement processes in Israel, the United States and other countries is subject
to specific regulations governing the conduct of the process of procuring defense and homeland security contracts.



Israeli Export Regulations.
Israel’s defense export policy regulates the sale of a number of our systems and products, which are developed and marketed
by our affiliated company TSG. Current Israeli policy encourages exports to approved customers of defense systems and products
such as ours, as long as the export is consistent with Israeli government policy. Subject to certain exemptions, a license is
required to initiate marketing activities. We also must receive a specific export license for defense related hardware, software
and technology exported from Israel. Israeli law also regulates export of “dual use” items (items that are typically
sold in the commercial market but that also may be used in the defense market).



Procurement Regulations. Solicitations
for procurements by governmental purchasing agencies in Israel, the United States and other countries are governed by laws, regulations
and procedures relating to procurement integrity, including avoiding conflicts of interest, corruption, human trafficking and conflict
minerals in the procurement process. Such regulations also include provisions relating to information assurance and for the avoidance
of counterfeit parts in the supply chain.



Civil Aviation Regulations. Several
of the products sold by TSG for commercial aviation applications are subject to flight safety and airworthiness standards of the
U.S. Federal Aviation Administration (FAA) and similar civil aviation authorities in Israel, Europe and other countries.



Buy-Back.As
part of their standard contractual requirements for defense programs, several of our customers may include “buy-back”
or “offset” provisions. These provisions are typically obligations to make, or to facilitate third parties to make,
various specified transactions in the customer’s country, such as procurement of defense and commercial related products,
investment in the local economy and transfer of know-how.



Magic Software’s business has not
been impacted to a material extent by government regulations.



| | C. | Organizational Structure
| | -- | ------------------------



Formula is the parent company of the Formula
Group.



58







The following table presents certain information regarding the
control and ownership of our directly held investments in subsidiaries and affiliates, as of April 30, 2016.



|Subsidiaries and affiliate             |  | Country of Incorporation |  | Percentage of Ownership |      
|-------------------------------------- |  | ------------------------ |  | ----------------------- | -----
|Matrix IT Ltd.                         |  | Israel                   |  |                         | 50.01
|                                       |  |                          |  |                         |      
|Sapiens International Corporation N.V. |  | Curaçao                  |  |                         | 48.85
|                                       |  |                          |  |                         |      
|Magic Software Enterprises Ltd.        |  | Israel                   |  |                         | 47.26
|                                       |  |                          |  |                         |      
|Michpal Micro Computers (1983) Ltd.    |  | Israel                   |  |                         | 100  
|                                       |  |                          |  |                         |      
|TSG IT Advanced Systems Ltd.           |  | Israel                   |  |                         | 50.00
|                                       |  |                          |  |                         |      
|InSync Staffing Solutions, Inc.        |  | Delaware                 |  |                         | 90.09



The common shares of Sapiens and the ordinary
shares of Magic Software are traded on the NASDAQ Capital Market and the NASDAQ Global Select Market, respectively and on the TASE,
and the ordinary shares of Matrix are traded on the TASE.



| | D. | Property, Plants and Equipment
| | -- | ------------------------------



Formula’s headquarters, as well as the headquarters and principal administrative, finance, sales,
marketing and research and development office of Magic Software, are located in Or-Yehuda, Israel, a suburb of Tel Aviv. Magic
Software leases its and our office space, constituting approximately 23,841 square feet, under a lease which expires in December
2017. Magic Software has an option to terminate the lease agreement upon six months prior written notice. In addition, Magic Software
leases office spaces in the United States, Europe, Asia and South Africa. In 2016, Magic Software rent costs totaled $2.2 million,
in the aggregate, for all of its leased offices.



Matrix leases approximately
592,000 square feet of office space in Israel pursuant to leases which expiring primarily in three to four years. This includes
Matrix’s facility in Herzliya, which serves as Matrix’s corporate headquarters. In addition, Matrix leases an aggregate
of approximately 61,350 square feet of office space in locations outside of Israel. The lease terms for the spaces that Sapiens
currently occupies are generally three to four years. In the year ended December 31, 2016, Matrix rent costs totaled $16.9 million,
in the aggregate, for all of its leased offices.



Sapiens leases office spaces in Israel, the United States, Canada, the United Kingdom, Belgium and Japan.
The lease terms for the spaces that Sapiens currently occupies are generally five to eleven years. In Israel, based on Sapiens
current occupancy, they lease approximately 135,100 square feet of office space; in the United States, approximately 10,000 square
feet; in Canada, approximately 1,400 square feet; in the United Kingdom, approximately 21,400 square feet, in Japan, approximately
6,400 square feet, in India, approximately 45,400 square feet, in Poland, approximately 27,200 square feet and in China, approximately
1,200 feet. Sapiens also occupies 10,243 square feet of office space which constitutes owned real property in the United States.
In 2016, Sapiens rent costs totaled $6.3 million, in the aggregate, for all of its leased offices (which does not include office
space leased by StoneRiver in the United States, since it was acquired after December 31, 2016). Sapiens corporate headquarters
are located in Israel and its core research and development activities are performed at its offices across Israel. The lease at
Sapiens headquarters in Holon, Israel is for a term in excess of seven remaining years and Sapiens holds an option to extend the
term for additional five years.



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



59







As described in “Subsidiary
Commitments” in Item 5.B below, while our subsidiaries and our affiliated companies have incurred liens on leased vehicles,
leased equipment and other assets in favor of leasing companies, neither Formula nor any subsidiary has encumbered the real property
that it uses in its operations.



We furthermore believe
that there are no environmental issues that encumber our use of our facilities.



ITEM 4A.  UNRESOLVED STAFF COMMENTS



Not applicable.



ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS



Overview



We are a global software solutions and
IT professional services holdings company that is principally engaged through our directly held investees in providing proprietary
and non-proprietary software solutions and IT professional services, software product marketing and support, computer infrastructure
and integration solutions and learning and integration. We deliver our solutions in over 50 countries worldwide to customers with
complex IT services needs, including a number of “Fortune 1000” companies.



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



Other than in our joint control in TSG
in which we and Israeli Aerospace Industries Ltd., each hold 50% of their voting power, we currently have effective control under
IFRS 10 in each of our other investees, Matrix, Sapiens, Magic Software, Michpal and InSync despite the lack of absolute majority
of voting power in Magic Software and Sapiens. As a result of our effective control in these investees and in accordance with IFRS
as of December 31, 2016, we consolidated their financial results with ours throughout the period covered by the financial statements
included in Item 18 of this annual report. Prior to our transition to reporting under IFRS, we would consolidate investees in which
we held an equity interest only if we held a controlling interest in those companies. Under IFRS 10, we may consolidate entities
in which we have effective control. For further information, please see Note 2(2) to our consolidated financial statements included
in Item 18 of this annual report



Except for providing our investees with
our management, technical expertise and marketing experience to help them create a consecutive positive economic impact and long-term
value and direct their overall strategy through our active involvement, we do not conduct independent operations at our parent
company level. Our operating results are, and have been, directly influenced by the business operations of our subsidiaries and
affiliated company.



Our consolidated financial
statements for the year ended December 31, 2016 are our first consolidated financial statements prepared in accordance with IFRS.
For all periods up to and including the year ended December 31, 2015, we have prepared our financial statements in accordance with
U.S GAAP. Accordingly, we have prepared financial statements that comply with IFRS applicable as of December 31, 2016, together
with the comparative period data for the year ended December 31, 2015. An explanation of the principal adjustments made in restating
the U.S. GAAP financial statements, including the statement of financial position as of January 1, 2015 and the financial statements
for the year ended December 31, 2015, is provided in note 19 to our consolidated financial statements included in Item 18 of this
annual report.



We recognize
revenues in two categories: the delivery of software services and the delivery of proprietary software solutions and related services.
All of our investees, recognize revenues from the delivery of software services, and most of them recognize revenues in both revenue
categories. For ease of reference, we have separated our subsidiaries into these categories in accordance with the category in
which each subsidiary has earned most of its revenues (although each type of revenue is nevertheless recorded according to actual
revenue type, rather than based on strict, subsidiary-demarcated categories).



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Our functional and reporting currency



The currency of the primary economic environment
in which we operate is the dollar since most of our assets are denominated in dollars. The functional currencies of our investees
are the NIS and the dollar. Formula has elected to use the dollar as its reporting currency for all years presented.



Assets, including fair value adjustments
upon acquisition, and liabilities of an investee which is a foreign operation, are translated at the closing rate at each reporting
date. Profit or loss items are translated at average exchange rates for all periods presented. The resulting translation differences
are recognized in other comprehensive income (loss).



Intragroup loans for which settlement is
neither planned nor likely to occur in the foreseeable future are, in substance, a part of the investment in the foreign operation
and, accordingly, the exchange rate differences from these loans (net of the tax effect) are recorded in other comprehensive income
(loss).



Upon the full or partial disposal of a
foreign operation resulting in loss of control in the foreign operation, the cumulative gain (loss) from the foreign operation
which had been recognized in other comprehensive income is transferred to profit or loss. Upon the partial disposal of a foreign
operation which results in the retention of control in the subsidiary, the relative portion of the amount recognized in other comprehensive
income is reattributed to non-controlling interests.



Transactions denominated in foreign currency
are recorded upon initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary
assets and liabilities denominated in foreign currency are translated at each reporting date into the functional currency at the
exchange rate at that date. Exchange rate differences, other than those capitalized to qualifying assets or accounted for as hedging
transactions in equity, are recognized in profit or loss. Non-monetary assets and liabilities denominated in foreign currency and
measured at cost are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated
in foreign currency and measured at fair value are translated into the functional currency using the exchange rate prevailing at
the date when the fair value was determined.



Critical Accounting Policies



Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance
with IFRS. The preparation of our financial statements required us to make estimations and judgments that affect the reporting
amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities within the reporting
period. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis of making judgments about the values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
More detailed descriptions of these policies are provided in Note 2 to our consolidated financial statements contained elsewhere
in this annual report.



The significant accounting policies which
we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:



Consolidated financial statements:



The consolidated financial statements comprise
the financial statements of companies that we controlled (subsidiaries). Control is achieved when we are exposed, or have rights,
to variable returns from our involvement with the investee and has the ability to affect those returns through our power over the
investee. Potential voting rights are considered when assessing whether an entity has control. In a situation when we hold less
than a majority of voting rights in a given entity, but it is sufficient to unilaterally direct the relevant activities of such
entity, then the control is exercised. When assessing whether our voting rights are sufficient to give us power, we consider all
facts and circumstances, including: the size of our holding of voting rights relative to the size and dispersion of other vote
holders; our potential voting rights and other shareholders or parties; rights arising from other contractual arrangements; significant
personal ties and any additional facts and circumstances that may indicate that we have, or do not have the ability to direct the
relevant activities when decisions need to be made, inclusive of voting patterns observed at previous meetings of shareholders.



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The consolidation of the financial statements
commences on the date on which control is obtained and ends when such control ceases.



Our financial statements and the financial
statements of our investees, after being adjusted to comply with IFRS, are prepared for the same reporting period and using consistent
accounting treatment of similar transactions and economic activities. Any discrepancies in the applied accounting policies are
eliminated by making appropriate adjustments. Significant intragroup balances and transactions and gains or losses resulting from
intragroup transactions are eliminated in full in the consolidated financial statements.



Business combinations and goodwill:



Business combinations are accounted for
by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration transferred
on the acquisition date with the addition of non-controlling interests in the acquiree. In each business combination, we consider
whether to measures the non-controlling interests in the acquiree based on their fair value on the acquisition date or at their
proportionate share in the fair value of the acquiree's net identifiable assets.



Direct acquisition costs are carried to
the statement of profit or loss as incurred.



In a business combination achieved in stages,
equity interests in the acquiree that had been held by the acquirer prior to obtaining control are measured at the acquisition
date fair value while recognizing a gain or loss resulting from the revaluation of the prior investment on the date of achieving
control.



Contingent consideration is recognized
at fair value on the acquisition date and classified as a financial asset or liability in accordance with IAS 39, "Financial
Instruments: Recognition and Measurement". Subsequent changes in the fair value of the contingent consideration are recognized
in profit or loss. If the contingent consideration is classified as an equity instrument, it is measured at fair value on the acquisition
date without subsequent remeasurement.



Goodwill is initially measured at cost
which represents the excess of the acquisition consideration and the amount of non-controlling interests over the net identifiable
assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on the
acquisition date without subsequent measurement.



Investment in joint arrangements:



Joint arrangements
are arrangements in which we have joint control. Joint control is the contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.



| | i. | Joint ventures:
| | -- | ---------------



In joint ventures
the parties that have joint control of the arrangement have rights to the net assets of the arrangement. A joint venture is accounted
for at equity



| | ii. | Joint operations:
| | --- | -----------------



In joint operations the parties
that have joint control of the arrangement have rights to the assets and obligations for the liabilities relating to the arrangement.
We recognize in relation to our interest our share of the assets, liabilities, revenues and expenses of the joint operation.



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The acquisition of interests
in a joint operation which represents a business, as defined in IFRS 3, is accounted for using the acquisition method, including
the measurement of the identifiable assets and liabilities at fair value, the recognition of deferred taxes arising from this measurement,
the accounting treatment of the related transaction costs and the recognition of goodwill or bargain purchase gains. This applies
to the acquisition of the initial interest and additional interests in a joint operation that represents a business.



Investments accounted for using the equity method:



Our investments in
associates and joint ventures are accounted for using the equity method. Under the equity method, the investment in the associate
or in the joint venture is presented at cost with the addition of post-acquisition changes in our share of net assets, including
other comprehensive income of the associate or the joint venture. Gains and losses resulting from transactions between us and the
associate or the joint venture are eliminated to the extent of the interest in the associate or in the joint venture.



Goodwill relating to the acquisition of
an associate or a joint venture is presented as part of the investment in the associate or the joint venture, measured at cost
and not systematically amortized. Goodwill is evaluated for impairment as part of the investment in the associate or in the joint
venture as a whole.



Our financial statements and of the associate
or joint venture are prepared as of the same dates and periods. The accounting policies applied in the financial statements of
the associate or the joint venture are uniform and consistent with the policies applied in our financial statements.



Upon the acquisition of an associate or
a joint venture achieved in stages when the former investment in the acquiree was accounted for pursuant to the provisions of IAS
39, we adopt the principles of IFRS 3 regarding business combinations achieved in stages. Consequently, equity interests in the
acquiree that had been held by us prior to achieving significant influence or joint control are measured at fair value on the acquisition
date and are included in the acquisition consideration while recognizing a gain or loss resulting from the fair value measurement.



We recognize losses of an associate in
amounts which exceed its equity to the extent of our investment in the associate plus any losses that we may incur as a result
of a guarantee or other financial support provided in respect of the associate. For this purpose, the investment includes long-term
receivables (such as loans granted) for which settlement is neither planned nor likely to occur in the foreseeable future.



The equity method
is applied until the loss of significant influence in the associate or loss of joint control in the joint venture or classification
as investment held for sale. We continue to apply the equity method even in cases where the investment in the associate becomes
an investment in a joint venture and vice versa. We apply the provisions of IFRS 5 to the investment or a portion of the investment
in the associate or the joint venture that is classified as held-for-sale. Any retained interest in this investment which is not
classified as held-for-sale continues to be accounted for using the equity method.



On the date of loss of significant influence
or joint control, we measure any remaining investment in the associate or the joint venture at fair value and recognizes in profit
or loss the difference between the fair value of any remaining investment plus any proceeds from the sale of the investment in
the associate or the joint venture and the carrying amount of the investment on that date.



Revenue Recognition



We derive our revenues primarily from the
sale of information technology services which also include sale of: non-proprietary software products, including maintenance, integration
and infrastructure, outsourcing, training and deployment. In addition, we generate revenues from licensing the rights to use our
proprietary software, provision of related IT professional services (which may or may not be considered essential to the functionality
of the software license), related maintenance and technical support, as well as implementation and post-implementation consulting
services.



Revenues are recognized
in profit or loss when the revenues can be measured reliably, it is probable that the economic benefits associated with the transaction
will flow to us and the costs incurred or to be incurred in respect of the transaction can be measured reliably. When we act as
a principal and are exposed to the risks associated with the transaction, revenues are presented on a gross basis. When we act
as an agent and are not exposed to the risks and rewards associated with the transaction, revenues are presented on a net basis.
Revenues are measured at the fair value of the consideration less any trade discounts, volume rebates and returns.





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We generally consider all arrangements
with payment terms extending beyond a minimum of six or a maximum of twelve months from the delivery of the elements not to be
fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer,
provided that all other revenue recognition criteria have been met.



We generally do not
grant a right of return to our customers. When a right of return exists, revenue is deferred until the right of return expires,
at which time revenue is recognized, provided that all other revenue recognition criteria are met. Deferred revenue includes unearned
amounts received under maintenance and support contracts and amounts received from customers but not yet recognized as revenues.



Following are the specific revenue recognition
criteria which must be met before revenue is recognized by us and our subsidiaries:



| | i. | Revenues from software solutions and services:
| | -- | ----------------------------------------------



| | a) | Revenues from contracts
based on actual inputs. Revenues from master agreements based on actual inputs are recognized based on actual labor hours.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Outsourcing - these agreements
are similar in nature to agreements that are based on actual labor hours. The Group allocates employees to projects that are generally
managed by the customers at their charge based on the pricing of labor hours. Revenues are recognized based on actual labor hours.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain of the software license
sales may also include significant implementation and customization services with respect to such sales which are deemed essential
to the functionality of the license. In addition, we also provide consulting services that are not deemed essential to the functionality
of the license, as well as outsourcing IT services.



With
respect to revenues that involve significant implementation and customization services to customer specific requirements and which
are considered essential to the functionality of the product offered (for example when we sell software licenses as part of an
overall solution offered to a customer that combines the sale of software licenses which includes significant implementation that
is considered essential to the functionality of the license) whether generated by fixed-price or time-and-materials contracts we
account for revenues for the services together with the software under contract, using the percentage-of-completion method. The
percentage-of-completion method is used when the required services are quantifiable, based on the estimated number of labor hours
necessary to complete the project, and under that method revenues are recognized using labor hours incurred as the measure of progress
towards completion. This type of revenues is included in our proprietary software products and related services and software services
revenue streams.



Estimates
of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology,
and are reviewed and updated regularly by management. After delivery, if uncertainty exists about customer acceptance of the software,
license revenue is not recognized until acceptance. Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are first determined, in the amount of the estimated loss on the entire contract. As of each of December 31,
2015 and 2016, no estimated losses were identified.



| | ii. | Revenues from sales, distribution and support of software
products:
| | --- | -------------------------------------------------------------------



We recognize revenues from the
sale of software only after the significant risks and rewards of ownership of the software have been transferred to the buyer for
which a necessary condition is delivery of the software, either physically or electronically, or providing the right to use or
permission to make copies of the software. We report income on a gross basis since we act as a principal and bear the risks and
rewards derived from the transaction. We recognize revenues from providing software related services. When the stage of completion
cannot be determined reliably, revenues are recognized on a straight-line basis over the agreement period.





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



Revenues from sale agreements
that do not provide a general right of return and consist of multiple elements such as hardware, service and support agreements
are split into different accounting units which are separately recognized. An element only represents a separate accounting unit
if and only if it has standalone value for the customer. Moreover, there should be reliable and objective evidence of the fair
value of all the elements in the agreement or of the fair value of undelivered elements. Revenues from the various accounting units
are recognized when the revenue recognition criteria are met with respect to all the elements of the accounting unit based on their
specific type and only up to the amount of the consideration that is not contingent on completion or performance of the other elements
in the contract.



Maintenance and support includes
annual maintenance contracts providing for unspecified upgrades for new versions and enhancements on a when-and-if-available basis
for an annual fee. The right for unspecified upgrades for new versions and enhancements on a when-and-if-available basis does not
specify the features, functionality and release date of future product enhancements for the customer to know what will be made
available and the general timeframe in which it will be delivered. Revenues from maintenance services are recognized on a straight-line
basis at the relative portion of the maintenance contract that is determined for each reporting year. Revenues that have been received
before the respective service has been provided are carried to deferred income.



| | iii. | Revenues from training and implementation services:
| | ---- | ---------------------------------------------------



Revenues from trainings and
implementations are recognized when providing the service. Revenues from training services in respect of courses conducted over
a period of up to 3 months will be recognize over the period of the course. Revenues from training services in respect of courses
ordered in advance and long-term or short term (for a period of up to a year) retraining courses months will be recognized over
the period of the course. Revenues from projects which usually ordered by organizations, will be recognize under the actual inputs
recognize using the basis hours actual invested in the project.



| | iv. | Revenues from hardware products and infrastructure solutions:
| | --- | -------------------------------------------------------------



Revenues from hardware products
and infrastructure solutions are recognized after all the significant risks and rewards of ownership of the products have been
transferred to the buyer. We do not retain any continuing management involvement that is associated with ownership and do not retain
the effective control of the sold products, the amount of revenues can be measured reliably, it is probable that the economic benefits
associated with the transaction will flow to us and the costs incurred or to be incurred in respect of the transaction can be measured
reliably.



Software Development Costs



Research expenditures
incurred in the process of software development are recognized in profit or loss when incurred. An intangible asset arising from
a software development project or from the development phase of an internal project is recognized if the Group can demonstrate
the technical feasibility of completing the intangible asset so that it will be available for use or sale; the Group’s intention
to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; how the intangible asset
will generate future economic benefits; the availability of adequate technical, financial and other resources to complete the intangible
asset; and the ability to measure reliably the respective expenditure asset during its development. The Group establishes technological
feasibility upon completion of a detailed program design or working model.





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Research
and development costs incurred between completion of the detailed program design and the point at which the product is ready for
general release, have been capitalized.



Capitalized software costs are measured
at cost less any accumulated amortization and any accumulated impairment losses on a product by product basis. Amortization of
capitalized software costs begin when development is complete and the product is available for use. We consider a product to be
available for use when we complete the internal validation of the product that is necessary to establish that the product meets
its design specifications including functions, features, and technical performance requirements. Internal validation includes the
completion of coding, documentation and testing that ensure bugs are reduced to a minimum. The internal validation of the product
takes place a few weeks before the product is made available to the market. In certain instances, we enter into a short pre-release
stage, during which the product is made available to a selected number of customers as a beta program for their own review and
familiarization. Subsequently, the release is made generally available to customers. Once a product is considered available for
use, the capitalization of costs ceases and amortization of such costs to "cost of sales" begins.



Capitalized software
costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the software product
(between 4-7 years, due to their high rates of acceptance, the continued reliance on these products by existing customers, and
the demand for such products from prospective customers, all of which validate the Group’s expectations) which provides greater
amortization expense compared to the revenue-curve method.



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



We assess the recoverability of our capitalized
software costs on a regular basis by assessing the net realizable value of these intangible assets based on the estimated future
gross revenues from each product reduced by the estimated future costs of completing and disposing of it, including the estimated
costs of performing maintenance and customer support over its remaining economical useful life using internally generated projections
of future revenues generated by the products, cost of completion of products and cost of delivery to customers over its remaining
economical useful life. During the years ended December 31, 2015 and 2016, no such unrecoverable amounts were identified.



Other intangible assets



Separately acquired intangible assets are
measured on initial recognition at cost including directly attributable costs. Intangible assets acquired in a business combination
are measured at fair value at the acquisition date. Expenditures relating to internally generated intangible assets, excluding
capitalized development costs, are recognized in profit or loss when incurred.



Intangible assets with a finite useful
life are amortized over their useful life and reviewed for impairment whenever there is an indication that the asset may be impaired.
The amortization period and the amortization method for an intangible asset are reviewed at least at each year end.



Other intangible assets are comprised mainly
of customer-related intangible assets, backlogs, brand names, capitalized courses development costs, non-compete agreements and
acquired technology and Patent, and are amortized over their useful lives using a method of amortization that reflects the pattern
in which the economic benefits of the intangible assets are consumed or otherwise used up. The useful life of intangible assets
is as follows:



|                                                      |  | Years | 
|----------------------------------------------------- |  | ----- | 
|                                                      |  |       | 
|Customer relationship and acquired technology         |  | 3-15  | 
|Capitalized courses development costs                 |  | 3     | 
|Brand names                                           |  | 5     | 
|Backlog, non-compete agreements and other intangibles |  | 2-10  | 
|Patent                                                |  | 10    | 





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We assess the recoverability of our intangible
assets on a regular basis by determining whether the amortization of the asset over its remaining useful life can be recovered
through undiscounted future operating cash flows from the specific software product sold. During the years ended December 31, 2015
and 2016, no unrecoverable amounts were identified.



Intangible assets with indefinite useful
lives are not systematically amortized and are tested for impairment annually or whenever there is an indication that the intangible
asset may be impaired. The useful life of these assets is reviewed annually to determine whether their indefinite life assessment
continues to be supportable. If the events and circumstances do not continue to support the assessment, the change in the useful
life assessment from indefinite to finite is accounted for prospectively as a change in accounting estimate and on that date the
asset is tested for impairment. Commencing from that date, the asset is amortized systematically over its useful life.



Taxes on income:



Current or deferred
taxes are recognized in profit or loss, except to the extent that they relate to items which are recognized in other comprehensive
income or equity.



| | i. | Current taxes:
| | -- | --------------



The current
tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the reporting date
as well as adjustments required in connection with the tax liability in respect of previous years.



| | ii. | Deferred taxes:
| | --- | ---------------



Deferred taxes are computed in respect of temporary differences between the carrying amounts in the financial
statements and the amounts attributed for tax purposes. Deferred taxes are measured at the tax rate that is expected to apply when
the asset is realized or the liability is settled, based on tax laws that have been enacted or substantively enacted by the reporting
date. Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is not probable that they will
be utilized. Deductible carry forward losses and temporary differences for which deferred tax assets had not been recognized are
reviewed at each reporting date and a respective deferred tax asset is recognized to the extent that their utilization is probable.



Taxes on income that
relate to distributions of an equity instrument and to transaction costs of an equity transaction are accounted for pursuant to
IAS 12.



Deferred taxes are offset if there is a
legally enforceable right to offset a current tax asset against a current tax liability and the deferred taxes relate to the same
taxpayer and the same taxation authority.



Impairment of non-financial assets:



We evaluate the need
to record an impairment of non-financial assets (property, plant and equipment, capitalized software costs and other intangible
assets, goodwill, investments in joint venture) whenever events or changes in circumstances indicate that the carrying amount is
not recoverable.



If the carrying amount of non-financial
assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher
of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using
a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate
independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized
in profit or loss.





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An impairment loss
of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset's recoverable
amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased above the
lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been
recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost
is recognized in profit or loss.



The following criteria are applied in assessing
impairment of these specific assets:



| | i. | Goodwill in respect of subsidiaries:
| | -- | ------------------------------------



We
review goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate
that there is an impairment.



Goodwill
is tested for impairment by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to
which the goodwill has been allocated. An impairment loss is recognized if the recoverable amount of the cash-generating unit
(or group of cash-generating units) to which goodwill has been allocated is less than the carrying amount of the cash-generating
unit (or group of cash-generating units). Any impairment loss is allocated first to goodwill. Impairment losses recognized for
goodwill cannot be reversed in subsequent periods.



| | ii. | Investment in associate or joint venture using the
equity method:
| | --- | -----------------------------------------------------------------



After
application of the equity method, we determine whether it is necessary to recognize any additional impairment loss with respect
to the investment in associates or joint ventures. We determine at each reporting date whether there is an objective evidence
that the carrying amount of the investment in the associate or the joint venture is impaired. The test of impairment is carried
out with reference to the entire investment, including the goodwill attributed to the associate or the joint venture.



| | iii. | Intangible assets with an indefinite useful life:
| | ---- | -------------------------------------------------



The
impairment test is performed annually, on December 31, or more frequently if events or changes in circumstances indicate that
there is an impairment.



During the years ended December 31, 2015
and 2016, no impairment indicators were identified.



Compound financial instruments:



Convertible debentures which contain both
an equity component and a liability component are separated into two components. This separation is performed by first determining
the liability component based on the fair value of an equivalent non-convertible liability. The value of the conversion component
is determined to be the residual amount. Directly attributable transaction costs are apportioned between the equity component and
the liability component based on the allocation of proceeds to the equity and liability components.



Convertible debentures that are denominated
in foreign currency contain two components: the conversion component and the debt component. The liability conversion component
is initially recognized as a financial derivative at fair value. The balance is attributed to the debt component. Directly attributable
transaction costs are allocated between the liability conversion component and the liability debt component based on the allocation
of the proceeds to each component.



Put option granted to non-controlling interests:



When we grant non-controlling
interests a put option to sell part or all of their interests in a subsidiary during a certain period, on the date of grant, the
non-controlling interests are classified as a financial liability under redeemable non-controlling interests.





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We remeasure the financial liability at
the end of each reporting period based on the estimated present value of the consideration to be transferred upon the exercise
of the put option. If we have present ownership of the non-controlling interests, these non-controlling interests are accounted
for as if they are held by us and changes in the amount of the liability are carried to profit or loss. If we do not have present
ownership, the interests are accounted for using the partial recognition method. Accordingly, a portion of net profit attributable
to non-controlling interests is still allocated to profit or loss but at the end of the reporting period the non-controlling interests
are reclassified as a financial liability. The difference between non-controlling interests at the end of the reporting period
and the present value of the liability is recognized directly in our equity, under “Adjustment to redeemable non-controlling
interests”. If the option is exercised in subsequent periods, the consideration paid upon exercise is treated as settlement
of the liability. If the option expires, the liability is settled and it is a portion of the investment in the subsidiary disposed
of, without loss of control therein.



As of December 31, 2016, there are no redeemable
non-controlling interests which are subject to immediate exercise.



Disclosure
of new standards in the period prior to their adoption



| | 1. | IFRS 15, "Revenue from Contracts with Customers":
| | -- | -------------------------------------------------



IFRS 15, or
the new Standard, was issued by the IASB in May 2014. The new Standard replaces IAS 18, "Revenue", IAS 11, "Construction
Contracts", IFRIC 13, "Customer Loyalty Programs", IFRIC 15, "Agreements for the Construction of Real Estate",
IFRIC 18, "Transfers of Assets from Customers" and SIC-31, "Revenue - Barter Transactions Involving Advertising
Services".





The new Standard introduces
a five-step model that will apply to revenue earned from contracts with customers:



Step 1: Identify the contract
with a customer, including reference to contract combination and accounting for contract modifications.

Step 2: Identify the separate
performance obligations in the contract

Step 3: Determine the
transaction price, including reference to variable consideration, financing components that are significant to the contract,
non-cash consideration and any consideration payable to the customer.

Step 4: Allocate the transaction
price to the separate performance obligations on a relative stand-alone selling price basis using observable information, if it
is available, or using estimates and assessments.

Step 5: Recognize revenue when
a performance obligation is satisfied, either at a point in time or over time.



The new Standard
allows the option of modified retrospective adoption with certain reliefs according to which the new Standard will be applied
to existing contracts from the initial period of adoption and thereafter with no restatement of comparative data. Under this option,
we will recognize the cumulative effect of the initial adoption of the new Standard as an adjustment to the opening balance of
retained earnings (or another component of equity, as applicable) as of the date of initial application. Alternatively, the new
Standard permits full retrospective adoption with certain reliefs.





At this stage, we are evaluating
the different options for adoption of the new Standard. However, at this stage, the Company is unable to quantify the impact on
the financial statements.



The new Standard is to be applied
retrospectively for annual periods beginning on January 1, 2018. Early adoption is permitted. At this stage, the Group does not
intend to adopt IFRS 15 early.



The new Standard allows the
option of modified retrospective adoption with certain reliefs according to which the new Standard will be applied to existing
contracts from the initial period of adoption and thereafter with no restatement of comparative data. Under this option, the Group
will recognize the cumulative effect of the initial adoption of the new Standard as an adjustment to the opening balance of retained
earnings (or another component of equity, as applicable) as of the date of initial application. Alternatively, the new Standard
permits full retrospective adoption with certain reliefs.



At this stage, the Group is evaluating
the different options for adoption of the new Standard.





| | 2. | IFRS 9, "Financial Instruments
| | -- | ------------------------------



In July 2014,
the IASB issued the final and complete version of IFRS 9, "Financial Instruments," or IFRS 9, , which replaces IAS 39,
"Financial Instruments: Recognition and Measurement". IFRS 9 mainly focuses on the classification and measurement of
financial assets and it applies to all assets in the scope of IAS 39.





69







According to
IFRS 9, all financial assets are measured at fair value upon initial recognition. In subsequent periods, debt instruments are measured
at amortized cost only if both of the following conditions are met:



| | - | the asset is held within a business model whose objective
is to hold assets in order to collect the contractual cash flows.
| | - | ---------------------------------------------------------------------------------------------------------------------------

| | - | the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of
                                                                                 principal and interest on the principal amount outstanding.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Subsequent measurement
of all other debt instruments and financial assets should be at fair value. IFRS 9 establishes a distinction between debt instruments
to be measured at fair value through profit or loss and debt instruments to be measured at fair value through other comprehensive
income.



Financial assets
that are equity instruments should be measured in subsequent periods at fair value and the changes recognized in profit or loss
or in other comprehensive income (loss), in accordance with the election by the Company on an instrument-by-instrument basis. If
equity instruments are held for trading, they should be measured at fair value through profit or loss.



According to
IFRS 9, the provisions of IAS 39 will continue to apply to derecognition and to financial liabilities for which the fair value
option has not been elected.



According to
IFRS 9, changes in fair value s of financial liabilities which are attributable to the change in credit risk should be presented
in other comprehensive income. All other changes in fair value should be presented in profit or loss.



IFRS 9 also
prescribes new hedge accounting requirements.



IFRS 9 is to
be applied for annual periods beginning on January 1, 2018. Early adoption is permitted.



We believe that
the amendments to IFRS 9 are not expected to have a material impact on our consolidated financial statements, but at the end of
the reporting period the impact analysis has not yet been completed.



| | 3. | Amendments to IFRS 10 and IAS 28 regarding sale or transfer
of assets between an investor and its associate or joint venture:
| | -- | -----------------------------------------------------------------------------------------------------------------------------



In September
2014, the IASB issued amendments to IFRS 10 and IAS 28, or the amendments, regarding the accounting treatment of the sale or transfer
of assets (an asset, a group of assets or a subsidiary) between an investor and its associate or joint venture. According to the
amendments, when the investor loses control of a subsidiary or a group of assets that are not a business in a transaction with
its associate or joint venture, the gain will be partially eliminated so that the gain to be recognized is the gain from the sale
to the other investors in the associate or joint venture. According to the amendments, if the remaining rights held by the investor
represent a financial asset as defined in IFRS 9, the gain will be recognized in full. If the transaction with an associate or
joint venture involves loss of control of a subsidiary or a group of assets that are a business, the gain will be recognized in
full. The amendments are to be applied prospectively. A mandatory effective date has not yet been determined by the IASB but early
adoption is permitted.



| | 4. | Amendments to IAS 7, "Statement of Cash Flows", regarding additional disclosures of
financial liabilities:
| | -- | ----------------------------------------------------------------------------------------------------------



In January 2016,
the IASB issued amendments to IAS 7, "Statement of Cash Flows", or the amendments, which require additional disclosures
regarding financial liabilities. The amendments require disclosure of the changes between the opening balance and the closing balance
of financial liabilities, including changes from cash flows, changes arising from obtaining or losing control of subsidiaries,
the effect of changes in foreign exchange rates and changes in fair value.





70







The amendments
are effective for annual periods beginning on or after January 1, 2017. Comparative information for periods prior to the effective
date of the amendments is not required. Early application is permitted. We will include the necessary disclosures in the financial
statements when applicable.



| | 5. | IFRS 16, "Leases”:
| | -- | ------------------



In January 2016,
the IASB issued IFRS 16, "Leases," or the new Standard. According to the new Standard, a lease is a contract, or part
of a contract, that conveys the right to use an asset for a period of time in exchange for consideration.



According to
the new Standard:



Lessees are
required to recognize an asset and a corresponding liability in the statement of financial position in respect of all leases (except
in certain cases) similar to the accounting treatment of finance leases according to the existing IAS 17, "Leases".





According to the new Standard:



| | - | Lessees are required to recognize an asset and a corresponding liability in the statement of financial position in respect of all leases (except in certain cases) similar to the accounting treatment of finance leases according to the existing IAS 17, "Leases".
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Lessees are required to initially recognize a lease liability for the obligation to make lease payments and a corresponding right-of-use asset. Lessees will also recognize interest and depreciation expense separately.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Variable lease payments that are not dependent on changes in the Consumer Price Index ("CPI") or interest rates, but are based on performance or use (such as a percentage of revenues) are recognized as an expense by the lessees as incurred and recognized as income by the lessors as earned.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | In the event of change in variable lease payments that are CPI-linked, lessees are required to remeasure the lease liability and the effect of the remeasurement is an adjustment to the carrying amount of the right-of-use asset.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | The new Standard includes two exceptions according to which lessees are permitted to elect to apply a method similar to the current accounting treatment for operating leases. These exceptions are leases for which the underlying asset is of low value and leases with a term of up to one year.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | The accounting treatment by lessors remains substantially unchanged, namely classification of a lease as a finance lease or an operating lease.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



The new Standard
is effective for annual periods beginning on or after January 1, 2019. Early adoption is permitted provided that IFRS 15, "Revenue
from Contracts with Customers", is applied concurrently. For leases existing at the date of transition, the new Standard permits
lessees to use either a full retrospective approach, or a modified retrospective approach, with certain transition relief whereby
restatement of comparative data is not required.



We are evaluating the possible effects of the new Standard.
However, at this stage, the Company is unable to quantify the impact on the financial statements.



| | A. | Operating Results
| | -- | -----------------



Year Ended December 31, 2016 Compared
to Year Ended December 31, 2015



The following tables set forth certain
data from our statement of profit or loss for the years ended December 31, 2015 and 2016, as well as such data as a percentage
of our revenues for those years. The data has been derived from our audited consolidated financial statements included elsewhere
in this annual report. The operating results for the below years should not be considered indicative of results for any future
period. This information should be read in conjunction with the audited consolidated financial statements and notes thereto included
in this annual report.





71







|Statements of Profits or Loss                                      
|-------------------------------------------------------------------
|(U.S. dollars, in thousands)                                       
|                                                                   
|                                                                   
|                                                                   
|Revenues                                                           
|                                                                   
|Cost of revenues                                                   
|                                                                   
|Gross profit                                                       
|                                                                   
|Research and development expenses, net                             
|Selling, marketing, general and administrative expenses            
|                                                                   
|Operating income                                                   
|                                                                   
|Financial expenses                                                 
|Financial income                                                   
|Group's share of earnings of companies accounted for at equity, net
|                                                                   
|Income before taxes on income                                      
|Taxes on income                                                    
|                                                                   
|Net income                                                         
|                                                                   
|Attributable to:                                                   
|Equity holders of the Company                                      
|Redeemable non-controlling interests                               
|Non-controlling interests                                          
|                                                                   
|                                                                   



Statement of Income Data as a

Percentage of Revenues



|                                                        |  | Year ended December 31, |    
|------------------------------------------------------- |  | ----------------------- | ---
|                                                        |  | 2015                    |    
|                                                        |  |                         |    
|Revenues                                                |  |                         | 100
|                                                        |  |                         |    
|Cost of revenues                                        |  |                         | 76 
|                                                        |  |                         |    
|Gross profit                                            |  |                         | 24 
|                                                        |  |                         |    
|Research and development expenses, net                  |  |                         | 2  
|Selling, marketing, general and administrative expenses |  |                         | 14 
|                                                        |  |                         |    
|Operating income                                        |  |                         | 8  
|                                                        |  |                         |    
|Financial expenses                                      |  |                         | (2 
|Financial income                                        |  |                         | 1  
|                                                        |  |                         |    
|Income before taxes on income                           |  |                         | 7  
|Taxes on income                                         |  |                         | 2  
|                                                        |  |                         |    
|Net income                                              |  |                         | 5  
|                                                        |  |                         |    
|Attributable to:                                        |  |                         |    
|Equity holders of the Company                           |  |                         | 2  
|Non-controlling interests                               |  |                         | 3  
|                                                        |  |                         |    
|                                                        |  |                         | 5  





72







Revenues.Revenues in 2016 increased by 13.9%, from $
973.2 million in 2015 to $ 1,108.6 million in 2016. Revenues from the two categories of our operations were as follows: revenues
from the delivery of software services increased by 14.4%, from $ 730.4 million in 2015 to $ 835.4 million in 2016, and revenues
from the sale of our proprietary software products and related services increased by 12.5%, from $ 242.8 million in 2015 to $ 273.2
million in 2016.



The increase in software services revenues
was recorded across all our investees reporting under this revenue stream: Matrix, Magic Software and InSync) and primarily due
to the growth in



Matrix:



Matrix's revenues increased from NIS 2,280.1 million (approximately $ 586.6 million) in 2015 to NIS 2,544.6
million (approximately $ 662.6 million) in 2016, reflecting an increase of 11.6% when measured in NIS, Matrix local currency (compared
to 13.0% when measured in U.S dollars due to the devaluation of the U.S Dollar versus the NIS). The increase in Matrix’s
revenues was due to an increase in almost all of Matrix’s principal areas of operations. The increase was primarily attributable
to an increase of 9.7 % in Matrix’s software solutions and services in Israel business line from NIS 1,409.4 million (approximately
$ 362.6 million) in 2015 to NIS 1,546.3 million (approximately $ 402.6 million) in 2016 and an increase of 28.6% in Matrix’s
computer infrastructure and integration solutions from NIS 325.5 million (approximately $ 83.7 million) in 2015 to NIS 418.5 million
(approximately $ 109.0 million) in 2016. Revenues from Matrix’s software product marketing and support business line, were
similar in 2016 and 2015.



Magic Software:



Magic Software’s revenues, reported
under this revenue stream, increased by 20.8% from $ 116.8 million to $ 141.1 million, primarily attributable to (i) increased
demand for Magic Software’s professional services offerings of Comblack IT Ltd and Infinigy Solutions LLC in addition to
the inclusion of Infinigy, a Magic Software subsidiary, for the full year (consolidated during the second half of 2015) and (ii)
consolidation for the first time of Shavit Software (2009) Ltd. (consolidated as of November 2016), Twingo Ltd., (consolidated
as of August 2016) and Quickcode Ltd., (consolidated as of February 2016) offset by a continued decline in Magic Software’s
professional services provided to Ericsson from $12.9 million in 2015 to $7.6 million in 2016, due to the successful completion
of number of projects at Ericsson.



InSync:



InSync’s revenues increased
by 14.7% from $ 29.9 million to $ 34.3 million, primarily attributable to increased demand for InSync’s professional services
offerings.



The increase in revenues from proprietary
software products and related services was attributable to Sapiens’ organic growth of approximately $38.0 million, primarily
due to implementation and professional services generated from Sapiens existing and new customers, which were offset in part, in
an amount of $4.6 million, resulting from to the devaluation of foreign currencies (in which revenues were received) relative to
the U.S. dollar. The increase was furthermore due to $3.5 million of revenues attributable to MaxPro and 4Sight results, both subsidiaries
of Sapiens, which were included in our consolidated results for the first time for the year ended December 31, 2016.



A breakdown of our overall revenues into
proprietary software products and related services and software services revenues for the years ended December 31, 2015 and 2016,
the percentage those respective categories of revenues constituted out of our total revenues in those years, and the percentage
change for each such category of revenues from 2015 to 2016, are provided in the below table:





73







|                              |  | Year ended        |         |  | Year-over  |  |       | Year ended        | 
|----------------------------- |  | ----------------- | ------- |  | ---------- |  | ----- | ----------------- | 
|                              |  | December 31, 2015 |         |  | Year       |  |       | December 31, 2016 | 
|                              |  | Revenues          |         |  | Percentage |  |       | change            | 
|Revenue category              |  | ($ in thousands)  |        
|                              |  |                   |         |  |            |  |       |                   | 
|Proprietary software          |  |                   | 242,818 |  |            |  | 24.95 | %                 | 
|products and related services |  |                   |         |  |            |  |       |                   | 
|Software services             |  |                   | 730,376 |  |            |  | 75.05 | %                 | 
|                              |  |                   |         |  |            |  |       |                   | 
|Total                         |  |                   | 973,194 |  |            |  | 100   | %                 | 



Revenues by geographical region



The dollar amount and percentage share of our revenues attributable
to each of the geographical regions in which we conduct our operations for the years ended December 31, 2015 and 2016, respectively,
as well as the percentage change between such years, were as follows:



|               |  | Year ended  December 31, |        
|-------------- |  | ------------------------ | -------
|               |  | 2015                     |        
|               |  |                          |        
|Israel         |  | $                        | 570,614
|International: |  |                          |        
|United States  |  |                          | 252,526
|Europe         |  |                          | 112,169
|Japan          |  |                          | 30,009 
|Other          |  |                          | 7,876  
|               |  |                          |        
|Total          |  | $                        | 973,194



Cost of Revenues. Cost of revenues
consists primarily of wages, personnel expenses, other personnel-related expenses of software consultants, subcontractors and engineers,
amortization of capitalized software, and hardware and other materials costs. Cost of revenues increased by 14.6% from $ 741.3
million in 2015 to $ 849.8 million in 2016. As a percentage of total revenues, costs of revenues in 2015 and 2016 were 76.2% and
76.7%, respectively.





Our proprietary software solutions and
related services sales are generally characterized by a higher gross margin than sales of our software services. The cost of revenues
for proprietary software solutions and related services increased from $ 131.1 million in 2015 to $ 149.2 million in 2016. As a
percentage of our proprietary software solutions and related services revenues, costs of revenues for proprietary software solutions
and related services in 2015 and 2016 remained relatively stable at 54% in 2015 compared to 54.6% in 2016.



The cost of revenues for software services increased from $ 610.1 million in 2015 to $ 700.6 million in
2016. As a percentage of software services revenues, costs of revenues for software services in 2015 and 2016 remained relatively
stable at 83.5% in 2015 compared to 83.9% in 2016.



The increase in our cost of revenues was
primarily due to the following:



Matrix:



Matrix’s cost of revenues increased
13.7% from $ 492.8 million in 2015 to $ 560.4 million in 2016. The increase in absolute cost of revenues was related to the increase
in their revenues during the year ended December 31, 2016 relative to the year ended December 31, 2015. The level of Matrix’s
cost of revenues as a percentage of their revenues remained relatively stable in 2016 increasing from 84% in 2015 to 84.6% in 2016.
The increase in Matrix’s cost of revenues as a percentage of its revenues as recorded in U.S. dollars was primarily attributable
to increase in employee salary rates in Israel and in the U.S.



74







Sapiens:



Sapiens’ cost of revenues increased
14.8% from $ 110.0 million in 2015 to $ 126.3 million in 2016. The increase in absolute cost of revenues was related to the increase
in its revenues during the year ended December 31, 2016 relative to the year ended December 31, 2015, including due to the inclusion
of MaxPro and 4Sight, both subsidiaries of Sapiens, in our consolidated results for the first time for the year ended December
31, 2016. Certain projects in certain non-central locations that are not part of Sapiens core insurance business had a lower degree
of profitability, which contributed to the slight increase in Sapiens cost of revenues as a percentage of their revenues. In addition,
the appreciation of the NIS relative to the U.S. dollar increased Sapiens cost of revenues as a percentage of their revenues as
recorded in U.S. dollars for the year ended December 31, 2016.



Magic Software:



Magic Software’s cost of revenues
increased 17.8% from $ 113.2 million in 2015 to $ 133.4 million in 2016. The increase in cost of revenues was primarily attributable
to (i) the inclusion of Infinigy, a Magic Software subsidiary, for the full year (consolidated during the second half of 2015)
and (ii) consolidation for the first time of Shavit Software (2009) Ltd. (consolidated as of November 2016), Twingo Ltd., (consolidated
as of August 2016) and Quickcode Ltd., (consolidated as of February 2016), with the remaining increase being consistent with the
increase in Magic Software’s revenues from IT consulting services, though offset by continued decline in Magic’s U.S.
IT professional services provided to Ericsson.



InSync:



InSync’s cost of revenues increased
18.0% from $ 25.3 million in 2015 to $ 29.8 million in 2016. The increase in absolute cost of revenues was related to the increase
in its revenues during the year ended December 31, 2016 relative to the year ended December 31, 2015.



Cost of revenues for the years ended December
31, 2015 and 2016 include insignificant amounts of stock-based compensation.



Research and Development Costs, net.Research and development, or R&D, expenses consist primarily of wages and related expenses and, to a lesser degree, consulting
fees that we pay to employees and independent contractors, respectively, engaged in research and development.  Research and
development expenses, net, consist of research and development expenses, gross, less capitalized software costs.  Research
and development expenses, gross, increased from $ 25.0 million in 2015 to $ 32.1 million in 2016, mainly due to our greater level
of investment in research and development activities both in Magic Software and in Sapiens in support of the expansion of our offering
of solutions in the year ended December 31, 2016, including due to the inclusion of MaxPro, 4Sight, both subsidiaries of Sapiens,
and Roshtov, a subsidiary of Magic, in our consolidated results for the first time for the year ended December 31, 2016.



In 2016, we capitalized software costs
of $ 9.8 million, compared to $ 9.9 million in 2015. Capitalization of software costs in 2015 and 2016 was attributable to our
subsidiaries engaged in providing proprietary software solutions (i.e., Magic Software and Sapiens). Research and development expenses,
net, increased from $ 15.1 million in 2015 to $ 22.3 million in 2016, mainly due to the factors described above.



As a percentage of revenues, research and
development expenses, net, increased from 1.6% in 2015 to 2.0% in 2016. Research and development expenses for the years ended December
31, 2015 and 2016 include insignificant amounts of stock-based compensation.



Selling, Marketing General and Administrative
Expenses. Selling, marketing, general and administrative expenses consist primarily of cost of salaries, severance and related
expenses of sales, marketing, management and administrative employees, travel expenses, selling expenses, rent, utilities, communications
expenses, expenses related to external consultants, depreciation, amortization and other expenses. Selling, marketing, general
and administrative expenses increased from $ 140.9 million in 2015 to $ 148.0 million in 2016. As a percentage of revenues, selling,
marketing, general and administrative expenses decreased from 14.5% in 2015 to 13.4% in 2016.



75







The increase in the absolute amount of
selling, general and administrative expenses was primarily attributable to increase in (1) Magic Software’s general and administrative
expenses increasing from $ 12.1 million in 2015 to $ 16.1 million in 2016, mainly attributable to (i) acquisitions of subsidiaries
consolidated for the first time in 2016 and to acquisitions completed during 2015 and consolidated for the entire year for the
first time in 2016 amounting to $2.8 million; and (ii) valuation of contingent liabilities in acquired subsidiaries amounting to
$0.5 million; and (iii) an increase in headcount of general and administrative employees, and (2) Sapiens’ selling, marketing
general and administrative expenses increasing from $ 42.6 million in 2015 to $ 47.1 million in 2016, mainly attributable to a
greater investment in Sapiens sales and marketing organizations team and their increased marketing expenses to support their brands
and expand sales opportunities, including due to the inclusion of MaxPro and 4Sight, both subsidiaries of Sapiens in our consolidated
results for the first time for the year ended December 31, 2016, which was evidenced by Sapiens 16.5% increase in their revenues
in the year ended December 31,2016.



Selling, marketing general and administrative expenses for the years ended December 31, 2015 and 2016
include $ 4.2 million and $ 4.3 million, respectively, of stock-based compensation expenses.



Operating Income. Our operating
income increased from $ 75.9 million in 2015 to $ 88.5 million in 2016. As a percentage of revenues, our operating remained relatively
stable increasing from 7.8% in 2015 to 8.0% in 2016. The increase in our operating income during the year ended December 31, 2016
relative to the year ended December 31, 2015 as an absolute amount was attributable to the various gross profit and operating expenses
trends described above.



Financial Expenses, net. Financial
expenses increased from $ 15.0 million in 2015 to $ 17.6 million in 2016. Financial expenses, net increased from $ 9.5 million
in 2015 to $ 11.6 million in 2016. Financial expenses are influenced by various factors, including our cash balances, loan balances,
outstanding debentures, changes in market value of trading marketable securities, changes in the exchange rate of the NIS against
the dollar, changes in the exchange rate of the dollar against the Euro and changes in the Israeli consumer price index, or CPI.
The increase in financial expenses in 2016 was primarily attributable to (i) increase in financial expenses recorded with respect
to Formula’s debentures, which were issued on September 2015, from $ 0.6 million in 2015 to $2.0 million in 2016 and (ii)
increase in financial expenses recorded with respect of change in financial liabilities of put options granted to non-controlling
interests from $ 1.2 million in 2015 to $ 2.6 million in 2016.



Equity in gains of affiliated companies net.Our equity
in gains of affiliated companies, net increased from $ 5 thousand in 2015 to $ 349 thousand in 2016. Our equity in gains of affiliates
in 2016 was attributable to TSG.



Taxes on Income. Taxes on income
increased from $ 16.0 million in 2015 to $ 21.2 million in 2016. The increase in our expense from taxes on income was primarily
attributable to (i) an increase in our taxable income in the jurisdictions in which we operate, (ii) during the year ended December
31, 2016, certain of our subsidiaries in Israel and the UK became subject to tax liability following the utilization of tax benefits
in previous years and (iii) a decrease in deferred tax assets recorded mainly in Matrix and having a negative impact of $0.9 million,
resulting from a decrease in Israel’s corporate income tax rate from 25% to 23% which was approved by the Israeli parliament
on December 2016.



Net income attributable to redeemable
non-controlling interests. Change in redeemable non-controlling interest in 2015 amounted to an expense of $ 0.9 million. Change
in redeemable non-controlling interest in 2016 amounted to amounted to an expense of $ 2.1 million. Net income attributable to
redeemable non-controlling interests includes the redeemable non-controlling interests held by other shareholders in our consolidated
companies which are not wholly owned by Formula during each of the periods indicated to which we have granted put options to sell
part or all of their capital interests in our subsidiary.



Net Income Attributable
to Non-Controlling Interests.
Net income attributable to non-controlling interests includes the non-controlling interests held by other shareholders in our
consolidated companies which are not wholly owned by Formula during each of the periods indicated. Net income attributable to
non-controlling interests increased from $ 29.7 million in 2015 to $ 31.6 million in 2016.





76







Impact of Inflation and Currency Fluctuations on
Results of Operations



Our financial statements are stated in
U.S. dollars, our functional currency. However, most of our revenues and expenses from our software services revenue line are denominated
in NIS and a substantial portion of our revenues and costs from our proprietary software products and related services revenue
line are incurred in other currencies, particularly NIS, Euros, Japanese yen, and the British pound. We also maintain substantial
non-U.S. dollar balances of assets, including cash, accounts receivable, and liabilities, including accounts payable, debentures
and debt to financial institutions Therefore, fluctuations in the value of the currencies in which we do business relative to the
U.S. dollar may adversely affect our business, results of operations and financial condition. For financial reporting purposes,
we translate all non-U.S. dollar denominated transactions into dollars using the average exchange rate over the period during which
the transactions occur, in accordance with IFRS. Therefore, we are exposed to the risk that the devaluation of the NIS relative
to the U.S. dollar may reduce the revenue growth rate and profitability for our software services in dollar terms. The representative
average exchange rate of the NIS to the dollar in 2015 and 2016, as reported by the Bank of Israel, was NIS 3.8869 per US$1 and
NIS 3.8406 per US$1, respectively. On the other hand, a significant portion of our revenues from proprietary software products
and related services is currently mainly denominated in U.S dollar, Euros, Japanese Yen and the British Pound, whereas a substantial
portion of our expenses relating to those products, principally salaries and related personnel expenses, are denominated in NIS.
As a result, the devaluation of the Euro or those other currencies relative to the dollar (as was the case in 2014, 2015 and 2016
with respect to the Euro and as was in the case of the Japanese Yen in 2014 and 2015 and as was in the case of the British Pound
in 2016 following the Brexit) reduces the revenue growth rate and profitability for our proprietary software products and related
services in dollar terms, thereby adversely affecting our operating results. On the other hand, the devaluation of the NIS relative
to the dollar, which occurred in 2015, decreased the relative value of the NIS-denominated operating costs related to our proprietary
software product revenues, and, therefore, partially compensates for the negative effect on our revenues and our profitability.



Since most of our expenses are incurred
in NIS, the dollar cost of our operations also rises as a result of any increase in the rate of inflation in Israel, to the extent
that such inflation is not offset, or is only offset on a lagging basis, by the devaluation (if any) of the NIS against the dollar
during a relevant period of time. The Israeli rate of inflation amounted to (-0.2)%, (-1.0)% and (-0.2)% for the years ended December
31, 2014, 2015 and 2016, respectively. In 2014 and 2015, the U.S. dollar appreciated relative to the NIS at a rate that eclipsed
the Israeli rate of deflation for those years. In 2016 the NIS appreciated relative to the U.S dollar.



An increase in the rate of inflation in
Israel may also have a material adverse effect on our financial results by increasing our operational expenses, as certain of our
operating lease and rent agreements are denominated in NIS and are generally linked to the Israeli CPI, so to the extent that the
CPI rises so will our operational expenses.



To date, we have not engaged in significant
currency hedging transactions. In the future, we may enter into more or larger currency hedging transactions to decrease the risk
of financial exposure from fluctuations in the exchange rate of the NIS, Euro, Japanese Yen or British Pound against the dollar,
and from increases in the Israeli inflation rate. However, we cannot assure you that these measures will adequately protect us
from the adverse effects of those fluctuations.



Following is a summary of the most relevant monetary indicators
for the reported periods:



|For the year ended  December 31, |  | Inflation rate in Israel |  | Devaluation (appreciation) of NIS  against the US$* |       |   | Devaluation (appreciation) of Euro  against the US$* | 
|-------------------------------- |  | ------------------------ |  | --------------------------------------------------- | ----- | - | ---------------------------------------------------- | 
|                                 |  | %                        |  | %                                                   |       |   | %                                                    | 
|                                 |  |                          |  |                                                     |       |   |                                                      | 
|2014                             |  | (-0.2)                   |  |                                                     | (12.0 | ) |                                                      | 
|2015                             |  | (-1.0)                   |  |                                                     | (0.3  | ) |                                                      | 
|2016                             |  | (-0.2)                   |  |                                                     | 1.5   |   |                                                      | 





*Reflects the change in the exchange rate
from January 1 to December 31 of the relevant year, rather than the difference in the average exchange rate over the course of
each year relative to the previous year.



77







Effective Corporate Tax Rates in Israel



Tax regulations have a material impact
on our business, particularly in Israel where we have the headquarters or certain our investees. The following summary describes
the current tax structure applicable to companies in Israel, with special reference to its effect on us. The following also contains
a discussion of government programs from which we, and some of our subsidiaries, benefit. To the extent that the discussion is
based on tax legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that
the views expressed in the discussion will be accepted by the tax authorities in question.



Corporate Tax



Israeli companies are generally subject to corporate tax on their taxable income. In 2017, the corporate
tax rate is 24% (in 2015 and 2016, the corporate tax rate was 26.5% and 25%, respectively) and as of 2018 the corporate tax rate
will be 23%. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Benefited
Enterprise or Preferred Enterprise, as further discussed below, may be considerably less. In addition, Israeli companies are generally
subject to tax at the prevailing regular corporate tax rate on their capital gains.



Besides being subject to the general corporate tax rules in
Israel, certain of our Israeli subsidiaries have also, from time to time, applied for and received certain grants and tax benefits
from, and participate in, programs sponsored by the Government of Israel, as described below.



Taxation of Non-Israeli Subsidiaries Held by an Israeli
Parent Company



Non-Israeli subsidiaries of an Israeli
parent company are generally subject to tax in their countries of residence under tax laws applicable to them in such countries.
Such subsidiaries could also be subject to Israeli corporate tax on their income if they were to be managed and controlled from
Israel. In such case, double taxation could ensue unless an applicable tax treaty provides applicable rules for relief from double
taxation or such relief is available under internal law.



An Israeli parent company may also be required
to include in its income on a current basis, as a deemed dividend, certain income derived by its subsidiaries under the Israeli
Controlled Foreign Corporation rules, regardless of whether such income is distributed or not. Under these rules, a non-Israeli
subsidiary is considered to be a controlled foreign corporation, if, among other things, a majority of the subsidiary’s means
of control are held by Israeli residents, most of its revenues or income is passive (such as interest, dividends, royalties, rental
income or income from capital gains) and such income is taxed at a rate that does not exceed 15%. An Israeli parent company that
is subject to Israeli taxes on such deemed dividend income, may generally receive a credit for foreign taxes paid by its subsidiaries
in their country of residence and for deemed foreign taxes to be withheld upon the actual distribution of such income.



Law for the Encouragement of Industry (Taxes), 5729-1969



The Law for the Encouragement of Industry
(Taxes), 5729-1969, or the Industry Encouragement Law, provides certain tax benefits for an “Industrial Company”. Pursuant
to the Industry Encouragement Law, a company qualifies as an Industrial Company if it is an Israeli resident company that was incorporated
in Israel and at least 90% of its income in any tax year (other than income from certain government loans) is generated from an
“Industrial Enterprise” that it owns and located in Israel. An “Industrial Enterprise” is defined as an
enterprise whose major activity, in a given tax year, is industrial production.



An Industrial Company is entitled to certain
tax benefits, including:



| | · | Deduction of the cost of the purchases of patents, or the right to use a patent or know-how used for the development or promotion
of the Industrial Company;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------





| | · | The right to elect, under certain conditions, to file
a consolidated tax return together with Israeli Industrial Companies controlled by it; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Accelerated depreciation rates on equipment and buildings.
| | - | ----------------------------------------------------------





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



We believe that certain of our Israeli
subsidiaries currently qualify as Industrial Companies within the definition under the Industry Encouragement Law. We cannot assure
you that we will continue to qualify as Industrial Companies or that the benefits described above will be available in the future.



Tax Benefits under the Law for the Encouragement of Capital
Investments, 5719-1959



The Law for the Encouragement of Capital
Investments, 5719-1959 (the “Investment Law”), provides certain incentives for capital investments in a production
facility (or other eligible assets) by “Industrial Enterprises” (as defined under the Investment Law). Generally, an
investment program that is implemented in accordance with the provisions of the Investment Law, referred to as an Approved Enterprise,
a Beneficiary Enterprise or a Preferred Enterprise, is entitled to benefits as discussed below. These benefits may include cash
grants from the Israeli government and tax benefits, based upon, among other things, the geographic location in Israel of the facility
in which the investment is made or the election of the grantee. In order to qualify for these incentives, an Approved Enterprise,
a Beneficiary Enterprise or a Preferred Enterprise is required to comply with the requirements of the Investment Law.



The Investment Law has been amended several
times over the last years, with the three most significant changes effective as of April 1, 2005 (referred to as the “2005
Amendment”), as of January 1, 2011 (the “2011 Amendment”) and as of January 1, 2017 (the “2017 Amendment”).
Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision
by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the 2005 Amendment.
Similarly, the 2011 Amendment introduced new benefits instead of the benefits granted in accordance with the provisions of the
Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect
prior to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met,
or elect instead irrevocably to forego such benefits and elect the benefits of the 2011 Amendment. The 2017 Amendment introduces
new benefits for Technological Enterprises, alongside the existing tax benefits.



Tax Benefits for Income from Approved
Enterprises Approved Before April 1, 2005



Under the Investment Law prior to the
2005 Amendment, a company that wished to receive benefits on its investment program that is implemented in accordance with
the provisions of the Investment Law (referred to as an Approved Enterprise), had to receive an approval from the Israeli
Authority for Investments and Development of the Industry and Economy (referred to as the Investment Center) which we refer
to as the Investment Center. Each certificate of approval for an Approved Enterprise relates to a specific investment program
delineated by the financial scope of the investment, including sources of funds, and by the physical characteristics of the
facility or other assets. The tax benefits available under any certificate of approval relate only to taxable income
attributable to the specific program and are contingent upon meeting the criteria set out in the certificate of approval.



An Approved Enterprise may elect to
forego any entitlement to the cash grants otherwise available under the Investment Law and, instead, participate in an
alternative benefits program. Under the alternative benefits program, a company’s undistributed income derived from an
Approved Enterprise will be exempt from corporate tax for a period of between 2 and 10 years from the first year of taxable
income, depending on the geographic location within Israel of the Approved Enterprise, and a reduced corporate tax rate of
between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in
each year, as detailed below. The benefits period under Approved Enterprise status is limited to 12 years from the year in
which the production commenced (as determined by the Investment Center), or 14 years from the year of receipt of the approval
as an Approved Enterprise, whichever ends earlier. If a company has more than one Approved Enterprise program or if only a
portion of its capital investments are approved, its effective tax rate is the result of a weighted combination of the
applicable rates. The tax benefits available under any certificate of approval relate only to taxable income attributable to
the specific program and are contingent upon meeting the criteria set out in the certificate of approval. Income derived from
activity that is not integral to the activity of the Approved Enterprise will not enjoy tax benefits. The entitlement to the
above benefits is subject to fulfillment of certain conditions, according to the law and related regulations.





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A company that has an Approved Enterprise
program is eligible for further tax benefits, if it qualifies as a Foreign Investors’ Company, or FIC. An FIC eligible for
benefits is essentially a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level
of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and
appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not
residents of Israel. The determination as to whether or not a company qualifies as an FIC is made on an annual basis. An FIC that
has an Approved Enterprise program will be eligible for an extension of the period during which it is entitled to tax benefits
under its Approved Enterprise status (so that the benefits period may be up to ten years) and for further tax benefits if the level
of foreign investment is 49% or more. If a company that has an Approved Enterprise program is a wholly owned subsidiary of another
company, then the percentage of foreign investment is determined based on the percentage of foreign investment in the parent company.



The corporate tax rates and related levels
of foreign investments with respect to an FIC that has an Approved Enterprise program are set forth in the following table:



|Percentage of non-Israeli ownership |  | Corporate Tax Rate |   
|----------------------------------- |  | ------------------ | --
|                                    |  |                    |   
|Over 25% but less than 49%          |  |                    | 25
|49% or more but less than 74%       |  |                    | 20
|74% or more but less than 90%       |  |                    | 15
|90% or more                         |  |                    | 10



A company that has elected to participate
in the alternative benefits program and that subsequently pays a dividend out of the income derived from the portion of its facilities
that have been granted Approved Enterprise status during the tax exemption period will be subject to corporate tax in respect of
the amount of dividend distributed (grossed up to reflect such pre-tax income that it would have had to earn in order to distribute
the dividend) at the corporate tax rate that would have been otherwise applicable if such income had not been tax-exempted under
the alternative benefits program. This rate generally ranges from 10% to 25%, depending on the level of foreign investment in the
company in each year, as explained above.



In addition, dividends paid out of income
attributed to an Approved Enterprise (or out of dividends received from a company whose income is attributed to an Approved Enterprise)
are generally subject to withholding tax at the rate of 15%, or at a lower rate as may be provided under an applicable tax treaty
(subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). The 15%
tax rate is limited to dividends and distributions out of income derived during the benefits period and actually paid at any time
up to 12 years thereafter. After this period, the withholding tax is applied at a rate of up to 30%, or at a lower rate under an
applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced
tax rate). In the case of an FIC, the 12-year limitation on reduced withholding tax on dividends does not apply.



The Investment Law also provides that an
Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an Approved Enterprise
program. This benefit is an incentive granted by the Israeli government regardless of whether the alternative benefits program
is elected.



The benefits available to an Approved Enterprise
are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific
certificate of approval with respect thereto, as described above. If a company does not meet these conditions, it would be required
to refund the amount of tax benefits, adjusted to the Israeli consumer price index and interest or other monetary penalty.



In our case, subject to compliance with
applicable requirements stipulated in the Investment Law and its regulations and in the specific certificate of approval, as described
above, the portion of undistributed income derived from Approved Enterprise programs of one of Sapiens Israeli subsidiaries was
exempt from corporate tax for a period of two years commencing in 2014,





80







Tax benefits under the 2005 Amendment that became effective
on April 1, 2005.



The 2005 Amendment applies to new investment
programs commencing after 2004, and does not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides
that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment became effective (April
1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval. Pursuant to the
2005 Amendment, the Investment Center will continue to grant Approved Enterprise status to qualifying investments. The 2005 Amendment,
however, limits the scope of enterprises that may be approved by the Investment Center by setting criteria for the approval of
a facility as an Approved Enterprise.



An enterprise that qualifies under the
new provisions is referred to as a Beneficiary Enterprise, rather than Approved Enterprise. The 2005 Amendment provides that a
certificate of approval from the Investment Center is required only for Approved Enterprises that receive cash grants. As a result,
a company is no longer required to obtain the advance approval of the Investment Center in order to receive the tax benefits previously
available under the alternative benefits program. Rather, a company may claim the tax benefits offered by the Investment Law directly
in its tax returns, provided that its facilities meet the criteria for tax benefits set forth in the 2005 Amendment. A company
that has a Beneficiary Enterprise may, at its discretion, approach the Israel Tax Authority for a pre-ruling confirming that it
is in compliance with the provisions of the Investment Law.



Tax benefits are available under the 2005
Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their
business income from export to specific markets with a population of at least 14 million in 2012 (such export criteria will further
increase in the future by 1.4% per annum). In order to receive the tax benefits, the 2005 Amendment states that a company must
make an investment which meets certain conditions set forth in the amendment for tax benefits and which exceeds a minimum investment
amount specified in the Investment Law. Such investment entitles a company to receive a Beneficiary Enterprise status with respect
to the investment, and may be made over a period of no more than three years from the end of the year in which the company chose
to have the tax benefits apply to its Beneficiary Enterprise. Where a company requests to have the tax benefits apply to an expansion
of existing facilities, only the expansion will be considered to be a Beneficiary Enterprise, and the company’s effective
tax rate will be the weighted average of the applicable rates. In such case, the minimum investment required in order to qualify
as a Beneficiary Enterprise must exceed a certain percentage of the value of the company’s production assets before the expansion.



The extent of the tax benefits available
under the 2005 Amendment to qualifying income of a Beneficiary Enterprise depends on, among other things, the geographic location
in Israel of the Beneficiary Enterprise. The location will also determine the period for which tax benefits are available. Such
tax benefits include an exemption from corporate tax on undistributed income generated by the Beneficiary Enterprise for a period
of between two to ten years, depending on the geographic location of the Beneficiary Enterprise in Israel, and a reduced corporate
tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company
in each year, as explained above. The benefits period is limited to 12 or 14 years from the year the company first chose to have
the tax benefits apply, depending on the location of the company



Dividends paid out of income attributed
to a Beneficiary Enterprise (or out of dividends received from a company whose income is attributed to a Beneficiary Enterprise)
are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax
treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
The reduced rate of 15% is limited to dividends and distributions out of income attributed to a Beneficiary Enterprise during the
benefits period and actually paid at any time up to 12 years thereafter, except with respect to an FIC, in which case the 12-year
limit does not apply. Furthermore, a company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of
income attributed to its Beneficiary Enterprise during the tax exemption period will be subject to corporate tax in respect of
the amount of the dividend distributed (grossed-up to reflect the pre-tax income that it would have had to earn in order to distribute
the dividend) at the corporate tax rate that would have otherwise been applicable.





81







The benefits available to a Beneficiary
Enterprise are subject to the continued fulfillment of conditions stipulated in the Investment Law and its regulations. If a company
does not meet these conditions, it would be required to refund the amount of tax benefits, as adjusted by the Israeli consumer
price index and interest, or other monetary penalty.



Income that is attributable to one of Sapiens’
Israeli subsidiaries, was exempt from income tax for a period of two years commencing 2014 and ending 2015, under the 2005 Amendment.



Tax benefits under the 2011 Amendment that became effective
on January 1, 2011.



The 2011 Amendment canceled the availability
of the benefits granted to companies in accordance with the provisions of the Investment Law prior to 2011 and, instead, introduced
new benefits for income generated by a “Preferred Company” through its Preferred Enterprise (as such terms are defined
in the Investment Law) as of January 1, 2011. A Preferred Company is defined as either (i) a company incorporated in Israel which
is not wholly owned by a governmental entity or (ii) a limited partnership that (a) was registered under the Israeli Partnerships
Ordinance and (b) all of its limited partners are companies incorporated in Israel, but not all of them are governmental entities;
which has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment,
a Preferred Company was entitled to a reduced corporate tax rate of 15% with respect to its preferred income attributed to its
Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise was located in a certain development zone, in which case
the rate was 10%. Such corporate tax rates were reduced to 12.5% and 7%, respectively, in 2013 and were increased to 16% and 9%,
respectively, in 2014 until 2016. Pursuant to the 2017 Amendment, in 2017 and thereafter, the corporate tax rate for a Preferred
Enterprise that is located in a specified development zone was decreased to 7.5%, while the reduced corporate tax rate for other
development zones remains 16%. Income derived by a Preferred Company from a ‘Special Preferred Enterprise’ (as such
term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of
8%, or 5% if the Special Preferred Enterprise is located in a certain development zone. As of January 1, 2017, the definition for
‘Special Preferred Enterprise’ includes less stringent conditions.



Dividends paid out of preferred income
attributed to a Preferred Enterprise or to a Special Preferred Enterprise are generally subject to withholding tax at source at
the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid
certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company,
no tax is required to be withheld (although, if such dividends are subsequently distributed to individuals or a non-Israeli company,
withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). In 2017 to 2019,
dividends paid out of preferred income attributed to a Special Preferred Enterprise, directly to a foreign parent company, are
subject to withholding tax at source at the rate of 5% (temporary provisions).



The 2011 Amendment also provided transitional
provisions to address companies already enjoying existing tax benefits under the Investment Law. These transitional provisions
provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended
in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval
that was granted to an Approved Enterprise, which chose to receive grants, before the 2011 Amendment became effective, will remain
subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; (ii)
the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise, that had participated
in an alternative benefits program, before the 2011 Amendment became effective, will remain subject to the provisions of the Investment
Law as in effect on the date of such approval, provided that certain conditions are met ; and (iii) a Beneficiary Enterprise can
elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain
conditions are met. As of December 31, 2014 and 2015, some of our Israeli subsidiaries had filed a request to apply the new benefits
under the 2011 Amendment.



New Tax benefits under the 2017 Amendment that became effective
on January 1, 2017



The 2017 Amendment was enacted as part
of the Economic Efficiency Law that was published on December 29, 2016, and is effective as of January 1, 2017, subject to the
publication of regulations that were expected to be released before March 31, 2017. The 2017 Amendment provides new tax benefits
for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial
programs under the Investment Law.





82







The 2017 Amendment provides that a technology
company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and will thereby enjoy a
reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined in the Investment
Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development zone A. In addition,
a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain
“Benefited Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefited Intangible
Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million, and the sale receives prior
approval from the National Authority for Technological Innovation (referred to as NATI).



The 2017 Amendment further provides that
a technology company satisfying certain conditions will qualify as a “Special Preferred Technology Enterprise” and
will thereby benefit from a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s
geographic location within Israel. In addition, a Special Preferred Technology Enterprise will benefit from a reduced corporate
tax rate of 6% on capital gain derived from the sale of certain “Benefited Intangible Assets” to a related foreign
company if the Benefited Intangible Assets were either developed by an Israeli company or acquired from a foreign company on or
after January 1, 2017, and the sale received prior approval from NATI. A Special Preferred Technology Enterprise that acquires
Benefited Intangible Assets from a foreign company for more than NIS 500 million will be eligible for these benefits for at least
ten years, subject to certain approvals as specified in the Investment Law.



Dividends distributed by a Preferred Technology
Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are subject to withholding tax
at source at the rate of 20%, and if distributed to a foreign company and other conditions are met, the withholding tax rate will
be 4%.



We are examining the impact of the 2017
Amendment and the degree to which our Israeli investees will qualify as a Preferred Technology Enterprise or Special Preferred
Technology Enterprise, and the amount of Preferred Technology Income that our investees may have, or other benefits that our investees
may receive, from the 2017 Amendment.



Tax Benefits for Research and Development



Israeli tax law allows, under certain conditions,
a tax deduction for research and development expenditures, including capital expenditures, for the year in which they are incurred.
Such expenditures must relate to scientific research and development projects, and must be approved by the relevant Israeli government
ministry, determined by the field of research. Furthermore, the research and development must be for the promotion of the company’s
business and carried out by or on behalf of the company seeking such tax deduction. However, the amount of such deductible expenses
is reduced by the sum of any funds received through government grants for the finance of such scientific research and development
projects. Expenditures not so approved by the relevant Israeli government ministry, but otherwise qualifying for deduction, are
deductible over a three-year period



| | B. | Liquidity and Capital Resources
| | -- | -------------------------------



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



Current Outlook



We had cash and cash equivalents and short-term
investments of $283.4 million and $275.7 million at December 31, 2015 and December 31, 2016, respectively. At December 31, 2015
and December 31, 2016, we had indebtedness to banks and others of $ 220.1 million and $ 259.0 million, respectively, of which $
59.3 million and $88.0 million were current liabilities and $ 160.8 million and $ 171.0 million were long-term liabilities as of
those respective dates. In addition, as of December 31, 2016, we had indebtedness of $58.7 million outstanding under our secured
debentures and convertible debentures which we sold in a public offering in Israel in September 2015, as described below.





83







In January 2014, Formula received
a NIS 200 million loan (approximately $57.6 million) from a leading Israeli institutional investor. The loan is secured by
certain of the shares of each of our publicly held subsidiary and affiliated companies. The loan's average duration from
inception is approximately four years (paid over a period of 6 years, with the first payment made in January 2016) and
carries a fixed annual interest rate of 5.5%.



Under the terms of the loan with the Israeli
institutional investor, Formula has undertaken to maintain the following financial covenants, as they will be expressed in its
financial statements, as described:



| | 1. | Formula’s equity shall not be lower than $ 160
million at all times.
| | -- | --------------------------------------------------------------------

| | 2. | The ratio of Formula’s equity to total assets
will not be less than 20%.
| | -- | ------------------------------------------------------------------------

| | 3. | The ratio of Formula’s total financial debts
less cash, short-term deposits and short-term marketable securities to the annual EBITDA will not exceed 3.5 to 1.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The ratio of Formula’s total financial debts
less cash, short-term deposits and short-term marketable securities to the total assets will not exceed 30%.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Formula’s liabilities to banks and other financial
institutions in its standalone balance sheet shall not be higher than NIS 450 million (approximately $ 115.7 million).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. | Formula will not create any pledge on all or part
of its property and assets in favor of any third party and will not provide any guarantee to secure any third party's debts as
they are today and as they will be without the financial institution's consent.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 7. | Formula will not sell and/or transfer all or part
of its assets to others in any manner whatsoever without the financial institution’s advance written consent, unless it
is done in the ordinary course of business.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In September 2015, Formula
consummated a public offering of debentures in Israel. The two series of debentures issued by Formula in the public offering
consisted of one series of debentures (the “Series A Secured Debentures”) that are secured by liens on the shares
of Formula’s subsidiaries and affiliate held by Formula, while the second series (the “Series B Convertible
Debentures,” and, together with the Secured Debentures, the “Debentures”) are convertible into ordinary
shares of Formula. The Debentures are listed for trading only on the TASE.



In the public offering, Formula issued
and sold a total amount of NIS 227,260,000 ($ 57.8 million) par value of the New Debentures, which were subdivided into the following
respective amounts of Secured Debentures and Convertible Debentures that are subject to the following terms:



| | · | NIS 102,260,000 ($ 26.1 million) par value of Series
A Secured Debentures, bearing interest on the unpaid principal at a fixed annual rate equal to 2.8% (which may vary based on the
credit rating of the debentures), paid on a semi-annual basis through July 2024. The principal is payable in eight equal annual
installments beginning in July 2017 and ending in July 2024. The interest rate varies based on the credit rating of the Secured
Debentures. The net proceeds received by Formula from the issuance of Series A Secured Debentures amount to $ 25.9 million (net
of issuance expenses).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | NIS 125,000,000 ($ 31.2 million) par value of Series
B Convertible Debentures, at a price per debenture unit (each unit comprised of NIS 1,000 par value of debentures) of NIS 1,020.
The Series B Convertible Debentures bear interest at a fixed annual rate equal to 2.74% (which may vary based on the credit rating
of the debentures), payable in one payment upon maturity of the Series B Convertible Debentures on March 26, 2019 (at which time
the accrued interest will constitute 10% of the principal amount of the Convertible Debentures, in the aggregate). The Series
B Convertible Debentures are subject to conversion into the Company’s ordinary shares at a rate of NIS 157 ($ 40.03) par
value of Convertible Debentures per one share. The conversion rate is subject to adjustment for the issuance of bonus shares,
rights and dividends. The principal amount of and interest on the Series B Convertible Debentures is subject to adjustment based
on changes in the exchange rate between the NIS and the U.S. dollar relative to the exchange rate on September 8, 2015. The net
proceeds received by Formula from the issuance of Series B Convertible Debentures amount to $ 32.1 million (net of issuance expenses).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





84







The gross proceeds received by Formula
from the issuance of all New Debentures were approximately NIS 229.8 million ($ 58.6 million), in the aggregate.



The Series A and B debentures contain,
in addition to standard terms and obligations, the following obligations:



| | · | a negative pledge, subject to certain exceptions;
| | - | -------------------------------------------------

| | · | a covenant not to distribute dividends unless (i) shareholders equity (not including minority interests) shall not be less
than $250 million, (ii) Formula’s net financial indebtedness (financial indebtedness net of cash, marketable securities,
deposits and other liquid financial instruments) shall not exceed 65% of net CAP (which is defined financial indebtedness, net,
plus shareholders equity), (iii) the amount of the distributions shall be equal to profits for the years ended December 31, 2014
and 2015 and 75% of profits accrued from January 1, 2016 until the distribution and (iv) no event of default shall have occurred.;
and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Financial covenants, including (i) the equity attributable to the shareholders of Formula, as reported in Formula’s annual
or quarterly financial statements, will not be less than $160 million, (ii) Formula’s net financial indebtedness (financial
indebtedness net of cash, marketable securities, deposits and other liquid financial instruments) shall not exceed 65% of net CAP
(which is defined as financial indebtedness, net, plus shareholders equity) and (iii) at all times, Formula’s cash balance
will not be less than the annual interest payment (compounded) for the unpaid principal amount of the Series B debentures.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We also agreed to standard events of default, together with
the following:



| | · | cross default, excluding following an immediate repayment
initiated in relation to the other series of debentures or other indebtedness (other than non-recourse debt) over NIS 75 million
($19.2 million);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | suspension of trading of the debentures on the TASE
over a period of 60 days;
| | - | -----------------------------------------------------------------------------

| | · | failure to have the debentures rated over a period
of 60 days;
| | - | --------------------------------------------------------------

| | · | If the rating of the debentures is less than BBB-
by Standard and Poors Maalot or equivalent rating of other rating agencies;
| | - | -----------------------------------------------------------------------------------------------------------------------------

| | · | If there is a change in control without consent of
the rating agency;
| | - | ---------------------------------------------------------------------

| | · | If Formula fails to provide additional security when
the loan-to-value of the securities securing the Series A debentures falls below the required ratio;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the existence of a real concern that Formula will
not meet its material undertakings towards the debenture holders;
| | - | -------------------------------------------------------------------------------------------------------------------

| | · | the inclusion in Formula’s financial statements
of a note regarding the existence of significant doubt as to Formula’s ability to continue as a going concern;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | breach of Formula’s undertakings regarding the
issuance of additional debentures;
| | - | ---------------------------------------------------------------------------------

| | · | Formula’s failure to continue to control any
of its subsidiaries; and
| | - | ---------------------------------------------------------------------

| | · | failure to comply with the negative pledge covenant.
| | - | ----------------------------------------------------



From time to time, our subsidiaries and
affiliated companies also maintain credit facilities with banks and issue debt instruments such as debentures in accordance with
their cash requirements. These credit facilities and debentures include, inter alia, certain covenants related to our subsidiaries’
operations, such as the required maintenance of a minimum level of shareholders’ equity and the achievement of certain operating
results targets. Some of our subsidiaries’ assets are pledged to the lender banks and debenture holders. If any of our subsidiaries
does not meet the covenants specified in its credit agreement or indenture (or equivalent agreement with the debenture holders),
and a waiver with respect to the fulfillment of such covenant has not been received from the lender bank or representative of the
debenture holders, the lender bank or debenture holders (via the action of their representative) may foreclose on the pledged assets
to satisfy a debt.





85







Currently, Matrix, Sapiens, Magic Software
and Formula have such material credit facilities outstanding. The long-term debt obligations of Matrix bear fixed interest at an
average annual rate of 2.60%-5.85%. The long-term debt obligations of Magic Software bear fixed interest at an annual rate of 2.60%.
These credit facilities expire over a period of time that ranges from 1 to 7 years.



As of December 31, 2016, Matrix had aggregate
short-term obligations to banks and others of NIS 256.1 million (approximately $ 66.6 million) and aggregate long-term obligations
to banks of NIS 208.0 million (approximately $ 54.1 million) under its credit facilities. As of December 31, 2016, Magic Software
had aggregate short-tem obligations to banks and others of $ 5.6 million and aggregate long-term obligations to banks and others
of $ 27.3 million) under its credit facilities.



In November 2016, Magic Software obtained
a NIS 120 million (approximately $31.4 million) loan linked to the New Israel shekel from an Israeli institution. Magic Software
intend to use the proceeds from this loan for its general corporate purposes, which may include the funding of its working capital
needs and the funding of potential acquisitions. The principal amount of the loan is payable in seven equal annual payments with
the final payment due on November 2, 2023 and bears a fixed interest rate of 2.60% per annum, payable in two semi-annually payments.
The loan, which may be prepaid under certain circumstances, is subject to various financial covenants which mainly consist of the
following:



| | 1. | Magic Software equity will not be lower than $ 100
million (one hundred million U.S. Dollars) at all times.
| | -- | -----------------------------------------------------------------------------------------------------------

| | 2. | Magic Software cash and cash equivalent and marketable
securities available for sales will not be less than $10 million (ten million U.S. Dollars).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The ratio of Magic Software total financial debts
to total assets will not exceed 50%.
| | -- | --------------------------------------------------------------------------------------

| | 4. | The ratio of Magic Software total financial debts
less cash, short-term deposits and short-term marketable securities to the annual EBITDA will not exceed 3.25 to 1.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. | Magic Software will not create any pledge on all of
its property and assets in favor of any third party without the financial institution’s consent
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------



In the first quarter of 2017, Sapiens (via
its wholly-owned subsidiary, Sapiens Americas Corporation, or the Borrower) entered into a secured credit agreement, or the Credit
Agreement, with HSBC Bank USA, National Association, or the Lender, in connection with, and as financing for, Sapiens’ acquisition
of StoneRiver. Pursuant to the Credit Agreement, Sapiens borrowed $ 40 million, or the Bank Loan, for a five-year term. The Bank
Loan will mature in March 2022 and is payable in equal consecutive quarterly principal installments of principal and accrued interest.
The Borrower is entitled to prepay the Bank Loan at any time (on any interest payment date) without penalty upon notice to the
Lender. The Bank Loan bears interest at the rate of LIBOR plus 1.85%.



The repayment of
the Bank Loan is secured by a first priority liens over (i) substantially all assets of the Borrower and its US subsidiaries and
(ii) the shares of the Borrower held by Sapiens International Corporation B.V. Certain affiliated entities of the Borrower have
guaranteed the repayment of the Bank Loan. The Credit Agreement contains customary representations and warranties, affirmative
covenants and negative covenants, which include, without limitation, restrictions on indebtedness, liens, investments, and certain
dispositions with respect to the property secured by the lien. The Credit Agreement also contains customary events of default that
entitle the Lender to cause any or all of our company's indebtedness to become immediately due and payable and to foreclose on
the lien, and includes customary grace periods before certain events are deemed events of default.



We believe that our
current cash reserves, together with cash that may be distributed to us from the ongoing operations of our subsidiaries and any
credit that we may choose to draw upon that is available under our (and our subsidiaries’ and affiliated company’s)
existing credit facilities should be sufficient for our present working capital requirements for at least the next 12 months at
our current level of operations. We will consider in the future additional equity issuances, debt issuances or borrowings from
banks if necessary to meet cash needs for our growth, including if needed to consummate one or more acquisitions for consideration
consisting of all or a substantial portion of our available cash. Should we require additional financing in the future, we cannot
assure you that such financing will be available on favorable terms or at all.





86







As of the date of
the financial statements, Formula, Magic Software and Matrix were in compliance with the above financial covenants.



Cash Provided by Operating Activities





Cash flow provided by our operating activities decreased from $87.1
million in 2015 to $75.0 million in 2016.



Net cash provided by operating activities in
2016 consisted primarily of the cash generated by our subsidiaries’ ongoing operating activities and of net income stemming
therefrom, as adjusted for non-cash activity, including changes in operating assets and liabilities. The material upwards adjustments
in cash flow reflecting non-cash activity included adjustments due to (i) depreciation and amortization of capitalized research
and development assets, other intangible assets (mainly customer relations) and property, plants and equipment, in an aggregate
amount of $ 32.4 million, (ii) stock-based compensation expenses, in an amount of $ 4.4 million, (iii) an increase in trade payables
and in other accounts payable and employees and payroll accrual, in an aggregate amount of $ 14.1 million, (iv) an increase in
redeemable non-controlling interests’ put option and in liabilities in respect of business combinations, in an aggregate
amount of $ 3.8 million, and (v) decrease in inventory of $ 0.9 million, (vi) change in value of debentures of $ 1.4 million and
(vii) changes in value of short-term and long term loans from banks and others and deposits in an amount of $ 0.5 million. Material
downwards adjustments in cash flow for non-cash activity, including changes in operating assets and liabilities, consisted of adjustments
of (i) an increase in trade receivables in an amount of $30.1 million, (ii) a decrease in deferred revenues, in an amount of $
2.7 million, (iii) gain from sale of property, plants and equipment in an amount of $ 3.1 million, (iv) decrease in employee benefit
liabilities in an amount of $ 1.7 million and (v) Increase in other current and long-term accounts receivable of $ 0.5 million.



Cash flow provided by operating activities
in 2016 was primarily comprised of $29.8 million provided by Matrix, $26.0 million provided by Sapiens, and $28.0 million provided
by Magic, offset by $5.4 million used by Formula and approximately $ 3.4 million used by Insync.



Net cash provided by operations in 2015 consisted
primarily of the cash generated by our subsidiaries’ ongoing operating activities and of net income stemming therefrom, as
adjusted for non-cash activity, including changes in operating assets and liabilities. The material upwards adjustments in cash
flow reflecting non-cash activity included adjustments due to (i) depreciation and amortization of capitalized research and development
assets and other intangible assets (mainly customer relations) and property, plants and equipment, in an aggregate amount of $
30.9 million, (ii) stock-based compensation expenses, in an amount of $4.9 million, (iii) increase in other accounts payable and
employees and payroll accrual and deferred revenues, in an aggregate amount of $12.5 million, (iv) increase in trade payables in
an amount of $10.0 million, (v) change in deferred taxes, net in an amount of $ 2.1 million, and (vi) change in redeemable non-controlling
interests’ put option and in liabilities in respect of business combinations, in an aggregate amount of $ 1.6 million. Material
downwards adjustments in cash flow for non-cash activity, including changes in operating assets and liabilities, consisted of adjustments
of (i) an increase in trade receivables in an amount of $17.7 million, (ii) an increase in inventory, in an amount of $2.4 million,
reflecting our subsidiaries’ strategy to maintain adequate, but not excessive, levels of inventory based on their anticipation
of future demand for proprietary software products and software services, (iii) increase in other current and long term account
receivables in an amount of $4.2 million, (iv) decrease in employee benefit liabilities in an amount of $0.5 million and (v) Realized
gain from sale of available for sale securities of $ 0.3 million.



Cash flow provided by operating activities
in 2015 was primarily comprised of $25.9 million provided by Matrix, $40.4 million provided by Sapiens, $19.6 million provided
by Magic.



Cash provided by (used in) Financing Activities



Cash used in financing activities of $7.0 million
in 2016 compared to cash provided by financing activities of $ 20.6 million in 2015, mainly reflecting the cumulative effect of
the following financing-related transactions that occurred over the course of those years:



Year Ended December 31, 2016



In June 2016, Formula declared a cash
dividend to its shareholders, to be paid in July 2016, of $0.34 per share. The aggregate amount distributed by Formula was approximately
$5.0 million.



87







In January 2016, Formula declared a cash dividend to its shareholders, to be paid in February 2016, of $0.34
per share. The aggregate amount distributed by Formula was approximately $5.0 million.





In March 2016, Matrix distributed to its
shareholders a cash dividend in an aggregate amount of approximately $ 6.4 million, of which $ 3.2 million was paid to non-controlling
interests in Matrix.



In June 2016, Matrix distributed to its
shareholders a cash dividend in an aggregate amount of approximately $ 6.0 million, of which $ 3.0 million was paid to non-controlling
interests in Matrix.



In September 2016, Matrix distributed to
its shareholders a cash dividend in an aggregate amount of approximately $ 7.8 million, of which $ 3.9 million was paid to non-controlling
interests in Matrix.



In December 2016, Matrix distributed to
its shareholders a cash dividend in an aggregate amount of approximately $ 5.9 million, of which $ 3.0 million was paid to non-controlling
interests in Matrix.



In June 2016, Sapiens distributed to its
shareholders a cash dividend in the aggregate amount of $0.20 per common shares. The aggregate amount distributed by Sapiens was
approximately $ 10.0 million.



In February 2016, Magic Software declared
a cash dividend in the amount of $0.09 per share that was paid on March 17, 2016. The aggregate amount distributed by Magic Software
was approximately $4.0 million.



In August 2016, Magic Software declared
a cash dividend in the amount of $0.085 per share that was paid on September 22, 2016. The aggregate amount distributed by Magic
Software was approximately $3.8 million.





In addition, net cash used in financing
activities in 2016 was attributable to (i) repayment of long term loans from banks and others in an amount of $ 37.4 million, (ii)
purchase of non-controlling interests and redeemable non-controlling interests in an amount of $ 3.2 million (iii) cash paid in
conjunction with acquisition of activities in an amount of $1.2 million and (iv) distribution of $ 1.4 million to our ultimate
parent company for a business acquisition under common control (that is, for the acquisition of Insseco, as described in Item 3.A,
“Selected Financial Data” above), offset by (i) receipt of long term loans in an amount of $ 49.6 million (ii) exercise
of employees stock options in subsidiaries in an amount of $ 0.9 million and (iii) an increase in short-term bank credit, net in
an amount of $ 20.7 million.



Year Ended December 31, 2015



In February 2015, Formula paid to its shareholders
a cash dividend in an aggregate amount of approximately $ 7.9 million, which was announced in December 2014.



In August 2015, Formula paid to its shareholders
a cash dividend in an aggregate amount of approximately $ 5.0 million, which was announced in June 2015.



In March 2015, Matrix distributed to its
shareholders a cash dividend in an aggregate amount of approximately $ 5.5 million, of which $ 2.7 million was paid to non-controlling
interests in Matrix.



In June 2015, Matrix distributed to its
shareholders a cash dividend in an aggregate amount of approximately $ 5.0 million, of which $ 2.5 million was paid to non-controlling
interests in Matrix.



In September 2015, Matrix distributed to
its shareholders a cash dividend in an aggregate amount of approximately $ 4.4 million, of which $ 2.2 million was paid to non-controlling
interests in Matrix.





88







In December 2015, Matrix distributed to
its shareholders a cash dividend in an aggregate amount of approximately $ 3.9 million, of which $ 2.0 million was paid to non-controlling
interests in Matrix.



In April 2015, Sapiens distributed to its
shareholders a cash dividend in an aggregate amount of approximately $ 7.2 million, of which $ 3.6 million was paid to non-controlling
interests in Sapiens.



In addition, net cash provided by financing
activities in 2015 was attributable to (i) our issuance of debentures in the





In addition, net cash provided by financing
activities in 2015 was attributable to (i) our issuance of debentures in the amount of $ 58.6 million (ii) an increase in short
term bank credit, net and proceeds from long term debt in the aggregate amount of $ 35.0 million and (iii) exercise of employees
stock options in subsidiaries in an amount of $ 2.0 million, offset by (i) repayment of long term loans from banks and others in
an amount of $ 26.9 million, (ii) distribution of $ 8.5 million to our ultimate parent company for a business acquisition under
common control (that is, for the acquisition of Insseco, as described in Item 3.A, “Selected Financial Data” above),
and (iii) cash paid in conjunction with acquisition of activities and Purchase of non-controlling interests in the aggregate amount
of $ 6.7 million.



Cash Used in Investing Activities





Net cash used in our investing activities was
$ 78.9 million in 2016 compared to $ 31.5 million in 2015. Net cash used in investing activities in 2016 was attributable to (i)
expenditure (net of cash acquired) with respect to business acquisitions in an amount of $ 44.8 million, (ii) purchase of property
and equipment in an amount of $ 9.1 million, (iii) Investment in and loans to affiliates and other companies $ 25.8 million, (iv)
capitalization of software development and other cost in an amount of $9.8 million, (v) increase in restricted cash in other accounts
receivable in an amount of $ 0.5 million and (vi) payments to former shareholders of consolidated companies in an amount of $ 1.8
million, offset by (i) proceeds from sale of marketable securities, net in an amount of $ 8.5 million and (ii) proceeds from sale
of property, plants and equipment in an amount of $ 2.3 million and (iii) changes in short term deposits, net in an amount of $
2.7 million.



Net cash used in our investing activities was
$ 31.5 million in 2015. Net cash used in investing activities in 2015 was attributable to (i) expenditure (net of cash acquired)
with respect to business acquisitions in an amount of $ 17.0 million, (ii) purchase of property and equipment in an amount of $
6.8 million, (iii) proceeds from sale of marketable securities, net in an amount of $ 0.7 million, (iv) capitalization of software
development and other cost in an amount of $9.9 million, and (vi) increase in restricted cash in other accounts receivable in an
amount of $ 0.9 million, offset by (i) change in short term deposits in an amount of $ 3.9 million.



Company Commitments



In January 2014, Formula agreed to the
terms of a NIS 200 million loan (approximately $57.6 million) that was extended to us by a leading Israeli institutional investor.
The loan is secured by certain of the shares of each of our publicly held subsidiaries and affiliated company. The loan's average
duration is approximately four years (paid over a period of 6 years) and carries a fixed annual interest rate of 5.5%. The terms of the loan are further described above.





89







In September 2015, Formula
consummated a public offering in Israel of its Series A Secured Debentures and Series B Convertible Debentures, or together,
the New Debentures. The Debentures are listed for trading only on the TASE.



In the public offering, Formula issued
and sold a total amount of NIS 227,260,000 ($ 57.8 million) par value of the New Debentures, which were subdivided into the following
respective amounts of Secured Debentures and Convertible Debentures that are subject to the following terms:



NIS 102,260,000 ($ 26.1 million) par value
of Series A Secured Debentures, bearing interest on the unpaid principal at a fixed annual rate equal to 2.8% (which may vary based
on the credit rating of the debentures), paid on a semi-annual basis through July 2024. The principal is payable in eight equal
annual installments beginning in July 2017 and ending in July 2024. The interest rate varies based on the credit rating of the
Secured Debentures. The net proceeds received by Formula from the issuance of Series A Secured Debentures amount to $ 25.9 million
(net of issuance expenses).



NIS 125,000,000 ($ 31.2 million) par value of Convertible Debentures,
at a price per debenture unit (each unit comprised of NIS 1,000 par value of debentures) of NIS 1,020. The Convertible Debentures
bear interest at a fixed annual rate equal to 2.74% (which may vary based on the credit rating of the debentures), payable in one
payment upon maturity of the Convertible Debentures on March 26, 2019 (at which time the accrued interest will constitute 10% of
the principal amount of the Convertible Debentures, in the aggregate). The Convertible Debentures are subject to conversion into
the Company’s ordinary shares at a rate of NIS 157 ($ 40.03) par value of Convertible Debentures per one share. The conversion
rate is subject to adjustment for the issuance of bonus shares, rights and dividends. The principal amount of and interest on the
Convertible Debentures is subject to adjustment based on changes in the exchange rate between the NIS and the U.S. dollar relative
to the exchange rate on September 8, 2015. The net proceeds received by Formula from the issuance of Series B convertible Debentures
amount to $ 32.1 million (net of issuance expenses).



As noted above, the Series A
and B debentures contain, in addition to standard terms and obligations, the following obligations:



| | · | a negative pledge, subject to certain exceptions;
| | - | -------------------------------------------------

| | · | a covenant not to distribute dividends unless (i)
shareholders equity (not including minority interests) shall not be less than $250 million, (ii) Formula’s net financial
indebtedness (financial indebtedness net of cash, marketable securities, deposits and other liquid financial instruments) shall
not exceed 65% of net CAP (which is defined financial indebtedness, net, plus shareholders equity), (iii) the amount of the distributions
shall be equal to profits for the years ended December 31, 2014 and 2015 and 7% of profits accrued from January 1, 2016 until
the distribution and (iv) no event of default shall have occurred.; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Financial covenants, including (i) the equity attributable
to the shareholders of Formula, as reported in Formula’s annual or quarterly financial statements, will not be less than
$160 million, (ii) Formula’s net financial indebtedness (financial indebtedness net of cash, marketable securities, deposits
and other liquid financial instruments) shall not exceed 65% of net CAP (which is defined as financial indebtedness, net, plus
shareholders equity) and (iii) at all times, Formula’s cash balance will not be less than the annual interest payment (compounded)
for the unpaid principal amount of the Series B debentures.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2016, we were
in full compliance with the financial covenants of our loan and Series A Secured Debentures and Series B Convertible Debentures.



We do not have material commitments
for capital expenditures by Formula as of December 31, 2016 or as of the date of this annual report.





90







We have entered into an undertaking
to indemnify our office holders in specified limited categories of events and in specified amounts, subject to certain limitations.
For more information, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Indemnification
of Office Holders.”



Subsidiary Commitments



Our subsidiaries do not have
any material commitments for capital expenditures as of December 31, 2016 or as of the date of this annual report.



As alluded to above (see “—Current
Outlook”), the loan agreements, debentures and indentures to which we are party contain a number of conditions and limitations
on the way in which we (mainly Matrix and Formula can operate our businesses, including limitations on our ability to raise debt
and sell or acquire assets not in normal business activity. For example, Matrix’s loan agreement includes a negative pledge
with respect to Matrix’s assets, as well as limitations on Matrix’s ability to provide guarantees to third parties
and sell or transfer its assets. Matrix’s loan agreements also contain various covenants which require it to maintain certain
financial ratios related to shareholders’ equity and operating results that are customary for companies of comparable size.



Our subsidiaries and affiliate as of December
31, 2016 have provided bank guarantees aggregating to approximately $ 20.8 million as security for the performance of various contracts
with customers. If our subsidiaries and affiliates were to breach certain terms of such contracts, the customers could demand that
the banks providing the guarantees pay amounts claimed to be due.



Our subsidiaries and affiliate as of December
31, 2016 have also provided additional bank guarantees aggregating to $ 4.7 million as security for rent to be paid for their offices.
If our subsidiary and affiliate were to breach certain terms of their leases, the lessors could demand that the banks providing
the guarantees pay amounts claimed to be due.



Pursuant to the credit agreement and the
Secured Debentures described above, liens have been incurred over a certain portion of our investment in outstanding shares of
Matrix, Sapiens and Magic Software.



We and IAI granted TSG, our jointly controlled
affiliate, in equal share, a guarantee of NIS 40 million (approximately $ 10.4 million) as security against TSG’s bank credit
line and bank guarantees issued by TSG for the performance of various contracts with its customers.



| | C. | Research and Development, Patents and Licenses, etc.
| | -- | ----------------------------------------------------



The net amounts that we spent on research
and development activities in 2015 and 2016 were $ 15.1 million and $ 22.3 million, respectively. For more information about our
research and development activities, see “Item 4. Information on the Company—Business Overview— Software Development.”



For information concerning our intellectual
property rights, see “Item 4. Information on the Company— Business Overview— Intellectual Property Rights.”



| | D. | Trend Information
| | -- | -----------------



For information see discussion in Item
4. “Information on the Company-Business Overview-Industry Background and Trends” and Item 5. “Operating and Financial
Review and Prospects - Results of Operations.”



| | E. | Off-Balance Sheet Arrangements
| | -- | ------------------------------



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





91







| | F. | Tabular Disclosure of Contractual Obligations
| | -- | ---------------------------------------------



The following table summarizes our contractual
obligations and commitments as of December 31, 2016.



|                                                         |  | Payments due by period       |        
|-------------------------------------------------------- |  | ---------------------------- | -------
|                                                         |  | Total                        |        
|                                                         |  | (U.S. dollars, in thousands) |        
|Long-term debt obligations (1)                           |  |                              | 159,271
|Lease obligations                                        |  |                              | 62,732 
|Liabilities in respect of the acquisitions of operations |  |                              | 46,335 
|Debentures                                               |  |                              | 58,467 
|Liability to the Innovation Authority (2)                |  |                              |        
|Uncertainties in income taxes  (3)                       |  |                              | 3,770  
|Accrued severance payments, net  (4)                     |  |                              | 6,176  
|Total                                                    |  |                              | 336,751








| | (1) | Does not include interest.
| | --- | --------------------------

| | (2) | Does not include contingent liabilities to the Innovation
Authority of approximately $7.1 million as described in Note 17(f) to our consolidated financial statements contained elsewhere
in this annual report.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Payment of uncertain tax benefits would result from settlements
with taxation authorities. Due to the difficulty in determining the timing of settlements, this information is not included
in the above table. We do not expect to make any significant payments for these uncertain tax positions within the next 12
months.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Accrued severance payments, net relate to accrued severance obligations and notice obligations mainly to our Israeli
                                                                              employees as required under Israeli labor law or personal employment agreements. We are legally required to pay severance
                                                                              upon certain circumstances, primarily upon termination of employment by our company, retirement or death of the
                                                                              respective employee. Our liability for all of our Israeli employees is fully provided for by monthly deposits with
                                                                              insurance policies and by an accrual.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



92







ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES



| | A. | Directors and Senior Management
| | -- | -------------------------------



The following table sets forth information about our directors
and senior management as of May 11, 2017.



|Name                  |  | Age |  | Position                           |  | Expiration of Current Term of Directorship/Office                     
|--------------------- |  | --- |  | ---------------------------------- |  | ----------------------------------------------------------------------
|Guy Bernstein         |  | 49  |  | Chief Executive Officer            |  | December 2019 or upon 180 days advanced written notice of either party
|Asaf Berenstin        |  | 39  |  | Chief Financial Officer            |  | No formal arrangement regarding expiration of term of office          
|Maya Solomon-Ella     |  | 39  |  | Chief Operational Officer          |  | No formal arrangement regarding expiration of term of office          
|Marek Panek           |  | 47  |  | Chairman of the Board of Directors |  | 2017 annual shareholders meeting                                      
|Rafal Kozlowski       |  | 43  |  | Director                           |  | 2017 annual shareholders meeting                                      
|Dafna Cohen (1) (3)   |  | 47  |  | Director                           |  | 2017 annual shareholders meeting                                      
|Eli Zamir(1) (2) (3)  |  | 47  |  | External director                  |  | December 2018                                                         
|Iris Yahal(1) (2) (3) |  | 55  |  | External director                  |  | December 2018                                                         










| | (1) | Serves on the audit committee of our board of directors.
| | --- | --------------------------------------------------------

| | (2) | Serves as an external director under the Companies Law.
See “Item 6. Directors, Senior Management and Employees—Board Practices—External Directors under the Companies
Law; Audit Committee; Internal Auditor; Approval of Certain Transactions under the Companies Law,” below.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Serves on the compensation committee of our board of directors.
| | --- | ---------------------------------------------------------------



Guy Bernstein has served as our
Chief Executive Officer since January 2008. Mr. Bernstein served as a member of our board of directors from November 2006 to December
2008. Mr. Bernstein served as a director of Emblaze Ltd., or Emblaze, our former controlling shareholder and a publicly-traded
company listed on the London Stock Exchange, from April 2004 until February 2011. From December 2006 to November 2010, Mr. Bernstein
also served as chief executive officer of Emblaze, and, prior thereto, from April 2004 to December 2006, as the chief financial
officer of Emblaze. Mr. Bernstein serves as the chairman of the board of directors of each of Matrix and Sapiens and as chief
executive officer and director of Magic Software, where he served as the chief financial and operations officer from 1999 until
2004, when he joined Emblaze. He joined Magic Software from Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global,
where he served as senior manager from 1994 to 1997. Mr. Bernstein also serves as a director of Michpal Micro Computers (1983)
Ltd., a director at TSG IT Advanced Systems Ltd., and is a director at inSync staffing, all of them are subsidiaries of Formula
Systems Mr. Bernstein holds a B.A. degree in accounting and economics from College of Management and is a certified public accountant
in Israel.



Asaf Berenstin has served as our
Chief Financial Officer since November 2011. Mr. Berenstin also serves as the Chief Financial Officer of our subsidiary, Magic
Software, since April 2010. Prior to such time, beginning in August 2008, Mr. Berenstin served as Magic Software’s corporate
controller. Mr. Berenstin also serves as a director of Michpal Micro Computers (1983) Ltd., a director at TSG IT Advanced Systems
Ltd., and is a director at inSync staffing, all of them are subsidiaries of Formula Systems. Prior to joining our company, Mr.
Berenstin served as a controller at Gilat Satellite Networks Ltd. (NASDAQ: GILT), commencing in July 2007. From October 2003 to
July 2007, Mr. Berenstin practiced as a certified public accountant at Kesselman & Kesselman, a member of PriceWaterhouseCoopers.
Mr. Berenstin holds a B.A. degree in accounting and economics and an M.B.A. degree, both from Tel-Aviv University, and is a certified
public accountant (CPA) in Israel.



Maya Solomon-Ella has served as
our Chief Operational Officer since September 2016. In her last position Maya served as the Transaction Support leader in Ernst & Young Israel (Tel-Aviv branch).
Maya served in Ernst & Young 13 years, 3 of which with the Assurance Services team (Hi Tech) and 10 of which have been spent
in the Transaction Advisory Services (TAS) group. Since joining the TAS group at Ernst & Young, Ms. Solomon-Ella has been involved
in M&A transactions across the globe. Ms. Solomon-Ella holds a B.A. degree in Economics-Accounting from Bar Ilan University
and is a Certified Public Accountant (CPA) in Israel.





93







Marek
Panek has served as one of our directors since November 2010. Since January 2007 he
has been the Vice President of the Board of Directors of Asseco Poland S.A. and he is responsible for supervising the the
Capital Group Development Division and the EU Projects Office. Mr. Panek also holds  and has held several
other positions at Asseco and its affiliates, including Chairman of the Board of Directors of Asseco Denmark (since March
2011), Chairman of the  Supervisory Board of Asseco Resovia S.A. (since June 2016, former President of the Management Board), Supervisory Board Member of Asseco
Central Europe, a.s .(since September 2011), Supervisory Board Member of Sintagma UAB (since April 2011), Supervisory Board
Member of Asseco Lietuva UAB (since June 2011), Supervisory Board Member of Asseco Kazahstan LLP (since June 2014), Member of
the Board of Directors of ZAO R-Style Softlab (from May 2014 to March 2017), Member of the Board of Directors of Peak Consulting Group ApS
(since January 2016), President of the Management Board of Asseco Enterprise Solutions a.s. (since December 2016), Supervisory Board Member of Insseco Sp. Z o.o (from February 2015 to July 2015), Supervisory Board
Member of Asseco Bel LLC (from June 2015 to April 2016), Supervisory Board Member of Asseco Northern Europe S.A. (2010-2013),
Chairman of the Board of Asseco DACH (2008-2011). During 2007-2008, Mr. Panek served as the Chairman of the Management Board
of Asseco SEE and President of the Board of Asseco Romania. Mr. Panek first joined Asseco in 1995, having served in the
following positions for the following periods of time: Marketing Specialist (from September 1995 to September 1996);
Marketing Director (from October 1996 to March 2003); Sales and Marketing Director (from April 2003 to March 2004); and
Member of the Board, Sales and Marketing Director (from March 2004 to January 2007). Prior to joining Asseco, Mr. Panek was
employed at the ZE Gantel Sp. z o.o. from 1993 to 1995. Mr. Panek graduated from the Faculty of Mechanical Engineering and
Aeronautics of the Rzeszów University of Technology in 1994, having been awarded a master’s degree in
engineering.



Rafał Kozlowski has served
as one of our directors since August 2012. Since June 2012, Mr. Kozlowski has served as Vice President of the Management Board
and Chief Financial Officer of Asseco. Mr. Kozlowski is also a member of the Asseco Group Board of Directors. From May 2008 to
May 2012, Mr. Kozlowski served as Vice President of Asseco South Eastern Europe S.A. responsible for the company's financial management.
Mr. Kozlowski was directly involved in the acquisitions of companies incorporated within the holding of Asseco South Eastern Europe,
as well as in the holding's IPO process at the Warsaw Stock Exchange From 1996 to 1998, he served as Financial Director at Delta
Software, and subsequently, from 1998 to 2003 as Senior Manager at Veraudyt. In the years 2004-2006, he was Head of Treasury Department
at Softbank S.A. where he was delegated to act as Vice President of Finance at the company's subsidiary Sawan S.A. From 2007 through
June 2009, he served as Director of Controlling and Investment Division at Asseco Poland S.A. Mr. Kozlowski graduated of the University
of Warsaw, obtaining Master's degree at the Faculty of Organization and Management in 1998. He completed the Project Management
Program organized by PMI in 2004, and the International Accounting Standards Program organized by Ernst & Young Academy of
Business in the years 2005-2006.



Dafna Cohen has served as one of
our directors since October 2009, as a member of our audit committee since January 2011 and as a member of our compensation committee
since July 2013. Ms. Cohen is the Head of Business Control and Investor Relations of EL-AL Israel Airlines Ltd (TASE). Ms. Cohen
has served as a member of board of directors of Gilat Satellite Networks Ltd since 2014 (NASDAQ and TASE). Ms. Cohen served as
Director of Global Treasury of MediaMind Technologies Inc. (previously NASDAQ) and as a member of Investment Committee of the Board
from 2010 to 2011. Prior to that, Ms. Cohen served as a Director of Investments and Treasurer of Emblaze Ltd. and as a member of
Investment Committee of the Board from 2005 to 2009 (LSE). Prior to that, Ms. Cohen served as an Investment Manager for Leumi Partners
and as a manager at the derivatives sector of Bank Leumi. Ms. Cohen previously served as a member of boards of directors of XTL
Biopharmaceuticals Ltd. (NASDAQ and TASE) from 2009 to 2015, Europort Ltd. from 2012 to 2014 (TASE) and of Inventech Central Ltd
from 2011 to 2012 (TASE). Ms. Cohen holds an M.B.A. in finance and accounting and a B.A. degree in economics and political science,
both from The Hebrew University of Jerusalem.



Eli
Zamir has served as one of our external directors, as a member of our audit committee since April 2013 and a member of our
compensation committee since July 2013. Mr. Zamir currently serves as an independent financial advisor. From 2007 to December 2014
Mr. Zamir served as the CEO of Invest Pro Ltd., a private investment firm. From 1995 to 2002, Mr. Zamir served as a portfolio manager
and from 2002 to 2007 Mr. Zamir served as the CEO of an underwriter. Until 2014, Mr. Zamir served as a director of Synopsis Ltd.,
a public company listed on the TASE. Mr. Zamir holds a B.A. degree in accounting and finance from Tel-Aviv University and an M.B.A.
degree, from Ben Gurion University.





94







Iris
Yahal has served as one of our external directors, the chairperson of our audit committee since April 2013 and a member of
our compensation committee since July 2013. Ms. Yahal is an independent strategic transaction advisor for various software, renewable
energy, infrastructure and biotech companies since 2007. From 1995 through 2007, Ms. Yahal served as Chief Financial Officer of
BluePhoenix Solutions Ltd., a public company listed on the NASDAQ Global Market and the TASE. In addition, from 1999 through 2007
Ms. Yahal served as a director of BluePhoenix Solutions and each of its international subsidiaries. From 1991 until 1996, Ms. Yahal
served as a controller at Argotech Ltd. which, at that time, was a wholly owned subsidiary of our Company, operating as a start-up
incubator. Prior to 1991, Ms. Yahal worked as an auditor with Wallenstein and Co., a public accounting firm. Ms. Yahal holds a
B.A. degree in accounting and statistics and an M.B.A degree in business administration, both from Tel- Aviv University and is
a certified public accountant in Israel.



Arrangements for the
Election of Directors; Family Relationships



Asseco is our largest shareholder, holding
approximately 46.3% of our outstanding share capital (which excludes shares that we have repurchased that lack voting rights and
shares subject to restrictions that are voted in proportion to the votes of our other shares. Asseco has significant influence
over the election of the members of our board of directors (other than our external directors). Other than as described immediately
below, there are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any
of our directors or members of senior management were selected as such.



Mr. Guy Bernstein and Mr. Asaf Berenstin
are first cousins. Other than such relationship, there are no family relationships among our executive officers and directors.



| | B. | Compensation
| | -- | ------------



Aggregate Compensation Paid to Directors and Executive Officers



In 2016, Formula paid to its directors
and executive officers, consisting of the individuals listed above in the table under “—Directors and Senior Management”,
direct remuneration and provided related benefits of approximately $2.3 million, in the aggregate with respect to 2016. This aggregate
compensation amount includes amounts set aside or accrued to provide pension, retirement or similar post-employment benefits, which
themselves totaled less than $5,000 in 2016. In addition, Formula recorded with respect to its directors and executive officers,
consisting of the individuals listed above in the table under “—Directors and Senior Management” expenses with
respect to equity based compensation in the total amount of $ 0.8 million.



The above aggregate compensation amount
does not include the following:



| | · | expenses, including business travel, professional and business association dues and expenses, for which Formula reimburses
its officers; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | · | other fringe benefits that companies in Israel commonly reimburse or pay to their officers,
| | - | -------------------------------------------------------------------------------------------



as amounts incurred for such expenses and
benefits in 2016 were paid in reimbursement of activities carried out by our directors and executive officers for strict business
purposes in carrying out their duties on behalf of Formula and were therefore not compensatory in nature.



The above aggregate compensation amount
includes payment of director’s fees. Formula compensates its external directors and other directors in accordance with the
regulations promulgated under the Companies Law.





95







Summary Compensation Table



For so long as we qualify as a foreign
private issuer, we are not required to comply with the proxy rules applicable to U.S. domestic companies, including the requirement
to disclose information concerning the amount and type of compensation paid to its chief executive officer, chief financial officer
and the three other most highly compensated executive officers, rather than an aggregate, basis. Nevertheless, regulations promulgated
under the Israeli Companies Law require us to disclose the annual compensation of our five most highly compensated office holders
on an individual basis. Under the Companies Law regulations, this disclosure is required to be included in the annual proxy statement
for our annual meeting of shareholders each year, which we furnish to the SEC under cover of a Report of Foreign Private Issuer
on Form 6-K. Because of that disclosure requirement under Israeli law, we are also including such information in this annual report,
pursuant to the disclosure requirements of Form 20-F.



The tables below reflect the compensation
granted to our five most highly compensated office holders during or with respect to the year ended December 31, 2016. All amounts
reported in the table reflect the cost to the Company, as recognized in our financial statements for the year ended December 31,
2016.



Compensation of
Management (1)



|Name and Position(2), (3) |  | Salary ($) |         |  | Benefits And  Perquisites
($) |  |        | Variable Compensation ($) |  |  | Equity BasedCompensation
($) (5) | 
|------------------------- |  | ---------- | ------- |  | ----------------------------- |  | ------ | ------------------------- |  |  | -------------------------------- | 
|Guy Bernstein – CEO       |  |            | 472,171 |  |                               |  | (4)    |                           |  |  | (6)                              | 
|Maya Solomon-Ella – COO   |  |            | 36,802  |  |                               |  | 11,727 |                           |  |  | -                                | 



|(1) | All amounts reported in the table are in terms of cost to Formula, as recorded in Formula’s financial statements. We have two office holders who are members of management who are compensated by Formula (CEO and COO). For disclosure concerning compensation paid by us to our remaining four most highly compensated office holders (all of whom are directors), please see the table under “Compensation of Directors” below.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|(2) | The executive officer listed in the table is a full-time employee or consultants of Formula. Cash compensation amounts denominated in currencies other than the U.S. dollar were converted into U.S. dollars at the average conversion rate for 2016.                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(3) | Our Chief Financial Officer, Asaf Berenstin, also serves as the chief financial officer of Magic Software.  Pursuant to an agreement between Magic Software and Formula, Mr. Berenstin allocates 30%-40% of his time to Formula. Because he is not compensated by Formula, Mr. Berenstin is not listed in this table, however, Formula recognized an expense of $61,000 in 2016 with respect to restricted shares granted to Mr.
Berenstin.





|(4) | Amounts reported in this column include benefits and perquisites, including those mandated by applicable law. Such benefits and perquisites may include, to the extent applicable to the executive officer, payments, contributions and/or allocations for savings funds, pension, severance, vacation, car or car allowance, medical insurances and benefits, risk insurances (e.g., life, disability, accident), convalescence pay, payments for social security, tax gross-up payments and other benefits and perquisites consistent with our guidelines.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(5) | Amounts reported in this column represent the expense recorded in our financial statements for the year ended December 31, 2016 with respect to equity-based compensation. Assumptions and key variables used in the calculation of such amounts are described in paragraph (28) of Note 2 and on Note 14(a) to our consolidated financial statements, contained elsewhere in this annual report.                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(6) | Under his service agreement with
us, our chief executive officer, is entitled to an annual bonus in an amount equal to 3.3% of our net profit (including capital
gains) after tax. An advance of 70% of the estimated bonus with respect to each year is paid over the course of the year, divided
into quarterly installments, which is estimated based on our quarterly financial statements and is subject to final adjustment
at the end of the year.                                                                                                   





96







|(7) | In March 2012, concurrently with the amendment and extension of Mr. Bernstein’s service agreement as our Chief Executive Officer, our Board of Directors awarded him options exercisable for 1,122,782 ordinary shares of Formula, which took the place of 543,840 redeemable ordinary shares that had been granted to him in March 2011 and had been redeemed by Formula. The exercise price of the options granted in March 2012 was NIS 0.01 per share, and the options were exercised in their entirety in June 2013 by Mr. Bernstein. Our redemption right with respect to the ordinary shares issuable upon exercise of these options lapses in equal quarterly installments over an eight-year period that commenced in March 2012 and concludes in December 31, 2019. This March 2012 grant has been accounted for by Formula as a modification to the March 2011 grant to Mr. Bernstein. The total compensation expense that we recorded in our financial statements for the year ended December 31, 2016 in respect of Mr. Bernstein’s March 2012 option grant (constituting his equity compensation for all of 2016) was $ 0.7 million.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Compensation of Directors



The following table sets forth information
with respect to compensation of our directors (none of whom serves as an employee of our company) during fiscal year 2016. The
fees to the directors were paid by Formula.





|Name and Principal Position    |  | Total Fees Earned or 
 Paid in Cash ($)(1) |       
|------------------------------ |  | ------------------------------------------ | ------
|Marek Panek - Chairman         |  |                                            | 31,900
|Rafal Kozlowski - Director     |  |                                            | 31,500
|Dafna Cohen -  Director        |  |                                            | 39,000
|Eli Zamir - External Director  |  |                                            | 36,200
|Iris Yahal - External Director |  |                                            | 49,050








|(1) | All amounts reported in the table are in terms of cost to Formula, as recorded in Formula’s financial statements.
|--- | -----------------------------------------------------------------------------------------------------------------



Option Grants to, and Service Agreement with, Chief Executive
Officer



In January 2009, we granted
to our Chief Executive Officer, Mr. Guy Bernstein, in connection with his service agreement with us, options to purchase 396,000
Formula ordinary shares, exercisable at an exercise price of NIS 0.01 per share. These options were to vest over a three-year period,
commencing on December 17, 2008, on a quarterly basis (except that they would accelerate immediately prior to the announcement
of Formula’s 2010 dividend). In accordance with the accelerated vesting provisions of the grant, Mr. Bernstein exercised
all of the options in April 2010, prior to the distribution by Formula of its 2010 dividend. In accordance with the terms of the
option grant, the shares issued upon exercise of the option were deposited with a trustee and Mr. Bernstein was not permitted to
vote or dispose of them until the shares were to be released from the trust, as described in the grant letter. In January 2011,
in contemplation of our amendment and extension of Mr. Bernstein’s service agreement with us, our board of directors determined
that it was consistent with the intent of the original grant to immediately release from the trust 135,960 shares that had been
issued upon exercise, after the lapse of two years since the option grant date. As of December 31, 2011 the remaining 260,040 shares
were fully vested, although they remained in the trust.



In March 2011, concurrently with the amendment
and extension of our Chief Executive Officer’s service agreement, we granted to him options that were immediately exercisable
for 543,840 redeemable ordinary shares of Formula. The options were to vest, i.e., our redemption right with respect to the options
and the underlying ordinary shares issuable upon exercise was to lapse, in equal quarterly installments over a four year period
that commenced in December 2011 and was to conclude in December 2015. The exercise price of the options was NIS 0.01 per share.
Total fair value of the grant was calculated based on the share price on the grant date and totaled $ 9.06 million ($ 16.65
per share). In May 2011, Mr. Bernstein exercised all of these options for redeemable shares.





97







In December 2011, at which time we were
negotiating an amendment and extension of our Chief Executive Officer’s service agreement, we redeemed all of the above-described
543,840 shares for no consideration. In March 2012, concurrently with the amendment and extension of our Chief Executive Officer’s
service agreement, we approved a grant of options to him, exercisable for 1,122,782 ordinary shares of Formula as long as the Chief
Executive Officer is (i) a director of Formula and/or (ii) a director of each of the directly held subsidiaries of Formula; provided
that if he fails to meet the foregoing requirement (A) due to the request of the board of directors of either Formula or any of
its directly held subsidiaries (other than a request which is based on actions or omissions by the Chief Executive Officer that
would constitute "cause" under his service agreement with Formula), (B) because the Chief Executive Officer is prohibited
under the governing law or charter documents of the relevant company or the stock exchange rules and regulations applicable to
such company from being a director of such company (other than due to his actions or omissions) or (C) notwithstanding the Chief
Executive Officer’s willingness to be so appointed (but provided that neither (A) nor (B) applies); then, in each of (A),
(B) and (C), the Chief Executive Officer will be deemed to have complied with clauses (i) or (ii) above. The options vest, i.e.,
our redemption right with respect to the options and the underlying ordinary shares issuable upon exercise lapses, in equal quarterly
installments over an eight year period that commenced in March 2012 and concludes in December 2019. The exercise price of the options
is NIS 0.01 per share. In accordance with the terms of the option grant, the shares issuable upon exercise of the option will be
deposited with a trustee and our Chief Executive Officer will not be permitted to vote or dispose of them until the shares are
released from the trust, as described in the grant letter.



In June 2013, all 1,122,782 options were
exercised into ordinary shares. Such ordinary shares have been deposited with a trustee and, pursuant to the terms of our 2011
Plan and the option agreement with respect to such options, our chief executive officer is not permitted to vote or dispose of
them until the shares are released from the trust. All shares participate in dividends and have the right to vote, however for
so long as the shares are held by the trustee (even if they have vested) the voting rights may only be exercised by the trustee.
In accordance with the guidelines of our 2011 Share Incentive Plan for so long as the shares underlying any grant under the plan
are being held by the trustee they will be voted by the trustee in the same proportion as the results of the other shares voting
in the shareholder meeting.  Only those shares for which the vesting period has expired may be collected from the trustee.
As of May 11, 2017, all 1,122,782 shares were deposited with the trustee and 736,826 ordinary shares were vested.



Under his service agreement
with us, Mr. Guy Bernstein, as our Chief Executive Officer, is entitled to a monthly salary, as well as an annual bonus in an amount
equal to 3.3% of our net profit (including capital gains) after tax. An advance of 70% of the estimated bonus with respect to each
year is paid over the course of the year, divided into quarterly installments, which is estimated based on our quarterly financial
statements and is subject to final adjustment at the end of the year.



In November 2014, our
board of directors awarded our chief financial officer with 10,000 restricted shares under the 2011 Plan, or the Restricted Shares.
The Restricted Shares vest on a quarterly basis over a four-year period, which commenced on November 13, 2014 and concludes in
November 13, 2018, provided that during such time the chief financial officer will continue to serve as (i) an officer of the Company
and/or (ii) an officer in one of the directly held affiliates, except that if he fail to meet the service condition due to the
request of the board of directors of either Formula or any of its directly held affiliates (other than a termination of his provision
of services which is based on actions or omissions by him that will constitute "cause" under his grant agreement with
Formula); then, the chief financial officer will be deemed to have complied with clauses (i) or (ii) above. Notwithstanding the
foregoing, if a change of control of the Company occurs, then all unvested Restricted Shares will immediately become vested. Total
fair value of the grant was calculated based on the Formula share price on the grant date and equaled to $ 239 ($ 23.9
per share). As of May 13, 2017, all 10,000 Restricted Shares were deposited with the trustee with 6,250 Ordinary Shares, constituting
the currently vested portion of the 10,000 Restricted Shares that Formula’s chief financial officer was granted.



For a description of
our 2008 Share Option Plan and 2011 Share Incentive Plan pursuant to which Mr. Bernstein’s options have been granted and
other options or share awards may be granted from time to time to our directors, executive officers, employees and consultants,
see “Item 6.E. Share Ownership—Arrangements Involving the Issue or Grant of Options to Purchase Shares”
below.





98







| | C. | Board Practices
| | -- | ---------------



Pursuant to our amended and restated articles
of association, or our articles, directors are generally elected at the annual general meeting of shareholders by a vote of the
holders of a majority of the voting power represented at the meeting. Our existing board of directors may also appoint a new director
to the board, assuming that the then-authorized size of the board, as last approved by our shareholders, exceeds the number of
directors then serving on the board, whether due to a resignation or otherwise, in which case the newly appointed director holds
office until the next annual general meeting of shareholders immediately following such appointment. Our board is currently comprised
of five persons, of which each of Dafna Cohen, Eli Zamir and Iris Yahal has been determined by the board to be independent within
the meaning of the Listing Rules of the NASDAQ Stock Market (or the NASDAQ listing rules), on which our ADSs are listed for trading.
Mr. Zamir and Ms. Yahal serve as our external directors, as mandated under Israeli law, and are therefore subject to additional
criteria to help ensure their independence. See “External Directors Under the Companies Law” below. Each of our directors,
except for the external directors, holds office until the next annual general meeting of shareholders and may then be re-elected.
Our officers are appointed by our board of directors.



Under the Companies Law, a person who lacks
the necessary qualifications and the ability to devote an appropriate amount of time to the performance of his or her duties as
a director shall not be appointed director of a publicly traded company. While determining a person’s compliance with such
provisions, the company’s special requirements and its scope of business shall be taken into consideration. Where the agenda
of a shareholders meeting of a publicly traded company includes the appointment of directors, each director nominee should submit
a declaration to the company confirming that he or she has the necessary qualifications and that he or she is able to devote an
appropriate amount of time to performance of his or her duties as a director. In the declaration, the director nominee should specify
his or her qualifications and confirm that the restrictions set out in the Companies Law do not apply.



Under the Companies Law, if a director
ceases to comply with any of the requirements provided in the Companies Law, such director must immediately notify the company,
and his or her term of service shall terminate on the date of the notice.



External Directors Under the Companies Law



Under the Companies Law,
companies incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel, are required
to appoint at least two external directors. This law provides that a person may not be appointed as an external director if the
person is a relative of the controlling shareholder of the company or if that person or his or her relative, partner, employer,
another person to whom he or she was directly or indirectly subject, or any entity under the person’s control, has, as of
the date of the person’s appointment to serve as external director, or had, during the two years preceding that date: (a)
any affiliation or other disqualifying relationship with the company, with any person or entity controlling the company or a relative
of such person, or with any entity controlled by or under common control with the company; or (b) in the case of a company with
no shareholder holding 25% or more of its voting rights, had at the date of appointment as an external director, any affiliation
or other disqualifying relationship with a person then serving as chairman of the board or chief executive officer, a holder of
5% or more of the issued share capital or voting power in the company or the most senior financial officer. The term “affiliation”
and the similar types of prohibited relationships include:



| | · | an employment relationship;
| | - | ---------------------------

| | · | a business or professional relationship, even if not maintained on a regular basis (but excluding a de minimis level relationship);
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| | · | control; and
| | - | ------------

| | · | service as an office holder.
| | - | ----------------------------



The term "office
holder" is defined under the Israeli Companies Law as a general manager, chief business manager, deputy general manager, vice
general manager, any other person assuming the responsibilities of any of these positions regardless of that person's title, a
director and any other manager directly subordinate to the general manager.



No person may serve as
an external director if the person’s position or other business activities create, or may create, a conflict of interest
with the person’s responsibilities as an external director or may otherwise interfere with the person’s ability to
serve as an external director or if the person is an employee of the Israel Securities Authority or of an Israeli stock exchange.
A person may furthermore not continue to serve as an external director if he or she received, during his or her tenure as an external
director, direct or indirect compensation from the company including amounts paid pursuant to indemnification or exculpation contracts
or commitments and insurance coverage for his or her service as an external director, other than as permitted by the Israeli Companies
Law and the regulations promulgated thereunder. If, at the time of election of an external director, all other directors who are
not the company's controlling persons or their relatives are of the same gender, the external director to be elected must be of
the other gender. A director of one company may not be appointed as an external director of another company if a director of the
other company is acting as an external director of the first company at such time.





99







External directors are elected by a majority
vote at a shareholders’ meeting, provided that either:



| | · | such majority includes at least a majority of the shares held by all shareholders who are not controlling
shareholders and do not have a personal interest in the election of the external director (other than a personal interest not deriving
from a relationship with a controlling shareholder) that are voted at the meeting, excluding abstentions, to which we refer as
a disinterested majority, or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the total number of shares voted by non-controlling shareholders and by shareholders who do not
have a personal interest in the election of the external director against the election of the external director does not exceed
two percent (2%) of the aggregate voting rights in the company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



According to regulations promulgated under
the Israeli Companies Law, a person may be appointed as an external director only if he or she has professional qualifications
or if he or she has accounting and financial expertise (each, as defined below). In addition, at least one of the external directors
must be determined by our board of directors to have accounting and financial expertise. A director with “accounting and
financial expertise” is a director that due to his or her education, experience and skills has a high expertise and understanding
in financial and accounting matters and financial statements, in such a manner which allows him to deeply understand the financial
statements of the company and initiate a discussion about the presentation of financial data. A director is deemed to have “professional
qualifications” if he or she either (i) has an academic degree in economics, business management, accounting, law or public
service, (ii) has an academic or other degree or has completed other higher education, all in the field of business of the company
or relevant for his/her position, or (iii) has at least five years experience serving in one of the following capacities, or at
least five years of cumulative experience serving in two or more of the following capacities: (a) a senior business management
position in a company with a significant volume of business; (b) a senior position in the company's primary field of business;
or (c) a senior position in public administration or service. Our board of directors has determined that Ms. Iris Yahal and Mr.
Eli Zamir have the requisite professional qualifications and expertise as required of our external directors under the Companies
Law.



An external director may be removed from
office only: (i) by a court, upon determination that the external director to be so removed ceased to meet the statutory qualifications
for his or her appointment or if he or she violated his or her duty of loyalty to the company or (ii) by the same percentage of
shareholders, acting through a shareholders meeting, as is required for his or her election, if the board of directors has determined
that the external director to be so removed has ceased to meet the statutory qualifications for his or her appointment or violated
his or her duty of loyalty to the company and has proposed the removal to the shareholders. An external director who ceases to
meet the conditions for his or her service as such must notify the company immediately and such service shall cease immediately
upon such notification.



The initial term of an external director
is three years and may be extended by the general meeting of shareholders, for up to two additional three year terms, provided
that (i) his or her service for each such additional term is recommended by one or more shareholders holding at least 1% of the
company's voting rights and is approved at a shareholders meeting by a disinterested majority, where the total number of shares
held by non-controlling, disinterested shareholders voting for such reelection exceeds 2% of the aggregate voting rights in the
company, provided that the external director and certain of his or her related parties meet additional independence requirements;
or (ii) his or her service for each such additional term is recommended by the board of directors and is approved at a meeting
of shareholders by the same majority required for the initial election of an external director. In December 2015, Mr. Zamir and
Ms. Yahal were reappointed as our external directors, each to hold office until December 2018. In accordance with the regulations
under the Companies Law (Relief for Public Companies Whose Shares are Listed on a Stock Exchange Outside of Israel, 2000), dual
listed companies, like us, whose securities are listed on the NASDAQ Global Select Market or one of a number of other non-Israeli
stock exchanges, may re-appoint an external director for additional three-year terms, in excess of the nine years as described
above, if the audit committee and the board of directors confirm that, due to the expertise and special contribution of the external
director to the work of the board and its committees, his or her re-appointment is in the best interests of the company. The same
special majority is required for election of the external director for each additional three-year term.





100







Each committee of a company’s board
of directors is required to include at least one external director and the audit committee must include all of the external directors.



An external director is entitled to compensation
as provided in regulations promulgated under the Companies Law and is otherwise prohibited from receiving any compensation, directly
or indirectly, in connection with services provided as an external director or otherwise to the company.



Following the termination of an external
director’s service on a board of directors, such former external director and his or her spouse and children may not be provided
a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s
control, including engagement to serve as an executive officer or director of the company or a company controlled by its controlling
shareholder or employment by, or providing services to, any such company for consideration, either directly or indirectly, including
through a corporation controlled by the former external director. This restriction extends for a period of two years with regard
to the former external director and his or her spouse or child and for one year with respect to other relatives of the former external
director.



Under regulations recently promulgated
under the Companies Law, Israeli public companies whose shares are traded on certain U.S. stock exchanges, such as the NASDAQ Global
Select Market, and that lack a controlling shareholder (as defined below) are exempt from the requirement to appoint external directors.
Any such company is also exempt from the Companies Law requirements related to the composition of the audit and compensation committees
of the Board. Eligibility for these exemptions is conditioned on compliance with U.S. stock exchange listing rules related to majority
Board independence and the composition of the audit and compensation committees of the Board, as applicable to all listed domestic
U.S. companies. Because we have a controlling shareholder (Asseco), we are not eligible for these exemptions under the new regulations.



Qualifications of Directors Generally
Under the Companies Law



Under the Companies Law, the board of directors
of a publicly traded company is required to make a determination as to the minimum number of directors (not merely external directors)
who must have accounting and financial expertise (according to the same criteria described above with respect to external directors
under “—External Directors Under the Companies Law”). In accordance with the Companies Law, the determination
of the board should be based on, among other things, the type of the company, its size, the volume and complexity of its activities
and the number of directors. Based on the foregoing considerations, our board determined that the number of directors with financial
and accounting expertise in our company shall not be less than one. As described above under “—External Directors Under
the Companies Law,” currently Ms. Iris Yahal and Mr. Eli Zamir have been determined by the board to possess such accounting
and financial expertise.



Unaffiliated Directors Under the Companies
Law



Under the Companies Law, the audit committee
of a publicly traded company must consist of a majority of unaffiliated directors. An “unaffiliated director” is defined
as an external director or a director who meets the following criteria:



| | · | he or she meets the qualifications for being appointed
as an external director, except for (i) the requirement that the director be an Israeli resident (which does not apply to companies
whose securities have been offered outside of Israel or are listed outside of Israel) and (ii) the requirement for accounting
and financial expertise or professional qualifications; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | he or she has not served as a director of the company
for a period exceeding nine consecutive years. For this purpose, a break of less than two years in the service shall not be deemed
to interrupt the continuation of the service.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





101







Audit Committee



In addition to the foregoing
requirement with respect to the majority of its members being unaffiliated directors, the Companies Law requires public companies
such as ours to appoint an audit committee, comprised of at least three directors, including all of the external directors, one
of whom must serve as chairman of the committee. The chairman of the board of directors, or any director employed by or otherwise
providing services on a regular basis to the company or to a controlling shareholder or any entity controlled by a controlling
shareholder, may not be a member of the audit committee. Under the Companies Law, our audit committee is responsible for (i) determining
whether there are deficiencies in the business management practices of the company, including in consultation with the company’s
internal auditor or the independent auditor, and making recommendations to the board of directors to improve such practices, (ii)
determining whether to approve certain related party transactions , including transactions in which an office holder has a personal
interest and whether such transaction is extraordinary or material, (iii) establishing the approval process (including, potentially,
the approval of the audit committee) for certain transactions with a controlling shareholder or in which a controlling shareholder
has a personal interest, (iv) where the board of directors approves the working plan of the internal auditor, examining such working
plan before its submission to the board and propose amendments thereto, (v) examining the company's internal controls and internal
auditor's performance, including whether the internal auditor has sufficient resources and tools to dispose of his responsibilities
(taking into consideration the company's special needs and size), (vi) examining the scope of the company's auditor's work and
compensation and submitting a recommendation with respect thereto to the board of directors or the general meeting of shareholders,
depending on which of them is considering the appointment of our auditor and (vii) establishing procedures with respect to the
handling of company employees' complaints as to the management of the company's business and the protection to be provided to such
employees. In compliance with regulations under the Companies Law, our audit committee also approves our financial statements,
thereby fulfilling the requirement that a board committee provide such approval. An audit committee may not approve an action requiring
its approval, unless at the time of approval a majority of the committee’s members are present, of whom a majority consist
of unaffiliated directors and at least one of them is an external director.



The NASDAQ listing rules
and U.S. securities laws likewise require that we maintain an audit committee, all of whose members are independent of management.
In accordance with the Sarbanes-Oxley Act of 2002 and the NASDAQ requirements, our audit committee’s direct responsibilities
include the appointment, compensation, retention and oversight of our independent auditors (which itself also requires shareholder
ratification under Israeli law). The committee’s U.S. and NASDAQ mandated responsibilities also include assisting the board
in monitoring our financial statements and the effectiveness of our internal controls. We have adopted a formal audit committee
charter that we have implemented, embodying these responsibilities.



Our audit committee consists
of our two external directors, Mr. Eli Zamir andMs. Iris Yahal, as well as Ms. Dafna Cohen. Each of Mr. Zamir, Ms.Yahal
and Ms. Cohen qualifies as an independent director under both the NASDAQ listing rules and Rule 10A-3 of the Exchange Act. The
board has furthermore determined that Ms. Yahal is an “audit committee financial expert” as defined by applicable SEC
regulations. See “Item 16A. Audit Committee Financial Expert.”



Compensation Committee and Compensation Policy



Under the Companies Law,
the board of directors of a public company must appoint a compensation committee. The compensation committee must be comprised
of at least three directors, including all of the external directors, who must constitute a majority of the members of the compensation
committee. However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as the
NASDAQ Global Select Market, and who do not have a controlling shareholder, do not have to meet this majority requirement; provided,
however, that the compensation committee meets other Companies Law composition requirements, as well as the requirements of the
jurisdiction where the company's securities are traded. Each compensation committee member who is not an external director must
be a director whose compensation does not exceed an amount that may be paid to an external director. The compensation committee
is subject to the same Companies Law restrictions as the audit committee as to who may not be a member of the compensation committee.





102







The duties of the compensation
committee include the recommendation to the company's board of directors of a policy regarding the terms of engagement of office
holders, to which we refer as a compensation policy. That policy must be adopted by the company's board of directors, after considering
the recommendations of the compensation committee, and will need to be brought for approval by the company's shareholders, which
approval requires what we refer to as a Special Majority Approval for Compensation. A Special Majority Approval for Compensation
requires shareholder approval by a majority vote of the shares present and voting at a meeting of shareholders called for such
purpose, provided that either: (a) such majority includes at least a majority of the shares held by all shareholders who are not
controlling shareholders and do not have a personal interest in such compensation arrangement; or (b) the total number of shares
of non-controlling shareholders and shareholders who do not have a personal interest in the compensation arrangement and who vote
against the arrangement does not exceed 2% of the company's aggregate voting rights.



We initially adopted
a compensation policy during 2013. Our compensation policy was not re-approved at our Annual General Meeting of Shareholders that
was held on December 21, 2016, but the compensation committee and the board may exercise their right to adopt the compensation
policy nonetheless . The compensation policy serves as the basis for decisions concerning the financial terms of employment or
engagement of office holders, including exculpation, insurance, indemnification or any monetary payment or obligation of payment
in respect of employment or engagement. The compensation policy must relate to certain factors, including advancement of the company's
objectives, the company's business plan and its long-term strategy, and creation of appropriate incentives for office holders.
It must also consider, among other things, the company's risk management, size and the nature of its operations. The compensation
policy must furthermore consider the following additional factors:



| | · | the knowledge, skills, expertise and accomplishments
of the relevant office holder;
| | - | -----------------------------------------------------------------------------------

| | · | the office holder's roles and responsibilities and
prior compensation agreements with him or her;
| | - | -------------------------------------------------------------------------------------------------

| | · | the relationship between the terms offered and the
average compensation of the other employees of the company, including those employed through manpower companies;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the impact of disparities in salary upon work relationships
in the company;
| | - | ---------------------------------------------------------------------------

| | · | the possibility of reducing variable compensation
at the discretion of the board of directors;
| | - | ----------------------------------------------------------------------------------------------

| | · | the possibility of setting a limit on the exercise
value of non-cash variable equity-based compensation; and
| | - | ------------------------------------------------------------------------------------------------------------

| | · | as to severance compensation, the period of service
of the office holder, the terms of his or her compensation during such service period, the company's performance during that period
of service, the person's contribution towards the company's achievement of its goals and the maximization of its profits, and
the circumstances under which the person is leaving the company.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The compensation policy
must also include the following principles:



| | · | the link between variable compensation and long-term
performance and measurable criteria;
| | - | -----------------------------------------------------------------------------------------

| | · | the relationship between variable and fixed compensation,
and the ceiling for the value of variable compensation;
| | - | -----------------------------------------------------------------------------------------------------------------

| | · | the conditions under which an office holder would
be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based
was inaccurate and was required to be restated in the company's financial statements;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the minimum holding or vesting period for variable,
equity-based compensation; and
| | - | ----------------------------------------------------------------------------------

| | · | maximum limits for severance compensation.
| | - | ------------------------------------------



The compensation committee
is responsible for (a) recommending the compensation policy to a company's board of directors for its approval (and subsequent
approval by its shareholders) and (b) duties related to the compensation policy and to the compensation of a company's office holders
as well as functions previously fulfilled by a company's audit committee with respect to matters related to approval of the terms
of engagement of office holders, including:



| | · | recommending whether a compensation policy should
continue in effect, if the then-current policy has a term of greater than three (3) years (approval of either a new compensation
policy or the continuation of an existing compensation policy must in any case occur every three years);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | recommending to the board of directors periodic updates
to the compensation policy;
| | - | -----------------------------------------------------------------------------------

| | · | assessing implementation of the compensation policy;
and
| | - | --------------------------------------------------------

| | · | determining whether the compensation terms of the
chief executive officer of the company need not be brought to approval of the shareholders.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------





103







Our board of directors
has adopted a compensation committee charter setting forth the responsibilities of the compensation committee, which include:



| | · | the responsibilities set forth in the compensation
policy;
| | - | ----------------------------------------------------------

| | · | reviewing and approving the granting of options and
other incentive awards to the extent such authority is delegated by our board of directors; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | · | reviewing, evaluating and making recommendations regarding
the compensation and benefits for our non-employee directors.
| | - | ------------------------------------------------------------------------------------------------------------------------



Our compensation committee consists of
our two external directors, Mr. Eli Zamir and Ms. Iris Yahal, as well as Ms. Dafna Cohen. Each of the members of our compensation
committee qualifies as an independent director under the NASDAQ listing rules.



Internal Auditor



Under the Companies
Law, the board of directors is required to appoint an internal auditor, nominated by the audit committee. The role of the internal
auditor is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure.
Under the Companies Law, the internal auditor may be an employee of the company but not an office holder, or an interested party
(i.e., a holder of 5% or more of the voting rights in the company or of the issued share capital, the chief executive officer
of the company or any of its directors, or a person who has the authority to appoint the company’s chief executive officer
or any of its directors), or a relative of an office holder or of an interested party. In addition, the company’s independent
auditor or its representative may not serve as the company’s internal auditor. Our internal auditor is Mr. Eyal Weizman.



NASDAQ Exemptions for a Foreign Private
Issuer



We are a foreign private issuer within
the meaning of NASDAQ listing rule 5005(a)(18), since we are incorporated in Israel and we meet the other criteria set forth for
a “foreign private issuer” under Rule 3b-4(c) under the Exchange Act. Therefore, pursuant to NASDAQ listing rule 5615(a)(3),
we may follow home country practice in lieu of certain provisions of the NASDAQ listing rule 5600 series and certain other NASDAQ
listing rules. Please see “Item 16G. Corporate Governance” below for a description of the manner in which we rely upon
home country practice in lieu of complying with certain NASDAQ listing rules.



Exculpation,
Insurance and Indemnification of Directors and Officers



Our office holders
consist of the individuals listed in the table under “Directors and Senior Management,” which is displayed under “Item
6. Directors, Senior Management and Employees.” Under the Companies Law, an Israeli company may not exempt an office holder
from liability with respect to a breach of his or her duty of loyalty, but may exempt in advance an office holder from his or
her liability to the company, in whole or in part, with respect to a breach of his duty of care, provided, however, that such
a breach is not related to a distribution of a dividend or any other distribution by the company.



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



| | · | a breach of his duty of care to us or to another person;
| | - | --------------------------------------------------------

| | · | a breach of his duty of loyalty to us, provided that
the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a financial liability imposed upon him in favor of
another person.
| | - | ------------------------------------------------------------------



We have obtained an insurance policy covering
the Formula Group’s directors’ and officers’ liability. Certain of our subsidiaries (Magic Software, Sapiens,
Insync, Michpal and Matrix which participated only during the first six months of 2016) participate in the premium payments of
the insurance, on a proportional basis. The total premium we paid during 2016 was approximately $ 173,086.





104







Indemnification
of Office Holders.Our articles provide that we may indemnify an office holder in respect of an
obligation or expense imposed on or expended by an office holder in respect of an act performed in his capacity as an office holder
as specified below:



| | (i) | a financial obligation imposed on him in favor of
another person by any judgment, including a settlement or an arbitrator’s award approved by a court;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | reasonable litigation expenses, including attorney’s
fees, expended by the office holder as a result of an investigation or proceeding instituted against him by a competent authority,
provided that such investigation or proceeding concluded without the filing of an indictment against him, and either (i) concluded
without the imposition of any financial liability in lieu of criminal proceedings; or (ii) concluded with the imposition of a
financial liability in lieu of criminal proceedings but relates to a criminal offense that does not require proof of criminal
intent;
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii) | reasonable litigation expenses, including attorneys’
fees, expended by the office holder or charged to him by a court, in proceedings instituted against him by another person, or
in a criminal charge from which he was acquitted or in any criminal proceedings of a crime which does not require proof of criminal
intent;
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iv) | expenses,
including reasonable litigation expenses and legal fees, incurred by an office holder as a result of a proceeding instituted against
such office holder in relation to (1) infringements that may impose financial sanction pursuant to the provisions of Chapter H’3
under the Israeli Securities Law, which we refer to as the Securities Law, or (2) administrative infringements pursuant to the
provisions of Chapter H’4 under the Securities Law or (3) infringements pursuant to the provisions of Chapter I’1
under the Securities Law; and
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (v) | payments made by the office holder to an injured party
for damages suffered under Section 52(54)(a)(1)(a) of the Securities Law.
| | --- | --------------------------------------------------------------------------------------------------------------------------------



We may undertake to indemnify an office
holder as aforesaid, (a) prospectively, provided that in respect of (i) above, the undertaking is limited to categories of events
that in the opinion of our board of directors are foreseeable in light of our actual operations at the time that the undertaking
to indemnify is given, and to the amounts or criteria that our board of directors deems reasonable under the circumstances, and
further provided that such events and amount or criteria are set forth in the undertaking to indemnify, but in any event no more
than 25% of Formula’s shareholders equity according to its most recent financial statements as of the date of the actual
payment of indemnification; and (b) retroactively.



Limitations
on Exemption, Insurance and Indemnification.The Companies Law provides that a company may not
indemnify an office holder, enter into an insurance contract which would provide coverage for any monetary liability, or exempt
an office holder from liability, with respect to any of the following:



| | · | a breach by the office holder of his duty of loyalty
unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a breach by the office holder of his duty of care
if the breach was done intentionally or recklessly, except for a breach that was made in negligence;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | any act or omission done with the intent to derive
an illegal personal benefit;
| | - | -------------------------------------------------------------------------------

| | · | any fine levied against the office holder; or
| | - | ---------------------------------------------

| | · | a counterclaim made by the company or in its name
in connection with a claim against the company filed by the office holder.
| | - | ----------------------------------------------------------------------------------------------------------------------------



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



We have entered into undertakings to indemnify
our office holders in specified limited categories of events and in specified amounts, subject to the limitations set by the Companies
Law and our articles, as described above. For more information, see “Item 7.B. Related Party Transactions – Indemnification
of Office Holders.”





105







Directors’ Severance Benefits
Upon Termination of Employment



We have not entered
into any service contracts with any members of our board of directors that provide for specific benefits upon termination of employment,
as none of our directors is employed by us or otherwise subject to a consulting or similar contract with us that provides benefits
upon termination of employment or service. The only severance pay benefits that we provide are provided to employees as required
under Israeli law and are described below in the section titled “Employees”.



| | D. | Employees
| | -- | ---------



The table below sets
forth the average number of employees employed by us, as allocated (i) among our five subsidiaries in which we have effective control
through December 31, 2016 and (ii) by geographical area of employment, during each of the last three fiscal years:



|               |  | 2014 |        |  | 2015 |  |         | 2016 | 
|-------------- |  | ---- | ------ |  | ---- |  | ------- | ---- | 
|Matrix         |  |      | 7,260  |  |      |  | 7,644   |      | 
|Magic Software |  |      | 1,181  |  |      |  | 1,203   |      | 
|Sapiens        |  |      | 1,017  |  |      |  | 1,573   |      | 
|TSG            |  |      | -      |  |      |  | 375     |      | 
|Insync         |  |      | 650    |  |      |  | 561     |      | 
|Total          |  |      | 10,108 |  |      |  | 11,3561 |      | 



|                         |  | 2014 |        |  | 2015 |  |        | 2016 | 
|------------------------ |  | ---- | ------ |  | ---- |  | ------ | ---- | 
|Israel                   |  |      | 7,869  |  |      |  | 8,652  |      | 
|Europe                   |  |      | 539    |  |      |  | 704    |      | 
|United States and Canada |  |      | 1,518  |  |      |  | 1,538  |      | 
|South Africa             |  |      | 30     |  |      |  | 12     |      | 
|Asia                     |  |      | 152    |  |      |  | 420    |      | 
|Total                    |  |      | 10,108 |  |      |  | 11,326 |      | 



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



We are also subject to the labor laws and
regulations of other jurisdictions in the world where we have employees.



| | E. | Share Ownership
| | -- | ---------------



As of May 11, 2017, none
of our directors or officers owned any shares of our company (whether actual ordinary shares or shares issuable upon exercise of
options), except for Mr. Guy Bernstein, our Chief Executive Officer, and Mr. Asaf Berenstin, as described below. None of the ordinary
shares beneficially owned by Mr. Bernstein have voting rights different from those possessed by other holders of Formula’s
ordinary shares.





106







At the current time, based on information
he has provided to us, Mr. Guy Bernstein owns 260,040 of Formula’s ordinary shares, and furthermore holds 1,122,782
shares, which were issued to him upon the exercise of options granted to him in March 2012 (as described above under “Item
6. Directors, Senior Management and Employees— B. Compensation— Option Grants to, and Service Agreement with, Chief
Executive Officer”) and of which as of May 11, 2017, 736,826 were vested and the remainder are subject to restrictions.



At the current time, based on information
he has provided to us, Mr. Asaf Berenstin owns 10,000 of Formula’s ordinary shares, which were granted to him in November
2014 (as described on Note 13(b) to our consolidated financial statements contained elsewhere in this annual report) and of which
as of May 13, 2017, 6,250 are vested and the remainder are subject to restrictions.



Arrangements Involving the Issue or Grant
of Options to Purchase Shares



Formula’s 2008 Share Option Plan



In March 2008, our shareholders approved
the adoption of Formula’s 2008 Employee and Office Holders Share Option Plan, which we refer to as the 2008 Plan. Pursuant
to the 2008 Plan, we may grant from time to time to our and our subsidiaries’ employees and office holders (which are not
Formula’s controlling shareholders) options to purchase up to 400,000 ordinary shares of Formula. The 2008 Plan is administered
by our board of directors. The 2008 Plan provides that options may be granted, from time to time, to such grantees to be determined
by our board of directors, at such exercise prices and under such terms as shall be determined by the board at its sole and absolute
discretion. Options may be granted under the 2008 Plan through January 2018.



Of the options available for grant under
the 2008 Plan, we granted, in January 2009, options to purchase 396,000 ordinary shares to our Chief Executive Officer, each exercisable
at an exercise price of NIS 0.01. (Please see “Item 6. Directors, Senior Management and Employees— B. Compensation—
Option Grants to, and Service Agreement with, Chief Executive Officer” for a description of that grant.) As of April 30,
2017, options to purchase 4,000 shares remain available for future grants under the 2008 Plan.



Formula’s 2011 Share Incentive Plan



In March 2011, our board of directors adopted
Formula’s 2011 Share Incentive Plan, which we refer to as the 2011 Plan. Pursuant to the 2011 Plan, we may grant from time
to time to our and our subsidiaries’ employees, office holders (which are not Formula’s controlling shareholders) and
consultants options to purchase, share based awards or restricted shares with respect to, up to an aggregate of 545,000 ordinary
shares of Formula. The 2011 Plan is administered by our board of directors. The 2011 Plan provides that options, restricted shares
or other stock-based awards may be granted, from time to time, to such grantees to be determined by our board of directors, at
such exercise prices and with such vesting or other terms as shall be determined by the board at its sole and absolute discretion.
Options may be granted under the 2011 Plan through March 2021.



In March 2012, our board of directors increased
the amount of ordinary shares reserved for issuance under the 2011 Share Incentive Plan by 1,200,000 shares.



Of the options available for grant under
the 2011 Plan, we approved the grant, in March 2011, of options to purchase 543,840 ordinary shares to our Chief Executive Officer,
each to be exercisable for no consideration and, in March 2012, we approved the grant of options to purchase 1,122,782 ordinary
shares to our Chief Executive Officer, each to be exercisable for NIS 0.01 per share. (Please see “Item 6. Directors, Senior
Management and Employees— B. Compensation— Option Grants to, and Service Agreement with, Chief Executive Officer”
for a description of that grant.)





107







On November 13, 2014, our board of directors
approved the grant of 10,000 restricted shares to our chief financial officer under the 2011 Plan. These restricted shares vest
on a quarterly basis over a four-year period, commencing on November 13, 2014 and concluding on November 13, 2018, provided that
during such time the chief financial officer will continue to serve as (i) an officer of Formula and/or (ii) an officer in one
of the directly held affiliates, except that if he fail to meet the service condition due to the request of the board of directors
of either Formula or any of its directly held affiliates (other than a termination of his provision of services which is based
on actions or omissions by him that will constitute “cause” under his grant agreement with Formula); then, the chief
financial officer will be deemed to have complied with clauses (i) or (ii) above. Notwithstanding the foregoing, if a change of
control of Formula occurs, then all unvested restricted shares will immediately become vested.



As of April 30, 2017, options to purchase
68,378 shares remain available for future grants under the 2011 Plan.



Option Plans of Our Subsidiaries



Our subsidiaries generally have share option
plans pursuant to which qualified directors, employees and consultants may be granted options for the purchase of securities of
the subsidiaries.



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



| | A. | Major Shareholders
| | -- | ------------------



The following table presents information
regarding the beneficial ownership (as defined in Form 20-F promulgated by the SEC) of Formula’s ordinary shares as of April
30, 2017 by each person known to us to be the beneficial owner of 5% or more of Formula’s ordinary shares based on information
provided to us by our shareholders or disclosed in public filings with the SEC. Percentages expressed in the below table are based
on 14,728,782 ordinary shares outstanding as of April 30, 2017 (which includes ordinary shares subject to restrictions and repurchase
by us). Ordinary shares represented by ADSs are included both in the number of our outstanding ordinary shares and in determining
the beneficial ownership of any particular shareholder or group of shareholders. None of the holders of the ordinary shares listed
in the below table has voting rights different from other holders of Formula’s ordinary shares. Except where indicated otherwise,
we believe, based on information furnished by these owners, that each of the beneficial owners of Formula’s shares listed
below has sole investment and voting power with respect to such shares.



|Name                                                        |  | Number of Ordinary Shares Beneficially Owned (1) |           |     | Percentage of Ownership (2) | 
|----------------------------------------------------------- |  | ------------------------------------------------ | --------- | --- | --------------------------- | 
|Asseco Poland S.A. (3)                                      |  |                                                  | 6,823,602 |     |                             | 
|Guy Bernstein(4)                                            |  |                                                  | 996,866   |     |                             | 
|Menora Mivtachim Holdings Ltd.(5)                           |  |                                                  | 753,898   | (4) |                             | 
|All directors and executive officers as a group (6 persons) |  |                                                  | 1,003,116 | (6) |                             | 










| | (1) | Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with
respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of
this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding
for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where
applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially
owned by them.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The percentages shown are based on 14,728,782 ordinary
shares issued and outstanding as of May 13, 2017.
| | --- | --------------------------------------------------------------------------------------------------------



108







| | (3) | Based on the Schedule 13D filed by Asseco with the SEC on December 6, 2010. Due to the public ownership
of its shares, Asseco is not controlled by any other corporation or any one individual or group of shareholders.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Includes 996,866 ordinary shares held in trust for Mr. Bernstein. In April 2010, Mr. Bernstein,
the Company's Chief Executive Officer, exercised options to purchase 260,040 ordinary shares previously granted to him, in connection
with his service agreement. In accordance with the terms of the grant, all 260,040 ordinary shares are currently deposited with
a trustee and Mr. Bernstein is not permitted to vote or dispose of them until the shares are released from the trust, upon Mr.
Bernstein’s request. Furthermore, in March 2012, concurrently with the amendment and extension of Mr. Bernstein’s service
agreement, we approved a grant of options to him, exercisable for 1,122,782 ordinary shares, subject to certain vesting conditions.
In June 2013, all 1,122,782 options were exercised into shares however they have been deposited per the grant agreement with a
trustee. In accordance with the terms of that second option grant, the shares issuable upon exercise of the option have be deposited
with a trustee and Mr. Bernstein will not be permitted to dispose of them until the shares are released from the trust, as described
in the grant letter. Furthermore, Mr. Bernstein has granted a voting proxy to Asseco in respect of these ordinary shares. As of
May 13, 2017, 736,826 of such ordinary shares have vested and may be released to Mr. Bernstein upon his request. Because of the
foregoing limitations on voting and investment power, other than the 996,866 which may be released to Mr. Bernstein on request,
none of the ordinary shares held by Mr. Bernstein are deemed to be beneficially owned by him.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Based on Amendment No. 3 to the Schedule 13G filed by Menora Mivtachim Holdings Ltd., or Menora
Holdings on February 6, 2017. Menora Holdings is a holding company publicly-traded on the TASE. 61.986% of Menora Holdings’
outstanding shares are held directly and indirectly by the family of Menachem Gurevitch, 2.76% are held by other affiliates of
Menora Holdings and 38.135% are publicly held. Such ordinary shares are held for members of the public through, among others, provident
funds and/or mutual funds and/or pension funds and/or index-linked securities and/or insurance policies, which are managed by subsidiaries
of Menora Holdings, each of which subsidiaries operates under independent management and makes independent voting and investment
decisions.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) | Includes options held in trust for Guy Bernstein, our Chief Executive Officer, as described in item 4 above and 6,250 shares,
which is the vested portion of the aggregate of 10,000 restricted shares granted to Mr. Asaf Berenstin, as of May 13, 2016.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of April 30, 2017,
14,728,782 ordinary shares were issued and outstanding, which excludes 24,780 ordinary shares that we purchased during 2002 and
543,840 that we purchased during 2011. On May 13, 2017, we had two shareholders of record, one of which was a United States record
holder. The number of record holders is not representative of the number of beneficial holders of our ordinary shares, as the shares
of all shareholders (including shares represented by ADSs) are recorded in the name of our Israeli share registrar, Israel Discount
Bank Limited’s registrar company. All of our ordinary shares (including shares represented by ADSs) have equal voting rights.
However, under applicable Israeli law, the shares that we have repurchased and currently hold have no voting rights and, therefore,
are excluded from the number of our outstanding shares.



As of May 9, 2017, 184,587
ADSs were issued and outstanding pursuant to a depositary agreement with The Bank of New York Mellon, representing approximately
1.25% of our ordinary shares. As of that date, there were approximately 15 registered holders of our ADSs, of whom 10 record holders
were United States residents. Such number of record holders is not representative of the actual number of beneficial holders of
our ADSs in the United States.



We are unaware of any arrangements which
may at a subsequent date result in a change in control of Formula.



109







| | B. | Related Party Transactions
| | -- | --------------------------



Indemnification of Office Holders



We have undertaken to indemnify each of
our office holders. Our office holders’ indemnification letters provide, among other things, that we will indemnify each
of our office holders to the maximum extent permitted by our articles. Advance payments for coverage of legal expenses in criminal
proceedings will be required to be repaid by an office holder to the company if such office holder is found guilty of a crime which
requires proof of criminal intent, or if it is determined that the office holder is not lawfully entitled to such indemnification.



All of the indemnification letters granted
to our office holders are identical, including indemnification letters granted to office holders who are or may be considered “controlling
persons” under the Companies Law.



The indemnification is limited to the expenses
and matters detailed in the indemnification letters insofar as they result from an office holder’s actions in connection
with, among other things, the following matters: the offering of securities by us to the public or to private investors; the offer
by us to purchase securities from the public, private investors or other holders, whether pursuant to a prospectus, agreement,
notice, report, tender or any other proceeding; our labor relations and/or employment matters and our trade relations; the development
or testing of products developed by us, or the distribution, sale, license or use of such products; and occurrences in connection
with investments made by us.



Our undertaking for indemnification is
limited to up to 25% of our shareholders’ equity as it appears in our latest financial statements known at the date of indemnification,
calculated with respect to each director and officer of Formula.



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



| | (i) | a breach by an office holder of his or her fiduciary
duty, except, to the extent permitted by law, for a breach while acting in good faith and having reasonable cause to assume that
the action was in our best interest;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | a grossly negligent or intentional violation of the
office holder’s duty of care;
| | ---- | ---------------------------------------------------------------------------------



| | (iii) | an intentional action in which the office holder intended
to reap a personal gain illegally;
| | ----- | --------------------------------------------------------------------------------------------



| | (iv) | a fine, civil fine or financial sanction levied against
and/or imposed upon the office holder;
| | ---- | ----------------------------------------------------------------------------------------------



| | (v) | a proceeding instituted against the office holder
pursuant to the provisions of Chapter H’3, H’4 or I’1 under the Securities Law, except as otherwise permitted
in the undertaking; or
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) | a counterclaim brought by us or in our name in connection
with a claim against us filed by the office holder, other than by way of defense or by way of third party notice in connection
with a claim brought against the office holder by us, or in specific cases in which our board of directors has approved the initiation
or bringing of such suit by the office holder, which approval shall not be unreasonably withheld.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Office Holders’ Insurance



We have obtained an insurance policy covering
the Formula Group’s directors’ and officers’ liability. Our subsidiaries participate in the premium payments
of the insurance, on a proportional basis. The total premium Formula paid during 2016 was approximately $173,086.





110







Service Agreement with our Chief Executive Officer



We are party to a written service agreement
with our Chief Executive Officer, Mr. Guy Bernstein, which was entered into in December 2008 and was amended in March 2011 and
in March 2012 and has a term of eighty- four (84) months from the date of such last amendment. This agreement provides for early
termination by either side upon 180 days advanced written notice, during which time the Chief Executive Officer will continue to
receive service fees. This agreement furthermore contains customary provisions regarding nondisclosure, confidentiality of information
and assignment of inventions.



Option Agreement with our Chief Executive Officer



For a description of the option agreement
with our Chief Executive Officer, please see “Item 6.B. Compensation – Option Grants to, and Service Agreement with,
Chief Executive Officer.”



Acquisition of Insseco



The description of our affiliated company
Sapiens’ acquisition of Insseco from Asseco, the majority shareholder of our company, in August 2015, set forth in Item 4.A
“History and Development of the Company— Capital Expenditures and Divestitures”, is incorporated by reference
herein. Under the share purchase agreement for that acquisition, Asseco committed to assign all customer contracts to Insseco that
relate to the intellectual property that Sapiens acquired as part of the acquisition. In the event that Asseco cannot obtain the
consent of any customer to the assignment of its contract to Insseco, Asseco will hold that customer’s contract in trust
for the benefit of Insseco. Under that arrangement, in 2015, Insseco invoiced Asseco in a back-to-back manner for all invoices
issued by Asseco on Insseco’s behalf to customers under those contracts that were not yet assigned by Asseco to Insseco.



Services Obtained from Asseco



During 2016, Asseco provided back-office
services to Sapiens wholly-owned subsidiary, Insseco, in an amount totaling approximately $1.9 million..



Fees Paid for Board Services in Affiliates



Sapiens paid us approximately $23,000 in
respect of their share of the director fees of Guy Bernstein, their Chairman, for the year ended December 31, 2016.



Matrix paid us approximately $3,500 in
respect of their share of the director fees of Guy Bernstein, their Chairman, commencing from November 23, 2016 through December
31, 2016.



Mr. Bernstein serves as the Chief Executive
Officer of Formula and a director of Asseco.



Other Transactions



From time to time, in our ordinary course
of business, we engage in non-material transactions with our subsidiaries and affiliates where the amount involved in, and the
nature of, the transactions are not material to any party to the transaction. We believe that these transactions are made on an
arms’ length basis upon terms and conditions no less favorable to us, our subsidiaries and affiliates, as we could obtain
from unaffiliated third parties. If we engage with our subsidiaries and affiliates in transactions which are not in the ordinary
course of business, we receive the approvals required under the Companies Law. These approvals include audit committee approval,
board approval and, in certain circumstances, shareholder approval. See “Item 6.C. Board Practices.”



| | C. | Interests of Experts and Counsel
| | -- | --------------------------------



Not applicable.





111







ITEM 8. FINANCIAL INFORMATION



| | A. | Consolidated Statements and Other Financial Information
| | -- | -------------------------------------------------------



Financial Statements



Our consolidated financial statements and other financial information
are incorporated herein by reference to “Item 18. Financial Statements” below.



Export Sales



In
2016, 30.0% of our revenues originated from customers located outside of Israel. For information on our revenues breakdown by geographic
market for the past three years, see “Item 4.—Information on the Company— Business Overview— Geographical
Distribution of Revenues.”



Legal Proceedings



In August 2009, an Israeli software company
and one of its owners initiated an arbitration proceeding against Magic Software and one of its subsidiaries, claiming an alleged
breach of a non-disclosure agreement between the parties (the “First Arbitration”). The software company sought damages
in the amount of approximately NIS 52 million (approximately $13.4 million). The arbitrator rendered his decision in January 2015
and determined that Magic Software should pay damages in the amount of $2.4 million. Our profit or loss statement of 2014 included
a net impact of $1.6 million resulting from the arbitration expenses.



In September 2016, the same software company
filed a lawsuit for the sum of NIS 34,106,000 against Magic Software and one of its subsidiaries, in the context of the First Arbitration.
In the lawsuit, it claims that warning letters that Magic Software have sent to its clients in Israel and abroad, warning the clients
against the possibility that the conversion procedure offered by the software company may amount to an infringement of Magic Software
copyrights (the “Warning Letters”), may have caused them irreparable damages resulting from the loss profit of potential
business transactions. The lawsuit is based on the decision given in the First Arbitration, in which it was decided that the Warning
Letters constituted a breach of a non-disclosure agreement signed between the parties and awarded certain damages to the software
company.



The software company claims that the First
Arbitration awarded them damages for only the years 2009 and 2010, and they are allowed to sue for damages relating to the years
2011 through 2016 in separate proceedings. On January 23, 2017, In August 2009filed a statement of defense, maintaining, on various
grounds, that the new lawsuit must be dismissed. The plaintiffs filed their response on April 2, 2017. In view of the nature of
the claims, both factual and legal, that were raised in the proceedings, the likelihood of an expert-based ruling and given the
preliminary stage of the proceeding, it is impossible at this stage to properly evaluate the prospect of the lawsuit being successful.



On August 27, 2015, a wholly-owned subsidiary
of Sapiens was summoned to a hearing at a court in Amsterdam in connection with a claim initiated against it by one of its customers.
Although the software system provided by the subsidiary has been used by the customer since 2008, the customer now claims that
the software system furnished to the customer did not comply with the requirements of the customer and that the subsidiary failed
to correct errors in the software systems in accordance with the service level agreement between the parties. The remedies sought
by the customer are (i) termination of all contracts with the subsidiary and (ii) refund of all amounts paid by the customer to
the subsidiary under the foregoing contracts plus damages in an aggregate amount of approximately €21.5 million.



As of the date of this annual report, the
legal proceedings are at its early stage and Sapiens has included in its financial statements a provision which reflects our current
estimate of the potential outcome of the foregoing claim.



On February 26, 2017, a bill of indictment
was submitted by the Israeli Antitrust Authority against a subsidiary of Matrix, or the Sub and against a junior employee of the
Sub, claiming that the junior employee and as follows the Sub were allegedly a party in a binding agreement and also by "obtaining
by fraud", in one indictment regarding a tender of $360,000.





112







Other than the foregoing, we are not involved
in any proceedings in which any of our directors, members of our senior management or any of our affiliates is either a party adverse
to us or to our subsidiaries or has a material interest adverse to us or to our subsidiaries. Other than the foregoing, we are
also not involved in any proceedings which may have, or have had in the recent past, significant effects on our financial position
or profitability, except as described below.



From time to time, we
are subject to legal, administrative and regulatory proceedings, claims, demands and investigations in the ordinary course of business,
including claims with respect to intellectual property, contracts, employment and other matters. In Accordance with IFRS, we accrue
a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Significant judgment is required in the determination of both the probability and as to whether a loss is reasonably estimable.
These accruals are reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements, rulings, advice
of legal counsel and other information and events pertaining to a particular matter. We intend to vigorously defend ourselves against
the above claims, and we generally intend to vigorously defend any other legal claims to which we are subject. While for most litigation,
the outcome is difficult to determine, to the extent that there is a reasonable possibility that the losses to which we may be
subject could exceed the amounts (if any) that it has already accrued, we attempt to estimate such additional loss, if reasonably
possible, and disclose it (or, if it is an immaterial amount, indicate accordingly). The aggregate provision that we have recorded
for all other legal proceedings (other than the particular material proceeding described above) is not material. Furthermore, in
respect of our ordinary course legal, administrative and regulatory proceedings (i.e., other than the particular material proceeding
described above), we estimate, in accordance with the procedures described above, that as of the current time there is no reasonable
possibility that we will incur material losses exceeding the non-material amounts already recognized.



Dividend Policy



Under Formula’s dividend policy adopted
by its board of directors, sums that are not planned to be used for investments in the near future may be distributed to its shareholders
as a cash dividend, to the extent that our performance allows such distribution. In the three most recent fiscal years, Formula
has made the following distributions:



In December 2016, Formula declared a cash
dividend to its shareholders, to be paid in January 2017, of $0.48 per share. The aggregate amount distributed by Formula was approximately
$7.1 million.



In June 2016, Formula declared a cash dividend
to its shareholders, to be paid in July 2016, of $0.34 per share. The aggregate amount distributed by Formula was approximately
$5.0 million.



In January 2016, Formula declared a cash dividend to its shareholders,
to be paid in February 2016, of $0.34 per share. The aggregate amount distributed by Formula was approximately $5.0 million.



In June 2015, Formula declared a cash dividend to its shareholders,
to be paid in August 2015, of $0.34 per share. The aggregate amount distributed by Formula was approximately $5.0 million.





113







In December 2014, Formula declared a cash
dividend to its shareholders, to be paid in February 2014, of $0.535 per share. The aggregate amount distributed by Formula was
approximately $7.9 million.



In June 2014, Formula declared a cash dividend
to its shareholders to be paid in July 2014, of $0.48 per share. The aggregate amount distributed by Formula was approximately
$7.1 million.



In December 2013, Formula declared a cash
dividend to its shareholders, to be paid on February 2014, of $0.31 per share. The aggregate amount distributed by Formula was
approximately $4.6 million.



In September 2012, Magic Software’s
board of directors also adopted a policy for distributing dividends, under which Magic Software will distribute a dividend of up
to 50% of its annual distributable profits each year, subject to any applicable law. It is possible that Magic Software’s
board of directors will decide, subject to the conditions stated above, to declare additional dividend distributions. Magic Software’s
board of directors may at its discretion and at any time, change, whether as a result of a one-time decision or a change in policy,
the rate of dividend distributions or determine not to distribute a dividend.





In August 2010, Matrix’s board of
directors decided to change Matrix dividend distribution policy whereby every year, Matrix will distribute a dividend at a rate
of 75% (instead of 50% before) of its annual net income. The dividend is to be distributed on a quarterly basis.





Under Israeli law, dividends may be paid
by an Israeli company only out of profits and other surplus as calculated under Israeli law, as of the end date of the most recent
financial statements or as accrued over a period of two years, whichever amount is greater, and provided that there is no reasonable
concern that payment of a dividend will prevent the company from satisfying its existing and foreseeable obligations as they become
due. See “Item 10. Additional Information—Memorandum and Articles of Association—Dividend and Liquidation Rights”
below for more information.



| | B. | Significant Changes
| | -- | -------------------



Since
the date of our consolidated financial statements included in this annual report, there has not been a significant change in our
company.



ITEM 9. THE OFFER AND LISTING



| | A. | Offer and Listing Details
| | -- | -------------------------



Price Range of Ordinary Shares



The following table sets forth, for the
periods indicated, the reported high and low closing sale prices of our ordinary shares on the TASE in NIS and U.S. dollars. U.S.
dollar per ordinary share amounts are calculated using the U.S. dollar representative rate of exchange as reported by the Bank
of Israel on each respective date.



114







|                                             |  | NIS                      |        |  | U.S.$                    | 
|-------------------------------------------- |  | ------------------------ | ------ |  | ------------------------ | 
|                                             |  | Price Per Ordinary Share |        |  | Price Per Ordinary Share | 
|                                             |  | High                     |        |  | Low                      | 
|Annual:                                      |  |                          |        |  |                          | 
|2017 (through April 30, 2017)                |  |                          | 163.80 |  |                          | 
|2016                                         |  |                          | 163.10 |  |                          | 
|2015                                         |  |                          | 136.2  |  |                          | 
|2014                                         |  |                          | 114.10 |  |                          | 
|2013                                         |  |                          | 94.99  |  |                          | 
|2012                                         |  |                          | 69.21  |  |                          | 
|                                             |  |                          |        |  |                          | 
|Quarterly:                                   |  |                          |        |  |                          | 
|Second Quarter 2017 (through April 30, 2017) |  |                          | 150.8  |  |                          | 
|First Quarter 2017                           |  |                          | 163.80 |  |                          | 
|Fourth Quarter 2016                          |  |                          | 163.10 |  |                          | 
|Third Quarter 2016                           |  |                          | 157.70 |  |                          | 
|Second Quarter 2016                          |  |                          | 133.30 |  |                          | 
|First Quarter 2016                           |  |                          | 124.9  |  |                          | 
|Fourth Quarter 2015                          |  |                          | 122.6  |  |                          | 
|Third Quarter 2015                           |  |                          | 136.2  |  |                          | 
|Second Quarter 2015                          |  |                          | 116.90 |  |                          | 
|First Quarter 2015                           |  |                          | 106.80 |  |                          | 
|Fourth Quarter 2014                          |  |                          | 99.96  |  |                          | 
|Third Quarter 2014                           |  |                          | 105.00 |  |                          | 
|Second Quarter 2014                          |  |                          | 114.10 |  |                          | 
|First Quarter 2014                           |  |                          | 107.90 |  |                          | 
|                                             |  |                          |        |  |                          | 
|Most Recent Six Months:                      |  |                          |        |  |                          | 
|April 2017                                   |  |                          | 150.80 |  |                          | 
|March 2017                                   |  |                          | 154.30 |  |                          | 
|February 2017                                |  |                          | 160.00 |  |                          | 
|January 2017                                 |  |                          | 163.80 |  |                          | 
|December 2016                                |  |                          | 162.60 |  |                          | 
|November 2016                                |  |                          | 163.10 |  |                          | 



Price Range of American Depositary Shares



The following table sets forth, for the
periods indicated, the reported high and low closing sale prices of our ADSs on the NASDAQ Global Select Market in U.S. dollars.



|                                               |  | U.S.$         |      
|---------------------------------------------- |  | ------------- | -----
|                                               |  | Price Per ADS |      
|                                               |  | High          |      
|Annual:                                        |  |               |      
|2017 (through April 30, 2017)                  |  |               | 42.70
|2016                                           |  |               | 42.95
|2015                                           |  |               | 35.64
|2014                                           |  |               | 33.79
|2013                                           |  |               | 26.64
|2012                                           |  |               | 17.88
|                                               |  |               |      
|Quarterly:                                     |  |               |      
|Second Quarter 2017 (through April 30, 2017).. |  |               | 41.80
|First Quarter 2017                             |  |               | 42.70
|Fourth Quarter 2016                            |  |               | 42.95
|Third Quarter 2016                             |  |               | 42.20
|Second Quarter 2016                            |  |               | 34.00
|First Quarter 2016                             |  |               | 32.29
|Fourth Quarter 2015                            |  |               | 31.00
|Third Quarter 2015                             |  |               | 35.64
|Second Quarter 2015                            |  |               | 30.30
|First Quarter 2015                             |  |               | 27.98
|Fourth Quarter 2014                            |  |               | 27.41
|Third Quarter 2014                             |  |               | 29.85
|Second Quarter 2014                            |  |               | 33.79
|First Quarter 2014                             |  |               | 31.03
|                                               |  |               |      
|Most Recent Six Months:                        |  |               |      
|April 2017                                     |  |               | 41.80
|March 2017                                     |  |               | 41.93
|February 2017                                  |  |               | 42.70
|January 2017                                   |  |               | 42.70
|December 2016                                  |  |               | 42.95
|November 2016                                  |  |               | 42.18



115







| | B. | Plan of Distribution
| | -- | --------------------



Not applicable.



| | C. | Markets
| | -- | -------



Since our initial public offering in 1991,
our ordinary shares have been traded in Israel on the TASE under the symbol “FORT.” No U.S. trading market exists for
the ordinary shares. Since October 1997, our ADSs have been traded on the NASDAQ Global Select Market, under the symbol “FORTY.”



| | D. | Selling Shareholders
| | -- | --------------------



Not applicable.



| | E. | Dilution
| | -- | --------



Not applicable.



| | F. | Expenses of the Issue
| | -- | ---------------------



Not applicable.



ITEM 10. ADDITIONAL INFORMATION



| | A. | Share Capital
| | -- | -------------



Not applicable.



| | B. | Memorandum and Articles of Association
| | -- | --------------------------------------



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



| | · | operating within the field of informational and computer
systems;
| | - | -----------------------------------------------------------------



| | · | providing management, consulting and sale services
for computers, computer equipment, software for computers and for information systems;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------



| | · | operating a business of systems analysis, systems
programming and computer programming; and
| | - | -------------------------------------------------------------------------------------------



116







| | · | establishing facilities for instruction and training
for computers and digital systems.
| | - | ---------------------------------------------------------------------------------------



Description of Our Share Capital



Our company’s authorized share capital
consists solely of ordinary shares. No preferred shares are currently authorized. Our articles do not restrict in any way the ownership
of our ordinary shares by non-residents of Israel, except that these restrictions may exist with respect to citizens of countries
which are in a state of war with Israel.



Dividend and Liquidation Rights



Our board of directors
is authorized to declare dividends, subject to the provisions of the Companies Law. Dividends on our ordinary shares may be paid
only out of profits and other surplus, as defined in the Companies Law, as of the end date of the most recent financial statements
or as accrued over a period of two years, whichever amount is greater. Alternatively, if we do not have sufficient profits or other
surplus, we may seek permission to effect a distribution by order of an Israeli court. In any event, our board of directors is
authorized to declare dividends, provided there is no reasonable concern that a dividend will prevent us from satisfying our existing
and foreseeable obligations as they become due. Dividends may be paid in cash or in kind. We may invest or use for our own benefit
all unclaimed dividends. If a dividend remains unclaimed for seven years from the date on which we declared it, it lapses and reverts
back to us. Our board of directors can nevertheless cause us to pay the dividend to a holder who would have been entitled had the
dividend not reverted back to us. In case of the liquidation of our company, after satisfying liabilities to creditors, our assets
will be distributed to the holders of ordinary shares in proportion to their holdings. This right may be affected by the grant
of a preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized
in the future. Under the Companies Law, the declaration of a dividend does not require the approval of the shareholders of the
company, unless the company’s articles of association require otherwise. Our articles provide that our board of directors
may declare and pay dividends without any action required by our shareholders.



Redemption Provisions



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



Voting, Shareholder Meetings and Resolutions



Holders of our ordinary shares are entitled
to one vote for each ordinary share held on all matters submitted to the vote of shareholders. These voting rights may be affected
by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in
the future. Under the Companies Law, shares held by our company are not entitled to any rights so long as they are held by the
company.



Under the Companies Law and our articles,
we must hold an annual general meeting of our shareholders once a year with a maximum period of fifteen months between the meetings,
while under NASDAQ listing rule 5620(a), we must hold the meeting within one year after our fiscal year-end (which is December
31st). All meetings of shareholders other than annual general meetings are considered special general meetings. Our board of directors
may call a special general meeting whenever it decides it is appropriate. In addition, shareholders representing 5% of the outstanding
share capital may require the board of directors to call a special general meeting. Under our articles, the quorum required for
a general meeting of shareholders consists of two or more holders present in person or by proxy who hold or represent at least
25% of the voting power. We have opted out of the NASDAQ listing rule 5620(c) requirement that a quorum must constitute at least
33.33% of our outstanding share capital (see “Item 16G. Corporate Governance” below). A meeting adjourned for a lack
of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the
chairman of the meeting may decide with the consent of the holders of a majority of the voting power represented at the meeting
in person or by proxy and voting on the question of adjournment. At the reconvened meeting, if a quorum is not present within one-half
hour from the time designated for holding the meeting, the required quorum will consist of two shareholders present in person or
by proxy, regardless of the percentage of our outstanding ordinary shares or voting power held by them.





117







Under the Companies Law, unless otherwise
provided in the articles or applicable law (including the Companies Law), all resolutions of the shareholders require a simple
majority. Those matters that constitute exceptions to the simple majority approval rule under the Companies Law are described below
in this Item 10.B under “—Approval of Certain Transactions Under the Companies Law.”



Approval of Certain Transactions Under the Companies Law



The Companies Law codifies the fiduciary
duties that office holders, including directors and executive officers, owe to a company. An office holder’s fiduciary duties
consist of a duty of care and a duty of loyalty. The duty of loyalty includes (i) avoiding any conflict of interest between the
office holder’s position in the company and his or her personal affairs, (ii) avoiding any competition with the company,
(iii) avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others,
and (iv) revealing to the company any information or documents relating to the company’s affairs which the office holder
has received due to his or her position as an office holder.



The Companies Law requires that an office
holder of a company promptly disclose any personal interest that he or she may have and all related material information known
to him or her, in connection with any existing or proposed transaction by the company. An interested office holder's disclosure
must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered.
A personal interest, as defined under the Companies Law, includes any personal interest held by the office holder’s spouse,
siblings, parents, grandparents or descendants; spouse’s descendants, siblings or parents; and the spouses of any of the
foregoing, and also includes any interest held by any corporation in which the office holder owns 5% or more of the share capital,
is a director or general manager or in which he or she has the right to appoint at least one director or the general manager.
A personal interest furthermore includes the personal interest of a person for whom the office holder holds a voting proxy or
the interest of the office holder with respect to his or her vote on behalf of the shareholder for whom he or she holds a proxy
even if such shareholder itself has no personal interest in the approval of the matter.



Under the Companies Law, an extraordinary
transaction is defined as a transaction not in the ordinary course of business, not on market terms, or that is likely to have
a material impact on the company’s profitability, assets or liabilities.



If it is determined that an office holder
has a personal interest in a transaction, approval by the board of directors is required for the transaction, unless the company's
articles of association provide for a different method of approval. Further, so long as an office holder has disclosed his or her
personal interest in a transaction, the board of directors may approve an action by the office holder that would otherwise be deemed
a breach of his or her duty of loyalty. However, a company may not approve a transaction or action that is not in the company's
interest or that is not performed by the office holder in good faith. An extraordinary transaction in which an office holder has
a personal interest requires approval first by the company's audit committee and subsequently by the board of directors. The compensation
of, or an undertaking to indemnify or insure, an office holder who is not a director requires approval first by the company's compensation
committee, then by the company's board of directors. If such compensation arrangement or an undertaking to indemnify or insure
is inconsistent with the company's stated compensation policy, or if the office holder is the chief executive officer (apart from
a number of specific exceptions), then such arrangement is further subject to a Special Majority Approval for Compensation. Arrangements
regarding the compensation, indemnification or insurance of a director require the approval of the compensation committee, board
of directors and shareholders by ordinary majority, in that order, and under certain circumstances, a Special Majority Approval
for Compensation.



An office holder who has a personal interest
in a matter that is considered at a meeting of the board of directors or the audit committee may not be present at the meeting
or vote on the matter, subject to certain exceptions, including an allowance for him or her to be present in order to present the
transaction, if the chairman of the audit committee or board of directors (as applicable) determines that such presentation by
him or her is necessary. If the majority of the board members or members of the audit committee, as applicable, have a personal
interest in a transaction, they may all be present for the presentation of, and voting upon, the transaction, but it must also
then be approved by the shareholders of the company.





118







The Companies Law applies the same disclosure
requirements to a controlling shareholder of a public company, which includes a shareholder that holds 25% or more of the voting
rights in the company if no other shareholder owns more than 50% of the voting rights in the company. Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a personal interest, or a transaction with a controlling
shareholder or his or her relative, directly or indirectly, including for receipt of services from an entity controlled by him
or her (or his or her relative), and the terms of engagement and compensation of a controlling shareholder who is an office holder
or an employee of the company, require the approval of the audit committee, the board of directors and the shareholders of the
company. The shareholder approval must include the holders of a majority of the shares held by all shareholders who have no personal
interest in the transaction and are voting on the subject matter (with abstentions being disregarded) or, alternatively, the total
shares of shareholders who have no personal interest in the transaction and who vote against the transaction must not represent
more than two percent (2%) of the voting rights in the company. To the extent that any such transaction with a controlling shareholder
is for a period extending beyond three years, approval is required once every three years, unless the audit committee determines
that the duration of the transaction is reasonable given the circumstances related thereto. In certain cases provided in regulations
promulgated under the Companies Law, shareholder approval is not required.



The approvals of the
board of directors and shareholders are required for a private placement of securities (or a series of related private placements
during a 12-month period or that are part of one continuous transaction or transactions conditioned upon each other) in which:



| | · | the securities issued represent at least 20% of the
company’s actual voting power prior to the issuance of such securities, and such issuance increases the relative holdings
of a 5% shareholder or causes any person to become a 5% shareholder, and the consideration in the transaction (or a portion thereof)
is not in cash or in securities listed on a recognized stock exchange, or is not at a fair market value; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a person would become, as a result of such transaction,
a controlling shareholder of the company.
| | - | -------------------------------------------------------------------------------------------------



Further, under the Companies Law (as described
under “Item 6. Directors, Senior Management and Employees— Board Practices— External Directors Under the Companies
Law”), the appointment of external directors requires, in addition to a majority of the ordinary shares voting and approving
the appointment, that either (a) the approving majority must include a majority of the shares of shareholders that are not controlling
shareholders of the company and who do not have a personal interest in the election of the external director (other than a personal
interest not deriving from a relationship with a controlling shareholder) and who are present and voting (with abstentions being
disregarded), or (b) the shares of such non-controlling, non-interested shareholders that vote against the appointment may not
constitute more than two percent (2%) of our total voting rights. In addition, as described below (see “—Modification
of Class Rights” in this Item 10.B), under our articles, the alteration of the rights, privileges, preferences or obligations
of any class of our share capital requires a simple majority of the class so affected), in addition to the ordinary majority of
all classes of shares voting together as a single class at a shareholder meeting.



A further exception to
the simple majority shareholder vote requirement is a resolution for the voluntary winding up, or other reorganization of, the
company pursuant to Section 350 of the Companies Law, which requires the approval of holders of 75% of the voting rights represented
at the meeting, in person, by proxy or by voting deed and voting on the resolution, provided that such shareholders constitute
more than 50% of the shareholders voting on such matter.



Shareholder Duties



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



| | · | any amendment to the articles of association;
| | - | ---------------------------------------------



| | · | an increase of the company’s authorized share
capital;
| | - | ------------------------------------------------------



| | · | a merger; or
| | - | ------------





119







| | · | approval of actions of office holders in breach of
their duty of loyalty and of interested party transactions.
| | - | --------------------------------------------------------------------------------------------------------------



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



Transfer of Shares



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



Modification of Class Rights



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



Election of Directors



Our ordinary shares do not have cumulative
voting rights in the election of directors. As a result, the holders of ordinary shares that represent more than 50% of the voting
power represented at a shareholders meeting and voting on the matter (disregarding abstentions), have the power to elect all of
our directors, other than the external directors who are appointed by a special majority of shareholders. For a summary of the
provisions of our articles that govern our directors, see “Item 6. Directors, Senior Management and Employees.”



Anti-Takeover Provisions; Mergers and Acquisitions Under
Israeli Law



Mergers



The Companies Law permits
merger transactions if approved by each party’s board of directors and shareholders. In order for shareholder approval to
be obtained for a merger, a majority of the shares present and voting, excluding shares held by the other party to the merger,
or by any person holding at least 25% of the means of control of the other party to the merger, or anyone acting on behalf of
either of them, including any of their affiliates, must be voted in favor of the merger. If, however, the merger involves a merger
with a company’s own controlling shareholder or if the controlling shareholder has a personal interest in the merger, then
the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling
shareholders (as described above in this Item 10 under “—Approval of Certain Transactions Under the Companies Law”).
In the event that the merger transaction has not been approved by either of the above-described special majorities (as applicable),
the holders of at least 25% of the voting rights of the company may apply to a court for approval of the merger. The court may
approve the merger if it is found that the merger is fair and reasonable, taking into account the value of the parties to the
merger and the consideration offered to the shareholders. Upon the request of a creditor of either party to the proposed merger,
the court may delay or prevent the merger. A merger may not be consummated unless at least 50 days have passed from the time that
a proposal for approval of the merger has been filed with the Israeli Registrar of Companies and 30 days have passed from the
date of the approval of the shareholders of the merging companies.



The Companies Law further
provides that the foregoing approval requirements will not apply to shareholders of a wholly-owned subsidiary in a rollup merger
transaction, or to the shareholders of the acquirer in a merger or acquisition transaction if:





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| | · | the transaction does not involve an amendment to the
acquirer’s memorandum or articles of association;
| | - | ------------------------------------------------------------------------------------------------------



| | · | the transaction does not contemplate the issuance
of more than 20% of the voting rights of the acquirer which would result in any shareholder becoming a controlling shareholder;
and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | there is no “cross ownership” of shares
of the merging companies, as described above.
| | - | -------------------------------------------------------------------------------------



Tender Offers



The Companies Law provides
that an acquisition of shares of a public company must be made by means of a tender offer if as a result of the acquisition, the
purchaser would become a holder of 25% or more of the voting rights in the company. This rule does not apply if there is already
another holder of 25% or more of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of
shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become
a holder of more than 45% of the voting rights of the company, if there is no other holder of more than 45% of the voting rights
of the company.



The foregoing provisions
do not apply to:



| | · | a private placement in which the company’s shareholders
approved such holder owning 25% or more of the voting rights in the company (if there is no other shareholder that holds 25% or
more of the voting rights in the company); or more than 45% of the voting rights in the company (if there is no other shareholder
that holds more than 45% of the voting rights in the company); or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a purchase from an existing holder of 25% or more
of the voting rights in the company that results in another person becoming a holder of 25% or more of the voting rights in the
company or a purchase from an existing holder of more than 45% of the voting rights in the company that results in another person
becoming a holder of more than 45% of the voting rights in the company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Regulations adopted under the Companies
Law provide that these tender offer requirements do not apply to companies whose shares are listed for trading only outside of
Israel or have been publicly offered only outside of Israel if, according to the law in the country in which the shares are traded,
including the rules and regulations of the stock exchange on which the shares are traded, there is either a limitation on acquisition
of any level of control of the company, or the acquisition of any level of control requires the purchaser to do so by means of
a tender offer to the public.



The Companies Law also provides that if
following any acquisition of shares, the acquirer holds 90% or more of the company’s shares or of a class of shares, the
acquisition must be made by means of a tender offer for all of the target company’s shares or all of the shares of the class,
as applicable, not held by the acquirer. An acquirer who wishes to eliminate all minority shareholders must do so by way of a tender
offer and hold, following consummation of the tender offer, more than 95% of all of the company’s outstanding shares (and
provided that a majority of the offerees that do not have a personal interest in such tender offer shall have approved it, which
condition shall not apply if, following consummation of the tender offer, the acquirer holds at least 98% of all of the company’s
outstanding shares). If, however, following consummation of the tender offer the acquirer would hold 95% or less of the company’s
outstanding shares, the acquirer may not acquire shares tendered if by doing so the acquirer would own more than 90% of the shares
of the target company. Appraisal rights are available with respect to a successfully completed full tender offer for a period of
six months after such completion, although the acquirer may provide in the tender offer documents that a shareholder that accepts
the offer may not seek appraisal rights.



| | C. | Material Contracts
| | -- | ------------------



Please see “Item
5. Operating and Financial Review and Prospects – B. Liquidity and Capital Resources – Company Commitments” for
a description of our loan agreement with an Israeli institutional investor and the terms of the debentures we issued in September
2015 and “Item 6. Directors, Senior Management and Employees— B. Compensation— Option Grants to, and Service
Agreement with, Chief Executive Officer” for a description of our service agreement with our Chief Executive Officer, Mr.
Guy Bernstein. Beyond those agreements, Formula is not party to, and has not been party to in the last two years, any material
contract entered into outside of the ordinary course of business. In addition, while our subsidiaries are party and have been party
in the last two years to numerous contracts with customers, resellers and distributors, such contracts are entered into in the
ordinary course of business. Furthermore, we do not deem any other individual contract entered into by any of our subsidiaries
outside of the ordinary course of business (such as investment or acquisition agreements) during the last two years to be material
to us.





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| | D. | Exchange Controls
| | -- | -----------------



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



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



| | E. | Taxation
| | -- | --------



The following is a short summary of
the material provisions of the tax environment to which shareholders may be subject. This summary is based on the current provisions
of tax law. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative
interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the appropriate tax authorities
or the courts.



The summary does not address all of
the tax consequences that may be relevant to all holders of our ordinary shares and ADSs in light of each holder’s particular
circumstances and specific tax treatment. For example, the summary below does not address the tax treatment of residents of Israel
and traders in securities who are subject to specific tax regimes. As individual circumstances may differ, holders of our ordinary
shares and ADSs should consult their own tax adviser as to the United States, Israeli or other tax consequences of the purchase,
ownership and disposition of ordinary shares and ADSs. The following is not intended, and should not be construed, as legal or
professional tax advice and is not exhaustive of all possible tax considerations. Each individual should consult his or her own
tax or legal adviser.



Israeli Taxation Considerations for Our Shareholders



Tax Consequences Regarding Disposition of Our ADSs or
Ordinary Shares



Israeli law generally imposes a capital
gain tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and on the sale of assets
located in Israel, including shares of Israeli companies, by both residents and non-residents of Israel, unless a specific exemption
is available or unless a tax treaty between Israel and the shareholder’s country of residence provides otherwise. The Tax
Ordinance distinguishes between “Real Capital Gain” and “Inflationary Surplus”. The Inflationary Surplus
is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is
attributable to the increase in the Israeli consumer price index or, in certain circumstances, a foreign currency exchange rate,
between the date of purchase and the date of sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary
Surplus.





122







Israeli Resident Individuals



As of January 1, 2006, the tax rate applicable
to Real Capital Gain derived by Israeli individuals from the sale of shares which had been purchased on or after January 1, 2003,
whether or not listed on a stock exchange, is 20%, unless such shareholder claims a deduction for interest and linkage differences
expenses in connection with the purchase and holding of such shares, in which case the gain will generally be taxed at a rate of
25%. Additionally, if such shareholder is considered a Substantial Shareholder (i.e., a person who holds, directly or indirectly,
alone or together with another person who collaborates with such person on a permanent basis, 10% or more of any of the company’s
“means of control” (including, among other things, the right to receive profits of the company, voting rights, the
right to receive the company’s liquidation proceeds and the right to appoint a director)) at the time of sale or at any time
during the preceding 12-month period, such gain will be taxed at the rate of 25%. Individual shareholders dealing in securities
in Israel are taxed at their marginal tax rates applicable to business income (up to 47% in 2017).



Notwithstanding the foregoing, pursuant
to the Law for Change in the Tax Burden (Legislative Amendments) (Taxes), 2011, the capital gain tax rate applicable to individuals
was raised from 20% to 25% from 2012 and onwards (or from 25% to 30% if the selling individual shareholder is a Substantial Shareholder
at any time during the 12-month period preceding the sale and/or claims a deduction for interest and linkage differences expenses
in connection with the purchase and holding of such shares). With respect to assets (not shares that are listed on a stock exchange)
purchased on or after January 1, 2003, the portion of the gain generated from the date of acquisition until December 31, 2011 will
be subject to the previous capital gain tax rates (20% or 25%) and the portion of the gain generated from January 1, 2012 until
the date of sale will be subject to the new tax rates (25% or 30%).



Israeli Resident Corporations



Under current Israeli tax
legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of shares of
an Israeli company is the general corporate tax rate. As described above, the corporate tax rate was 25% in 2016, in 2017 the
corporate tax rate is 24%, and as of 2018 the corporate tax rate will be 23%.



Non-Israeli Residents



Israeli capital gain tax is imposed on
the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights
to shares in an Israeli resident company; or (iii) represent, directly or indirectly, rights to assets located in Israel, unless
a tax treaty between Israel and the seller’s country of residence provides otherwise. As mentioned above, Real Capital Gain
is generally subject to tax at the corporate tax rate (25% in 2016 and 24% in 2017 and 23% in 2018 and thereafter) if generated
by a company or, at the rate of 25% (for assets other than shares that are listed on stock exchange – 20% for the portion
of the gain generated up to December 31, 2011) or 30% (for any asset other than shares that are listed on stock exchange –
25% with respect to the portion of the gain generated up to December 31, 2011), if generated if by an individual from the sale
of an asset purchased on or after January 1, 2003. Individual and corporate shareholders dealing in securities in Israel are taxed
at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 47% for
an individual in 2017).



Notwithstanding the
foregoing, shareholders that are non-Israeli residents (individuals and corporations) are generally exempt from Israeli
capital gain tax on any gains derived from the sale, exchange or disposition of shares publicly traded on the Tel Aviv Stock
Exchange or on a recognized stock exchange outside of Israel, provided, among other things, that (i) such gains are not
derived through a permanent establishment that the non-Israeli resident maintains in Israel, (ii) the shares were purchased
after being listed on a recognized stock exchange, and (iii) with respect to shares listed on a recognized stock exchange
outside of Israel, such shareholders are not subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985.
However, non-Israeli corporations will not be entitled to the foregoing exemptions if Israeli residents (a) have a
controlling interest of more than 25% in such non-Israeli corporation, or (b) are the beneficiaries of or are
entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. Such an
exemption is not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be
business income.





123







In addition, a sale of shares may be exempt
from Israeli capital gain tax under the provisions of an applicable tax treaty. For example, under the U.S.-Israel Tax Treaty,
which we refer to as the U.S-Israel Treaty, the sale, exchange or disposition of shares of an Israeli company by a shareholder
who is a U.S. resident (for purposes of the U.S.-Israel Treaty) holding the shares and is entitled to claim the benefits afforded
to such person by the treaty, is generally exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly
or indirectly, shares representing 10% or more of the voting capital during any part of the 12-month period preceding such sale,
exchange or disposition, subject to certain conditions; (ii) the shareholder, if an individual, has been present in Israel for
a period or periods of 183 days or more in the aggregate during the applicable taxable year; or (iii) the capital gain arising
from such sale is attributable to a permanent establishment of the shareholder which is maintained in Israel. In each case, the
sale, exchange or disposition of such shares would be subject to Israeli tax, to the extent applicable; however, under the U.S.-Israel
Treaty, a U.S. resident would be permitted to claim a credit for the Israeli tax against the U.S. federal income tax imposed with
respect to the sale, exchange or disposition, subject to the limitations in U.S. laws applicable to foreign tax credits. The U.S-Israel
Treaty does not provide such credit against any U.S. state or local taxes.



In some instances where our shareholders
may be liable for Israeli tax on the sale of their Ordinary Shares, the payment of the consideration may be subject to the withholding
of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order
to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli
resident company, in the form of a merger or otherwise, the Israel Tax Authority may require from shareholders who are not liable
for Israeli tax to sign declarations in forms specified by this authority or obtain a specific exemption from the Israel Tax Authority
to confirm their status as non-Israeli residents, and, in the absence of such declarations or exemptions, may require the purchaser
of the shares to withhold taxes at source.



Taxes Applicable
to Dividends



Israeli Resident Shareholders



Israeli Resident Individuals. Israeli
residents who are individuals are generally subject to Israeli income tax for dividends paid on our ordinary shares and ADSs (other
than bonus shares or share dividends) at 25%, or 30% if the recipient of such dividend is a substantial shareholder at the time
of distribution or at any time during the preceding 12-month period. However, dividends distributed from taxable income accrued
during the benefits period of an Approved Enterprise or Benefited Enterprise are subject to withholding tax at the rate of 15%
(and 20% with respect to Preferred Enterprise), if the dividend is distributed during the tax benefits period under the Investment
Law or within 12 years after such period. An average rate will be set in case the dividend is distributed from mixed types of
income (regular and Approved/Benefited/ Preferred income).



Israeli Resident Corporations. Generally,
Israeli resident corporations are exempt from Israeli corporate tax on the receipt of dividends paid on ordinary shares or ADSs.
However, dividends distributed from taxable income accrued during the benefits period of an Approved Enterprise or Benefited Enterprise
are subject to withholding tax at the rate of 15%, if the dividend is distributed during the tax benefit period under the Investment
Law or within 12 years after that period.



Non-Israeli Resident Shareholders



Non-Israeli residents (whether individuals
or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on ordinary shares, like our ordinary
shares and ADSs, at the rate of 25% or 30% (if the dividend recipient is a substantial shareholder, at the time of distribution
or at any time during the preceding 12-month period), or 15% if the dividend is distributed from income attributed to an Approved
Enterprise or a Benefited Enterprise (and 20% with respect to a Preferred Enterprise). Such dividends are generally subject to
Israeli withholding tax at a rate of 25% so long as the shares are registered with a Nominee Company (whether the recipient is
a substantial shareholder or not), and 15% if the dividend is distributed from income attributed to an Approved Enterprise or a
Benefited Enterprise (and 20% if the dividend is distributed from income attributed to a Preferred Enterprise), unless a reduced
rate is provided under an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority
allowing for a reduced tax rate). For example, Under the U.S-Israel Treaty, the maximum rate of tax withheld at source in Israel
on dividends paid to a holder of our ordinary shares and ADSs who is a U.S. resident (for purposes of the U.S.-Israel Treaty) is
25%. However, generally, the maximum rate of withholding tax on dividends, not generated by our Approved or Benefited Enterprises,
as applicable, that are paid to a U.S. corporation holding at least 10% or more of our outstanding voting capital from the start
of the tax year preceding the distribution of the dividend through (and including) the distribution of the dividend, is 12.5%,
provided that no more than 25% of our gross income for such preceding year consists of certain types of dividends and interest.
Notwithstanding the foregoing, dividends distributed from income attributed to an Approved Enterprise or a Benefited Enterprise
are subject to a withholding tax rate of 15% for such a U.S. corporate shareholder, provided that the condition related to our
gross income for the previous year (as set forth in the previous sentence) is met. If the dividend is attributable partly to income
derived from an Approved Enterprise, a Benefited Enterprise or a Preferred Enterprise, and partly to other sources of income, the
withholding rate will be a mixed rate reflecting the relative portions of the two types of income. U.S residents who are subject
to Israeli withholding tax on a dividend may be entitled to a credit or deduction for U.S. federal income tax purposes in the amount
of the taxes withheld, subject to detailed rules contained in United States tax legislation.





124







A non-Israeli resident who receives dividends
from which tax was withheld is generally exempt from the obligation to file tax returns in Israel with respect to such income,
provided that (i) such income was not generated from business conducted in Israel by the taxpayer, and (ii) the taxpayer has no
other taxable sources of income in Israel with respect to which a tax return is required to be filed.



Excess Tax



Individuals who are subject to tax in Israel
are also subject to an additional tax at a rate of 2% on annual income exceeding NIS 803,520 for 2016 (and as of 2017, the additional
tax will be at a rate of 3% on annual income exceeding NIS 640,000), which amount is linked to the annual change in the Israeli
consumer price index, including, but not limited to, dividends, interest and capital gain.



Estate and gift tax



Israeli law presently does not impose estate
or gift taxes.





United States Federal Income Tax Considerations



The following is a discussion of the material
U.S. federal income tax consequences relating to the purchase, ownership and disposition of the ordinary shares or ADSs by U.S.
Holders (as defined below) that hold such ordinary shares or ADSs as capital assets. This discussion is based on the Internal Revenue
Code, or the Code, the regulations of the U.S. Department of the Treasury issued pursuant to the Code, or the Treasury Regulations,
and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change,
possibly with retroactive effect, or to different interpretation. It is also based in part on representations by the depositary
and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its
terms.



This discussion does not address all of
the tax consequences that may be relevant to specific U.S. Holders in light of their particular circumstances or to U.S. Holders
subject to special treatment under U.S. federal income tax law (such as banks, insurance companies, tax-exempt entities, retirement
plans, regulated investment companies, partnerships, dealers in securities, brokers, real estate investment trusts, certain former
citizens or residents of the United States, persons who acquire ordinary shares or ADSs as part of a straddle, hedge, conversion
transaction or other integrated investment, persons that have a “functional currency” other than the U.S. dollar, persons
that own (or are deemed to own, indirectly or by attribution) 10% or more of our outstanding voting shares or persons that generally
mark their securities to market for U.S. federal income tax purposes). This discussion does not address any U.S. state or local
or non-U.S. tax consequences or any U.S. federal estate, gift or alternative minimum tax consequences.



As used in this discussion, the term “U.S.
Holder” means a beneficial owner of ordinary shares or ADSs that is, for U.S. federal income tax purposes, (i) a citizen
or resident of the United States, (ii) a corporation, or other entity taxable as a corporation for U.S. federal income tax purposes,
created or organized in or under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate
the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust with respect to which a court
within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the
authority to control all of its substantial decisions, or (v) an electing trust that was in existence on August 19, 1996 and was
treated as a domestic trust on that date.



If an entity treated as a partnership for
U.S. federal income tax purposes holds ordinary shares or ADSs, the tax treatment of such partnership and each partner thereof
will generally depend upon the status and activities of the partnership and such partner. A holder that is treated as a partnership
for U.S. federal income tax purposes should consult its own tax advisor regarding the U.S. federal income tax considerations applicable
to it and its partners of the purchase, ownership and disposition of ordinary shares or ADSs.





125







U.S. Holders of ADSs will be treated as
owners of the ordinary shares underlying their ADSs. Accordingly, deposits and withdrawals of ordinary shares in exchange for ADSs
will not be taxable events for U.S. federal income tax purposes.



The U.S. Treasury has expressed concerns
that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits for
U.S. Holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable
to dividends received by certain non-corporate U.S. Holders. Accordingly, the analysis of the availability of foreign tax credits
and the reduced tax rate for dividends received by certain non-corporate U.S. Holders, described below, could be affected by actions
taken by parties to whom the ADSs are released.



Prospective investors should be aware
that this discussion does not address the tax consequences to investors who are not U.S. Holders. Prospective investors should
consult their own tax advisors as to the particular tax considerations applicable to them relating to the purchase, ownership and
disposition of ordinary shares or ADSs, including the applicability of U.S. federal, state and local tax laws and non-U.S. tax
laws.



Taxation of Distributions on our Ordinary Shares or ADSs



Subject to the discussion below under “Tax
Consequences if We Are a Passive Foreign Investment Company,” a distribution paid by us with respect to our ordinary shares
and ADSs to a U.S. Holder will be treated as dividend income to the extent that the distribution does not exceed our current and
accumulated earnings and profits, as determined for U.S. federal income tax purposes.



Dividends that are received by U.S. holders
that are individuals, estates or trusts generally will be taxed at the rate applicable to long-term capital gains, provided those
dividends meet the requirements of “qualified dividend income.” The maximum long-term capital gains rate is 20% for
individuals with annual taxable income over $400,000. In addition, under the Patient Protection and Affordable Care Act, higher
income taxpayers must pay an additional 3.8 percent tax on net investment income to the extent certain threshold amounts of income
are exceeded. See “Tax on Net Investment Income” in this Item below. For this purpose, qualified dividend income generally
includes dividends paid by a foreign corporation if certain holding period and other requirements are met and either (a) the stock
of the foreign corporation with respect to which the dividends are paid is “readily tradable” on an established securities
market in the U.S. (e.g., the NASDAQ Global Select Market) or (b) the foreign corporation is eligible for benefits of a comprehensive
income tax treaty with the U.S. which includes an information exchange program and is determined to be satisfactory by the U.S.
Secretary of the Treasury. Dividends that fail to meet such requirements and dividends received by corporate U.S. holders are
taxed at ordinary income rates. No dividend received by a U.S. holder will be a qualified dividend (i) if the U.S. holder held
the ordinary share and ADS with respect to which the dividend was paid for less than 61 days during the 121-day period beginning
on the date that is 60 days before the ex-dividend date with respect to such dividend, excluding for this purpose, under the rules
of Code Section 246(c), any period during which the U.S. holder has an option to sell, is under a contractual obligation to sell,
has made (and not closed) a short sale of, is the grantor of a deep-in-the-money or otherwise nonqualified option to buy, or has
otherwise diminished its risk of loss by holding other positions with respect to, such ordinary share and ADSs (or substantially
identical securities); or (ii) to the extent that the U.S. holder is under an obligation (pursuant to a short sale or otherwise)
to make related payments with respect to positions in property substantially similar or related to the ordinary share and ADS
with respect to which the dividend is paid. If we were to be a “passive foreign investment company” (as such term
is defined in the Code), or “PFIC”, for any taxable year, dividends paid on our ordinary shares and ADSs in such year
or in the following taxable year would not be qualified dividends. See the discussion below regarding our PFIC status under “Tax
Consequences if We Are a Passive Foreign Investment Company.” In addition, a non-corporate U.S. holder will be able to take
qualified dividend income into account in determining its deductible investment interest (which is generally limited to its net
investment income) only if it elects to do so; in such case the dividend income will be taxed at ordinary income rates.





126







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



Distributions of current or accumulated
earnings and profits paid in foreign currency to a U.S. holder will be includible in the income of a U.S. holder in a U.S. dollar
amount calculated by reference to the exchange rate on the day the distribution is received. A U.S. holder that receives a foreign
currency distribution and converts the foreign currency into U.S. dollars subsequent to receipt may have foreign exchange gain
or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar, which will generally
be U.S. source ordinary income or loss.



Taxation of the Disposition of the Ordinary Shares or
ADSs



Subject to the discussion below under “Tax
Consequences if We Are a Passive Foreign Investment Company,” upon the sale, exchange or other disposition of our ordinary
shares and ADSs, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the amount realized
on the disposition and the U.S. holder’s tax basis in our ordinary shares and ADSs. The gain or loss recognized on the disposition
of the ordinary shares and ADSs will be long-term capital gain or loss if the U.S. holder held the ordinary shares and ADSs for
more than one year at the time of the disposition and would be eligible for a reduced rate of taxation for certain non-corporate
U.S. holders. The maximum long-term capital gains rate is 20% for individuals with annual taxable income over $400,000. In addition,
under the Patient Protection and Affordable Care Act, higher income taxpayers must pay an additional 3.8 percent tax on net investment
income to the extent certain threshold amounts of income are exceeded. See “Tax on Net Investment Income” in this Item
below. Capital gain from the sale, exchange or other disposition of ordinary shares and ADSs held for one year or less is short-term
capital gain and taxed as ordinary income. Gain or loss recognized by a U.S. holder on a sale, exchange or other disposition of
our ordinary shares and ADSs generally will be treated as U.S. source income or loss. The deductibility of capital losses is subject
to certain limitations.



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



Tax Consequences if We Are a Passive Foreign Investment
Company



We would be a passive foreign investment
company, or PFIC, for a taxable year if either (1) 75% or more of our gross income in the taxable year is passive income; or (2)
the average percentage (by value determined on a quarterly basis) in a taxable year of our assets that produce, or are held for
the production of, passive income is at least 50%. Passive income for this purpose generally includes, among other things, certain
dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property
that gives rise to passive income. If we own (directly or indirectly) at least 25% by value of the stock of another corporation,
we would be treated for purposes of the foregoing tests as owning our proportionate share of the other corporation’s assets
and as directly earning our proportionate share of the other corporation’s income. As discussed below, we believe that we
were not a PFIC for 2016.



If we were a PFIC, each U.S. holder would (unless it made one
of the elections discussed below on a timely basis) be taxable on gain recognized from the disposition of our ordinary shares and
ADSs (including gain deemed recognized if our ordinary shares and ADSs are used as security for a loan) and upon receipt of certain
excess distributions (generally, distributions that exceed 125% of the average amount of distributions in respect to such shares
received during the preceding three taxable years or, if shorter, during the U.S. holder’s holding period prior to the distribution
year) with respect to our ordinary shares and ADSs as if such income had been recognized ratably over the U.S. holder’s holding
period for the shares. The U.S. holder’s income for the current taxable year would include (as ordinary income) amounts allocated
to the current taxable year and to any taxable year prior to the first day of the first taxable year for which we were a PFIC.
Tax would also be computed at the highest ordinary income tax rate in effect for each other taxable year to which income is allocated,
and an interest charge on the tax as so computed would also apply. The tax liability with respect to the amount allocated to the
taxable year prior to the taxable year of the distribution or disposition cannot be offset by any net operating losses. Additionally,
if we were a PFIC, U.S. holders who acquire our ordinary shares and ADSs from decedents (other than nonresident aliens) would be
denied the normally-available step-up in basis for such shares to fair market value at the date of death and, instead, would have
a tax basis in such shares equal to the lesser of the decedent’s basis or the fair market value of such shares on the decedent's
date of death.





127







As an alternative to the tax treatment
described above, a U.S. holder could elect to treat us as a “qualified electing fund” (a QEF), in which case the U.S.
holder would be taxed, for each taxable year that we are a PFIC, on its pro rata share of our ordinary earnings and net capital
gain (subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge). Special rules
apply if a U.S. holder makes a QEF election after the first taxable year in its holding period in which we are a PFIC. We have
agreed to supply U.S. holders with the information needed to report income and gain under a QEF election if we were a PFIC. Amounts
includable in income as a result of a QEF election will be determined without regard to our prior year losses or the amount of
cash distributions, if any, received from us. A U.S. holder’s basis in its Ordinary Shares and ADSs will increase by any
amount included in income and decrease by any amounts not included in income when distributed because such amounts were previously
taxed under the QEF rules. So long as a U.S. holder’s QEF election is in effect with respect to the entire holding period
for its Ordinary Shares and ADSs, any gain or loss realized by such holder on the disposition of its Ordinary Shares and ADSs held
as a capital asset generally will be capital gain or loss. Such capital gain or loss ordinarily would be long-term if such U.S.
holder had held such Ordinary Shares and ADSs for more than one year at the time of the disposition and would be eligible for a
reduced rate of taxation for certain non-corporate U.S. holders. The maximum long-term capital gains rate is 20% for individuals
with annual taxable income that exceeds certain thresholds. The QEF election is made on a shareholder-by-shareholder basis, applies
to all Ordinary Shares and ADSs held or subsequently acquired by an electing U.S. holder and can be revoked only with the consent
of the IRS. The QEF election must be made on or before the U.S. holder's tax return due date, as extended, for the first taxable
year to which the election will apply.



As an alternative to making a QEF election,
a U.S. holder of PFIC stock that is “marketable stock” (e.g., “regularly traded” on the NASDAQ Capital
Market) may, in certain circumstances, avoid certain of the tax consequences generally applicable to holders of stock in a PFIC
by electing to mark the stock to market as of the beginning of such U.S. holder’s holding period for our ordinary shares
and ADSs. Special rules apply if a U.S. holder makes a mark-to-market election after the first year in its holding period in which
we are a PFIC. As a result of such an election, in any taxable year that we are a PFIC, a U.S. holder would generally be required
to report gain or loss to the extent of the difference between the fair market value of the ordinary shares and ADSs at the end
of the taxable year and such U.S. holder’s tax basis in such shares and ADSs at that time. Any gain under this computation,
and any gain on an actual disposition of our ordinary shares and ADSs in a taxable year in which we are PFIC, would be treated
as ordinary income. Any loss under this computation, and any loss on an actual disposition of our ordinary shares and ADSs in a
taxable year in which we are PFIC, would be treated as ordinary loss to the extent of the cumulative net-mark-to-market gain previously
included. Any remaining loss from marking our ordinary shares and ADSs to market will not be allowed, and any remaining loss from
an actual disposition of our ordinary shares and ADSs generally would be capital loss. A U.S. holder’s tax basis in its ordinary
shares and ADSs is adjusted annually for any gain or loss recognized under the mark-to-market election. There can be no assurances
that there will be sufficient trading volume with respect to our ordinary shares and ADSs for the ordinary shares and ADSs to be
considered “regularly traded” or that our ordinary shares and ADSs will continue to trade on the NASDAQ Capital Market.
Accordingly, there are no assurances that our ordinary shares and ADSs will be marketable stock for these purposes. As with a QEF
election, a mark-to-market election is made on a shareholder-by-shareholder basis, applies to all ordinary shares and ADSs held
or subsequently acquired by an electing U.S. holder and can only be revoked with consent of the IRS (except to the extent our ordinary
shares and ADSs no longer constitute “marketable stock”).





128







Based on an analysis of our assets and
income, we believe that we were not a PFIC for 2016. We currently expect that we will not be a PFIC in 2017. The tests for determining
PFIC status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant
to this determination. Accordingly, there can be no assurance that we will not become a PFIC in any future taxable years. U.S.
holders who hold our ordinary shares and ADSs during a period when we are a PFIC will be subject to the foregoing rules, even if
we cease to be a PFIC, subject to certain exceptions for U.S. holders who made QEF, mark-to-market or certain other special elections.
U.S. holders are urged to consult their tax advisors about the PFIC rules, including the consequences to them of making a mark-to-market
or QEF election with respect to our ordinary shares and ADSs in the event that we qualify as a PFIC.



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



Tax on Net Investment Income



A U.S. holder that is an individual or
estate, or a trust that does not fall into a special class of trusts that is exempt from the tax, will be subject to a 3.8% tax
on the lesser of (1) the U.S. holder’s “net investment income” for the relevant taxable year and (2) the
excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case
of individuals will be between $125,000 and $250,000, depending on the individual’s circumstances). A U.S. holder’s
net investment income generally will include its dividends on our ordinary shares and ADSs and net gains from dispositions of our
ordinary shares and ADSs, unless those dividends or gains are derived in the ordinary course of the conduct of trade or business
(other than trade or business that consists of certain passive or trading activities). Net investment income, however, may be reduced
by deductions properly allocable to that income. A U.S. holder that is an individual, estate or trust is urged to consult its tax
adviser regarding the applicability of the Medicare tax to its income and gains in respect of its investment in our ordinary shares
or ADSs.



Non-U.S. Holders of Ordinary
Shares or ADSs



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



Information Reporting and
Backup Withholding



A U.S. holder generally is subject to information
reporting and may be subject to backup withholding at a rate of up to 28% with respect to dividend payments on, or receipt of the
proceeds from the disposition of, our ordinary shares and ADSs. Backup withholding will not apply with respect to payments made
to exempt recipients, including corporations and tax-exempt organizations, or if a U.S. holder provides correct taxpayer identification
number, certifies that such holder is not subject to backup withholding or otherwise establishes an exemption. Non-U.S. holders
are not subject to information reporting or backup withholding with respect to dividend payments on, or receipt of the proceeds
from the disposition of, ordinary shares and ADSs in the U.S., or by a U.S. payer or U.S. middleman, provided that such non-U.S.
holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes an exemption. Backup
withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a holder,
or alternatively, the holder may be eligible for a refund of any excess amounts withheld under the backup withholding rules, in
either case, provided that the required information is furnished to the IRS.





129







Information Reporting by
Certain U.S. Holders



U.S. citizens and individuals taxable as
resident aliens of the United States that own “specified foreign financial assets” with an aggregate value in a taxable
year in excess of $50,000 (as determined under rules in Treasury regulations) and that are required to file a U.S. federal income
tax return generally will be required to file an information report with respect to those assets with their tax returns. IRS Form
8938 has been issued for that purpose. “Specified foreign financial assets” include any financial accounts maintained
by foreign financial institutions, foreign stocks held directly, and interests in foreign estates, foreign pension plans or foreign
deferred compensation plans. Under those rules, our ordinary shares, whether owned directly or through a financial institution,
estate or pension or deferred compensation plan, would be “specified foreign financial assets”. Under Treasury regulations,
the reporting obligation applies to certain U.S. entities that hold, directly or indirectly, specified foreign financial assets.
Penalties can apply if there is a failure to satisfy this reporting obligation. A U.S. Holder is urged to consult his tax adviser
regarding his reporting obligation.



| | F. | Dividends and Paying Agents
| | -- | ---------------------------



Not applicable.



| | G. | Statement by Experts
| | -- | --------------------



Not applicable.



| | H. | Documents on Display
| | -- | --------------------



Formula is subject to the reporting requirements
of the Exchange Act that are applicable to a foreign private issuer. In accordance with the Exchange Act, we file reports with
the SEC, including annual reports on Form 20-F by April 30 each year (as of 2017). In addition, we furnish interim financial information
on Form 6-K on a quarterly basis. We also furnish to the SEC under cover of Form 6-K certain other material information required
to be made public in Israel, filed with and made public by any stock exchange or distributed by us to our shareholders. You may
inspect without charge and copy at prescribed rates such material at the public reference facilities maintained by the SEC, at
100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of such material from the SEC at prescribed rates by writing
to the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room.



The SEC maintains an Internet site at
http://www.sec.gov that contains reports and other material that are filed through the SEC’s Electronic Data Gathering,
Analysis and Retrieval (EDGAR) system. Formula began filing through the EDGAR system beginning in October 2002. The Exchange Act
file number for our SEC filings is 000-29442.



Formula’s ADSs are traded on the
NASDAQ Global Select Market. You may inspect reports and other information concerning Formula at the offices of the Financial Industry
Regulatory Authority, Inc., or FINRA, 9509 Key West Avenue, Rockville, Maryland 20850. Copies of our SEC filings and submissions
are also submitted to the Israel Securities Authority, or ISA, and the TASE. Such copies can be retrieved electronically through
the MAGNA distribution site of the ISA (www.magna.isa.gov.il) and the TASE website (maya.tase.co.il).



A copy of each report that we submit in
accordance with applicable United States law is available for public review at our principal executive offices, at 5 Haplada Street,
Or Yehuda 6021805, Israel. Information about us is also available on our website at http://www.formulasystems.com. Such
information is not part of this annual report.



| | I. | Subsidiary Information
| | -- | ----------------------



Not applicable.





130







ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK



Interest Rate and Currency Exchange
Rate Fluctuations; Impact of Inflation



In light of the nature of our activities,
we invest our cash and cash equivalents primarily in short-term and long-term deposits. As of December 31, 2016, substantially
all of the cash that we held was invested in dollar,Euro and British Pound accounts bearing interest based on LIBOR, and NIS accounts
bearing interest based on the Israeli prime rate. Given the current low interest rates in the financial markets, assuming a 10%
interest rate decrease, the net decrease in our earnings from our financial assets would be negligible, holding other variables
constant.



As described above in this annual report
(under “Item 3.D Risk Factors—Risks Relating to Operations in Israel—Fluctuations in foreign currency values
may affect our business and results of operations” and “Item 5. Operating and Financial Review and Prospects—Operating
Results— Impact of Inflation and Currency Fluctuations on Results of Operations”), because most of our software services
revenues are received in NIS, a decrease in value of the NIS against the dollar adversely impacts the operating results for our
software services operating segment, by reducing the dollar-recorded revenue growth rate for those services. Accordingly, an increase
in the value of the NIS relative to the dollar positively impacts our dollar-recorded software services revenues and operating
profit.



At the same time, a significant portion
of our revenues from proprietary software products is currently denominated in dollars and other currencies, particularly Euro
and British pound and to a lesser extent Japanese Yen, while a substantial portion of our expenses relating to the proprietary
software products, principally salaries and related personnel expenses, is denominated in NIS. As a result, the depreciation of
the dollar or these other currencies relative to the NIS increases our operating costs as a percentage of the revenues that we
derive from those dollar and other currency-denominated sales, and, therefore, adversely affects the operational profitability
of our proprietary software product reporting segment. A rise in the rate of Israeli inflation compounds this negative impact by
further increasing our NIS (and ultimately dollar-recorded) operating expenses, and, consequently, reducing our operational profitability
in that segment. Also, the depreciation of these other currencies—particularly Euro, British pound and to a lesser extent
Japanese Yen—relative to the U.S. dollar reduces our dollar recorded revenues from sales of our proprietary software products
and thereby harms our results of operations.



The net effect of these risks stemming
from currency exchange rate fluctuations on our operating results can be quantified as follows:



A hypothetical 10% movement in foreign
currency rates (primarily the NIS, GBP, Euro, Japanese Yen, PLN and INR) against the US dollar, with all other variables held constant
on the expected sales, would have resulted in a decrease or increase in 2016 sales revenues of approximately $ 76.2 million or
$ 89.6 million, respectively.



In addition, a hypothetical 10% movement
in the value of the USD against the NIS in the year ended December 31, 2016 with respect to Series A Secured Debentures, issued
by Formula on September 2015, and NIS 200 million loan that was extended to Formula by a leading Israeli institutional investor
in January 2014 which remaining principal amounts as of December 31, 2016 valued at NIS 101,319 and NIS 174,400, respectively,
would have resulted in an increase in 2016 financial expenses of approximately $ 8.0 million.



In January 2014, Formula concluded terms of a NIS 200 million
loan (approximately $57.6 million) that was extended to us by a leading Israeli institutional investor. The loan is secured by
certain of the shares of each of our publicly held subsidiary and affiliated companies. The loan's average duration from inception
is approximately four years (paid over a period of 6 years, first payment scheduled for January 2016) and carries a fixed annual
interest rate of 5.5%.



Depending upon the
circumstances, we will consider entering into currency hedging transactions to decrease the risk of financial exposure from fluctuations
in the exchange rate of the dollar, Euro, Japanese yen and/or British Pound against the NIS, or the Euro, Japanese yen and/or British
Pound against the dollar. There can be no assurance that these activities, or others that we may use from time to time, will eliminate
the negative financial impact of currency fluctuations and inflation. We do not—nor do we intend to in the future—engage
in currency speculation.





131







Fluctuations in Market Price of
Securities We Hold



We hold the securities
of three subsidiaries— Magic Software, Sapiens and Matrix,— which are companies whose securities are listed for trading
on the NASDAQ Global Market, NASDAQ Capital Market and/or the TASE. We consider these holdings as long-term holdings. We are exposed
to the risk of fluctuation of the price of these companies’ securities. All of these publicly traded companies have experienced
significant historical volatility in their stock prices. Fluctuations in the market price of our holdings in these companies may
result in the fluctuation of the value of our assets. We typically do not attempt to reduce or eliminate our market exposure on
these securities.



Generally, we do not hold nor have we issued,
to any material extent, any derivatives or other financial instruments for trading purposes except for our Series A Secured Debentures
and Series B Convertible Debentures issued as part of a public offering in Israel on the TASE in September 2015.



ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES



| | A. | Debt Securities
| | -- | ---------------



Not applicable.



| | B. | Warrants and Rights
| | -- | -------------------



Not applicable.



| | C. | Other Securities
| | -- | ----------------



Not applicable.



| | D. | American Depositary Shares
| | -- | --------------------------



Fees and charges payable by our
ADS holders



The Bank of New York
Mellon, which we refer to as the Depositary, serves as the depositary for our ADS program. Pursuant to the deposit agreement by
and among our Company, the Depositary and owners and holders of our ADSs, which we refer to as the Deposit Agreement, ADS holders
may be required to pay various fees to the Depositary. In particular, the Depositary may charge the following fees to any party
depositing or withdrawing ADSs, or to any party surrendering American Depositary Receipts (which we refer to as ADRs) that represent
the ADSs, or to whom ADRs are issued (including, without limitation, issuance pursuant to a stock dividend or stock split declared
by us or an exchange of stock involving the ADRs or any deposited ADSs underlying the ADRs or a distribution of ADRs pursuant to
a distribution of underlying shares), as applicable: (a) taxes and governmental charges, (b) such registration fees as may from
time to time be in effect for the registration of transfers of shares generally on our share register and applicable to transfers
of shares to the name of the Depositary or its nominee or agent in connection with making deposits or withdrawals under the Deposit
Agreement, (c) such cable, telex and facsimile transmission expenses as are expressly provided for in the Deposit Agreement, (d)
such expenses as are incurred by the Depositary in the conversion of foreign currency, (e) a fee of $5.00 or less per 100 ADSs
(or portion thereof) for the execution and delivery of ADRs (including in connection with distributions of shares or rights by
us) and in connection with the surrender of receipts and withdrawal of the underlying shares, (f) a fee of $.02 or less per ADS
(or portion thereof) for any cash distribution made pursuant to the Deposit Agreement, including in connection with distributions
of shares or rights, (g) a fee for the distribution of securities in connection with certain distributions, such fee being in an
amount equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such
securities but which securities are instead distributed by the Depositary to ADR holders, and (h) any other charges payable by
the Depositary or any of its agents in connection with the servicing of ADSs or other deposited securities underlying the ADRs.





132







Amounts received from the Depositary



We do not receive any
fees directly or indirectly from the Depositary.



PART
II



ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES



None.



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



None.



ITEM 15. CONTROLS AND PROCEDURES



Disclosure Controls and Procedures



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



Management’s Annual Report on Internal Control over
Financial Reporting



Our management is responsible for establishing
and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in
Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision
of, the company’s principal executive and principal financial officers and effected by the company’s board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies
and procedures that:



| | · | Pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could
have an effect on the financial statements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our management assessed the effectiveness
of our internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on that assessment, our management concluded that as of December 31, 2016, our internal control over financial reporting
was effective.





133







Our management has excluded from its assessment
of internal control over financial reporting as of December 31, 2016 the internal controls of subsidiaries acquired during 2016,
which constituted approximately 4% of our company’s consolidated total assets as of December 31, 2016, and 7% for the period
from the date of the acquisitions out of our company’s consolidated net income for the year then ended.



The effectiveness of our management’s
internal control over financial reporting as of December 31, 2016 has been audited by our company’s independent registered
public accountants, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, and their report as of May 15, 2017,
herein expresses an unqualified opinion on our company’s internal control over financial reporting.



Attestation Report of the Registered
Public Accounting Firm



Our independent registered public accounting
firm has issued an audit report on the effectiveness of our internal control over financial reporting. This report is included
under Item 18.



Changes in Internal Control over Financial
Reporting



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



ITEM 16. RESERVED



ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT



Our board of directors has determined that
Ms. Iris Yahal, who serves on the audit committee of our board of directors, qualifies as our “audit committee financial
expert,” as defined under the rules and regulations of the SEC.



ITEM 16B. CODE OF ETHICS



We have adopted a code of business conduct
and ethics, or code of ethics, applicable to Formula’s Chief Executive Officer and Chief Financial Officer (who also serves
as its principal accounting officer) and any person performing similar functions, as well as to its directors and other employees.
A copy of the code of ethics is available to all of Formula’s employees, investors and others without charge, upon request
to the following address: Formula Systems (1985) Ltd., 5 Haplada St., Or Yehuda 6021805, Israel, Attn: Chief Executive Officer.



The chairman of our audit committee may
approve a request by our Chief Executive Officer, Chief Financial Officer (who also serves as our principal accounting officer)
or any person performing similar functions for a waiver from the requirements of our code of ethics pertaining to (i) honest and
ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationship;
(ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we must file with, or submit to,
the SEC and in other public communications made by us; (iii) compliance with applicable governmental laws, rules and regulations;
(iv) the prompt internal reporting of violation of the code of ethics to the chairman of our audit committee; and (v) accountability
for adherence to the code of ethics; provided in each case that the person requesting such waiver provides to our audit committee
a full disclosure of the particular circumstances relating to such request. The chairman of our audit committee will first determine
whether a waiver of the relevant requirements of the code of ethics is required and, if such waiver is required, whether a waiver
will be granted. The person requesting such waiver may be required to agree to certain conditions before a waiver or a continuing
waiver is granted.



Any amendments to the code of ethics and
all waivers from compliance with the code of ethics granted to our Chief Executive Officer, Chief Financial Officer (who also serves
as our principal accounting officer) or any person performing similar functions with respect to its requirements described in the
above paragraph will be publicly disclosed by us via a report on Form 6-K in accordance with the regulations of the SEC. No such
amendment has been adopted, nor waiver provided, by us during the fiscal year ended December 31, 2016.





134







ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES



Principal Accountant Fees and
Services



We paid
the following fees for professional services rendered by Kost Forer Gabbay & Kasierer, Certified Public Accountant, a member
firm of Ernst & Young Global, independent registered public accounting firm (which we refer to as Kost Forer), for the years
ended December 31, 2015 and December 31, 2016, respectively:



|                      |  | 2015                            |       |  | 2016 | 
|--------------------- |  | ------------------------------- | ----- |  | ---- | 
|                      |  | (U.S. dollars in
    thousands) |      
|Audit Fees(1)         |  |                                 | 1,315 |  |      | 
|Audit-Related Fees(2) |  |                                 |       |  |      | 
|Tax Fees(3)           |  |                                 | 296   |  |      | 
|Total                 |  |                                 | 1,611 |  |      | 



| | (1) | The audit fees for the years ended December 31, 2015 and 2016
were for professional services rendered for: the audits of our annual consolidated financial statements; agreed-upon procedures
related to the review of our consolidated quarterly information; statutory audits of Formula and its subsidiaries and affiliated
companies; issuance of comfort letters and consents; and assistance with review of documents filed with the SEC.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Tax fees for the years ended December 31, 2015 and 2016 were
for services related to tax compliance, including the preparation of tax returns and claims for refund, and tax advice.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Policy on Pre-Approval of Audit
and Non-Audit Services of Independent Auditors



Our
audit committee is responsible for the oversight of our (and our subsidiaries’) independent auditor’s work. Our Audit
Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent
registered public accountants, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global. Pre-approval of an audit
or non-audit service may be given as a general pre-approval, as part of the audit committee’s approval of the scope of the
engagement of our independent auditor, or on an individual basis. Any proposed services that exceed general pre-approved levels
also require specific pre-approval by our audit committee. The policy prohibits retention of the independent public accountants
to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC,
and also requires the Audit Committee to consider whether proposed services are compatible with the independence of the public
accountants.



During
2015 and 2016, all audit and non-audit services were pre-approved by our audit committee in accordance with the policy and procedures.



ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
COMMITTEES



Not applicable.



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



None.



ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT



None.





135







ITEM 16G. CORPORATE GOVERNANCE



The
NASDAQ Global Select Market requires companies with securities listed thereon to comply with its corporate governance standards.
As a foreign private issuer, we are not required to comply with all of the rules that apply to listed domestic U.S. companies.
Pursuant to NASDAQ listing rule 5615(a)(3), we have notified NASDAQ that with respect to the corporate governance practices described
below, we instead follow Israeli law and practice and accordingly do not follow the NASDAQ listing rules.Except
for the differences described below, we do not believe there are any significant differences between our corporate governance
practices and those that apply to a U.S. domestic issuer under the NASDAQ Global Market corporate governance rules.



| | · | Independent Director Oversight of Nominations:
Under Israeli law, there is no requirement to have an independent nominating committee or the independent directors of a company
select (or recommend for selection) director nominees, as is required under NASDAQ listing rule 5605(e) for a U.S. domestic issuer.
Our board of directors handles this process, as is permitted by our articles and the Companies Law. We also need not adopt a formal
board resolution or charter addressing the director nominations process and such related matters as may be required under the
U.S. federal securities laws, as NASDAQ requires for a U.S. issuer.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Shareholder Approval: Pursuant to Israeli law,
we seek shareholder approval for all corporate actions requiring such approval under the requirements of the Companies Law, which
are different from, or in addition to, the requirements for seeking shareholder approval under NASDAQ listing rule 5635. See “Item
10. Additional Information— Memorandum and Articles of Association— Approval of Certain Transactions Under the Companies
Law” in this annual report for a description of the transactions requiring shareholder approval under the Companies Law.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Quorums for Shareholders Meetings. The quorum
for a shareholders meeting, as stipulated in our articles, complies with the provisions of Israeli law, and requires the presence,
in person or by proxy of holders of 25% of our outstanding ordinary shares, in lieu of the requirement specified in NASDAQ listing
rule 5620(c) under which the quorum for any shareholders meeting shall not be less than 331⁄3% of the outstanding voting shares
of a listed company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Required Timing for Annual Shareholders Meetings.
Under the Companies Law, we are required to hold an annual shareholders meeting each calendar year and within 15 months of the
last annual shareholders meeting, which differs from the corresponding requirement under NASDAQ listing rule 5620(a), which mandates
that a listed company hold its annual shareholders meeting within one year of the company’s fiscal year-end.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 16H. MINE SAFETY DISCLOSURES



Not applicable.



PART
III



ITEM 17. FINANCIAL STATEMENTS



We have elected to provide financial statements
and related information pursuant to Item 18.



ITEM 18. FINANCIAL STATEMENTS



Our consolidated financial statements and
the report of our independent registered public accounting firm in connection therewith are filed as part of this annual report,
as noted on the pages below:



|Reports of Independent Registered Public Accounting Firm |  | F-2
    - F-4   
|-------------------------------------------------------- |  | ----------------
|Consolidated Balance Sheets                              |  | F-5 - F-6       
|Consolidated Statements of Income                        |  | F-7             
|Consolidated Statements of Comprehensive Income          |  | F-8             
|Consolidated Statements of Changes in Equity             |  | F-9 - F-11      
|Consolidated Statements of Cash Flows                    |  | F-12 -
    F-14 
|Notes to Consolidated Financial Statements               |  | F-15
    - F-112





136







ITEM 19. EXHIBITS



|Exhibit No. |  |                                                                                                                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1         |  | Memorandum of Association (1)                                                                                                                                                                                  
|1.2         |  | Amended and Restated Articles of Association, as adopted by Formula Systems (1985) Ltd. on January 8, 2012 (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 for officers and directors, adopted by Formula Systems (1985) Ltd. on January 8, 2012 (3)                                                                                    
|4.2         |  | English translation of Formula Systems (1985) Ltd. Employees and Office Holders Share Option Plan (2008)(4)                                                                                                    
|4.3         |  | Formula Systems (1985) Ltd. 2011 Share Incentive Plan and amendment(5)                                                                                                                                         
|4.4         |  | Formula Systems (1985) Ltd. Compensation Policy(6)                                                                                                                                                             
|8           |  | List of Subsidiaries*                                                                                                                                                                                          
|12.1        |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act*                                                                                                 
|12.2        |  | Certification of the 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 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*
|13.2        |  | Certification of the 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 & Kaiserer, a member of Ernst & Young Global*                                                                                                                                   
|15.2        |  | Consent of KDA Audit
Corporation*                                                                                                                                                                              

*Filed herewith.



| | (1) | Incorporated by reference to the Registration Statement
on Form F-1 (File No. 333-8858) filed with respect to the registrant’s American Depositary Shares.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Incorporated by reference to Exhibit 99.1 to the report
on Form 6-K filed by the registrant with the Securities and Exchange Commission on January 18, 2012.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Incorporated by reference to Exhibit 99.2 to the report
on Form 6-K filed by the registrant with the Securities and Exchange Commission on January 18, 2012.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Incorporated by reference to the annual report on Form
20-F for the 2008 fiscal year filed by the registrant with the Securities and Exchange Commission on April 27, 2009.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Incorporated by reference to the annual report on Form
20-F for the 2013 fiscal year filed by the registrant with the Securities and Exchange Commission on April 30, 2014.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Incorporated by reference to Exhibit 99.2 to the report
on Form 6-K filed by the registrant with the Securities and Exchange Commission on November 11, 2016.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



137







SIGNATURES



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



FORMULA SYSTEMS (1985) LTD.



|By: | /s/Guy Bernstein        | May 15, 2017
|--- | ----------------------- | ------------
|    | Guy Bernstein           | Date        
|    | Chief Executive Officer |             



138







EXHIBIT INDEX



|Exhibit No. |  |                                                                                                                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                
|1.1         |  | Memorandum of Association (1)                                                                                                                                                                                  
|1.2         |  | Amended and Restated Articles of Association, as adopted by Formula Systems (1985) Ltd. on January 8, 2012(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 for officers and directors, adopted by Formula Systems (1985) Ltd. on January 8, 2012 (3)                                                                                    
|4.2         |  | English translation of Formula Systems (1985) Ltd. Employees and Office Holders Share Option Plan (2008)(4)                                                                                                    
|4.3         |  | Formula Systems (1985) Ltd. 2011 Share Incentive Plan and amendment(5)                                                                                                                                         
|4.4         |  | Formula Systems (1985) Ltd. Compensation Policy(6)                                                                                                                                                             
|8           |  | List of Subsidiaries*                                                                                                                                                                                          
|12.1        |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Exchange Act*                                                                                                 
|12.2        |  | Certification of the 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 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*
|13.2        |  | Certification of the 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 KDA Audit Corporation*                                                                                                                                                                              

*Filed herewith.



| | (1) | Incorporated by reference to the Registration Statement
on Form F-1 (File No. 333-8858).
| | --- | ----------------------------------------------------------------------------------------

| | (2) | Incorporated by reference to Exhibit 99.1 to the report
on Form 6-K filed by the registrant with the Securities and Exchange Commission on January 18, 2012.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Incorporated by reference to Exhibit 99.2 to the report
on Form 6-K filed by the registrant with the Securities and Exchange Commission on January 18, 2012.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Incorporated by reference to the annual report on Form
20-F for the 2008 fiscal year filed by the registrant with the Securities and Exchange Commission on April 27, 2009.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Incorporated by reference to the annual report on Form
20-F for the 2013 fiscal year filed by the registrant with the Securities and Exchange Commission on April 30, 2014.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Incorporated by reference to Exhibit 99.2 to the report
on Form 6-K filed by the registrant with the Securities and Exchange Commission on November 16, 2016.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



139













FORMULA SYSTEMS (1985) LTD. AND ITS SUBSIDIARIES



CONSOLIDATED FINANCIAL STATEMENTS



AS OF DECEMBER 31, 2016



U.S. DOLLARS IN THOUSANDS



INDEX



|                                                         | Page        
|-------------------------------------------------------- | ------------
|                                                         |             
|Reports of independent registered public accounting firm | F-2 - F-4   
|                                                         |             
|Consolidated statements of financial position            | F-5 - F-6   
|                                                         |             
|Consolidated statements of profit or loss                | F-7         
|                                                         |             
|Consolidated statements of comprehensive income          | F-8         
|                                                         |             
|Consolidated statements of changes in equity             | F-9 - F-11  
|                                                         |             
|Consolidated statements of cash flows                    | F-12 - F-14 
|                                                         |             
|Notes to consolidated financial statements               | F-15 - F-112



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











| | Kost Forer Gabbay & Kasierer
        3 Aminadav St.
        Tel-Aviv 6706703, Israel |  | Tel: +972-3-6232525
        Fax: +972-3-5622555
        ey.com
| | ------------------------------------------------------------------------------------ |  | --------------------------------------------------------------



REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Board of
Directors and Shareholders of



FORMULA SYSTEMS (1985) LTD.



We have audited the accompanying consolidated statement of financial position of
Formula Systems (1985) Ltd. and its subsidiaries (the "Company") as of January 1, 2015, December 31, 2015 and 2016 and
the related consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows for each of the
two years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company's
board of directors and management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audits. We did not audit the financial statements of a subsidiary, which statements reflect total assets of 0.5%, 0.4%
and 0.3% as of January 1, 2015, December 31, 2015 and 2016, respectively, and total revenues of 1% for the years ended December
31, 2015 and 2016, respectively, of the related consolidated totals. The financial statements of this subsidiary were audited
by other auditor whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included in respect
of this subsidiary, is based solely on the reports of the other auditor.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and
the report of the other auditor provide a reasonable basis for our opinion.



In our opinion, based
on our audit and the report of the other auditor, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its subsidiaries as of January 1, 2015, December 31,
2015 and 2016 and the related consolidated results of their operations and their cash flows for each of the two years in the period
ended December 31, 2016, in conformity with International Financial Reporting Standards ("IFRS").



We also have audited,
in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control
over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)  and our report dated
May 15, 2017 expressed an unqualified opinion thereon.



|Tel-Aviv, Israel | /s/ KOST FORER GABBAY & KASIERER
|---------------- | --------------------------------
|May 15, 2017     | KOST FORER GABBAY & KASIERER    
|                 | A Member of Ernst & Young Global



F-2









REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM



To the Shareholders and the Board of
Directors of



FORMULA SYSTEMS (1985) LTD.



We have audited Formula
Systems (1985) Ltd. and its subsidiaries ( the "Company") internal control over financial reporting as of
December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Company's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting
based on our audit.



We did not examine the effectiveness of
internal control over financial reporting of Magic Software Japan K.K, a wholly owned subsidiary of Magic Software Enterprises
Ltd., whose financial statements reflect total assets constituting approximately 0% as of December 31, 2016 and revenues constituting
1%, for the year ended December 31, 2016, of the related consolidated totals. The effectiveness of Magic Software Japan K.K’s
internal control over financial reporting was audited by other auditor whose report has been furnished to us, and our opinion,
insofar as it relates to the effectiveness of Magic Software Japan K.K’s internal control over financial reporting, is based
solely on the report of the other auditor.



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



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



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



F-3











Management has excluded
from its assessment of internal control over financial reporting as of December 31, 2016 the internal controls of subsidiaries
acquired during 2016, which constituted approximately 4% of the Company’s consolidated total assets as of December 31, 2016,
and 7% of the net income for the period from the date of acquisitions out of the Company’s consolidated net income for the
year then ended. Accordingly, our audit of internal control over financial reporting of the Company also did not include an evaluation
of the internal control over financial reporting of the acquired subsidiaries.



In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the
COSO criteria.



We also have
audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
financial position of the Company and its subsidiaries. as of January 1, 2015, December 31, 2015 and 2016, and the related
consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows for each of the two years
in the period ended December 31, 2016 and our report dated May 15, 2017 expressed an unqualified opinion thereon.



|Tel-Aviv, Israel | /s/KOST FORER GABBAY & KASIERER 
|---------------- | --------------------------------
|May 15, 2017     | KOST FORER GABBAY & KASIERER    
|                 | A Member of Ernst & Young Global





F-4









FORMULA SYSTEMS (1985) LTD.

AND ITS SUBSIDIARIES



|CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|---------------------------------------------
|U.S. dollars in thousands                    







|                                                                                                                                                                                               |  |      |  | January 1, |           |  | December 31, |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ---------- | --------- |  | ------------ | -
|                                                                                                                                                                                               |  | Note |  | 2015       |           |  | 2015         |  
|ASSETS                                                                                                                                                                                         |  |      |  |            |           |  |              |  
|                                                                                                                                                                                               |  |      |  |            |           |  |              |  
|CURRENT ASSETS:                                                                                                                                                                                |  |      |  |            |           |  |              |  
|Cash and cash equivalents                                                                                                                                                                      |  |      |  | $          | 179,931   |  |              | $
|Short-term deposits                                                                                                                                                                            |  |      |  |            | 6,454     |  |              |  
|Marketable securities                                                                                                                                                                          |  | 5    |  |            | 27,699    |  |              |  
|Trade receivables (net of allowances for doubtful accounts of  $4,481, $ 3,823 and $ 4,676 as of January 1, 2015, December 31, 2015 and December 31, 2015 and December 31, 2016, respectively) |  |      |  |            | 235,652   |  |              |  
|Other accounts receivable and prepaid expenses                                                                                                                                                 |  | 20a  |  |            | 34,470    |  |              |  
|Inventories                                                                                                                                                                                    |  |      |  |            | 2,437     |  |              |  
|                                                                                                                                                                                               |  |      |  |            |           |  |              |  
|Total current assets                                                                                                                                                                           |  |      |  |            | 486,643   |  |              |  
|                                                                                                                                                                                               |  |      |  |            |           |  |              |  
|LONG-TERM ASSETS:                                                                                                                                                                              |  |      |  |            |           |  |              |  
|Marketable Securities                                                                                                                                                                          |  | 5    |  |            | 33,748    |  |              |  
|Deferred taxes                                                                                                                                                                                 |  | 19e  |  |            | 15,983    |  |              |  
|Prepaid expenses and other accounts receivable                                                                                                                                                 |  |      |  |            | 12,663    |  |              |  
|                                                                                                                                                                                               |  |      |  |            |           |  |              |  
|Total long-term assets                                                                                                                                                                         |  |      |  |            | 62,394    |  |              |  
|                                                                                                                                                                                               |  |      |  |            |           |  |              |  
|INVESTMENTS IN COMPANIES ACCOUNTED FOR AT EQUITY  METHOD                                                                                                                                       |  | 7    |  |            | 528       |  |              |  
|                                                                                                                                                                                               |  |      |  |            |           |  |              |  
|PROPERTY, PLANTS AND EQUIPMENT, NET                                                                                                                                                            |  | 8    |  |            | 22,111    |  |              |  
|                                                                                                                                                                                               |  |      |  |            |           |  |              |  
|INTANGIBLE ASSETS, NET                                                                                                                                                                         |  | 10   |  |            | 109,412   |  |              |  
|                                                                                                                                                                                               |  |      |  |            |           |  |              |  
|GOODWILL                                                                                                                                                                                       |  | 9    |  |            | 424,807   |  |              |  
|                                                                                                                                                                                               |  |      |  |            |           |  |              |  
|Total assets                                                                                                                                                                                   |  |      |  | $          | 1,105,895 |  |              | $



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





F-5







FORMULA SYSTEMS (1985) LTD.

AND ITS SUBSIDIARIES



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



|                                                                                                                                                                                                                                                                 |  |        |  | January 1, |           |   | December 31, |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ |  | ---------- | --------- | - | ------------ | -
|                                                                                                                                                                                                                                                                 |  | Note   |  | 2015       |           |   | 2015         |  
|LIABILITIES AND EQUITY                                                                                                                                                                                                                                           |  |        |  |            |           |   |              |  
|                                                                                                                                                                                                                                                                 |  |        |  |            |           |   |              |  
|CURRENT LIABILITIES:                                                                                                                                                                                                                                             |  |        |  |            |           |   |              |  
|Liabilities to banks and other financial institutions                                                                                                                                                                                                            |  | 11,20b |  | $          | 46,043    |   |              | $
|Debentures                                                                                                                                                                                                                                                       |  | 12     |  |            | -         |   |              |  
|Trade payables                                                                                                                                                                                                                                                   |  |        |  |            | 56,580    |   |              |  
|Deferred revenue                                                                                                                                                                                                                                                 |  |        |  |            | 37,986    |   |              |  
|Dividend payable                                                                                                                                                                                                                                                 |  |        |  |            | 7,874     |   |              |  
|Employees and payroll accrual                                                                                                                                                                                                                                    |  |        |  |            | 70,456    |   |              |  
|Other accounts payable                                                                                                                                                                                                                                           |  | 20c    |  |            | 30,933    |   |              |  
|Liabilities in respect of business combinations                                                                                                                                                                                                                  |  |        |  |            | 2,202     |   |              |  
|Redeemable non-controlling interests                                                                                                                                                                                                                             |  | 2G     |  |            | 4,266     |   |              |  
|                                                                                                                                                                                                                                                                 |  |        |  |            |           |   |              |  
|Totalcurrent liabilities                                                                                                                                                                                                                                         |  |        |  |            | 256,340   |   |              |  
|                                                                                                                                                                                                                                                                 |  |        |  |            |           |   |              |  
|LONG-TERM LIABILITIES:                                                                                                                                                                                                                                           |  |        |  |            |           |   |              |  
|Liabilities to banks and other financial institutions                                                                                                                                                                                                            |  | 11,20b |  |            | 108,684   |   |              |  
|Debentures, net of current maturities                                                                                                                                                                                                                            |  | 12     |  |            | -         |   |              |  
|Other long term liabilities                                                                                                                                                                                                                                      |  |        |  |            | 4,763     |   |              |  
|Deferred taxes                                                                                                                                                                                                                                                   |  | 19e    |  |            | 22,409    |   |              |  
|Deferred revenues                                                                                                                                                                                                                                                |  |        |  |            | 4,838     |   |              |  
|Liability in respect of business combinations                                                                                                                                                                                                                    |  |        |  |            | 1,623     |   |              |  
|Liability in respect of capital lease                                                                                                                                                                                                                            |  |        |  |            | 903       |   |              |  
|Redeemable non-controlling interests                                                                                                                                                                                                                             |  | 2G     |  |            | 10,958    |   |              |  
|Employee
benefit liabilities                                                                                                                                                                                                                                     |  |        |  |            | 3,077     |   |              |  
|                                                                                                                                                                                                                                                                 |  |        |  |            |           |   |              |  
|Totallong-term liabilities                                                                                                                                                                                                                                       |  |        |  |            | 157,255   |   |              |  
|                                                                                                                                                                                                                                                                 |  |        |  |            |           |   |              |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                    |  | 17     |  |            |           |   |              |  
|                                                                                                                                                                                                                                                                 |  |        |  |            |           |   |              |  
|EQUITY                                                                                                                                                                                                                                                           |  | 18     |  |            |           |   |              |  
|Formula Systems (1985) equity:                                                                                                                                                                                                                                   |  |        |  |            |           |   |              |  
|Share capital:                                                                                                                                                                                                                                                   |  |        |  |            |           |   |              |  
|Ordinary shares of NIS 1 par value - Authorized: 25,000,000 shares at January 1, 2015 and December 31, 2015 and 2016 Issued: 15,287,402 January 1, 2015 and December 31, 2015 and 2016 Outstanding: 14,728,782 at January 1, 2015 and December 31, 2015 and 2016 |  |        |  |            | 4,184     |   |              |  
|Additional paid-in capital                                                                                                                                                                                                                                       |  |        |  |            | 106,501   |   |              |  
|Accumulated earnings                                                                                                                                                                                                                                             |  |        |  |            | 215,655   |   |              |  
|Accumulated other comprehensive loss                                                                                                                                                                                                                             |  |        |  |            | (1,305    | ) |              |  
|Treasury shares (568,620 shares as of January 1, 2015 and December 31, 2015 and 2016)                                                                                                                                                                            |  |        |  |            | (259      | ) |              |  
|                                                                                                                                                                                                                                                                 |  |        |  |            |           |   |              |  
|Total equity attributable to Formula Systems (1985) shareholders'                                                                                                                                                                                                |  |        |  |            | 324,776   |   |              |  
|Non-controlling interests                                                                                                                                                                                                                                        |  | 20d    |  |            | 367,524   |   |              |  
|                                                                                                                                                                                                                                                                 |  |        |  |            |           |   |              |  
|Totalequity                                                                                                                                                                                                                                                      |  |        |  |            | 692,300   |   |              |  
|                                                                                                                                                                                                                                                                 |  |        |  |            |           |   |              |  
|Total liabilities, redeemable non-controlling interestand equity                                                                                                                                                                                                 |  |        |  | $          | 1,105,895 |   |              | $



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



F-6







FORMULA SYSTEMS (1985) LTD.

AND ITS SUBSIDIARIES



|CONSOLIDATED STATEMENTS OF PROFIT OR LOSS                  
|-----------------------------------------------------------
|U.S. dollars in thousands (except share and per share data)



|                                                                        |  |      |  | Year ended December 31, |        
|----------------------------------------------------------------------- |  | ---- |  | ----------------------- | -------
|                                                                        |  | Note |  | 2015                    |        
|Revenues:                                                               |  | 20g  |  |                         |        
|Proprietary software products and related services                      |  |      |  | $                       | 242,818
|Software services                                                       |  |      |  |                         | 730,376
|                                                                        |  |      |  |                         |        
|Total revenues                                                          |  |      |  |                         | 973,194
|                                                                        |  |      |  |                         |        
|Cost of revenues:                                                       |  |      |  |                         |        
|Proprietary software products and related services                      |  |      |  |                         | 131,131
|Software services                                                       |  |      |  |                         | 610,139
|                                                                        |  |      |  |                         |        
|Total cost of revenues                                                  |  |      |  |                         | 741,270
|                                                                        |  |      |  |                         |        
|Gross profit                                                            |  |      |  |                         | 231,924
|                                                                        |  |      |  |                         |        
|Research and development expenses, net                                  |  |      |  |                         | 15,123 
|Selling, marketing, general and administrative expenses                 |  |      |  |                         | 140,935
|                                                                        |  |      |  |                         |        
|Operating income                                                        |  |      |  |                         | 75,866 
|                                                                        |  |      |  |                         |        
|Financial expenses                                                      |  | 20e  |  |                         | (14,955
|Financial income                                                        |  |      |  |                         | 5,422  
|Group's share of earnings of companies accounted for
    at equity, net |  | 7    |  |                         | 5      
|                                                                        |  |      |  |                         |        
|Income before taxes on income                                           |  |      |  |                         | 66,338 
|Taxes on income                                                         |  | 19g  |  |                         | 15,984 
|                                                                        |  |      |  |                         |        
|Net income                                                              |  |      |  | $                       | 50,354 
|                                                                        |  |      |  |                         |        
|Attributable to:                                                        |  |      |  |                         |        
|Equity holders of the Company                                           |  |      |  |                         | 19,829 
|Redeemable non-controlling interests                                    |  |      |  |                         | 864    
|Non-controlling interests                                               |  |      |  |                         | 29,661 
|                                                                        |  |      |  |                         |        
|                                                                        |  |      |  | $                       | 50,354 
|                                                                        |  |      |  |                         |        
|Net earnings per share attributable to Formula Systems                  |  |      |  |                         |        
|(1985) Shareholders                                                     |  | 20h  |  |                         |        
|                                                                        |  |      |  |                         |        
|Basic earnings per share                                                |  |      |  | $                       | 1.41   
|                                                                        |  |      |  |                         |        
|Diluted earnings per share                                              |  |      |  | $                       | 1.33   



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





F-7









FORMULA SYSTEMS (1985) LTD.

AND ITS SUBSIDIARIES



|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|-----------------------------------------------
|U.S. dollars in thousands                      



|                                                                                                        |  | Year ended December 31, |       
|------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                                        |  | 2015                    |       
|Net income                                                                                              |  | $                       | 50,354
|                                                                                                        |  |                         |       
|Other comprehensive income (loss) (net of tax effect):                                                  |  |                         |       
|                                                                                                        |  |                         |       
|Amounts that will not be reclassified subsequently to profit or loss:                                   |  |                         |       
|Actuarial loss from defined benefit plans                                                               |  |                         | (416  
|                                                                                                        |  |                         |       
|Amounts that will be or that have been reclassified to profit or loss when specific conditions are met: |  |                         |       
|Gain from derivative instruments, net                                                                   |  |                         | 9     
|Gain (loss) from available-for-sale financial assets                                                    |  |                         | 102   
|Amounts transferred to the statement of profit or loss for sale of available-for-sale financial assets  |  |                         | (300  
|Exchange differences on translation of foreign operations                                               |  |                         | (3,726
|                                                                                                        |  |                         |       
|Total other comprehensive income (loss), net of tax                                                     |  |                         | (4,331
|                                                                                                        |  |                         |       
|Total Comprehensive income                                                                              |  |                         | 46,023
|                                                                                                        |  |                         |       
|Total comprehensive income attributable to:                                                             |  |                         |       
|Equity holders of the Company                                                                           |  |                         | 17,693
|Redeemable non-controlling interests                                                                    |  |                         | 864   
|Non-controlling interests                                                                               |  |                         | 27,466
|                                                                                                        |  |                         |       
|                                                                                                        |  | $                       | 46,023



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





F-8









|FORMULA SYSTEMS (1985) LTD.                                
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY               
|U.S. dollars in thousands (except share and per share data)



|                                                                                                            |  |                   |            |  |            |   |       |          |  |   | Accumulated   |   |  |          |         |   |                   |   |        |           | 
|----------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- |  | ---------- | - | ----- | -------- |  | - | ------------- | - |  | -------- | ------- | - | ----------------- | - | ------ | --------- | 
|                                                                                                            |  |                   |            |  | Additional |   |       |          |  |   | other         |   |  |          |         |   | Non-              |   |        |           | 
|                                                                                                            |  | Share
    Capital |            |  | paid-in    |   |       | Retained |  |   | comprehensive |   |  | Treasury |         |   | controlling       |   |        | Total     | 
|                                                                                                            |  | Number            |            |  | Amount     |   |       | capital  |  |   | earnings      |   |  | Loss     |         |   | shares
    (cost) |   |        | interests | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Balance
    as of January 1, 2015                                                                           |  |                   | 14,728,782 |  |            | $ | 4,184 |          |  | $ | 106,501       |   |  | $        | 215,655 |   |                   | $ | (1,305 | )         | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Net
    Income                                                                                              |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | 19,829  |   |                   |   | -      |           | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Foreign currency translation
    reserve                                                                    |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | -       |   |                   |   | (1,663 | )         | 
|Actuarial loss from defined
    benefit plans                                                               |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | (213    | ) |                   |   | -      |           | 
|Unrealized gain from derivative
    instruments, net                                                        |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | -       |   |                   |   | 4      |           | 
|Unrealized gain from available-for-sale
    securities, net                                                 |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | -       |   |                   |   | 38     |           | 
|Realized
    gain from available-for-sale securities                                                        |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | -       |   |                   |   | (302   | )         | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Total
    other comprehensive income (loss)                                                                 |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | (213    | ) |                   |   | (1,923 | )         | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Total comprehensive income                                                                                  |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | 19,616  |   |                   |   | (1,923 | )         | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Adjustment to redeemable
    non-controlling interests                                                      |  |                   | -          |  |            |   | -     |          |  |   | (218          | ) |  |          | -       |   |                   |   | -      |           | 
|Stock-based Compensation
    expenses (Note 14a-b)                                                          |  |                   | -          |  |            |   | -     |          |  |   | 1,561         |   |  |          | -       |   |                   |   | -      |           | 
|Non-controlling interests
    changes due to holding changes, including exercise of employees stock options |  |                   | -          |  |            |   | -     |          |  |   | (2,940        | ) |  |          | -       |   |                   |   | -      |           | 
|Acquisition of non-controlling
    interests                                                                |  |                   | -          |  |            |   | -     |          |  |   | (1,892        | ) |  |          | -       |   |                   |   | -      |           | 
|Dividend to Formula's
    shareholders                                                                      |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | (5,015  | ) |                   |   | -      |           | 
|Dividend to non- controlling
    interests in subsidiaries                                                  |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | -       |   |                   |   | -      |           | 
|Distribution to parent
    for a business acquisition under common control                                  |  |                   | -          |  |            |   | -     |          |  |   | (5,314        | ) |  |          | -       |   |                   |   | -      |           | 
|Embedded
    conversion option of convertible debentures                                                    |  |                   | -          |  |            |   | -     |          |  |   | 1,248         |   |  |          | -       |   |                   |   | -      |           | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Balance
    as of December 31, 2015                                                                         |  |                   | 14,728,782 |  |            | $ | 4,184 |          |  | $ | 98,946        |   |  | $        | 230,256 |   |                   | $ | (3,228 | )         | 



F-9







|FORMULA SYSTEMS (1985) LTD.
|---------------------------
|AND ITS SUBSIDIARIES       



|                                                                                                            |  |                   |            |  |            |   |       |          |  |   | Accumulated   |   |  |          |         |   |                   |   |        |           | 
|----------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- |  | ---------- | - | ----- | -------- |  | - | ------------- | - |  | -------- | ------- | - | ----------------- | - | ------ | --------- | 
|                                                                                                            |  |                   |            |  | Additional |   |       |          |  |   | other         |   |  |          |         |   | Non-              |   |        |           | 
|                                                                                                            |  | Share
    Capital |            |  | paid-in    |   |       | Retained |  |   | comprehensive |   |  | Treasury |         |   | controlling       |   |        | Total     | 
|                                                                                                            |  | Number            |            |  | Amount     |   |       | capital  |  |   | earnings      |   |  | Loss     |         |   | shares
    (cost) |   |        | interests | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Balance
    as of January 1, 2016                                                                           |  |                   | 14,728,782 |  |            | $ | 4,184 |          |  | $ | 98,946        |   |  | $        | 230,256 |   |                   | $ | (3,228 | )         | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Net
    Income                                                                                              |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | 22,445  |   |                   |   | -      |           | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Foreign currency translation
    reserve                                                                    |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | -       |   |                   |   | 828    |           | 
|Actuarial loss from defined
    benefit plans                                                               |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | (1,348  | ) |                   |   | -      |           | 
|Unrealized gain from available-for-sale
    securities, net                                                 |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | -       |   |                   |   | 15     |           | 
|Realized
    loss (gain) from available-for-sale securities                                                 |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | -       |   |                   |   | 8      |           | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Total
    other comprehensive income (loss)                                                                 |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | (1,348  | ) |                   |   | 851    |           | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Total comprehensive income                                                                                  |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | 21,097  |   |                   |   | 851    |           | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Adjustment to redeemable
    non-controlling interests                                                      |  |                   | -          |  |            |   | -     |          |  |   | 393           |   |  |          | -       |   |                   |   | -      |           | 
|Stock-based Compensation
    expenses (Note 14a-b)                                                          |  |                   | -          |  |            |   | -     |          |  |   | 772           |   |  |          | -       |   |                   |   | -      |           | 
|Non-controlling interests
    changes due to holding changes, including exercise of employees stock options |  |                   | -          |  |            |   | -     |          |  |   | 1,200         |   |  |          | -       |   |                   |   | -      |           | 
|Acquisition of non-controlling
    interests                                                                |  |                   | -          |  |            |   | -     |          |  |   | (740          | ) |  |          | -       |   |                   |   | -      |           | 
|Dividend to Formula's
    shareholders                                                                      |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | (17,085 | ) |                   |   | -      |           | 
|Dividend to non- controlling
    interests in subsidiaries                                                  |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | -       |   |                   |   | -      |           | 
|Non-controlling
    interests arising from initially consolidated companies                                 |  |                   | -          |  |            |   | -     |          |  |   | -             |   |  |          | -       |   |                   |   | -      |           | 
|                                                                                                            |  |                   |            |  |            |   |       |          |  |   |               |   |  |          |         |   |                   |   |        |           | 
|Balance
    as of December 31, 2016                                                                         |  |                   | 14,728,782 |  |            | $ | 4,184 |          |  | $ | 100,571       |   |  | $        | 234,268 |   |                   | $ | (2,377 | )         | 



F-10







|FORMULA SYSTEMS (1985) LTD.                                
|-----------------------------------------------------------
|AND ITS SUBSIDIARIES                                       
|CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY               
|U.S. dollars in thousands (except share and per share data)



|                                                                                            |  | Year ended December 31, |       
|------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                            |  | 2015                    |       
|                                                                                            |  |                         |       
|Reserve from available-for-sale financial assets                                            |  |                         | 328   
|Foreign currency translation reserve                                                        |  |                         | (1,341
|Reserve from derivatives                                                                    |  |                         | 4     
|Group's share of net other comprehensive income (loss) of companies accounted for at equity |  |                         | (2,219
|                                                                                            |  |                         |       
|Accumulated other comprehensive loss                                                        |  | $                       | (3,228



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



F-11







|FORMULA SYSTEMS (1985) LTD.          
|-------------------------------------
|AND ITS SUBSIDIARIES                 
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|U.S. dollars in thousands            





|                                                                                           |  | Year ended December 31, |        
|------------------------------------------------------------------------------------------ |  | ----------------------- | -------
|                                                                                           |  | 2015                    |        
|                                                                                           |  |                         |        
|Cash flows from operating activities:                                                      |  |                         |        
|                                                                                           |  |                         |        
|Net income                                                                                 |  | $                       | 50,354 
|Adjustments to reconcile net income to net cash provided by operating activities:          |  |                         |        
|Equity in losses (gains) of companies accounted for at equity                              |  |                         | 142    
|Depreciation and amortization                                                              |  |                         | 30,896 
|Changes in value of debentures                                                             |  |                         | 195    
|Decrease in employee benefit liabilities                                                   |  |                         | (522   
|Gain from sale of property, plants and equipment                                           |  |                         | -      
|Stock-based compensation expenses                                                          |  |                         | 4,866  
|Changes in value of short-term and long term loans from banks and others and deposits, net |  |                         | (120   
|Changes in deferred taxes, net                                                             |  |                         | 2,134  
|Change in liability in respect of business combinations                                    |  |                         | 654    
|Gain from sale and increase in value of marketable securities classified as trading        |  |                         | (114   
|Amortization of premium and accrued interest on marketable securities                      |  |                         | (230   
|Realized gain from sale of available for sale securities                                   |  |                         | (300   
|Change in  redeemable non-controlling interests' put options                               |  |                         | 905    
|Decrease (Increase) in inventories                                                         |  |                         | (2,387 
|Increase in trade receivables                                                              |  |                         | (17,668
|Increase in other current and long-term accounts receivable                                |  |                         | (4,154 
|Increase in trade payables                                                                 |  |                         | 9,982  
|Increase in other accounts payable and employees and payroll accrual                       |  |                         | 10,793 
|Increase (decrease) in deferred revenues                                                   |  |                         | 1,693  
|                                                                                           |  |                         |        
|Net cash provided by operating activities                                                  |  |                         | 87,119 





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



F-12







|FORMULA SYSTEMS (1985) LTD.          
|-------------------------------------
|AND ITS SUBSIDIARIES                 
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|U.S. dollars in thousands            







|                                                                                                    |  | Year ended December 31, |        
|--------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                    |  | 2015                    |        
|Cash flows from investing activities:                                                               |  |                         |        
|                                                                                                    |  |                         |        
|Payments for business acquisitions, net of cash acquired (Appendix C)                               |  |                         | (17,000
|Payments to former shareholders of consolidated companies                                           |  |                         | -      
|Purchase of intangible assets                                                                       |  |                         | (211   
|Purchase of property and equipment                                                                  |  |                         | (6,766 
|Proceeds from sale of (investment in) marketable securities, net                                    |  |                         | (690   
|Proceeds from sale of property, plants and equipment                                                |  |                         | -      
|Investment in and loans to affiliates and other companies                                           |  |                         | -      
|Change in restricted cash in other accounts receivable                                              |  |                         | (888   
|Changes in short term deposits, net                                                                 |  |                         | 3,942  
|Capitalization of software development and other costs                                              |  |                         | (9,879 
|                                                                                                    |  |                         |        
|Net cash used in investing activities                                                               |  |                         | (31,492
|                                                                                                    |  |                         |        
|Cash flows from financing activities:                                                               |  |                         |        
|                                                                                                    |  |                         |        
|Exercise of employees stock options in subsidiaries                                                 |  |                         | 1,987  
|Dividend paid to non-controlling interests and redeemable non-controlling interests in subsidiaries |  |                         | (19,088
|Dividend to Formula's shareholders                                                                  |  |                         | (12,890
|Short-term bank credit, net                                                                         |  |                         | 2,862  
|Repayment of long-term loans from banks and others                                                  |  |                         | (26,902
|Receipt of long term loans                                                                          |  |                         | 32,160 
|Proceeds from issuance of Series A and Series B debentures                                          |  |                         | 58,556 
|Repayment of long-term liabilities to office of the chief scientist                                 |  |                         | (555   
|Purchase of non-controlling interests                                                               |  |                         | (5,396 
|Cash paid in conjunction with acquisitions of activities                                            |  |                         | (1,280 
|Repayment of capital lease                                                                          |  |                         | (399   
|Distribution to ultimate parent for a business acquisition under common control                     |  |                         | (8,482 
|                                                                                                    |  |                         |        
|Net cash provided by (used in) financing activities                                                 |  |                         | 20,573 
|                                                                                                    |  |                         |        
|Effect of exchange rate changes on cash and cash equivalents                                        |  |                         | (6,990 
|                                                                                                    |  |                         |        
|Increase (decrease) in cash and cash equivalents                                                    |  |                         | 69,210 
|Cash and cash equivalents at beginning of year                                                      |  |                         | 179,931
|                                                                                                    |  |                         |        
|Cash and cash equivalents at end of year                                                            |  | $                       | 249,141





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



F-13







|FORMULA SYSTEMS (1985) LTD.          
|-------------------------------------
|AND ITS SUBSIDIARIES                 
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|U.S. dollars in thousands            







|   |                                                                                      |  | Year ended December 31, |        
|-- | ------------------------------------------------------------------------------------ |  | ----------------------- | -------
|   |                                                                                      |  | 2015                    |        
|A. | Supplemental cash flow information:                                                  |  |                         |        
|   | Cash paid (received) in respect of:                                                  |  |                         |        
|   |                                                                                      |  |                         |        
|   | Interest paid                                                                        |  | $                       | 6,158  
|   |                                                                                      |  |                         |        
|   | Interest received                                                                    |  | $                       | (1,688 
|   |                                                                                      |  |                         |        
|   | Income tax                                                                           |  | $                       | 23,014 
|   |                                                                                      |  |                         |        
|B. | Non-cash activities:                                                                 |  |                         |        
|   | Dividend payable to Formula's shareholders                                           |  | $                       | -      
|   | Purchase of property and equipment                                                   |  | $                       | -      
|   |                                                                                      |  |                         |        
|C. | Acquisition of newly-consolidated subsidiaries and activities, net of cash acquired: |  |                         |        
|   |                                                                                      |  |                         |        
|   | Assets and liabilities of subsidiaries consolidated as of acquisition date:          |  |                         |        
|   | Working capital (other than cash and cash equivalents)                               |  |                         | (1,445 
|   | Property and equipment                                                               |  |                         | (360   
|   | Goodwill and intangible assets                                                       |  |                         | (25,673
|   | Other long-term assets                                                               |  |                         | (134   
|   | Liabilities to banks and others                                                      |  |                         | 47     
|   | Long-term liabilities                                                                |  |                         | 1,556  
|   | Deferred tax liability, net                                                          |  |                         | 425    
|   | Liability to formerly shareholders                                                   |  |                         | 4,117  
|   | Non-controlling interests at acquisition date                                        |  |                         | -      
|   | Redeemable non-controlling interests at acquisition date                             |  |                         | 4,467  
|   |                                                                                      |  |                         |        
|   | Total                                                                                |  | $                       | (17,000





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



F-14









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | a. | General:
| | -- | --------



Formula Systems
(1985) Ltd. ("Formula" or the “Company”) was incorporated in Israel and began its business operations in
1985. Since 1991, Formula's ordinary shares, par value NIS 1.0 per share, have been traded on the Tel-Aviv Stock Exchange ("TASE"),
and, in 1997, began trading through American Depositary Shares ("ADSs") under the symbol "FORTY" on the NASDAQ
Global Market in the United States until January 3, 2011, at which date the listing of Formula's ADSs was transferred to the NASDAQ
Global Select Market ("NASDAQ"). Each ADS represents one ordinary share of Formula. The Company is considered an Israeli
resident. As of November, 2010, the controlling shareholder of the Company is Asseco Poland S.A. ("Asseco"), a Polish
public company, traded on the Warsaw Stock Exchange.



Formula, through
its investees (collectively, the "Group") is engaged in providing software services, proprietary and non-proprietary
software solutions, software product marketing and support, computer infrastructure and integration solutions and learning and
integration. The Group operates through five directly held investees: Matrix IT Ltd. ("Matrix"); Magic Software Enterprises
Ltd. ("Magic"), Sapiens International Corporation N.V ("Sapiens"), InSync Staffing Solutions, Inc ("Insync")
and, TSG IT Advanced Systems Ltd. (“TSG”).



| | b. | Investees:
| | -- | ----------



The following
table presents certain information regarding ownership of Formula's significant investees, as of the dates indicated
(the list consists only of active companies that are held directly by Formula):



|                 |  | Percentage of ownership |      
|---------------- |  | ----------------------- | -----
|                 |  | December 31,            |      
|                 |  | 2015                    |      
|Name of Investee |  |                         |      
|                 |  |                         |      
|Matrix           |  |                         | 50.04
|Magic            |  |                         | 46.40
|Sapiens          |  |                         | 49.13
|Insync           |  |                         | 90.09
|TSG(1)           |  |                         | -    



| | 1) | TSG’s results of operations are reflected in the Company's results of operations using the equity
method of accounting commencing May 9, 2016.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------



F-15







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



|NOTE 1:- | general (Cont.)
|-------- | ---------------



| | c. | Definitions:
| | -- | ------------



In these financial
statements:



|The Company                                    | - | Formula Systems (1985) Ltd.                                                                                                                                                                
|---------------------------------------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                               |   |                                                                                                                                                                                            
|The Group                                      | - | Formula Systems (1985) Ltd. and its investees.                                                                                                                                             
|                                               |   |                                                                                                                                                                                            
|Subsidiaries                                   | - | Companies that are controlled by the Company (as defined in IFRS 10) and whose accounts are consolidated with those of the Company.                                                        
|                                               |   |                                                                                                                                                                                            
|Jointly controlled entities                    | - | Companies owned by various entities that have a contractual arrangement for joint control and are accounted for using the equity method of accounting.                                     
|                                               |   |                                                                                                                                                                                            
|Associates                                     | - | Companies over which the Company has significant influence and that are not subsidiaries. The Company's investment therein is included in the financial statements using the equity method.
|                                               |   |                                                                                                                                                                                            
|Investees                                      | - | Subsidiaries, jointly controlled entities and associates.                                                                                                                                  
|                                               |   |                                                                                                                                                                                            
|Interested parties and controlling shareholder | - | As defined in the Israeli Securities Regulations (Annual Financial Statements), 2010.                                                                                                      
|                                               |   |                                                                                                                                                                                            
|Related parties                                | - | As defined in IAS 24.                                                                                                                                                                      



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



The following
accounting policies have been applied consistently in the financial statements for all periods presented, unless otherwise stated.



| | 1) | Basis of presentation of the financial statements
| | -- | -------------------------------------------------



These financial
statements have been prepared in accordance with International Financial Reporting Standards ("IFRS").



The Company's
financial statements have been prepared on a cost basis, except for: investment property; available-for-sale financial assets;
financial assets and liabilities (including derivatives) which are presented at fair value through profit or loss.



The Company
has elected to present the profit or loss items using the function of expense method.



F-16







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



These
financial statements for the year ended December 31, 2016 are the Group’s first consolidated financial statements
prepared in accordance with IFRS. The date of transition to IFRS is January 1, 2015. For all periods up to and including the
year ended December 31, 2015, the Group prepared its financial statements in accordance with United States generally accepted
accounting principles (“U.S. GAAP”). Accordingly, the Group has prepared financial statements that comply with
IFRS applicable as of December 31, 2016, together with the comparative period data for the year ended December 31, 2015. An
explanation of the principal adjustments made in representing its U.S. GAAP financial statements, including the statement of
financial position as of January 1, 2015, the Group's date of transition to IFRS and the financial statements for the year ended December 31, 2015, in order to
comply with IFRS, is provided in note 21 to our consolidated financial statements.



Pursuant to
the transitional relief granted by the U.S. SEC in respect of the first-time adoption of IFRS, we have only provided financial
statements and financial information for two fiscal years ended December 31, 2016 in this annual report as presented under IFRS.



| | 2) | Use of estimates and judgments
| | -- | ------------------------------



The preparation
of the consolidated financial statements in conformity with IFRS requires management to make estimates, judgments and assumptions
that affect the amounts reported in the financial statements and accompanying notes. The Company's management believes that the
estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. Actual results
could differ from those estimates. The most significant assumptions are employed in estimates used in determining values of goodwill
and identifiable intangible assets and their subsequent impairment analysis, revenue recognition, tax assets and tax positions,
legal contingencies, research and development capitalization, contingent consideration related to acquisitions, determining the
fair value of non-controlling interests and redeemable non-controlling interests, pension and other post-employment benefits and
share-based compensation costs.



In the process of applying the
significant accounting policies, the Group has made the following judgments which have the most significant effect on the amounts
recognized in the financial statements:



Effective control:



The Company’s management
assess whether it controls an investee in which it holds less than the majority of the voting power, among others, by reference
to the size of its voting power relative to the size and dispersion of other holders voting power including voting patterns at
previous shareholders' meetings.



The Company’s
Management has concluded that despite the lack of absolute majority of voting power at the general meetings of shareholders
of Sapiens and Magic, in accordance with IFRS 10, these investees are controlled by the Company. The conclusion regarding the
existence of control as of January 1, 2015 and during the twelve months period ended 31 December 2015 and 2016, in accordance
with IFRS 10, was made in accordance with the following factors:



F-17







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



Sapiens:



| | i. | Governing bodies of Sapiens:
| | -- | ----------------------------



Decisions of Sapiens’
shareholders general meeting are taken by a simple majority of votes represented at the general meeting. The annual (ordinary)
general meeting adopts resolutions to appoint individual directors, choose Sapiens’ independent auditors for the next year,
as well as approve the company’s financial statements and the management’s report on operations.



In accordance with Sapiens’
articles of association, the board of directors of Sapiens is responsible for managing its current business operations and is authorized
to take substantially all decisions which are not specifically reserved to Sapiens’ shareholders by its articles of association,
including the decision to pay out dividends. Sapiens’ board of directors is composed of 7 members, 4 of whom are independent
directors. For the last 6 years, the Company has consistently reappointed the same members of the board of directors. Likewise,
the previous composition of the board of directors was re-elected during the general meeting that was held in May 2016, this is
when the Company’s share interest in Sapiens was already below 50%.



| | ii. | Shareholders structure of Sapiens:
| | --- | ----------------------------------



Sapiens’
shareholders structure is dispersed because, apart from the Company, just one shareholder holds more than 5% of the
voting rights at the general meeting (5.36% of votes). There is no evidence that any shareholders have or had granted to any
other shareholder a voting proxy at the general meeting. Over the last four years from 2013 to 2016, the Sapiens’
general meetings were attended by shareholders representing in total between 70% and 77% of total voting power (including
the Company’s share power and bearing in mind that the Company presently holds approximately 48.85% of total
voting rights). This means that the level of activity of Sapiens’ other shareholders is relatively moderate or low. As
of December 31, 2016, the attendance from shareholders would have to be higher than 98% in order to deprive the Company of
an absolute majority of votes at the general meeting. In accordance with voting patterns at Sapiens’ recent
years shareholders' meetings, it is the Company’s management belief that achieving such a high attendance seems
unlikely.



Magic:



| | i. | Governing bodies of Magic:
| | -- | --------------------------



Decisions of Magic’s shareholders
general meeting are taken by a simple majority of votes represented at the general meeting. The annual (ordinary) general meeting
adopts resolutions to appoint individual directors, choose Magic’s independent auditors for the next year, as well as to
approve Magic’s financial statements and the management’s report on operations.



F-18







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



In accordance with the Magic’s
articles of association, the board of directors of Magic is responsible for managing Magic’s current business operations
and is authorized to take substantially all decisions which are not specifically reserved to Magic shareholders by its articles
of association, including the decision to pay out dividends. Magic’s board of directors is composed of 5 members, 3 of whom
are independent directors. In recent years, the Company has consistently reappointed the same members of the board of directors.



| | ii. | Shareholders structure of Magic:
| | --- | --------------------------------



Magic’s
shareholders structure may be considered as dispersed because, apart from the Company, as of December 31, 2016 there was no
other shareholder that held more than 5% of Magic’s voting power (with the next major shareholder holding
approximately 4.04%) and as of December 31, 2015 just one shareholder held more than 5% of Magic’s voting power
(approximately 5.41%) with the next major shareholder holding approximately 4.5%. There is no evidence that any shareholders
have or had granted to any other shareholder a voting proxy at the general meeting. Over the last five years from 2012 to
2016, Magic’s general meetings were attended by shareholders representing in total between 65% and 85% of total voting
rights (including the Company’s share power and bearing in mind that the Company presently holds approximately 47.26%
of total voting power). This means that the level of activity of Magic’s other shareholders is relatively moderate or
low. As of December 31, 2016, the attendance from shareholders would have to be higher than 95% in order to deprive the
Company of an absolute majority of votes at the general meeting. In accordance with voting patterns at Magic’s recent
years shareholders' meetings, it is the Company’s management belief that achieving such a high attendance seems
unlikely.



| | 3) | Consolidated financial statements:
| | -- | ----------------------------------



The consolidated
financial statements comprise the financial statements of companies that are controlled by the Company (subsidiaries). Control
is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the investee. Potential voting rights are considered when assessing whether
an entity has control. In a situation when the Company holds less than a majority of voting rights in a given entity, but it is
sufficient to unilaterally direct the relevant activities of such entity, then the control is exercised. When assessing whether
voting rights held by the Company are sufficient to give it power, the Company considers all facts and circumstances, including:
the size of its holding of voting rights relative to the size and dispersion of other vote holders; potential voting rights held
by the Company and other shareholders or parties; rights arising from other contractual arrangements; significant personal ties
and any additional facts and circumstances that may indicate that the Company has, or does not have the ability to direct the relevant
activities when decisions need to be made, inclusive of voting patterns observed at previous meetings of shareholders.



The consolidation
of the financial statements commences on the date on which control is obtained and ends when such control ceases.



The financial
statements of the Company and of the subsidiaries, after being adjusted to comply with IFRS, are prepared for the same reporting
period and using consistent accounting treatment of similar transactions and economic activities. Any discrepancies in the applied
accounting policies are eliminated by making appropriate adjustments. Significant intragroup balances and transactions and gains
or losses resulting from intragroup transactions are eliminated in full in the consolidated financial statements.



F-19







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



Non-controlling
interests in subsidiaries represent the equity in subsidiaries not attributable, directly or indirectly, to a parent. Non-controlling
interests are presented in equity separately from the equity attributable to the equity holders of the Company. Profit or loss
and components of other comprehensive income are attributed to the Company and to non-controlling interests. Losses are attributed
to non-controlling interests even if they result in a negative balance of non-controlling interests in the consolidated statement
of financial position.



The disposal
of a subsidiary that does not result in a loss of control is recognized as a change in equity. In such events, in order to reflect
changes in the ownership of a respective subsidiary, the Group shall adjust the carrying value of controlling interests and non-controlling
interests. Any differences between the change in non-controlling interests and the fair value of consideration paid or received
are recognized directly in equity and attributed to the owners of the Company.



| | 4) | Business combinations and goodwill:
| | -- | -----------------------------------



Business combinations
are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration
transferred on the acquisition date with the addition of non-controlling interests in the acquiree. In each business combination,
the Company whether to measures the non-controlling interests in the acquiree based on their fair value on the acquisition date
or at their proportionate share in the fair value of the acquiree's net identifiable assets.



Direct acquisition
costs are carried to the statement of profit or loss as incurred.



In a business
combination achieved in stages, equity interests in the acquiree that had been held by the acquirer prior to obtaining control
are measured at the acquisition date fair value while recognizing a gain or loss resulting from the revaluation of the prior investment
on the date of achieving control.



Contingent
consideration is recognized at fair value on the acquisition date and classified as a financial asset or liability in accordance
with IAS 39, "Financial Instruments: Recognition and Measurement". Subsequent changes in the fair value of the contingent
consideration are recognized in profit or loss. If the contingent consideration is classified as an equity instrument, it is measured
at fair value on the acquisition date without subsequent remeasurement.



Goodwill is
initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests
over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes
the resulting gain on the acquisition date without subsequent measurement.



| | 5) | Investment in joint arrangements:
| | -- | ---------------------------------



Joint arrangements
are arrangements in which the Company has joint control. Joint control is the contractually agreed sharing of control of an arrangement,
which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.



F-20







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | i. | Joint ventures:
| | -- | ---------------



In joint
ventures the parties that have joint control of the arrangement have rights to the net assets of the arrangement. A joint venture
is accounted for at equity



| | ii. | Joint operations:
| | --- | -----------------



In joint operations
the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities relating to
the arrangement. The Company recognizes in relation to its interest its share of the assets, liabilities, revenues and expenses
of the joint operation.



| | 6) | Investments in associates:
| | -- | --------------------------



Associates
are companies in which the Group has significant influence over the financial and operating policies without having control. The
investment in an associate is accounted for using the equity method.



| | 7) | Investments accounted for using the equity method:
| | -- | --------------------------------------------------



The Group's
investments in associates and joint ventures are accounted for using the equity method. Under the equity method, the investment
in the associate or in the joint venture is presented at cost with the addition of post-acquisition changes in the Group's share
of net assets, including other comprehensive income of the associate or the joint venture. Gains and losses resulting from transactions
between the Group and the associate or the joint venture are eliminated to the extent of the interest in the associate or in the
joint venture.



Goodwill relating
to the acquisition of an associate or a joint venture is presented as part of the investment in the associate or the joint venture,
measured at cost and not systematically amortized. Goodwill is evaluated for impairment as part of the investment in the associate
or in the joint venture as a whole.



The financial
statements of the Company and of the associate or joint venture are prepared as of the same dates and periods. The accounting policies
applied in the financial statements of the associate or the joint venture are uniform and consistent with the policies applied
in the financial statements of the Group.



F-21







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



Upon the acquisition
of an associate or a joint venture achieved in stages when the former investment in the acquiree was accounted for pursuant to
the provisions of IAS 39, the Group adopts the principles of IFRS 3 regarding business combinations achieved in stages. Consequently,
equity interests in the acquiree that had been held by the Group prior to achieving significant influence or joint control are
measured at fair value on the acquisition date and are included in the acquisition consideration while recognizing a gain or loss
resulting from the fair value measurement.



| | 8) | Functional currency, presentation currency and foreign currency:
| | -- | ----------------------------------------------------------------



| | i. | Functional currency and presentation currency:
| | -- | ----------------------------------------------



The presentation currency of
the financial statements is the U.S dollars (the "dollar"). The Group determines the functional currency of each investee,
including companies accounted for at equity. The currency of the primary economic environment in which the operations of Formula
and certain of its investees are conducted is the dollar, thus, the dollar is the functional and reporting currency of Formula
and certain of its investees.



Assets, including fair value
adjustments upon acquisition, and liabilities of an investee which is a foreign operation, are translated at the closing rate at
each reporting date. Profit or loss items are translated at average exchange rates for all periods presented. The resulting translation
differences are recognized in other comprehensive income (loss).



Intragroup loans for which settlement
is neither planned nor likely to occur in the foreseeable future are, in substance, a part of the investment in the foreign operation
and, accordingly, the exchange rate differences from these loans (net of the tax effect) are recorded in other comprehensive income
(loss).



F-22







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



Upon the full or partial disposal
of a foreign operation resulting in loss of control in the foreign operation, the cumulative gain (loss) from the foreign operation
which had been recognized in other comprehensive income is transferred to profit or loss. Upon the partial disposal of a foreign
operation which results in the retention of control in the subsidiary, the relative portion of the amount recognized in other comprehensive
income is reattributed to non-controlling interests.



| | ii. | Transactions, assets and liabilities in foreign currency:
| | --- | ---------------------------------------------------------



Transactions denominated in
foreign currency are recorded upon initial recognition at the exchange rate at the date of the transaction. After initial recognition,
monetary assets and liabilities denominated in foreign currency are translated at each reporting date into the functional currency
at the exchange rate at that date. Exchange rate differences, other than those capitalized to qualifying assets or accounted for
as hedging transactions in equity, are recognized in profit or loss. Non-monetary assets and liabilities denominated in foreign
currency and measured at cost are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities
denominated in foreign currency and measured at fair value are translated into the functional currency using the exchange rate
prevailing at the date when the fair value was determined.



| | 9) | Cash equivalents:
| | -- | -----------------



Cash equivalents
are considered as highly liquid investments, including unrestricted short-term bank deposits with an original maturity of three
months or less from the date of investment or with a maturity of more than three months, but which are redeemable on demand without
penalty and which form part of the Group's cash management. Cash and cash equivalent includes amounts held primarily in New-Israeli
Shekel, U.S. dollars, Euro and British Pound.



| | 10) | Short-term and restricted deposits:
| | --- | -----------------------------------



Short-term
bank deposits are deposits with an original maturity of more than three months from the date of investment and which do not meet
the definition of cash equivalents. The deposits are presented according to their terms of deposit. Restricted deposits include
deposits used to secure certain subsidiaries' ongoing projects and credit lines from banks as well as, security deposits with respect
to leases, and are classified under other receivables.



| | 11) | Allowance for doubtful accounts:
| | --- | --------------------------------



The allowance
for doubtful accounts is determined in respect of specific trade receivables whose collection, in the opinion of the Group’s
management, is doubtful. The Group did not recognize an allowance in respect of groups of trade receivables that are collectively
assessed for impairment due to immateriality. Impaired receivables are derecognized when they are assessed as uncollectible. The
allowance for doubtful accounts is determined with respect to specific debts that are doubtful of collection. The bad debt expense
net for the years ended December 31, 2015 and 2016 was $ 747 and $ 652 respectively.



F-23







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | 12) | Inventories:
| | --- | ------------



Inventories
are measured at the lower of cost and net realizable value. The cost of inventories comprises costs of purchase and costs incurred
in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the
ordinary course of business less estimated costs of completion and estimated costs necessary to make the sale. Inventories are
mainly comprised of purchased merchandise and products which consist of educational software kits, computers, peripheral equipment
and spare parts. Cost is determined on the "first in - first out" basis. The Group periodically evaluates the condition
and aging of its inventories and makes provisions for impairment of slow moving inventories accordingly. No such impairments have
been recognized in any period presented.



| | 13) | Revenue recognition:
| | --- | --------------------



The Group derives
its revenues primarily from the sale of information technology (or "IT") services which also include sale of: non-proprietary
software products, including maintenance, integration and infrastructure, outsourcing, training and deployment. In addition, the
Group generates revenues from licensing the rights to use its proprietary software, provision of related IT professional services
(which may or may not be considered essential to the functionality of the software license), related maintenance and technical
support, as well as implementation and post-implementation consulting services.



Revenues are
recognized in profit or loss when the revenues can be measured reliably, it is probable that the economic benefits associated with
the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably.
When the Group acts as a principal and is exposed to the risks associated with the transaction, revenues are presented on a gross
basis. When the Group acts as an agent and is not exposed to the risks and rewards associated with the transaction, revenues are
presented on a net basis. Revenues are measured at the fair value of the consideration less any trade discounts, volume rebates
and returns.



The Group generally
considers all arrangements with payment terms extending beyond a minimum of six or a maximum of twelve months from the delivery
of the elements not to be fixed or determinable. If the fee is not fixed or determinable, revenue is recognized as payments become
due from the customer, provided that all other revenue recognition criteria have been met.



The Group generally
does not grant a right of return to its customers. When a right of return exists, revenue is deferred until the right of return
expires, at which time revenue is recognized, provided that all other revenue recognition criteria are met. Deferred revenue includes
unearned amounts received under maintenance and support contracts and amounts received from customers but not yet recognized as
revenues.



F-24







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



Following are
the specific revenue recognition criteria which must be met before revenue is recognized by the Company and its subsidiaries:



| | i. | Revenues from software solutions and services:
| | -- | ----------------------------------------------



| | a) | Revenues from contracts based on actual inputs. Revenues from master agreements based on actual
inputs are recognized based on actual labor hours.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Outsourcing - these agreements are similar in nature to agreements that are based on actual labor
hours. The Group allocates employees to projects that are generally managed by the customers at their charge based on the pricing
of labor hours. Revenues are recognized based on actual labor hours.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain of
the software license sales may also include significant implementation and customization services with respect to such sales which
are deemed essential to the functionality of the license. In addition, the Group also provides consulting services that are not
deemed essential to the functionality of the license, as well as outsourcing IT services.



With respect
to revenues that involve significant implementation and customization services to customer specific requirements and which are
considered essential to the functionality of the product offered (for example when the Group sells software licenses as part of
an overall solution offered to a customer that combines the sale of software licenses which includes significant implementation
that is considered essential to the functionality of the license) whether generated by fixed-price or time-and-materials contracts
the Company accounts for revenues for the services together with the software under contract, using the percentage-of-completion
method. The percentage-of-completion method is used when the required services are quantifiable, based on the estimated number
of labor hours necessary to complete the project, and under that method revenues are recognized using labor hours incurred as the
measure of progress towards completion. This type of revenues is included in the Company’s Proprietary software products
and related services and software services revenue streams.



Estimates
of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology,
and are reviewed and updated regularly by management. After delivery, if uncertainty exists about customer acceptance of the software,
license revenue is not recognized until acceptance. Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are first determined, in the amount of the estimated loss on the entire contract. As of each of January 1,
2015 and December 31, 2015 and 2016, no estimated losses were identified.



| | ii. | Revenues from sales, distribution and support of software products:
| | --- | -------------------------------------------------------------------



The Group
recognizes revenues from the sale of software only after the significant risks and rewards of ownership of the software have been
transferred to the buyer for which a necessary condition is delivery of the software, either physically or electronically, or providing
the right to use or permission to make copies of the software. The Group reports income on a gross basis since it acts as a principal
and bears the risks and rewards derived from the transaction. The Group recognizes revenues from providing software related services.
When the stage of completion cannot be determined reliably, revenues are recognized on a straight-line basis over the agreement
period.



F-25







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



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



Revenues from
sale agreements that do not provide a general right of return and consist of multiple elements such as hardware, service and support
agreements are split into different accounting units which are separately recognized. An element only represents a separate accounting
unit if and only if it has standalone value for the customer. Moreover, there should be reliable and objective evidence of the
fair value of all the elements in the agreement or of the fair value of undelivered elements. Revenues from the various accounting
units are recognized when the revenue recognition criteria are met with respect to all the elements of the accounting unit based
on their specific type and only up to the amount of the consideration that is not contingent on completion or performance of the
other elements in the contract.



Maintenance
and support includes annual maintenance contracts providing for unspecified upgrades for new versions and enhancements on a when-and-if-available
basis for an annual fee. The right for unspecified upgrades for new versions and enhancements on a when-and-if-available basis
does not specify the features, functionalityand release date of
future product enhancements for the customer to know what will be made available and the general timeframe in which it will be
delivered. Revenues from maintenance services are recognized on a straight-line basis at the relative portion of the maintenance
contract that is determined for each reporting year. Revenues that have been received before the respective service has been provided
are carried to deferred income.



| | iii. | Revenues from training and implementation services:
| | ---- | ---------------------------------------------------



Revenues from
trainings and implementations are recognized when providing the service.
Revenues from training services in respect of courses conducted over a period of up to 3 months will be recognize over the period
of the course. Revenues from training services in respect of courses
ordered in advance and long-term or short term (for a period of up to a year) retraining courses months will be recognized over
the period of the course. Revenues from projects which usually
ordered by organizations, will be recognize under the actual inputs recognize using the basis hours actual invested in the project.



| | iv. | Revenues from hardware products and infrastructure solutions:
| | --- | -------------------------------------------------------------



Revenues from
hardware products and infrastructure solutions are recognized after all the significant risks and rewards of ownership of the products
have been transferred to the buyer. The Group does not retain any continuing management involvement that is associated with ownership
and does not retain the effective control of the sold products, the amount of revenues can be measured reliably, it is probable
that the economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect
of the transaction can be measured reliably.



F-26







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | 14) | Government grants:
| | --- | ------------------



Government
grants are recognized when there is reasonable assurance that the grants will be received and the Group will comply with the attached
conditions. Government grants received from the Office of the Chief Scientist in Israel ("OCI") are recognized upon receipt
as a liability if future economic benefits are expected from the research project that will result in royalty-bearing sales. A
liability for the loan is first measured at fair value using a discount rate that reflects a market rate of interest. The difference
between the amount of the grant received and the fair value of the liability is accounted for as a Government grant and recognized
as a reduction of research and development expenses. After initial recognition, the liability is measured at amortized cost using
the effective interest method. Royalty payments are treated as a reduction of the liability. If no economic benefits are expected
from the research activity, the grant receipts are recognized as a reduction of the related research and development expenses.
In that event, the royalty obligation is treated as a contingent liability in accordance with IAS 37.



In each reporting
date, the Group evaluates whether there is reasonable assurance that the liability recognized, in whole or in part, will not be
repaid (since the Group will not be required to pay royalties) based on the best estimate of future sales and using the original
effective interest method, and if so, the appropriate amount of the liability is derecognized against a corresponding reduction
in research and development expenses. Amounts paid as royalties are recognized as settlement of the liability.



| | 15) | Taxes on income:
| | --- | ----------------



Current or
deferred taxes are recognized in profit or loss, except to the extent that they relate to items which are recognized in other comprehensive
income or equity.



| | · | Current taxes:
| | - | --------------



The current
tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the reporting date
as well as adjustments required in connection with the tax liability in respect of previous years.



| | · | Deferred taxes:
| | - | ---------------



Deferred
taxes are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts
attributed for tax purposes. Deferred taxes are measured at the tax rate that is expected to apply when the asset is realized or
the liability is settled, based on tax laws that have been enacted or substantively enacted by the reporting date. Deferred tax
assets are reviewed at each reporting date and reduced to the extent that it is not probable that they will be utilized. Deductible
carryforward losses and temporary differences for which deferred tax assets had not been recognized are reviewed at each reporting
date and a respective deferred tax asset is recognized to the extent that their utilization is probable.



Taxes on income
that relate to distributions of an equity instrument and to transaction costs of an equity transaction are accounted for pursuant
to IAS 12.



F-27







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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





Taxes that would
apply in the event of the disposal of investments in investees have not been taken into account in computing deferred taxes, as
long as the disposal of the investments in investees is not probable in the foreseeable future. Also, deferred taxes that would
apply in the event of distribution of earnings by investees as dividends have not been taken into account in computing deferred
taxes, since the distribution of dividends does not involve an additional tax liability or since it is the Company's policy not
to initiate distribution of dividends from a subsidiary that would trigger an additional tax liability.





Deferred taxes
are offset if there is a legally enforceable right to offset a current tax asset against a current tax liability and the deferred
taxes relate to the same taxpayer and the same taxation authority.



| | 16) | Leases:
| | --- | -------



The criteria
for classifying leases as finance or operating leases depend on the substance of the agreements and are made at the inception of
the lease in accordance with the following principles as set out in IAS 17.



The Group as
lessee:



| | i. | Financial leases:
| | -- | -----------------



A lease that
transfers substantially all the risks and rewards incidental to ownership of the leased asset to the Group is classified as a finance
lease. At the commencement of the lease term, the leased asset is measured at the lower of the fair value of the leased asset or
the present value of the minimum lease payments. The leased asset is depreciated over the shorter of its useful life and the lease
term.



| | ii. | Operating leases:
| | --- | -----------------



Leases in
which substantially all the risks and rewards of ownership of the leased asset are not transferred to the Group are classified
as operating leases. Lease payments are recognized as an expense in profit or loss on a straight-line basis over the lease term.



| | 17) | Property, plant and equipment, net
| | --- | ----------------------------------



Property, plant
and equipment are measured at cost, including directly attributable costs, less accumulated depreciation, accumulated impairment
losses and any related investment grants and excluding day-to-day servicing expenses. Cost includes spare parts and auxiliary equipment
that are used in connection with plant and equipment. The cost of an item of property, plant and equipment comprises the initial
estimate of the costs of dismantling and removing the item and restoring the site on which the item is located.



Depreciation
is calculated on a straight-line basis over the useful life of the assets at annual rates as follows:



|                                             |  | %                 
|-------------------------------------------- |  | ------------------
|                                             |  |                   
|Computers, software and peripheral equipment |  | 20-33 (mainly 33%)
|Office furniture and equipment               |  | 6-20              
|Motor vehicles                               |  | 15                
|Buildings                                    |  | 2-4               



Leasehold improvements
are amortized using the straight-line method over the term of the lease (including option terms that are deemed to be reasonably
assured) or the estimated useful life of the improvements, whichever is shorter.





F-28







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



The useful
life, depreciation method and residual value of an asset are reviewed at least each year-end (at the end of the year) and any changes
are accounted for prospectively as a change in accounting estimate. Depreciation of an asset ceases at the earlier of the date
that the asset is classified as held for sale and the date that the asset is derecognized. For impairment testing of property,
plant and equipment, see Note 2(20) below.



| | 18) | Research and development costs:
| | --- | -------------------------------



Research expenditures
incurred in the process of software development are recognized in profit or loss when incurred. An intangible asset arising from
a software development project or from the development phase of an internal project is recognized if the Group can demonstrate
the technical feasibility of completing the intangible asset so that it will be available for use or sale; the Group’s intention
to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; how the intangible asset
will generate future economic benefits; the availability of adequate technical, financial and other resources to complete the intangible
asset; and the ability to measure reliably the respective expenditure asset during its development. The Group establishes technological
feasibility upon completion of a detailed program design or working model.



Research and
development costs incurred between completion of the detailed program design and the point at which the product is ready for general
release, have been capitalized.



Capitalized
software costs are measured at cost less any accumulated amortization and any accumulated impairment losses on a product by product
basis. Amortization of capitalized software costs begin when development is complete and the product is available for use. The
Group considers a product to be available for use when the Group completes its internal validation of the product that is necessary
to establish that the product meets its design specifications including functions, features, and technical performance requirements.
Internal validation includes the completion of coding, documentation and testing that ensure bugs are reduced to a minimum. The
internal validation of the product takes place a few weeks before the product is made available to the market. In certain instances,
The Group enters into a short pre-release stage, during which the product is made available to a selected number of customers as
a beta program for their own review and familiarization. Subsequently, the release is made generally available to customers. Once
a product is considered available for use, the capitalization of costs ceases and amortization of such costs to "cost of sales"
begins.



Capitalized
software costs are amortized on a product by product basis by the straight-line method over the estimated useful life of the software
product (between 4-7 years, due to their high rates of acceptance, the continued reliance on these products by existing customers,
and the demand for such products from prospective customers, all of which validate the Group’s expectations) which provides
greater amortization expense compared to the revenue-curve method.



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



The Group assesses
the recoverability of its Capitalized software costs on a regular basis by assessing the net realizable value of these intangible
assets based on the estimated future gross revenues from each product reduced by the estimated future costs of completing and disposing
of it, including the estimated costs of performing maintenance and customer support over its remaining economical useful life using
internally generated projections of future revenues generated by the products, cost of completion of products and cost of delivery
to customers over its remaining economical useful life. During the years ended December 31, 2015 and 2016, no such unrecoverable
amounts were identified.



F-29







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | 19) | Other intangible assets:
| | --- | ------------------------



Separately
acquired intangible assets are measured on initial recognition at cost including directly attributable costs. Intangible assets
acquired in a business combination are measured at fair value at the acquisition date. Expenditures relating to internally generated
intangible assets, excluding capitalized development costs, are recognized in profit or loss when incurred.



Intangible
assets with a finite useful life are amortized over their useful life and reviewed for impairment whenever there is an indication
that the asset may be impaired. The amortization period and the amortization method for an intangible asset are reviewed at least
at each year end



Other intangible
assets are comprised mainly of customer-related intangible assets, backlogs, brand names, capitalized courses development costs,
non-compete agreements and acquired technology and Patent, and are amortized over their useful lives using a method of amortization
that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up. The useful
life of intangible assets is as follows:



|                                                      |  | Years
|----------------------------------------------------- |  | -----
|                                                      |  |      
|Customer relationship and acquired technology         |  | 3-15 
|Capitalized courses development costs                 |  | 3    
|Brand names                                           |  | 5    
|Backlog, non-compete agreements and other intangibles |  | 2-10 
|Patent                                                |  | 10   



The Group assesses
the recoverability of its intangible assets on a regular basis by determining whether the amortization of the asset over its remaining
useful life can be recovered through undiscounted future operating cash flows from the specific software product sold. During the
years ended December 31, 2015 and 2016, no unrecoverable amounts were identified.



Intangible
assets with indefinite useful lives are not systematically amortized and are tested for impairment annually or whenever there is
an indication that the intangible asset may be impaired. The useful life of these assets is reviewed annually to determine whether
their indefinite life assessment continues to be supportable. If the events and circumstances do not continue to support the assessment,
the change in the useful life assessment from indefinite to finite is accounted for prospectively as a change in accounting estimate
and on that date the asset is tested for impairment. Commencing from that date, the asset is amortized systematically over its
useful life.



| | 20) | Impairment of non-financial assets:
| | --- | -----------------------------------



The Group evaluates
the need to record an impairment of non-financial assets (property, plant and equipment, capitalized software costs and other intangible
assets, goodwill, investments in joint venture) whenever events or changes in circumstances indicate that the carrying amount is
not recoverable.



F-30







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



If the carrying
amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable
amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows
are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset
that does not generate independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment
losses are recognized in profit or loss.



An impairment
loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset's
recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased
above the lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment
loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented
at cost is recognized in profit or loss.



The following
criteria are applied in assessing impairment of these specific assets:



| | i. | Goodwill in respect of subsidiaries:
| | -- | ------------------------------------



The Group
reviews goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate
that there is an impairment.



Goodwill
is tested for impairment by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to
which the goodwill has been allocated. An impairment loss is recognized if the recoverable amount of the cash-generating unit (or
group of cash-generating units) to which goodwill has been allocated is less than the carrying amount of the cash-generating unit
(or group of cash-generating units). Any impairment loss is allocated first to goodwill. Impairment losses recognized for goodwill
cannot be reversed in subsequent periods.



| | ii. | Investment in associate or joint venture using the equity method:
| | --- | -----------------------------------------------------------------



After application
of the equity method, the Group determines whether it is necessary to recognize any additional impairment loss with respect to
the investment in associates or joint ventures. The Group determines at each reporting date whether there is objective evidence
that the carrying amount of the investment in the associate or the joint venture is impaired. The test of impairment is carried
out with reference to the entire investment, including the goodwill attributed to the associate or the joint venture.



During the
years ended December 31, 2015 and 2016, no impairment indicators were identified.



F-31







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | 21) | Financial instruments:
| | --- | ----------------------



| | A. | Financial assets:
| | -- | -----------------



Financial assets
within the scope of IAS 39 are initially recognized at fair value plus directly attributable transaction costs, except for financial
assets measured at fair value through profit or loss in respect of which transaction costs are recorded in profit or loss. After
initial recognition, the accounting treatment of financial assets is based on their classification as follows:



| | i. | Financial assets at fair value through profit or loss:
| | -- | ------------------------------------------------------



This category includes financial
assets held for trading.



| | ii. | Loans and receivables:
| | --- | ----------------------



Loans and receivables are investments
with fixed or determinable payments that are not quoted in an active market. After initial recognition, loans are measured based
on their terms at amortized cost plus directly attributable transaction costs using the effective interest method and less any
impairment losses. Short-term borrowings are measured based on their terms, normally at face value.





| | iii. | Available-for-sale financial assets:
| | ---- | ------------------------------------



Available-for-sale financial
assets are (non-derivative) financial assets that are designated as available for sale or are not classified in any of the three
preceding categories. After initial recognition, available-for-sale financial assets are measured at fair value. Gains or losses
from fair value adjustments, except for interest, exchange rate differences that relate to debt instruments and dividends from
an equity instrument, are recognized in other comprehensive income. When the investment is disposed of or in case of impairment,
the other comprehensive income (loss) is transferred to profit or loss.



| | B. | Financial liabilities:
| | -- | ----------------------



Financial liabilities
are initially recognized at fair value. Loans and other liabilities measured at amortized cost are presented less direct transaction
costs. After initial recognition, the accounting treatment of financial liabilities is based on their classification as follows:





F-32







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | i. | Financial liabilities at amortized cost:
| | -- | ----------------------------------------



After initial recognition, loans
and other liabilities are measured based on their terms at amortized cost less directly attributable transaction costs using the
effective interest method.



| | ii. | Financial liabilities at fair value through profit or loss:
| | --- | -----------------------------------------------------------



Financial liabilities at fair
value through profit or loss include financial liabilities classified as held for. Derivatives, including separated embedded derivatives,
are classified as held for trading unless they are designated as effective hedging instruments.



| | C. | Offsetting financial instruments:
| | -- | ---------------------------------



Financial assets
and financial liabilities are offset and the net amount is presented in the statement of financial position if there is a legally
enforceable right to set off the recognized amounts and there is an intention either to settle on a net basis or to realize the
asset and settle the liability simultaneously.



The right of
set-off must be legally enforceable not only during the ordinary course of business of the parties to the contract but also in
the event of bankruptcy or insolvency of one of the parties. In order for the right of set-off to be currently available, it must
not be contingent on a future event, there may not be periods during which the right is not available, or there may not be any
events that will cause the right to expire.



| | D. | Compound financial instruments:
| | -- | -------------------------------



| | i. | Convertible debentures which contain both an equity component and a liability component are separated
into two components. This separation is performed by first determining the liability component based on the fair value of an equivalent
non-convertible liability. The value of the conversion component is determined to be the residual amount. Directly attributable
transaction costs are apportioned between the equity component and the liability component based on the allocation of proceeds
to the equity and liability components.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-33







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | ii. | Convertible debentures that are denominated in foreign currency contain two components: the conversion
component and the debt component. The liability conversion component is initially recognized as a financial derivative at fair
value. The balance is attributed to the debt component. Directly attributable transaction costs are allocated between the liability
conversion component and the liability debt component based on the allocation of the proceeds to each component.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | E. | Embedded derivatives:
| | -- | ---------------------



The Group assesses
the existence of an embedded derivative and whether it is required to be separated from a host contract when the Group first becomes
party to the contract. Reassessment of the need to separate an embedded derivative only occurs if there is a change in the terms
of the contract that significantly modifies the cash flows that would otherwise be required.



| | F. | Issue of a unit of securities:
| | -- | ------------------------------



The issue of
a unit of securities involves the allocation of the proceeds received (before issue expenses) to the securities issued in the unit
based on the following order: financial derivatives and other financial instruments measured at fair value in each period. Then
fair value is determined for financial liabilities that are measured at amortized cost. The proceeds allocated to equity instruments
are determined to be the residual amount. Issue costs are allocated to each component pro rata to the amounts determined for each
component in the unit.



| | G. | Put option granted to non-controlling interests:
| | -- | ------------------------------------------------



When the Group
grants non-controlling interests a put option to sell part or all of their interests in a subsidiary during a certain period, on
the date of grant, the non-controlling interests are classified as a financial liability under redeemable non-controlling interests.



The Group remeasures
the financial liability at the end of each reporting period based on the estimated present value of the consideration to be transferred
upon the exercise of the put option. If the Group has present ownership of the non-controlling interests, these non-controlling
interests are accounted for as if they are held by the Group and changes in the amount of the liability are carried to profit or
loss. If the Group does not have present ownership, the interests are accounted for using the partial recognition method. Accordingly,
a portion of net profit attributable to non-controlling interests is still allocated to profit or loss but at the end of the reporting
period the non-controlling interests are reclassified as a financial liability. The difference between non-controlling interests
at the end of the reporting period and the present value of the liability is recognized directly in equity of the Group, under
“Adjustment to redeemable non-controlling interests”.If the option is exercised
in subsequent periods, the consideration paid upon exercise is treated as settlement of the liability. If the option expires, the
liability is settled and it is a portion of the investment in the subsidiary disposed of, without loss of control therein.



As of December
31, 2016, there are no redeemable non-controlling interests which are subject to immediate exercise.



F-34







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



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



|January 1, 2016                                                                            |  | $ | 18,751 |  
|------------------------------------------------------------------------------------------ |  | - | ------ | -
|Net income attributable to redeemable non-controlling interest                             |  |   | 2,124  |  
|Share-based compensation attributable to redeemable non-controlling interest               |  |   | 215    |  
|Change in redeemable non-controlling interest to redemption value                          |  |   | 715    |  
|Increase in redeemable non-controlling interest as part of acquisitions                    |  |   | 29,174 |  
|Increase in redeemable non-controlling interest due to change in ownership in subsidiaries |  |   | 292    |  
|Dividend in redeemable non-controlling interest                                            |  |   | (1,537 | )
|Foreign currency translation adjustments                                                   |  |   | (105   | )
|                                                                                           |  |   |        |  
|December 31, 2016                                                                          |  | $ | 49,629 |  



| | H. | Derecognition of financial instruments:
| | -- | ---------------------------------------



| | i. | Financial assets:
| | -- | -----------------



A financial asset is derecognized
when the contractual rights to the cash flows from the financial asset expire or the Group has transferred its contractual rights
to receive cash flows from the financial asset or assumes an obligation to pay the cash flows in full without material delay to
a third party, and in addition it has transferred substantially all the risks and rewards of the asset, or has neither transferred
nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.



A transaction involving factoring
of accounts receivable and credit card vouchers is derecognized when the abovementioned conditions are met.



If the Group transfers its
rights to receive cash flows from an asset and neither transfer nor retains substantially all the risks and rewards of the asset
nor transfers control of the asset, a new asset is recognized to the extent of the Group's continuing involvement in the asset.
When continuing involvement takes the form of guaranteeing the transferred asset, the extent of the continuing involvement is the
lower of the original carrying amount of the asset and the maximum amount of consideration received that the Company could be required
to repay. As of December 31, 2016, the Group has no open factoring transactions.



| | ii. | Financial liabilities:
| | --- | ----------------------



A financial liability is derecognized
when it is extinguished, that is when the obligation is discharged or cancelled or expires. A financial liability is extinguished
when the debtor (the Group) discharges the liability by paying in cash, other financial assets, goods or services or is legally
released from the liability.



F-35







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | I. | Impairment of financial assets:
| | -- | -------------------------------



The Group assesses
at the end of each reporting period whether there is any objective evidence of impairment of a financial asset or group of financial
assets as follows:



| | i. | Financial assets carried at amortized cost:
| | -- | -------------------------------------------



Objective evidence
of impairment exists when one or more events that have occurred after initial recognition of the asset have a negative impact on
the estimated future cash flows. The amount of the loss recorded in profit or loss is measured as the difference between the asset's
carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred)
discounted at the financial asset's original effective interest rate. If the financial asset has a variable interest rate, the
discount rate is the current effective interest rate. In a subsequent period, the amount of the impairment loss is reversed if
the recovery of the asset can be related objectively to an event occurring after the impairment was recognized. The amount of the
reversal, up to the amount of any previous impairment, is recorded in profit or loss.



| | ii. | Available-for-sale financial assets:
| | --- | ------------------------------------



For equity
instruments classified as available-for-sale financial assets, evidence of impairment includes a significant or prolonged decline
in the fair value of the asset below its cost and evaluation of changes in the technological, economic or legal environment or
in the market in which the issuer of the instrument operates. The determination of a significant or prolonged impairment depends
on the circumstances at each reporting date. In making such a determination, historical volatility in fair value is considered,
as well as a decline in fair value of 20% or more, or a decline in fair value whose duration is six months or more. Where there
is evidence of impairment, the cumulative loss recorded in other comprehensive income is reclassified to profit or loss. In subsequent
periods, any reversal of the impairment loss is recognized in other comprehensive income.



During 2015
and 2016 the Company did not recognize an impairment charge over its investments in available-for-sale marketable securities.



| | J. | Extinguishing financial liabilities with equity instruments:
| | -- | ------------------------------------------------------------



Equity instruments
issued to replace a debt are measured at the fair value of the equity instruments issued if their fair value can be reliably measured.
If their fair value cannot be reliably measured, the equity instruments are measured based on the fair value of the financial liability
extinguished on the date of extinguishment. The difference between the carrying amount of the financial liability extinguished
and the fair value of the equity instruments issued is recognized in profit or loss.



F-36







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | 22) | Fair value measurement
| | --- | ----------------------



Fair value
is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. Fair value measurement is based on the assumption that the transaction will take place in the asset's
or the liability's principal market, or in the absence of a principal market, in the most advantageous market.



The fair value
of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability,
assuming that market participants act in their economic best interest. Fair value measurement of a non-financial asset takes into
account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling
it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that
are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant
observable inputs and minimizing the use of unobservable inputs. All assets and liabilities measured at fair value or for which
fair value is disclosed are categorized into levels within the fair value hierarchy based on the lowest level input that is significant
to the entire fair value measurement:



|Level 1 | - | quoted prices (unadjusted) in active markets for identical assets or liabilities.                                                        
|------- | - | -----------------------------------------------------------------------------------------------------------------------------------------
|        |   |                                                                                                                                          
|Level 2 | - | inputs other than quoted prices included within Level 1 that are observable directly or indirectly.                                      
|        |   |                                                                                                                                          
|Level 3 | - | inputs that are not based on observable market data (valuation techniques which use inputs that are not based on observable market data).



Assets and
liabilities measured at fair value on a recurring basis are comprised of marketable securities, foreign currency forward contracts
and contingent consideration of acquisitions (see Note 6).



| | 23) | Treasury shares:
| | --- | ----------------



Company shares
held by the Company and/or subsidiaries are recognized at cost of purchase and presented as a deduction from equity. Any gain or
loss arising from a purchase, sale, issue or cancellation of treasury shares is recognized directly in equity.



| | 24) | Provisions
| | --- | ----------



A provision
in accordance with IAS 37 is recognized when the Group has a present obligation (legal or constructive) as a result of a past event,
it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable
estimate can be made of the amount of the obligation. When the Group expects part or all of the expense to be reimbursed, for example
under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain.
The expense is recognized in the statement of profit or loss net of any reimbursement.



F-37







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



Following are
the types of provisions included in the financial statements:



| | i. | Legal claims
| | -- | ------------



A provision for claims is recognized
when the Group has a present legal or constructive obligation as a result of a past event, it is more likely than not that an outflow
of resources embodying economic benefits will be required by the Group to settle the obligation and a reliable estimate can be
made of the amount of the obligation.



| | ii. | Contingentliability recognized in a business combination
| | --- | --------------------------------------------------------



A contingent liability in a
business combination is measured at fair value upon initial recognition. In subsequent periods, it is measured at the higher of
the amount initially recognized less, when appropriate, cumulative amortization, and the amount that would be recognized at the
end of the reporting period in accordance with IAS 37.



| | 25) | Combination of businesses under common control
| | --- | ----------------------------------------------



A business
combination involving business entities under common control is a business combination whereby all of the combining business entities
are ultimately controlled by the same party or parties, both before and after the business combination, and that control is not
transitory. This refers in particular to transactions such as a transfer of companies or ventures between individual companies
within a capital group, or a merger of a parent company with its subsidiary.



The effects
of combinations of businesses under common control are accounted for by the Group by the pooling of interests method, assuming
that: assets and liabilities of the combining business entities are measured at their carrying values as disclosed in the Group’s
consolidated financial statements; merger-related transaction costs are expensed in the income statement (financial expenses);
mutual balances of accounts receivable/payable are eliminated; any difference between the purchase price paid/transferred and the
value of net assets acquired (at their carrying values disclosed in the consolidated financial statements) shall be recognized
in equity of the acquirer (such amounts recognized in equity are not included in reserve capital, and therefore they are not distributable).



On August 18,
2015 (the “Acquisition Date”), Sapiens consummated the acquisition from Asseco of all issued and outstanding shares
of Insseco Sp. Z O.O. (“Insseco”). Asseco is the ultimate parent company of Sapiens, through Asseco’s holdings
in Formula, which is the direct parent company of Sapiens. Insseco is a newly established company into which Asseco had transferred
all of its Polish insurance employees, certain fixed assets, certain customer contracts and certain software, including intellectual
property rights. Insseco has an established presence in the Polish insurance market, and services major insurance customers in
Poland, including top tier insurance carriers



The acquisition
of Insseco from Asseco, is a transaction between entities under common control, and therefore accounted for under the pooling of
interest method. As the common control commenced on December 23, 2014, the balance sheets as of December 31, 2014 of Sapiens and,
as such, of Formula were adjusted to reflect the carrying amounts combination between Sapiens and Insseco. The results of Sapiens
and of Formula for the twelve-month period ended December 31, 2015 were also adjusted to reflect the combination with Insseco,
accordingly.



F-38







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



Under the pooling-of-interests
method, the equity accounts of the combining entities are combined and the difference between the consideration paid and the net
assets acquired is reflected as an equity transaction (i.e., distribution to parent company). As opposed to the purchase method
of accounting, no intangible assets are recognized in the transaction, other than those existed in the combining entities and no
goodwill is recognized as a result of the combination.



The application
of the pooling-of-interests method with respect to the acquisition of Insseco increased the total assets, liabilities and equity
as of December 31, 2014 by $ 4,387, $ 2,290, and $ 2,097, respectively. Revenues, pretax income and net income of Insseco for the
twelve month period ended December 31, 2015, which are included in the consolidated statements of profit or loss amounted to $
10,516, $ 1,324 and $ 1,165, respectively. (see additional information in Note 4(ii)(a)).



| | 26) | Derivative financial instruments designated as hedges:
| | --- | ------------------------------------------------------



A material
portion of the Group's revenues, expenses and earnings is exposed to changes in foreign exchange rates. Depending on market conditions,
foreign exchange risk is also managed through the use of derivative financial instruments. These financial instruments serve to
protect net income against the impact of the translation into U.S. dollars of certain foreign exchange-denominated transactions.
Therefore, The Group enters into contracts for derivative financial instruments such as forward currency contracts to hedge risks
associated with foreign exchange rate and interest rate fluctuations.



The derivative
instruments primarily hedge or offset exposures to Euro, Japanese Yen and New Israeli Shekel ("NIS") exchange rate fluctuations.



Any gains or
losses arising from changes in the fair values of derivatives that do not qualify for hedge accounting are recorded immediately
in profit or loss.



Hedges qualify
for hedge accounting, among others, when at inception of the hedging relationship there is a formal designation and documentation
of the hedging relationship and of the Group's risk management objective and strategy for undertaking the hedge. Hedges are assessed
on an ongoing basis to determine whether they are highly effective during the reporting period for which the hedge is designated.
Hedges are accounted for as follows:



| | i. | Fair value hedges:
| | -- | ------------------



The change
in the fair value of the derivative (the hedging item) and the hedged item is recognized in profit or loss. For fair value hedges
relating to hedged items carried at amortized cost, the adjustment to carrying value is amortized to profit or loss over the remaining
term to maturity. Any adjustment of the hedged financial instrument for which the effective interest rate method is used, is recognized
in profit or loss. If the hedged item is derecognized, the unamortized changes to fair value are recognized immediately in profit
or loss.



F-39







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | ii. | Cash flow hedges:
| | --- | -----------------



The effective
portion of the change in the fair value of the hedging instrument is recognized in other comprehensive income (loss) while any
ineffective portion is recognized immediately in profit or loss.



Amounts recognized
as other comprehensive income (loss) are reclassified to profit or loss when the hedged transaction affects profit or loss, such
as when the hedged income or expense is recognized or when a forecasted transaction occurs. Where the hedged item is a non-financial
asset or liability, their cost also includes the gain (loss) from the hedging instrument.



If the forecast
transaction or firm commitment is no longer expected to occur, amounts previously recognized in other comprehensive income (loss)
are reclassified to profit or loss. If the hedging instrument expires or is sold, terminated or exercised, or if its designation
as a hedge is revoked, amounts previously recognized in other comprehensive income (loss) remain in other comprehensive income
(loss) until the forecast transaction or firm commitment occurs.



Hedge accounting
is not applied to financial derivatives used as an economic hedge of financial assets and liabilities. At December 31, 2015
and 2016, the Group did not have any cash flow hedges.



| | 27) | Employee benefit liabilities:
| | --- | -----------------------------



The Group has
several employee benefit plans:



| | i. | Short-term employee benefits:
| | -- | -----------------------------



Short-term
employee benefits are benefits that are expected to be settled wholly before twelve months after the end of the annual reporting
period in which the employees render the related services. These benefits include salaries, paid annual leave, paid sick leave,
recreation and social security contributions and are recognized as expenses as the services are rendered. A liability in respect
of a cash bonus or a profit-sharing plan is recognized when the Group has a legal or constructive obligation to make such payment
as a result of past service rendered by an employee and a reliable estimate of the amount can be made.



| | ii. | Post-employment benefits:
| | --- | -------------------------



The plans
are normally financed by contributions to insurance companies and classified as defined contribution plans or as defined benefit
plans.



Formula's
and its Israeli investees’ has defined with respect to their Israeli employees contribution plans pursuant to section 14
of Israel's Severance Pay Law, 1963 (the "Severance Pay Law") under which the Group pays fixed contributions and will
have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient amounts to pay all employee
benefits relating to employee service in the current and prior periods. Contributions to the defined contribution plan in respect
of severance or retirement pay are recognized as an expense when contributed concurrently with performance of the employee's services.



F-40







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



Formula's
and its Israeli investees’ also operates a defined benefit plan in respect of severance pay to their Israeli employees pursuant
to the Severance Pay Law. According to the Law, employees are entitled to severance pay upon dismissal or retirement. The liability
for termination of employment is measured using the projected unit credit method. The actuarial assumptions include rates of employee
turnover and future salary increases based on the estimated timing of payment. The amounts are presented based on discounted expected
future cash flows using a discount rate determined by reference to market yields at the reporting date on high quality corporate
bonds that are linked to Israel’s Consumer Price Index with a term that is consistent with the estimated term of the severance
pay obligation.



In respect
of its severance pay obligation to certain of its employees, the Group makes current deposits in pension funds and insurance companies
("the plan assets"). Plan assets comprise assets held by a long-term employee benefit fund or qualifying insurance policies.
Plan assets are not available to the Group's own creditors and cannot be returned directly to the Group.



The liability
for employee benefits shown in the statement of financial position reflects the present value of the defined benefit obligation
less the fair value of the plan assets.



Remeasurements
of the net liability are recognized in other comprehensive income in the period in which they occur.



Total expenses
in respect of employee benefit liabilities for the years 2015 and 2016 were $ 13,555and $ 14,470, respectively.



F-41







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



| | 28) | Earnings per share:
| | --- | -------------------



Earnings per
share are calculated by dividing the net income attributable to equity holders of the Company by the weighted number of Ordinary
shares outstanding during the period. Potential Ordinary shares are included in the computation of diluted earnings per share when
their conversion decreases earnings per share from continuing operations. Potential Ordinary shares that are converted during the
period are included in diluted earnings per share only until the conversion date and from that date in basic earnings per share.
The Company's share of earnings of investees is included based on its share of earnings per share of the investees multiplied by
the number of shares held by the Company.



| | 29) | Concentration of credit risk
| | --- | ----------------------------



Financial instruments
that potentially subject the Group to concentrations of credit risk consist principally of cash and cash equivalents, short-term
bank deposits, restricted cash, trade receivables, marketable securities and foreign currency derivative contracts.



The majority
of the Group's cash and cash equivalents, bank deposits and marketable securities are invested with major banks in Israel, the
United States and Europe. Such cash and cash equivalents and short-term deposits in the United States may be in excess of insured
limits and are not insured in other jurisdictions. Management believes that these financial instruments are held in financial institutions
with high credit standing, and accordingly, minimal credit risk exists with respect to these investments.



The Group’s
marketable securities include investments in commercial and government bonds and foreign banks. The Group's marketable securities
are considered to be highly liquid and have a high credit standing. In addition, managements of the Group’s investees limit
the amount that may be invested in any one type of investment or issuer, thereby reducing credit risk concentrations and consider
their portfolios in foreign banks to be well-diversified (also refer to Note 5).



The Group's
trade receivables are generally derived from sales to large organizations located mainly in Israel, North America, Europe and Asia
Pacific. The Group performs ongoing credit evaluations of its customers and to date has not experienced any material losses. In
certain circumstances, Formula and its investees may require letters of credit, other collateral or additional guarantees. From
time to time, the Group sells certain of its accounts receivable to financial institutions, within the normal course of business.



The Group maintains
an allowance for doubtful accounts receivable based upon management's experience and estimate of collectability of each outstanding
invoice. The allowance for doubtful accounts is determined with respect to specific debts that are doubtful of collection. The
bad debt expenses, net for the years ended December 31, 2015 and 2016 was $ 747 and $ 652 respectively. The risk of collection
associated with accounts receivable is mitigated by the diversity and number of customers.



F-42







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS            
|U.S. dollars in thousands, except share and per share data



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



From time to
time, the Group transfers financial assets by factoring of accounts receivable and credit card vouchers to a financial institution
IAS-39 establishes a standard for determining when a transfer of financial assets should be accounted for as a sale. Certain underlying
conditions must be met for the transfer of financial assets to qualify for accounting as a sale. All sales of receivable were closed
during the years and as so there are no outstanding sales of receivables as of December 31, 2015 and 2016.



The agreements
pursuant to which the Company sells certain of its trade receivables are structured such that the Company (i) transfers the proprietary
rights in the receivable from the Company to the financial institution; (ii) legally isolates the receivable from the Company's
other assets, and presumptively puts the receivable beyond the legal reach of the Company and its creditors, even in bankruptcy
or other receivership; (iii) confers on the financial institution the right to pledge or exchange the receivable; and (iv) eliminates
the Company's effective control over the receivable, in the sense that the Company is not entitled and shall not be obligated to
repurchase the receivable other than in case of failure by the Company to fulfill its commercial obligation.



From time to
time, the Group enters into foreign exchange forward and option contracts intended to protect against the changes in value of forecasted
non-dollar currency cash flows. These derivative instruments are designed to offset a portion of the Company's non-dollar currency
exposure (see Note 2 (26) above).



F-43









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 3:- | DISCLOSURE OF NEW STANDARDS IN THE PERIOD PRIOR TO
THEIR ADOPTION
| | -------- | -----------------------------------------------------------------



| | 1. | IFRS 15, "Revenue from Contracts
                                         with Customers":
| | -- | ------------------------------------------------------------------------------------------



IFRS 15 ("the
new Standard") was issued by the IASB in May 2014. The new Standard replaces IAS 18, "Revenue", IAS 11, "Construction
Contracts", IFRIC 13, "Customer Loyalty Programs", IFRIC 15, "Agreements for the Construction of Real Estate",
IFRIC 18, "Transfers of Assets from Customers" and SIC-31, "Revenue - Barter Transactions Involving Advertising
Services".



The new Standard
introduces a five-step model that will apply to revenue earned from contracts with customers:



Step 1: Identify
the contract with a customer, including reference to contract combination and accounting for contract modifications.

Step 2: Identify
the separate performance obligations in the contract

Step 3: Determine
the transaction price, including reference to variable consideration, financing components that are significant to the contract,
non-cash consideration and any consideration payable to the customer.

Step 4: Allocate
the transaction price to the separate performance obligations on a relative stand-alone selling price basis using observable information,
if it is available, or using estimates and assessments.

Step 5: Recognize
revenue when a performance obligation is satisfied, either at a point in time or over time.





The Company is
evaluating the possible effects of the new Standard. However, at this stage, the Company is unable to quantify the impact on the
financial statements.





The new Standard
is to be applied retrospectively for annual periods beginning on January 1, 2018. Early adoption is permitted. At this stage,
the Group does not intend to adopt IFRS 15 early.



The new Standard
allows the option of modified retrospective adoption with certain reliefs according to which the new Standard will be applied
to existing contracts from the initial period of adoption and thereafter with no restatement of comparative data. Under this option,
the Group will recognize the cumulative effect of the initial adoption of the new Standard as an adjustment to the opening balance
of retained earnings (or another component of equity, as applicable) as of the date of initial application. Alternatively, the
new Standard permits full retrospective adoption with certain reliefs.



At this stage,
the Group is evaluating the different options for adoption of the new Standard.



| | 2. | IFRS 9, "Financial Instruments
| | -- | ------------------------------



In July 2014,
the IASB issued the final and complete version of IFRS 9, "Financial Instruments" ("IFRS 9"), which replaces
IAS 39, " Financial Instruments: Recognition and Measurement". IFRS 9 mainly focuses on the classification and measurement
of financial assets and it applies to all assets in the scope of IAS 39.



According
to IFRS 9, all financial assets are measured at fair value upon initial recognition. In subsequent periods, debt instruments are
measured at amortized cost only if both of the following conditions are met:



F-44







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 3:- | DISCLOSURE OF NEW STANDARDS IN THE PERIOD PRIOR TO
THEIR ADOPTION (Cont.)
| | -------- | -------------------------------------------------------------------------



| | - | the asset is held within a business
                                         model whose objective is to hold assets in order to collect the contractual cash flows.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | the contractual terms of the
                                         financial asset give rise on specified dates to cash flows that are solely payments of
                                         principal and interest on the principal amount outstanding.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Subsequent
measurement of all other debt instruments and financial assets should be at fair value. IFRS 9 establishes a distinction between
debt instruments to be measured at fair value through profit or loss and debt instruments to be measured at fair value through
other comprehensive income.



Financial
assets that are equity instruments should be measured in subsequent periods at fair value and the changes recognized in profit
or loss or in other comprehensive income (loss), in accordance with the election by the Company on an instrument-by-instrument
basis. If equity instruments are held for trading, they should be measured at fair value through profit or loss.



According
to IFRS 9, the provisions of IAS 39 will continue to apply to derecognition and to financial liabilities for which the fair value
option has not been elected.



According
to IFRS 9, changes in fair value s of financial liabilities which are attributable to the change in credit risk should be presented
in other comprehensive income. All other changes in fair value should be presented in profit or loss.



IFRS 9 also
prescribes new hedge accounting requirements.



IFRS 9 is
to be applied for annual periods beginning on January 1, 2018. Early adoption is permitted.



The Group
believes that the amendments to IFRS 9 are not expected to have a material impact on the consolidated financial statements, but
at the end of the reporting period the impact analysis has not yet been completed.



| | 3. | Amendments to IFRS 10 and IAS
                                         28 regarding sale or transfer of assets between an investor and its associate or joint
                                         venture:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In September
2014, the IASB issued amendments to IFRS 10 and IAS 28 ("the amendments") regarding the accounting treatment of the
sale or transfer of assets (an asset, a group of assets or a subsidiary) between an investor and its associate or joint venture.
According to the amendments, when the investor loses control of a subsidiary or a group of assets that are not a business in a
transaction with its associate or joint venture, the gain will be partially eliminated so that the gain to be recognized is the
gain from the sale to the other investors in the associate or joint venture. According to the amendments, if the remaining rights
held by the investor represent a financial asset as defined in IFRS 9, the gain will be recognized in full. If the transaction
with an associate or joint venture involves loss of control of a subsidiary or a group of assets that are a business, the gain
will be recognized in full. The amendments are to be applied prospectively. A mandatory effective date has not yet been determined
by the IASB but early adoption is permitted.



F-45







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 3:- | DISCLOSURE OF NEW STANDARDS IN THE PERIOD PRIOR TO
THEIR ADOPTION (Cont.)
| | -------- | -------------------------------------------------------------------------



| | 4. | Amendments to IAS 7, "Statement
                                         of Cash Flows", regarding additional disclosures of financial liabilities:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------



In January
2016, the IASB issued amendments to IAS 7, "Statement of Cash Flows", ("the amendments") which require additional
disclosures regarding financial liabilities. The amendments require disclosure of the changes between the opening balance and
the closing balance of financial liabilities, including changes from cash flows, changes arising from obtaining or losing control
of subsidiaries, the effect of changes in foreign exchange rates and changes in fair value.



The amendments
are effective for annual periods beginning on or after January 1, 2017. Comparative information for periods prior to the effective
date of the amendments is not required. Early application is permitted. The Company will include the necessary disclosures in
the financial statements when applicable.



| | 5. | IFRS 16, "Leases”:
| | -- | ------------------



In January
2016, the IASB issued IFRS 16, "Leases" ("the new Standard"). According to the new Standard, a lease is a
contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration.



According
to the new Standard:



| | - | Lessees are required to recognize
                                         an asset and a corresponding liability in the statement of financial position in respect
                                         of all leases (except in certain cases) similar to the accounting treatment of finance
                                         leases according to the existing IAS 17, "Leases".
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Lessees are required to initially
                                         recognize a lease liability for the obligation to make lease payments and a corresponding
                                         right-of-use asset. Lessees will also recognize interest and depreciation expense separately.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Variable lease payments that are
                                         not dependent on changes in the Consumer Price Index ("CPI") or interest rates,
                                         but are based on performance or use (such as a percentage of revenues) are recognized
                                         as an expense by the lessees as incurred and recognized as income by the lessors as earned.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | In the event of change in variable
                                         lease payments that are CPI-linked, lessees are required to remeasure the lease liability
                                         and the effect of the remeasurement is an adjustment to the carrying amount of the right-of-use
                                         asset.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | The new Standard includes two exceptions
                                         according to which lessees are permitted to elect to apply a method similar to the current
                                         accounting treatment for operating leases. These exceptions are leases for which the
                                         underlying asset is of low value and leases with a term of up to one year.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | The accounting treatment by lessors
                                         remains substantially unchanged, namely classification of a lease as a finance lease
                                         or an operating lease.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-46







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 3:- | DISCLOSURE OF NEW STANDARDS IN THE PERIOD PRIOR TO
THEIR ADOPTION (Cont.)
| | -------- | -------------------------------------------------------------------------



The new Standard
is effective for annual periods beginning on or after January 1, 2019. Early adoption is permitted provided that IFRS 15, "Revenue
from Contracts with Customers", is applied concurrently. For leases existing at the date of transition, the new Standard
permits lessees to use either a full retrospective approach, or a modified retrospective approach, with certain transition relief
whereby restatement of comparative data is not required.



The Company
is evaluating the possible effects of the new Standard. However, at this stage, the Company is unable to quantify the impact on
the financial statements.



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS
| | -------- | ------------------------------------------------------------------



| | i. | Formula
| | -- | -------



| | a. | Acquisition of TSG IT Advanced Systems
                                         Ltd
| | -- | -----------------------------------------------------------------------------------



On May 9,
2016, Formula and Israel Aerospace Industries (IAI) concluded the joint purchase of TSG – a subsidiary and the military
arm of Ness Technologies, engaged in the fields of command and control systems, intelligence, homeland security and cyber security.
The total purchase price in the transaction amounted to $ 51,532 in cash, with each of IAI and Formula acquiring 50% of TSG for
$ 25,766. TSG is a leading provider of core command and control systems to Israel's defense organization, including the Israeli
Defense Forces and the Israeli Police.



As TSG is
jointly controlled by both Formula and IAI, its results of operations are reflected in the Company's profit or loss using the
equity method of accounting commencing May 9, 2016.



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



|Net Assets                                 |  | $ | 1,824  |  
|------------------------------------------ |  | - | ------ | -
|Intangible assets                          |  |   | 13,693 |  
|Backlog                                    |  |   | 2,221  |  
|Deferred tax liability                     |  |   | (3,979 | )
|Dividend preference derivative             |  |   | 2,140  |  
|Goodwill                                   |  |   | 9,867  |  
|                                           |  |   |        |  
|Total assets acquired net of acquired cash |  | $ | 25,766 |  



F-47









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



| | b. | Investment in Sapiens
| | -- | ---------------------



On November
19, 2013, Sapiens completed a follow-on public offering of its ordinary shares on the NASDAQ. Sapiens issued 6,497,400 shares
at a price of $ 6.25 per share before issuance expenses. Total net proceeds from the issuance amounted to approximately $ 37,791.
As a result of the offering, Formula’s interest in Sapiens' outstanding common shares was diluted from 56.8% to 48.6% and
due to the loss of control in Sapiens in accordance with IFRS 10, the Company started applying the equity method of accounting
to reflect its investment in Sapiens. The gain recognized in relation of Formula’s interest in in Sapiens' outstanding common
shares, diluting to 48.6%, amounted to $ 61,164 and is presented in the income statement as equity in gains of affiliated companies,
net. The fair value of the retained investment in Sapiens was measured according to Sapiens' share price on November 19, 2013
of $ 7.09 per share.



From August
21, 2014 through December 23, 2014, Formula purchased an aggregate of 1,545,802 common shares of Sapiens through broker-initiated
and private transactions for an aggregate purchase price of $ 11,908, pursuant to which Formula’s holdings in Sapiens were
increased to 50.2%. As a result of Formula’s gaining control in Sapiens, Formula’s investment in Sapiens was consolidated
in Formula’s closing balances as of December 31, 2014. The gain recognized in relation to the consolidation of Sapiens and
the related re-measurement of the investment to fair value amounted to $ 3,413 and is presented in the income statement as equity
in gains of affiliated companies, net.



The acquisition
was accounted for using the purchase method. The results of operations of Sapiens have been consolidated commencing as of December
23, 2014.



The following
table summarizes the estimated fair values of the assets acquired and liabilities assumed, with reference to the acquisition as
of December 23, 2014:



|Net assets                        |  | $ | 170,834  |  
|--------------------------------- |  | - | -------- | -
|Customer relationships            |  |   | 20,707   |  
|Developed and acquired Technology |  |   | 19,066   |  
|Backlog and deferred revenues     |  |   | 3,351    |  
|Deferred revenues                 |  |   | 513      |  
|Deferred tax liability, net       |  |   | (11,972  | )
|Non-controlling interests         |  |   | (173,565 | )
|Goodwill                          |  |   | 145,730  |  
|                                  |  |   |          |  
|Net assets acquired               |  | $ | 174,664  |  



In performing
the purchase price allocation, management considered, among other factors, analyses of historical financial performance, highest
and best use of the acquired assets and estimates of future performance of Sapiens' business. In performing the purchase price
allocation, the fair value of intangible assets such as customer relationship
was determined based on the income approach and core technology was valued using the relief from royalty method.



F-48







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



| | ii. | Sapiens
| | --- | -------



| | a. | Acquisition of Insseco
| | -- | ----------------------



On August
18, 2015 (the “acquisition date”), Sapiens completed the acquisition from Asseco of all issued and outstanding shares
of Insseco. Asseco is the ultimate parent company of Sapiens, through holding in Formula, which is the direct parent company of
Sapiens. Insseco is a newly established company into which Asseco had transferred all of its Polish insurance employees, certain
fixed assets, certain customer contracts and certain software including intellectual property rights. Insseco has a team of approximately
140 insurance professionals and an established presence in the Polish insurance market, and services major insurance customers
in Poland, including top tier insurance carriers.



Sapiens paid
the acquisition consideration in cash, consisting of 34,300 Polish Zloty or approximately $ 9,100. In addition, the transaction
consideration includes upside or downside performance based payments relating to achievements of revenue goals and profitability
over the next five years. If the aggregate revenues generated by Insseco from its activity from July 1, 2015 through June 30,
2020 exceed 90,000 Polish Zloty or approximately $ 23,800, Asseco shall be entitled to receive additional amounts ranging from
3% to 15% of the excess amount of the respective revenues. If the aggregate revenues generated by Insseco for the period from
July 1, 2015 through June 30, 2018 are below 84,000 Polish Zloty or $ 22,200, the seller shall pay Sapiens an amount equal to
35% of the deficiency below such amount. In addition, the amounts payable to Asseco may be adjusted upwards or downwards as a
result of changes in the profitability of a specific account that Sapiens acquired as part of the acquisition. The estimated fair
value of the contingent payments as of December 31, 2016 is $ 1,000.



The acquisition
of Insseco from Asseco, which was as of the acquisition date the ultimate parent company of Sapiens, is a transaction between
entities under common control, and therefore accounted for under the pooling of interest. Under the pooling-of-interests method,
combination between two businesses under common control is accounted for at carrying amounts with retrospective adjustment of
prior period financial statements, therefore balance sheet as of December 31, 2014 of Sapiens and as such of Formula were adjusted
to reflect the carrying amounts combination between Sapiens and Insseco. The results of Sapiens for the twelve-month period ended
December 31, 2015 were also adjusted to reflect the combination with Insseco, accordingly.



Under the
pooling-of-interests method, the equity accounts of the combining entities are combined and the difference between the consideration
paid and the net assets acquired is reflected as an equity transaction (i.e., distribution to parent company). As opposed to the
purchase method of accounting, no intangible assets are recognized in the transaction, other than those existed in the combining
entities and no goodwill is recognized as a result of the combination. The application of the pooling-of-interests method with
respect to the acquisition of Insseco increased the total assets, liabilities and equity as of December 31, 2014 by $ 4,387, $
2,290, and $ 2,097, respectively. Revenues, pretax income and net income of Insseco for the twelve month period ended December
31, 2015, which are included in the consolidated statements of income amounted to $ 10,516, $ 1,324 and $ 578, respectively.



F-49







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



| | b. | Acquisition of Knowledge Partners
                                         International
| | -- | ----------------------------------------------------------------------------------------



On August
1, 2014, Sapiens completed the acquisition of all of the outstanding shares of Knowledge Partners International (KPI), a pioneer
and recognized leader in decision management consultancy, services and training, in consideration of $ 2,380, composed of the
following:



|Cash                    |  | $ | 2,203 | 
|----------------------- |  | - | ----- | 
|Share consideration (1) |  |   | 177   | 
|                        |  |   |       | 
|Net assets acquired     |  | $ | 2,380 | 



| | (1) | Sapiens issued 57,000 shares of
                                         its subsidiary, Sapiens Software Solution (Decision) Ltd, reflecting 3% of the subsidiary's
                                         outstanding shares. According to the agreement, the sellers will have the right to sell
                                         their minority interests to the Company during the period commencing on the date that
                                         is 48 months following the acquisition date, and the Company will have a corresponding
                                         call option.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sapiens issued
additional 88,500 restricted shares of its subsidiary, Sapiens Software Solution (Decision) Ltd, expensed over a vesting period
of three years commencing on the acquisition date.



| | c. | Acquisition of Ibexi Solution
                                         Private Limited
| | -- | --------------------------------------------------------------------------------------



On May 6,
2015, Sapiens completed the agreement to acquire all of outstanding shares of Ibexi Solution Private Limited (Ibexi), an India-based
provider of insurance business and technology solutions, in total consideration of $ 4,764 including a contingent obligation valued
at $ 949 on the acquisition date. As of December 31, 2016, the estimated fair value of the contingent payment is $1,680. In addition,
an amount of approximately $ 1,900 is subject to continued employment and therefore not part of the purchase price, but is recognized
over the service period. Acquisition related costs were immaterial



The following
table summarizes the estimated fair values of the assets acquired and liabilities assumed, with reference to the acquisition as
of the acquisition date:



F-50







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



|Net assets          |  | $ | 1,105 | 
|------------------- |  | - | ----- | 
|Intangible assets   |  |   | 1,315 | 
|Goodwill            |  |   | 2,344 | 
|                    |  |   |       | 
|Net assets acquired |  | $ | 4,764 | 



| | d. | Acquisition of Maximum Processing
                                         Inc.
| | -- | -------------------------------------------------------------------------------



On May 26,
2016, Sapiens entered into an agreement to purchase the entire share capital of Maximum Processing Inc.’s (MaxPro) for a
consideration of $ 4,278 (of which $1,490 was deposited at closing in escrow)). In addition, the seller has performance based
payments relating to achievements of revenue and profitability targets over three years (2016-2018) of up to $ 2,500. Such payments
are also subject to continued employment and therefore, not part of the purchase price. MaxPro specializes in providing business
and technology solutions across the insurance industry. Acquisition related costs were immaterial.



The following
table summarizes the estimated fair values of the assets acquired and liabilities assumed, with reference to the acquisition as
of the acquisition date:



|Net assets          |  | $ | (240  | )
|------------------- |  | - | ----- | -
|Intangible assets   |  |   | 1,859 |  
|Goodwill            |  |   | 2,659 |  
|                    |  |   |       |  
|Net assets acquired |  | $ | 4,278 |  



| | e. | Acquisition of 4Sight Business
                                         Intelligence Inc
| | -- | ----------------------------------------------------------------------------------------



On June 7,
2016, Sapiens entered into an agreement to purchase 100% of the total outstanding shares of 4Sight Business Intelligence Inc.
(4Sight). 4sight's system provides analytics software for the insurance industry.Sapiens paid the acquisition consideration in cash, consisting of $ 330. In addition, the seller has performance based
payments relating to achievements of revenue and profitability targets over three years (2016-2018) of up to $ 2,200. Such payments
are also subject to continued employment and therefore, are not part of the purchase price. Acquisition related costs were immaterial



The following
table summarizes the estimated fair values of the assets acquired and liabilities assumed, with reference to the acquisition as
of the acquisition date:



|Net assets          |  | $ | (145 | )
|------------------- |  | - | ---- | -
|Intangible assets   |  |   | 279  |  
|Deferred taxes      |  |   | (112 | )
|Goodwill            |  |   | 308  |  
|                    |  |   |      |  
|Net assets acquired |  | $ | 330  |  



F-51







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



| | iii. | Magic
| | ---- | -----



| | a. | Acquisition of Formula Telecom Solutions
                                         Ltd. (FTS)
| | -- | --------------------------------------------------------------------------------------------



On October
1, 2014 Magic acquired the entire share interests in Formula Telecom Solutions Ltd. (FTS), an Israel-based software vendor, for
a total consideration of $ 5,800. FTS specializes in the development, sale, service and support of Business Support Systems (BSS),
including convergent charging, billing, customer management, policy control and payment software solutions for the telecommunications
industry. Acquisition related costs were immaterial. The acquisition was accounted for by the purchase method.



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



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



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





| | b. | Acquisition of Comblack IT Ltd
| | -- | ------------------------------





On April
14, 2015 Magic acquired a 70% interest in Comblack IT Ltd. ("Comblack"), an Israeli-based company that specializes in
software professional and outsourced management services mainly for mainframes and complex large-scale environments, for a total
consideration of $1,821, of which $ 1,523 was paid upon closing and $ 298 which was payable contingent upon the acquired
business meeting certain operational targets in 2015. Magic and the seller hold mutual Call and Put options respectively for the
remaining 30% interest in Comblack. As a result of the Put option, Magic recorded redeemable non-controlling interest in the amount
of $ 989 on the acquisition date. Acquisition related costs were immaterial. The acquisition was accounted for by the purchase
method.



The results
of operations were included in the consolidated financial statements of the Company commencing April 1, 2015.



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



F-52







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



|Net Assets, excluding cash acquired        |  | $ | (405  | )
|------------------------------------------ |  | - | ----- | -
|Redeemable non-controlling interests       |  |   | (989  | )
|Intangible assets                          |  |   | 1,249 |  
|Goodwill                                   |  |   | 1,966 |  
|                                           |  |   |       |  
|Total assets acquired net of acquired cash |  | $ | 1,821 |  



In March
2016, Magic paid the seller the remaining contingent payments for meeting the 2015 operational targets.





| | c. | Acquisition
of Infinigy Solutions LLC
| | -- | -------------------------------------





On June
30, 2015 Magic acquired a 70% interest in Infinigy Solutions LLC ("Infinigy"), a US-based services company focused on
expanding the development and implementation of technical solutions throughout the telecommunications industry with offices across
the US, providing nationwide coverage and support for wireless engineering, deployment services, surveying, environmental service
and project management, for a total consideration of $ 6,527, of which $ 5,600 was paid upon closing and $ 927 is payable
contingent upon the acquired business meeting certain operational targets in 2016 and 2017. Magic and the seller hold mutual Call
and Put options respectively for the remaining 30% interest in Infinigy. As a result of the Put option, Magic recorded redeemable
non-controlling interest in the amount of $ 3,590. Acquisition related costs were immaterial. The acquisition was accounted
for by the purchase method.



The results
of operations were included in the consolidated financial statements of the Company commencing July 1, 2015.



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



|Net Assets, excluding cash acquired        |  | $ | 1,182  |  
|------------------------------------------ |  | - | ------ | -
|Redeemable non-controlling interests       |  |   | (3,590 | )
|Intangible assets                          |  |   | 3,675  |  
|Goodwill                                   |  |   | 5,260  |  
|                                           |  |   |        |  
|Total assets acquired net of acquired cash |  | $ | 6,527  |  



In July
2016, Magic paid the seller $ 534 with respect to the acquired business meeting certain of its 2016 operational targets. As of
December 31, 2016 the contingent payment with respect to the acquired business meeting its 2017 operational target amounted to
$ 685.



F-53









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



d.		Acquisition
of Roshtov Software Industries Ltd



On July
11, 2016 Magic acquired a 60% interest in Roshtov Software Industries Ltd ("Roshtov"), an Israeli-based software company
that is a market leader in Israel in patient record information systems, for a total cash consideration of $ 20,550, which was
paid upon closing. The purchaser and the seller hold mutual Call and Put options respectively for the remaining 40% interest in
Roshtov. As a result of the Put option, Magic recorded redeemable non-controlling interest in the amount of $ 14,012. Acquisition
related costs were immaterial. The acquisition was accounted for by the purchase method.



The results
of operations were included in the consolidated financial statements of the Company commencing July 2016.



The following
table summarizes the provisional estimated fair values of the assets acquired and liabilities at the date of acquisition(1):



|Net Assets, excluding cash acquired        |  | $ | 15      |  
|------------------------------------------ |  | - | ------- | -
|Redeemable non-controlling interests       |  |   | (14,012 | )
|Intangible assets                          |  |   | 22,439  |  
|Deferred tax liabilities                   |  |   | (5,610  | )
|Goodwill                                   |  |   | 17,718  |  
|                                           |  |   |         |  
|Total assets acquired net of acquired cash |  | $ | 20,550  |  



(1)The estimated fair values of the tangible and intangible assets are provisional and are based on information that was available
as of the acquisition date to estimate the fair value of these amounts. Magic’s management believes the information provides
a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize
those fair values. Therefore, provisional measurements of fair value reflected are subject to change. Magic expects to finalize
the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than
the measurement period.



| | e. | Acquisition of in Shavit Software
                                         (2009) Ltd
| | -- | -------------------------------------------------------------------------------------



On October
31, 2016 Magic acquired the entire share interests in Shavit Software (2009) Ltd., an Israeli-based company that specializes in
software professional and outsourced management services, for a total consideration of $ 6,836, of which $ 4,699 was paid
upon closing, $ 1,633 (measured based on present value) was allocated to a deferred payment which is due in 2018 and $ 504 is
contingent upon the acquired business meeting certain operational targets in 2017, 2018 and 2019. Acquisition related costs were
immaterial. The acquisition was accounted for by the purchase method.



F-54









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



The results
of operations were included in the consolidated financial statements of the Company commencing November 1, 2016.



The following
table summarizes the provisional estimated fair values of the assets acquired and liabilities at the date of acquisition(1):



|Net Assets, excluding cash acquired        |  | $ | 801    |  
|------------------------------------------ |  | - | ------ | -
|Intangible assets                          |  |   | 4,215  |  
|Deferred tax liabilities                   |  |   | (1,053 | )
|Goodwill                                   |  |   | 2,873  |  
|                                           |  |   |        |  
|Total assets acquired net of acquired cash |  | $ | 6,836  |  



(1)The estimated fair values of the tangible and intangible assets are provisional and are based on information that was available
as of the acquisition date to estimate the fair value of these amounts. The Company's management believes the information provides
a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize
those fair values. Therefore, provisional measurements of fair value reflected are subject to change. The Company expects to finalize
the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but not later than
the measurement period.



| | f. | Other acquisitions by Magic in 2015
                                         and 2016
| | -- | -------------------------------------------------------------------------------------



During the
years ended December 31, 2015 and 2016, Magic acquired additional activities whose influence on the financial statements of the
Company was immaterial, for a total consideration of $ 1,892 and $ 8,884, respectively. In addition, during 2015, Magic increased
its ownership interest in Complete Business Solutions from 96.3% to 100% and in CommIT Embedded Ltd. from 50.1% to 75%, for a
total consideration of $ 244 and $ 1,412 (of which $ 356 were paid in January 2016), respectively.



The following
table summarizes the provisional estimated fair values of the assets acquired and liabilities at the date of acquisition(1):



|Net Assets, excluding cash acquired        |  | $ | 2,174  |  
|------------------------------------------ |  | - | ------ | -
|Non-controlling interests                  |  |   | (1,209 | )
|Intangible assets                          |  |   | 2,106  |  
|Deferred tax liabilities                   |  |   | (427   | )
|Goodwill                                   |  |   | 6,240  |  
|                                           |  |   |        |  
|Total assets acquired net of acquired cash |  | $ | 8,884  |  



(1)The estimated fair values of the tangible and intangible assets are provisional and are based on information that was available
as of the acquisition date to estimate the fair value of these amounts. Magic’s management believes the information provides
a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize
those fair values. Therefore, provisional measurements of fair value reflected are subject to change. Magic expects to finalize
the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than
the measurement period.



F-55







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



| | iv. | Matrix
| | --- | ------



| | a. | Acquisition of SeeV Solutions Ltd
| | -- | ---------------------------------



During January
2015, Matrix acquireda75% interest in SeeV Solutions Ltd from its former shareholders for
NIS 4,875 (approximately $ 1,232). In addition, the purchaser and the seller hold mutual Call and Put options respectively for
the remaining 25% interest in the company valued at NIS 1,713 (approximately $ 433). SeeV engages in permanent placement of employees
in start-ups and high-tech companies.



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



|Net Assets                           |  | $ | 340   |  
|------------------------------------ |  | - | ----- | -
|Redeemable non-controlling interests |  |   | (433  | )
|Intangible assets                    |  |   | 270   |  
|Deferred tax liabilities             |  |   | (72   | )
|Goodwill                             |  |   | 1,127 |  
|                                     |  |   |       |  
|Total assets acquired                |  | $ | 1,232 |  



| | b. | Acquisition of Tiltan Systems Engineering
                                         Ltd
| | -- | --------------------------------------------------------------------------------------



On April
1, 2015, Matrix acquired 64% interest in Tiltan Systems Engineering Ltd from its other shareholders (prior to the acquisition
Matrix held a 36% interest in Tiltan share capital) for an amount of NIS 2,600 (approximately $ 654). Following right after the
acquisition Matrix holds the entire share capital of Tiltan and consequently recognized a loss of NIS 565 (approximately $ 142)
resulting from the fair value measurement of its investment in Tiltan. The excess of the purchase price over the estimated fair
value of the assets acquired and liabilities assumed in a total of approximately NIS 4, 900 (approximately $ 1,233), NIS 640 (approximately
$ 161) was allocated to deferred taxes, and the remaining balance was allocated to goodwill.



| | c. | Acquisition of Hydus Inc
| | -- | ------------------------



On April
1, 2015 Xtivia Inc (a wholly owned subsidiary of Matrix) completed the acquisition of the entire share capital of Hydus Inc for
a total consideration of $ 2,505 (net of acquired cash). Hydus Inc. is a U.S based consulting firm specializing in software services
in the field of Enterprise Information Management (EIM). In addition, the sellers may be eligible for future consideration, valued
at $ 1,441 on the acquisition date ($ 1,739 as of December 31, 2016), subject to obtaining accumulated operating income targets
during three years (not exceeding Hydus operating income).



F-56









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



Acquisition
related costs were immaterial. The acquisition was accounted for by the purchase method.



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



|Net Assets               |  | $ | 583   |  
|------------------------ |  | - | ----- | -
|Intangible assets        |  |   | 580   |  
|Deferred tax liabilities |  |   | (203  | )
|Goodwill                 |  |   | 2,986 |  
|                         |  |   |       |  
|Total assets acquired    |  | $ | 3,946 |  



| | d. | Acquisition of Ono Apps Ltd
| | -- | ---------------------------



On May
7, 2015, Matrix completed the acquisition of the entire share capital of Ono Apps Ltd., an Israeli based service provider specializing
in mobile applications development services, for a total consideration of NIS 4,584 (approximately $ 1,186). In addition, the
sellers may be eligible for future consideration, valued at $ 316 as of the acquisition date, subject to obtaining accumulated
operating income targets during three years commencing on January 1, 2016 and not exceeding NIS 5,000 (approximately $ 1,300).
Acquisition related costs were immaterial. The acquisition was accounted for by the purchase method.



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



|Net Assets               |  | $ | 86    |  
|------------------------ |  | - | ----- | -
|Intangible assets        |  |   | 420   |  
|Deferred tax liabilities |  |   | (111  | )
|Goodwill                 |  |   | 1,107 |  
|                         |  |   |       |  
|Total assets acquired    |  | $ | 1,502 |  



| | e. | Acquisition of Programa Logistics
                                         Systems Ltd
| | -- | --------------------------------------------------------------------------------------



On March
30, 2016, Matrix acquired a 60% interest in Programa Logistics Systems Ltd.,for a total consideration
of NIS 7,295 (approximately $ 1,937).In addition the
sellers may be eligible for future consideration valued, on the acquisition date, at NIS 1,144 ($ 304) which is contingent
upon the acquired business meeting certain operational targets in the years 2016-2018. Programa,
an Israeli company, is a provider of advisory services and design and development of solutions in supply chain, production and
logistics. Matrix and the seller hold mutual Call and Put options respectively for the remaining 40% interest in Programa.
As a result of the Put option, Matrix recorded redeemable non-controlling interest of $ 2,471 on the acquisition date. Acquisition
related costs were immaterial. The acquisition was accounted for by the purchase method.



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



F-57









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



|Net Assets                           |  | $ | 267    |  
|------------------------------------ |  | - | ------ | -
|Redeemable non-controlling interests |  |   | (2,471 | )
|Intangible assets                    |  |   | 1,216  |  
|Goodwill                             |  |   | 3,229  |  
|                                     |  |   |        |  
|Total assets acquired                |  | $ | 2,241  |  



As of December
31, 2016, Programa’s redeemable non-controlling interest amount to $ 2,411.



| | f. | Acquisition of Network Infrastructure
                                         Technologies Inc
| | -- | -----------------------------------------------------------------------------------------------



On October
4, 2016, Exzac Inc, a wholly owned subsidiary of Matrix, completed the acquisition of a 60% interest in Network Infrastructure
Technologies Inc. ("NIT") for a cash consideration of $ 6,750. In addition the sellers
may be eligible for future consideration valued, on the acquisition date, at $ 743 which is contingent upon the acquired
business meeting certain operational targets in the years 2017-2019. NIT, a U.S based company, mainly provides IT help desk services
to the Healthcare and Finance sectors for managing their information systems. Matrix and the seller hold mutual Call and Put options
respectively for the remaining 40% interest in NIT. As a result of the Put option, Matrix recorded redeemable non-controlling
interest of $ 7,263 on the acquisition date. Acquisition related costs were immaterial. The acquisition was accounted for
by the purchase method.



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



|Net Assets                           |  | $ | 977    |  
|------------------------------------ |  | - | ------ | -
|Redeemable non-controlling interests |  |   | (7,263 | )
|Intangible assets                    |  |   | 3,512  |  
|Deferred tax liabilities             |  |   | (1,405 | )
|Goodwill                             |  |   | 11,672 |  
|                                     |  |   |        |  
|Total assets acquired                |  | $ | 7,493  |  



| | g. | Acquisition of Second to none solutions
                                         Inc.
| | -- | -------------------------------------------------------------------------------------



On
November 8, 2016, Xtivia Technologies Inc., a wholly owned subsidiary of Matrix, completed the acquisition of a 55% interest
in Second to none solutions Inc. ("Stons") for a consideration of $ 287 paid in cash. Stons is a certified
distributer of IBM products to U.S federal and enterprise customers. Matrix and the seller hold mutual Call and Put options
respectively for the remaining 45% interest in Stons. As a result of the Put option, Matrix recorded redeemable
non-controlling interest of $ 2,184 on the acquisition
date. In addition the sellers may be eligible for future consideration valued, on the acquisition
date, at $ 514 which is contingent upon the acquired business meeting certain operational targets in the years 2017-2019. Acquisition
related costs were immaterial. The acquisition was accounted for by the purchase method.



F-58







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



The following
table summarizes the provisional estimated fair values of the assets acquired and liabilities at the date of acquisition(1):



|Intangible assets                    |  | $ | 917    |  
|------------------------------------ |  | - | ------ | -
|Redeemable non-controlling interests |  |   | (2,184 | )
|Deferred tax liabilities             |  |   | (314   | )
|Goodwill                             |  |   | 2,382  |  
|                                     |  |   |        |  
|Total assets acquired                |  | $ | 801    |  



(1)The estimated fair values of the tangible and intangible assets are provisional and are based on information that was available
as of the acquisition date to estimate the fair value of these amounts. Matrix’s management believes the information provides
a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize
those fair values. Therefore, provisional measurements of fair value reflected are subject to change. Matrix expects to finalize
the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than
the measurement period.



| | h. | Acquisition of Aviv Management Engineering
                                         Systems Ltd.
| | -- | ------------------------------------------------------------------------------------------------



On December
27, 2016, Matrix completed the acquisition of an 85% interest
of Aviv Management Engineering Systems Ltd ("Aviv") for a consideration of NIS 19,699 in cash (approximately $ 5,123).
In addition the sellers may be eligible for future consideration valued, on the acquisition date, at NIS 1,576 (approximately
$ 410) which is contingent upon the acquired business meeting certain operational targets in the years 2017-2019. Aviv provides
management consulting and multidisciplinary engineering consulting focusing in four areas of expertise: environmental planning,
project management, urban and physical planning and management consulting. Matrix and the seller hold mutual Call and Put options
respectively for the remaining 15% interest in Aviv. As a result of the Put option, Matrix recorded redeemable non-controlling
interest of NIS 5,714 (approximately $ 1,486) on the acquisition date. Acquisition related costs were immaterial. The acquisition
was accounted for by the purchase method.



F-59









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 4:- | BUSINESS COMBINATION, SIGNIFICANT TRANSACTION AND
SALE OF BUSINESS (Cont.)
| | -------- | --------------------------------------------------------------------------



The following
table summarizes the provisional estimated fair values of the assets acquired and liabilities at the date of acquisition(1):



|Net Assets                           |  | $ | (668   | )
|------------------------------------ |  | - | ------ | -
|Redeemable non-controlling interests |  |   | (1,486 | )
|Intangible assets                    |  |   | 2,264  |  
|Deferred tax liabilities             |  |   | (1,096 | )
|Goodwill                             |  |   | 6,519  |  
|                                     |  |   |        |  
|Total assets acquired                |  | $ | 5,533  |  



(1)The estimated fair values of the tangible and intangible assets are provisional and are based on information that was available
as of the acquisition date to estimate the fair value of these amounts. Matrix’s management believes the information provides
a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize
those fair values. Therefore, provisional measurements of fair value reflected are subject to change. Matrix expects to finalize
the tangible and intangible assets valuation and complete the acquisition accounting as soon as practicable but no later than
the measurement period.



| | NOTE 5:- | MARKETABLE SECURITIES
| | -------- | ---------------------





| |  | 
| |  | 

The Group invests
in marketable debt and equity securities, which were classified at fair value through profit or loss and as
available-for-sale securities. The following is a summary of marketable securities:



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



|                                     |  | January 1, |        |  | December 31, |  
|------------------------------------ |  | ---------- | ------ |  | ------------ | -
|                                     |  | 2015       |        |  | 2015         |  
|Short-term:                          |  |            |        |  |              |  
|Fair value through profit or loss(1) |  |            | 15,784 |  |              |  
|Available-for-sale                   |  |            | 11,915 |  |              |  
|                                     |  |            |        |  |              |  
|Total short-term securities          |  | $          | 27,699 |  |              | $
|                                     |  |            |        |  |              |  
|Long-term:                           |  |            |        |  |              |  
|Available-for-sale                   |  |            | 33,748 |  |              |  
|                                     |  |            |        |  |              |  
|Total long-term securities           |  | $          | 33,748 |  |              | $



| | (1) | The Group recognized trading
                                         gains in amounts of $ 114 and $ 136 during the years ended December 31, 2015
                                         and 2016, respectively.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-60







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 5:- | MARKETABLE SECURITIES (Cont.)
| | -------- | -----------------------------



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



|                                              |  | December
    31,   |       
|--------------------------------------------- |  | ------------------ | ------
|                                              |  | 2015               |       
|                                              |  | Amortized
    cost |       
|                                              |  |                    |       
|Available-for-sale:                           |  |                    |       
|                                              |  |                    |       
|Government
    bonds                          |  | $                  | 5,242 
|Commercial bonds                              |  |                    | 46,328
|Equity
    securities                         |  |                    | 118   
|                                              |  |                    |       
|Totalavailable-for-sale marketable securities |  | $                  | 51,688



|                                              |  | January 1,         |       
|--------------------------------------------- |  | ------------------ | ------
|                                              |  | 2015               |       
|                                              |  | Amortized
    cost |       
|                                              |  |                    |       
|Available-for-sale:                           |  |                    |       
|                                              |  |                    |       
|Government
    bonds                          |  | $                  | 5,161 
|Commercial bonds                              |  |                    | 40,064
|Equity
    securities                         |  |                    | 447   
|                                              |  |                    |       
|Totalavailable-for-sale marketable securities |  | $                  | 45,672



Interest
receivable of available-for-sale marketable securities included in other receivables and prepaid expenses amounted to $ 280, $
334 and $ 226 as of January 1, 2015, and December 31, 2015 and 2016, respectively.



In 2015 and
2016 the Group received proceeds from sale and maturity of available-for-sale marketable securities of $ 2,136 and $16,541 and
recorded related net gains (losses) of $ 300 and $ (16) in financial income (expenses), respectively.



The amortized
costs of available-for-sale debt securities at December 31, 2016, by contractual maturities, are shown below:



|                                |  | Amortized |        |  | Unrealized gains (losses) |   |   | Market | 
|------------------------------- |  | --------- | ------ |  | ------------------------- | - | - | ------ | 
|                                |  | cost      |        |  | Gains                     |   |   | Losses | 
|                                |  |           |        |  |                           |   |   |        | 
|Due up to three years           |  | $         | 46,264 |  |                           | $ | - |        | 
|Due between three to five years |  | $         | 1,724  |  |                           | $ | - |        | 
|                                |  | $         | 47,988 |  |                           | $ | - |        | 



F-61







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 5:- | MARKETABLE SECURITIES (Cont.)
| | -------- | -----------------------------



The following is the
change in the other comprehensive income from available-for-sale securities during 2016 and 2015:

|                                                                                      |  | Other comprehensive  income |     
|------------------------------------------------------------------------------------- |  | --------------------------- | ----
|                                                                                      |  |                             |     
|Other comprehensive income from available-for-sale securities as of January 1, 2015   |  | $                           | 319 
|                                                                                      |  |                             |     
|Unrealized gain from available-for-sale securities                                    |  |                             | 102 
|Realized gain reclassified into profit or loss                                        |  |                             | (300
|Other comprehensive income from available-for-sale securities as of December 31, 2015 |  |                             | 121 
|                                                                                      |  |                             |     
|Unrealized gain from available-for-sale securities                                    |  |                             | 30  
|Realized loss reclassified into profit or loss                                        |  |                             | 16  
|                                                                                      |  |                             |     
|Other comprehensive income from available-for-sale securities as of December 31, 2016 |  | $                           | 167 



| | Note 6:- | Fair
                                         value measurement
| | -------- | ---------------------------------------------------------------



In determining fair
value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable
inputs to the extent possible and considers counterparty credit risk in its assessment of fair value.



The Company's financial
assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components; consisted of the following
types of instruments as of January 1, 2015 and December 31, 2015 and 2016:



|                                          |  | Fair value measurements |      
|----------------------------------------- |  | ----------------------- | -----
|                                          |  | December 31, 2016       |      
|                                          |  | Level 1                 |      
|                                          |  |                         |      
|Assets:                                   |  |                         |      
|Equity securities                         |  | $                       | 1,001
|Government and corporate debentures       |  |                         | 6,019
|Foreign currency derivative contracts (1) |  |                         | -    
|Dividend preference derivative in TSG (2) |  |                         | -    
|                                          |  |                         |      
|Total financial assets                    |  | $                       | 7,020
|                                          |  |                         |      
|Liabilities:                              |  |                         |      
|Redeemable non-controlling interests (1)  |  | $                       | -    
|Foreign currency derivative contracts     |  |                         | -    
|Contingent consideration (1)              |  |                         | -    
|                                          |  |                         | -    
|Total financial liabilities               |  | $                       | -    



F-62







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 6:- | FAIR VALUE MEASUREMENT (Cont.)
| | -------- | ------------------------------





|                                         |  | Fair value measurements |       
|---------------------------------------- |  | ----------------------- | ------
|                                         |  | December 31, 2015       |       
|                                         |  | Level 1                 |       
|                                         |  |                         |       
|Assets:                                  |  |                         |       
|Equity securities                        |  | $                       | 3,525 
|Government and corporate debentures      |  |                         | 7,721 
|Foreign currency derivative contracts    |  |                         | -     
|                                         |  |                         |       
|Total financial assets                   |  | $                       | 11,246
|                                         |  |                         |       
|Liabilities:                             |  |                         |       
|Redeemable non-controlling interests (1) |  | $                       | -     
|Foreign currency derivative contracts    |  |                         | -     
|Contingent consideration (1)             |  |                         | -     
|                                         |  |                         |       
|Total financial liabilities              |  | $                       | -     



|                                         |  | Fair value measurements |       
|---------------------------------------- |  | ----------------------- | ------
|                                         |  | January 1, 2015         |       
|                                         |  | Level 1                 |       
|                                         |  |                         |       
|Assets:                                  |  |                         |       
|Equity securities                        |  | $                       | 4,658 
|Government and corporate debentures      |  |                         | 12,007
|Foreign currency derivative contracts    |  |                         | -     
|                                         |  |                         |       
|Total financial assets                   |  | $                       | 16,665
|                                         |  |                         |       
|Liabilities:                             |  |                         |       
|Redeemable non-controlling interests (1) |  | $                       | -     
|Contingent consideration (1)             |  |                         | -     
|                                         |  |                         |       
|Total financial liabilities              |  | $                       | -     



| | (1) | The fair value of redeemable non-controlling
                                         interests and contingent consideration was determined based on the present value of the
                                         future expected cash flow.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The fair value of dividend preference
                                         derivative in TSG was estimated using the Monte-Carlo simulation technique.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



F-63







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 7:- | Investments
                                         in companies accounted for at equity METHOD
| | -------- | ------------------------------------------------------------------------------------------------



| | a. | The following is a summary of
                                         Formula’s investments in companies accounted for at equity:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



|                               |  | January 1, |     |  | December 31, | 
|------------------------------ |  | ---------- | --- |  | ------------ | 
|                               |  | 2015       |     |  | 2015         | 
|                               |  |            |     |  |              | 
|Affiliated companies           |  |            | 528 |  |              | 
|                               |  |            |     |  |              | 
|Joint venture (see Note 4(i)a) |  |            | -   |  |              | 
|                               |  |            |     |  |              | 
|                               |  |            | 528 |  |              | 



The
following table summarizes activity related to Formula's investments in companies accounted for at equity:



|                                                             |  | 2016 |       
|------------------------------------------------------------ |  | ---- | ------
|                                                             |  |      |       
|January 1, 2016                                              |  | $    | -     
|Acquisition of shares in joint venture                       |  |      | 16,024
|Investment in Capital notes of joint venture                 |  |      | 7,669 
|Company's share of earnings (losses) of joint venture        |  |      | 349   
|Affiliated company due to business combination of Subsidiary |  |      | 38    
|                                                             |  |      |       
|December 31, 2016                                            |  | $    | 24,080



| | b. | Composition of investment in
                                         joint venture :
| | -- | -------------------------------------------------------------------------------------



|                                         |  | January 1, |   |  | December 31, | 
|---------------------------------------- |  | ---------- | - |  | ------------ | 
|                                         |  | 2015       |   |  | 2015         | 
|Details of investment in TSG:            |  |            |   |  |              | 
|                                         |  |            |   |  |              | 
|Shares                                   |  |            | - |  |              | 
|Capital notes                            |  |            | - |  |              | 
|Dividend preference derivative in TSG(1) |  |            | - |  |              | 
|                                         |  |            | - |  |              | 
|                                         |  |            |   |  |              | 
|Goodwill included in the investment      |  |            | - |  |              | 



| | (1) | Dividend preference derivative
                                         in TSG is included in Company’s long term prepaid expenses and other receivables
                                         and is accounted for at fair value through to profit or loss.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-64







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 7:- | Investments
                                         in companies accounted for at equity (Cont.)
| | -------- | -------------------------------------------------------------------------------------------------



| | c. | Group's share of statements of
                                         financial position of companies accounted for at equity, after being adjusted to comply
                                         with IFRS, based on the interests therein, as of the below reporting dates:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                            |  | January 1, |   |  | December 31, | 
|------------------------------------------------------------------------------------------- |  | ---------- | - |  | ------------ | 
|                                                                                            |  | 2015       |   |  | 2015         | 
|Statement of financial position of companies accounted for at equity at
    reporting date: |  |            |   |  |              | 
|Current assets                                                                              |  |            | - |  |              | 
|Noncurrent assets (1)                                                                       |  |            | - |  |              | 
|Current liabilities                                                                         |  |            | - |  |              | 
|Noncurrent liabilities                                                                      |  |            | - |  |              | 
|                                                                                            |  |            | - |  |              | 
|Adjustments for differences in accounting policies:                                         |  |            |   |  |              | 
|Excess cost of intangible assets net of deferred tax liabilities                            |  |            | - |  |              | 
|Goodwill                                                                                    |  |            | - |  |              | 
|                                                                                            |  |            |   |  |              | 
|Total investment in companies accounted for at equity                                       |  |            | - |  |              | 



| | (1) | Doesnot include balance
                                         of goodwill in an amount of $ 9,867 as of December 31, 2016.
| | --- | -----------------------------------------------------------------------------------------------------------------------------



| | d. | Group's share of statement of income
                                         of companies accounted for at equity, after being adjusted to comply with IFRS, based
                                         on the interests therein, during the periods shown below (with respect to the Group's
                                         interest in TSG, for the periods from May 1, 2016 until December 31, 2016, and with respect
                                         to the Group's interest in Subsidiary’s affiliate, only for the period from December
                                         26, 2016):
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                     |  | Year ended December 31, |  
|-------------------------------------------------------------------- |  | ----------------------- | -
|                                                                     |  | 2015                    |  
|Revenues of companies accounted for at equity in the reporting year: |  |                         |  
|Revenues                                                             |  |                         | -
|Amortization of excess cost related to revenues                      |  |                         | -
|Company's share of revenues of companies accounted for at equity     |  |                         | -
|                                                                     |  |                         |  
|Income (loss)                                                        |  |                         | -
|Amortization of excess costs                                         |  |                         | -
|Company's share of income of companies accounted for at equity       |  |                         | -



F-65







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 8:- | PROPERTY,
                                         PLANTS AND EQUIPMENT, NET
| | -------- | ----------------------------------------------------------------------------



Composition:



|                                  |  | January 1, |        |  | December 31, |  
|--------------------------------- |  | ---------- | ------ |  | ------------ | -
|                                  |  | 2015       |        |  | 2015         |  
|Cost:                             |  |            |        |  |              |  
|Computers, equipment and software |  | $          | 54,635 |  |              | $
|Motor vehicles                    |  |            | 417    |  |              |  
|Buildings                         |  |            | 1,852  |  |              |  
|Leasehold improvements            |  |            | 19,087 |  |              |  
|                                  |  |            |        |  |              |  
|                                  |  |            | 75,991 |  |              |  
|Accumulated depreciation:         |  |            |        |  |              |  
|Computers, equipment and software |  | $          | 43,417 |  |              | $
|Motor vehicles                    |  |            | 212    |  |              |  
|Buildings                         |  |            | 822    |  |              |  
|Leasehold improvements            |  |            | 9,429  |  |              |  
|                                  |  |            |        |  |              |  
|                                  |  |            | 53,880 |  |              |  
|                                  |  |            |        |  |              |  
|Depreciated cost                  |  | $          | 22,111 |  |              | $



| |  | In December 2016, Matrix has sold its
                                         full rights in a land property for a total consideration of approximately $ 4,473. The
                                         group recognized a gain from the aforementioned sale in an amount of approximately $
                                         3,147. Simultaneouslyto
                                         the sale, Matrix had leased the land for its operations. The lease is treated as an operating
                                         lease in accordance with IAS 17.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Depreciation
expenses totaled $ 7,092 and $ 7,880 for the years ended December 31, 2015 and 2016, respectively.



| | Note 9:- | Goodwill
| | -------- | --------



The changes in the carrying
amount of goodwill for the years ended December 31, 2015 and 2016 were as follows:



|Balance as of January 1, 2015                |  | $ | 424,807 |  
|-------------------------------------------- |  | - | ------- | -
|                                             |  |   |         |  
|Adjustments due to purchase price allocation |  |   | 458     |  
|Adjustments to negative goodwill write-off   |  |   | (458    | )
|Acquisition of subsidiaries                  |  |   | 17,104  |  
|Classifications                              |  |   | (90     | )
|Foreign currency translation adjustments     |  |   | (800    | )
|                                             |  |   |         |  
|Balance as of December 31, 2015              |  |   | 441,021 |  
|Acquisition of subsidiaries                  |  |   | 53,498  |  
|Classifications                              |  |   | 389     |  
|Foreign currency translation adjustments     |  |   | 2,876   |  
|                                             |  |   |         |  
|Balance as of December 31, 2016              |  | $ | 497,784 |  



The Company
performed annual impairment tests during the fourth quarter of 2016 and did not identify any impairment losses (See Note 2(20)).



F-66







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NotE 10:- | Intangible
                                         Assets, Net
| | --------- | ---------------------------------------------------------------



| | a. | Intangible assets, net, are comprised
                                         of the following as of the below dates:
| | -- | ----------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

|                                  |  | January 1, |         |  | December 31, |  
|--------------------------------- |  | ---------- | ------- |  | ------------ | -
|                                  |  | 2015       |         |  | 2015         |  
|Original amounts:                 |  |            |         |  |              |  
|                                  |  |            |         |  |              |  
|Capitalized Software costs        |  | $          | 155,519 |  |              | $
|Customer relationship             |  |            | 73,666  |  |              |  
|Acquired technology               |  |            | 11,733  |  |              |  
|Patent                            |  |            | 1,234   |  |              |  
|Backlog and non-compete agreement |  |            | 4,974   |  |              |  
|Other intangibles                 |  |            | 3,418   |  |              |  
|                                  |  |            |         |  |              |  
|                                  |  |            | 250,544 |  |              |  
|Accumulated amortization:         |  |            |         |  |              |  
|                                  |  |            |         |  |              |  
|Capitalized Software costs        |  |            | 102,817 |  |              |  
|Customer relationship             |  |            | 29,207  |  |              |  
|Acquired technology               |  |            | 4,787   |  |              |  
|Patent                            |  |            | 51      |  |              |  
|Backlog and non-compete agreement |  |            | 1,142   |  |              |  
|Other intangibles                 |  |            | 3,128   |  |              |  
|                                  |  |            |         |  |              |  
|                                  |  |            | 141,132 |  |              |  
|                                  |  |            |         |  |              |  
|Total                             |  | $          | 109,412 |  |              | $



| | b. | Amortized expenses totaled $
                                         23,346 and $ 24,490 for the years ended December 31, 2015 and 2016, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------



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



|December 31,        |  |   |         | 
|------------------- |  | - | ------- | 
|                    |  |   |         | 
|2017                |  | $ | 27,193  | 
|2018                |  |   | 24,324  | 
|2019                |  |   | 21,751  | 
|2020                |  |   | 17,702  | 
|2021 and thereafter |  |   | 38,851  | 
|                    |  |   |         | 
|Total               |  | $ | 129,821 | 



F-67







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 11:- | Long
                                         term Liabilities to Banks and Others
| | --------- | ----------------------------------------------------------------------------------



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

|December 31,
    2016 |  | Linkage 
    Basis |  | Long-term
    liabilities |         |  | Current
    maturities     |  |        | Total long-term
    liabilities net of current
    maturities |  |  | Total long-term
    liabilities net of current maturities |  |  | Total long-term
    liabilities net of current maturities |        
|--------------------- |  | ------------------ |  | ------------------------- | ------- |  | -------------------------- |  | ------ | ------------------------------------------------------------- |  |  | --------------------------------------------------------- |  |  | --------------------------------------------------------- | -------
|Interest
    rate     |  |                    |  | December
    31, 2016     |         |  | December
    31, 
    2015 |  |        | January
    1, 2015                                           | 
|%                     |  |                    |  |                           |         |  |                            |  |        |                                                               | 
|2.64-5.85             |  | NIS - Unlinked     |  | $                         | 155,583 |  |                            |  | 40,054 |                                                               |  |  | 115,529                                                   |  |  | $                                                         | 103,632



| | i) | In November 2016, Magic obtained
                                         a loan in the amount of $ 31,356 linked to the New Israel shekel from an Israeli financial
                                         institution. The principal amount is payable in seven equal annual installments with
                                         the final payment due on November 2, 2023 and bears a fixed interest rate of 2.60% per
                                         annum, payable in two semi-annual payments. As of December 31, 2016, Magic was in full
                                         compliance with the financial covenants.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii) | On February 28, 2017, Sapiens
                                         (via its wholly-owned subsidiary, Sapiens Americas Corporation, or the Borrower) entered
                                         into a secured credit agreement, with HSBC Bank USA, National Association, for, the acquisition
                                         of StoneRiver. Pursuant to the credit agreement, Sapiens borrowed $ 40 million, for a
                                         five-year term. The Loan will mature in February 2022 and is payable in equal consecutive
                                         quarterly principal installments of principal and accrued interest. The loan bears interest
                                         at the rate of LIBOR plus 1.85%. For additional information see note 22.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



|                                |  | January 1, |         |  | December 31, |  
|------------------------------- |  | ---------- | ------- |  | ------------ | -
|                                |  | 2015       |         |  | 2015         |  
|                                |  |            |         |  |              |  
|First year (current maturities) |  | $          | 26,127  |  |              | $
|Second year                     |  |            | 31,512  |  |              |  
|Third year                      |  |            | 28,393  |  |              |  
|Fourth year                     |  |            | 22,631  |  |              |  
|Fifth year and thereafter       |  |            | 26,148  |  |              |  
|                                |  |            |         |  |              |  
|Total                           |  | $          | 134,811 |  |              | $



| | c. | For details of liens, guarantees
                                         and credit facilities, see Note 17.
| | -- | -------------------------------------------------------------------------------------------------------------



F-68







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 12:- | DEBENTURES
| | --------- | ----------



On September
16, 2015, Formula concluded a public offering in Israel on the Tel-Aviv Stock Exchange (the "TASE") of (i) NIS 101,014
(net of issuance expenses) Series A Secured Debentures (the "Series A Secured Debentures") that are in NIS (not linked
to any currency or index) and secured by liens on certain shares of Formula's investees (Matrix, Sapiens and Magic) held by Formula
(with a loan-to-value of not more than 60% measured on the date of the issuance), and of (ii) $ 32,148 (net of issuance expenses)
Series B Convertible Debentures (the " Series B Convertible Debentures") that are linked to the U.S Dollar and convertible
into ordinary shares of Formula (the Convertible Debentures together with the Secured Debentures - the "New Debentures").
The New debentures were offered and sold pursuant to a shelf prospectus filed with the Israeli Securities Authority (the "ISA")
and TASE on August 6, 2015, amended thereafter on September 3, 2015.



Formula
accounts for the outstanding principal amount of our New Debentures as long-term liability, in accordance with IAS 39, with current
maturities classified as short-term liabilities. Formula has identified and separated an equity component contained in Series
B Convertible Debentures, by first determining the liability component, in accordance with IAS 32, based on the fair value of
an equivalent non-convertible liability. The conversion component valued at $ 1,248 has been determined to be the residual amount.



Debt issuance
costs were capitalized and reported as deferred financing costs, which are amortized over the life of the New Debentures using
the effective interest rate method. As of December 31, 2016, the value of Series A Secured Debentures and the value of Series
B Convertible Debentures was NIS 102,739 (approximately $ 26,720) and $ 32,364 respectively.



The public
offering of the New Debentures was made only in Israel and not to U.S. persons (as defined in Rule 902(k) under the Securities
Act of 1933, as amended (the "Securities Act")), in an overseas directed offering (as defined in Rule 903(b)(i)(ii)
under the Securities Act), and was exempt from registration under the Securities Act pursuant to the exemption provided by Regulation
S thereunder. The sale of the debentures was not registered under the Securities Act, and the debentures may not be offered or
sold in the United States and/or to U.S. persons without registration under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act.



Series
A Secured Debentures (NIS 102,260,000 par value)



The Series
A Secured Debentures were issued at a purchase price equal to 100% of their par value and bear fixed annual interest at a rate
of 2.8% (which may vary based on the credit rating of the debentures), payable semi-annually. The proceeds of the offering, before
early commitment commission valued at $ 129 with respect to the units for which the qualified investors have committed to subscribe,
and issuance costs of $ 190, amounted to NIS 102,260 (approximately $ 26,295). The principal of the Series A Secured Debentures,
are nominated in NIS (not linked to any currency or index) and will be paid to holders in eight equal annual installments commencing
on July 2, 2017. Formula may redeem the Series A Secured Debentures or any part thereof at its discretion after 60 days from their
issuance date subject to certain conditions.



In accordance
with the terms of the indenture related to Series A Secured debentures, the collateral will consist of the following shares
of the Company's subsidiaries and affiliate held by the Company:



F-69







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 12:- | DEBENTURES
(Cont.)
| | --------- | ------------------



| | - | 2,435,910 ordinary shares, par
                                         value 1.0 New Israeli Shekels ("NIS") per share, of the Company's subsidiary,
                                         Matrix IT Ltd.;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | 2,338,483 ordinary shares, par
                                         value NIS 0.1 per share, of the Company's affiliate, Magic Software Enterprises Ltd.;
                                         and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | 1,260,266 common shares, par
                                         value €0.01 per share, of the Company's affiliate, Sapiens International Corporation
                                         N.V.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Series
B Convertible Debentures (NIS 125,000,000 par value)



The Series
B Convertible Debentures were issued at a purchase price equal to 102% of their par value and bear fixed annual interest at a
rate of 2.74% (which may vary based on the credit rating of the debentures), payable in one installment upon maturity of the debentures
on March 26, 2019 (at which time the accrued interest will constitute 10% of the principal amount of the Convertible Bonds, in
the aggregate). The proceeds of the offering, before early commitment commission valued at $ 131 with respect to the units for
which the qualified investors committed to subscribe, and issuance costs of $ 236, amounted to NIS 127,500 (approximately $ 32,785).
The principal of the Bonds is subject to adjustment based on changes in the exchange rate between the NIS and the U.S. Dollar
relative to the exchange rate on September 8, 2015 (3.922), and will be repaid on March 26, 2019. Formula may not redeem the Series
B Convertible Debentures or any part thereof at its discretion.



The Series
B Convertible Debentures are convertible, at the election of each holder, into the Formula's ordinary shares at a conversion price
of NIS 157 par value of Convertible Debentures per one share from the date of issuance and until March 10, 2019. The conversion
price is subject to adjustment in the event that the Company effects a share split or reverse share split, a rights offering or
a distribution of bonus shares or a cash dividend. As of December 31, 2016, the adjusted conversion price to one share is NIS
151.52166 par value following cash dividend distributions.



During 2016,
and as of December 31, 2016, the Company satisfied all of the financial covenants associated with both, the Convertible Bonds
and the Secured Bonds.



As at 31
December 2016, liabilities of Formula under the above-mentioned bonds amounted to $ 58,715.



|           |  |        |  | Effective     |      |   |          |         | January, 1 |  |   | December 31, | 
|---------- |  | ------ |  | ------------- | ---- | - | -------- | ------- | ---------- |  | - | ------------ | 
|           |  | Series |  | interest rate |      |   | Currency |         | 2015       |  |   | 2015         | 
|           |  |        |  |               |      |   |          |         |            |  |   |              | 
|Short-term |  | A      |  |               | 3.07 | % |          | NIS     |            |  | - |              | 
|           |  |        |  |               |      |   |          |         |            |  |   |              | 
|Long-term  |  | A      |  |               | 3.07 | % |          | NIS     |            |  | - |              | 
|           |  | B      |  |               | 3.65 | % |          | NIS/USD |            |  | - |              | 
|           |  |        |  |               |      |   |          |         |            |  | - |              | 



F-70







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 12:- | DEBENTURES
(Cont.)
| | --------- | ------------------



The following
is the change in the carrying amount of the New Debentures during 2015 and 2016:



|Balance as of January 1, 2015                       |  |   | -      |  
|--------------------------------------------------- |  | - | ------ | -
|Issuance of convertible and secured debentures, net |  | $ | 58,394 |  
|Equity conversion component                         |  |   | (1,248 | )
|Accrued interest                                    |  |   | 476    |  
|Premium and issuance costs amortization             |  |   | 77     |  
|Foreign currency translation adjustments            |  |   | (358   | )
|                                                    |  |   |        |  
|Balance as of January 1, 2016                       |  | $ | 57,341 |  
|Accrued interest                                    |  |   | 1,653  |  
|Interest payments                                   |  |   | (964   | )
|Premium and issuance costs amortization             |  |   | 296    |  
|Foreign currency translation adjustments            |  |   | 389    |  
|                                                    |  |   |        |  
|Balance as of December 31, 2016                     |  | $ | 58,715 |  



As of
December 31, 2016, the aggregate principal annual payments of the bonds are as follows:



|                    |  | Repayment amount |       
|------------------- |  | ---------------- | ------
|                    |  |                  |       
|2017                |  |                  | 3,324 
|2018                |  |                  | 3,324 
|2019                |  |                  | 35,195
|2020                |  |                  | 3,324 
|2021 and thereafter |  |                  | 13,300
|                    |  |                  |       
|Total               |  |                  | 58,467



| | Note 13:- | RELATED
                                         PARTY TRANSACTIONS
| | --------- | -------------------------------------------------------------------



On August
18, 2015, Sapiens completed the acquisition from Asseco Poland S.A. ("Asseco") of all issued and outstanding shares
of Insseco. Asseco is the parent company of Formula. Please see note 1 above for further information concerning this acquisition.



Under the
share purchase agreement for that acquisition, Asseco committed to assign all customer contracts to Insseco that relate to the
intellectual property that Sapiens acquired as part of the acquisition. In the event that Asseco cannot obtain the consent of
any customer to the assignment of its contract to Insseco, Asseco will hold that customer's contract in trust for the benefit
of Insseco. Under that arrangement, in 2015, Insseco invoiced Asseco in a back-to-back manner for all invoices issued by Asseco
on Insseco's behalf to customers under those contracts that were not yet assigned by Asseco to Insseco.



During the
years ended December 31, 2015 and 2016, Asseco provided back office and professional services and fixed assets to Insseco in an
amount totaling approximately $1,700 and $1,900, respectively.



F-71







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 14:- | Employee
                                         Option Plans
| | --------- | --------------------------------------------------------------



| | a. | In March 2011, Formula's shareholders
                                         approved the adoption of Formula's 2011 Employee and Officer Share Incentive Plan (the
                                         "2011 plan"). Pursuant to the 2011 plan, Formula may grant from time to time
                                         to Formula’s and its investees’ employees and officers (which are not Formula's
                                         controlling shareholders) Ordinary shares, restricted shares or options to purchase up
                                         to 545,000 ordinary shares of Formula. The 2011 plan is administered by Formula's board
                                         of directors. The 2011 plan provides that share based compensation may be granted, from
                                         time to time, to such grantees to be determined by the board, at an exercise price and
                                         under such terms to be determined at its sole and absolute discretion. Share based compensation
                                         may be granted under the 2011 plan through March 2021. In 2012, Formula increased the
                                         amount of ordinary shares reserved for issuance under the 2011 plan by 1,200,000 options.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In March
2011, concurrently with the amendment and extension of Formula's chief executive officer's service agreement, Formula approved
a grant of options to its chief executive officer, exercisable for an additional 543,840 ordinary shares. The options vest in
equal quarterly installments, over a four year period that commences in December 31, 2011 and concludes in December 31, 2015.
The exercise price of the options is NIS 0.01 per share. In May 2011, the chief executive officer exercised all of these options
for redeemable restricted shares, for which the Company's redemption right was to lapse in accordance with the remaining vesting
schedule for the unvested options from which they arose. Total fair value of the grant was calculated based on the Formula share
price on the grant date and totaled $ 9,055 ($ 16.65 per share).



In December
2011, at which time Formula was negotiating an amendment and an extension of its chief executive officer's service agreement,
it redeemed all of the above-described 543,840 shares for no consideration.



In March
2012, concurrently with the amendment and extension of its chief executive officer's service agreement, the board of directors
of Formula awarded him with a new share option incentive plan, following the redemption of the 543,840 redeemable ordinary shares,
which were granted to him in March 2011 and which were not yet vested in their redemption date. Under the 2011 plan, the chief
executive officer of Formula was granted with options exercisable to 1,122,782 ordinary shares of Formula (the "New grant"),
as long as he continue to serve as (i) a director of Formula and/or (ii) a director of each of the directly held subsidiaries
of Formula; provided that if he fails to meet the foregoing requirement (A) due to the request of the board of directors of either
Formula or any of its directly held subsidiaries (other than a request which is based on actions or omissions by the chief executive
officer that would constitute "cause" under his service agreement with Formula), (B) because the chief executive officer
is prohibited under the governing law or charter documents of the relevant company or the stock exchange rules and regulations
applicable to such company from being a director of such company (other than due to his actions or omissions) or (C) notwithstanding
the chief executive officer's willingness to be so appointed (but provided that neither (A) nor (B) applies); then, in each of
(A), (B) and (C), the chief executive officer will be deemed to have complied with clauses (i) or (ii) above. The options vest,
i.e., Formula's redemption right with respect to the options and the underlying ordinary shares issuable upon exercise lapses,
in equal quarterly installments over an eight year period that commenced in March 2012 and concludes on December 31, 2019. The
exercise price of the options is NIS 0.01 per share. The New grant is accounted for as a modification to the March 2011 grant
to the chief executive officer. Total fair value of the grant was calculated based on the share price on the grant date and totaled
$ 18,347 ($ 16.34 per share).



F-72







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 14:- | Employee
                                         Option Plans (Cont.)
| | --------- | ----------------------------------------------------------------------



In accordance
with the terms of the option grant, the shares issuable upon exercise of the options will be deposited with a trustee and Formula's
chief executive officer will not be permitted to vote or dispose of them until the shares are released from the trust.



In June 2013
all options were exercised into shares however they have been deposited with a trustee and Formula's chief executive officer is
not permitted to vote or dispose of them until the shares are released from the trust. All shares participate in dividends and
have the right to vote, however for so long as the shares are held by the trustee (even if they have vested) the voting rights
may only be exercised by the trustee. In accordance with the guidelines of Formula incentive plan for so long as the shares underlying
any grant under the plan are being held by the trustee they will be voted by the trustee in the same proportion as the results
of the shareholder meeting. Only those shares for which the vesting period has expired may be collected from the trustee.



As of December
31, 2016 all 1,122,782 restricted shares were deposited with the trustee with 701,739 Ordinary Shares, constituting the currently
vested portion of the 1,122,782 restricted shares that Formula chief executive officer was granted.



| | b. | In November 2014, Formula board                                          of directors awarded
                                                                  its chief financial officer with 10,000 restricted shares under                                          the 2011 plan (the
                                                                  "restricted shares"). These restricted shares vest on a                                          quarterly basis
                                                                  over a four-year period, commencing on November 13, 2014 and concludes                                          in November
                                                                  13, 2018, provided that during such time the chief financial officer will                                          continue
                                                                  to serve as (i) an officer of the Company and/or (ii) an officer in one of the
                                                                  directly held affiliates, except that if he fail to meet the service condition due to
                                                                  the request of the board of directors of either Formula or any of its directly held affiliates
                                                                  (other than a termination of his provision of services which is based on actions or omissions
                                                                  by him that will constitute "cause" under his grant agreement with Formula);
                                                                  then, the chief financial officer will be deemed to have complied with clauses (i) or
                                                                  (ii) above. Notwithstanding the foregoing, if a change of control of the Company occurs, then all unvested restricted shares
                                                                  will immediately become vested. Total fair                                          value of the grant was calculated based
                                                                  on the Formula share price on the grant date                                          and equaled to $ 239 ($ 23.9
                                                                  per share).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December
31, 2016 all 10,000 restricted shares were deposited with the trustee with 5,000 Ordinary Shares, constituting the currently vested
portion of the 10,000 restricted shares that Formula chief financial officer was granted.



| | c. | Formula's investees grant, from
                                         time to time, options to their officers and employees to purchase shares in the respective
                                         companies. In general, the options expire 5-10 years after grant. For further information
                                         with respect to expenses relating to the benefit to the employees, an additional disclosure
                                         required IFRS, see Note 2(28).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | The following table sets forth
                                         the breakdown of stock-based compensation expense resulting from stock options grants,
                                         as included in the consolidated statements of income:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-73







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 14:- | Employee
                                         Option Plans (Cont.)
| | --------- | ----------------------------------------------------------------------





|                                       |  | Year ended December 31, |      
|-------------------------------------- |  | ----------------------- | -----
|                                       |  | 2015                    |      
|                                       |  |                         |      
|Cost of revenues                       |  | $                       | 31   
|Research and development expenses      |  |                         | 48   
|Selling and marketing expenses         |  |                         | 137  
|General and administrative expenses    |  |                         | 4,078
|                                       |  |                         |      
|Total stock-based compensation expense |  | $                       | 4,294



Matrix:



The following
table is a summary of employee option activity as of December 31, 2016, and changes during the year ended December 31, 2016, in
Matrix:



|                                 |  | Number of options |           |  | Weighted average exercise price |  |      | Weighted average remaining contractual term  (in years) |  |  | Aggregate intrinsic value | 
|-------------------------------- |  | ----------------- | --------- |  | ------------------------------- |  | ---- | ------------------------------------------------------- |  |  | ------------------------- | 
|                                 |  |                   |           |  |                                 |  |      |                                                         |  |  |                           | 
|Outstanding at January 1, 2016   |  |                   | 2,375,000 |  |                                 |  | 4.39 |                                                         |  |  | 4.18                      | 
|RSU Exercised                    |  |                   | 75,000    |  |                                 |  | -    |                                                         |  |  |                           | 
|                                 |  |                   |           |  |                                 |  |      |                                                         |  |  |                           | 
|Outstanding at December 31, 2016 |  |                   | 2,300,000 |  |                                 |  | 4.26 |                                                         |  |  | 3.13                      | 
|                                 |  |                   |           |  |                                 |  |      |                                                         |  |  |                           | 
|Exercisable at December 31, 2016 |  |                   | -         |  |                                 |  | -    |                                                         |  |  | -                         | 



The aggregate
intrinsic value in the table above represents the total intrinsic value that would have been received by the option holders had
all option holders exercised their options on December 31, 2016. This value would change based on the change in the market value
of Matrix' ordinary shares and the change in the exchange rate between the New Israeli Shekel and U.S. dollar. As of December
31, 2016, there was $ 837 of total unrecognized compensation costs related to non-vested share-based compensation arrangements
granted under Matrix equity incentive plan. The total intrinsic value of options exercised during the years ended December 31,
2015 and 2016 was $ 807 and $ 0, respectively.



F-74







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 14:- | Employee
                                         Option Plans (Cont.)
| | --------- | ----------------------------------------------------------------------



Sapiens:



The following
table is a summary of employee option activity as of December 31, 2016, and changes during the year ended December 31, 2016, in
Sapiens:



|                                 |  | Year ended December 31, 2016 |          
|-------------------------------- |  | ---------------------------- | ---------
|                                 |  | Amount of
    options        |          
|                                 |  |                              |          
|Outstanding at January 1, 2016   |  |                              | 2,175,488
|Granted                          |  |                              | 310,000  
|Exercised                        |  |                              | (276,170 
|Expired and forfeited            |  |                              | (71,535  
|                                 |  |                              |          
|Outstanding at December 31, 2016 |  |                              | 2,137,783
|                                 |  |                              |          
|Exercisable at December 31, 2016 |  |                              | 1,172,950



In 2015
and 2016, Sapiens granted 673,408 and 310,000 stock options to purchase its shares to employees and directors, respectively. The
weighted average grant date fair values of the options granted during the years ended December 31, 2015 and 2016 were $ 3.79 and
$ 4.30, respectively. All outstanding options are in the money as of December 31, 2016.



The total
intrinsic value of options exercised during the years ended December 31, 2015 and 2016 was $ 10,294 and $2,304, respectively.



The options
outstanding under Sapiens' stock option plans as of December 31, 2016 have been separated into ranges of exercise price as follows:



|               |  |              |           |  |             |  |      |          |  |  |              |  |  | Weighted    |          
|-------------- |  | ------------ | --------- |  | ----------- |  | ---- | -------- |  |  | ------------ |  |  | ----------- | ---------
|               |  | Options      |           |  | Weighted    |  |      |          |  |  | Options      |  |  | Average     |          
|               |  | outstanding  |           |  | Average     |  |      | Weighted |  |  | Exercisable  |  |  | Exercise    |          
|               |  | as of        |           |  | remaining   |  |      | average  |  |  | as of        |  |  | price of    |          
|Ranges of      |  | December 31, |           |  | contractual |  |      | exercise |  |  | December 31, |  |  | Options     |          
|exercise price |  | 2016         |           |  | Term        |  |      | price    |  |  | 2016         |  |  | Exercisable |          
|               |  |              |           |  | (Years)     |  |      | $        |  |  |              |  |  | $           |          
|               |  |              |           |  |             |  |      |          |  |  |              |  |  |             |          
|1.28-1.88      |  |              | 64,590    |  |             |  | 2.87 |          |  |  | 1.44         |  |  |             | 64,590   
|2.06-2.50      |  |              | 273,972   |  |             |  | 1.69 |          |  |  | 2.40         |  |  |             | 273,972  
|3.25-3.57      |  |              | 288,221   |  |             |  | 1.53 |          |  |  | 3.37         |  |  |             | 288,221  
|4.52           |  |              | 74,000    |  |             |  | 2.40 |          |  |  | 4.52         |  |  |             | 43,000   
|5.05-5.33      |  |              | 67,500    |  |             |  | 2.60 |          |  |  | 5.08         |  |  |             | 48,750   
|6.07-6.81      |  |              | 230,000   |  |             |  | 3.15 |          |  |  | 6.48         |  |  |             | 174,167  
|7.21-7.48      |  |              | 209,500   |  |             |  | 3.21 |          |  |  | 7.44         |  |  |             | 90,250   
|8.22-9.73      |  |              | 500,000   |  |             |  | 4.63 |          |  |  | 8.80         |  |  |             | 140,000  
|10.58-11.21    |  |              | 280,000   |  |             |  | 4.78 |          |  |  | 10.76        |  |  |             | 50,000   
|12.43-13.02    |  |              | 150,000   |  |             |  | 5.69 |          |  |  | 12.73        |  |  |             | -        
|               |  |              |           |  |             |  |      |          |  |  |              |  |  |             |          
|               |  |              | 2,137,783 |  |             |  | 3.43 |          |  |  | 6.91         |  |  |             | 1,172,950



The total
equity-based compensation expense related to all of Sapiens’ equity-based awards, recognized for the years ended December
31, 2015 and 2016, was $ 1,349 and $ 1,955, respectively. As of December 31, 2016, there was $ 3,288 of total unrecognized
compensation cost related to non-vested options, which is expected to be recognized over a period of up to four years.



F-75







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 14:- | Employee
                                         Option Plans (Cont.)
| | --------- | ----------------------------------------------------------------------



During 2016,
29,500 of the 88,500 restricted shares of Sapiens Decision, the Company's majority-owned subsidiary that were granted to one of
the former shareholders of KPI in 2014 vested, thereby reducing the Company's percentage ownership of Sapiens Decision from 95.7%
to 94.25%. During 2016, Sapiens Decision granted 10,000 options to certain of its employees to purchase shares of Sapiens Decision.



Magic:

A summary
of employee option activity under the Magic plans as of December 31, 2016

and
changes during the year ended December 31, 2016 are as follows:



|                                 |  | Number of options |         |   | Weighted average exercise price |  |      | Weighted average remaining contractual term  (in years) |  |  | Aggregate intrinsic value | 
|-------------------------------- |  | ----------------- | ------- | - | ------------------------------- |  | ---- | ------------------------------------------------------- |  |  | ------------------------- | 
|                                 |  |                   |         |   |                                 |  |      |                                                         |  |  |                           | 
|Outstanding at January 1, 2016   |  |                   | 493,917 |   |                                 |  | 4.47 |                                                         |  |  | 5.99                      | 
|Granted                          |  |                   | -       |   |                                 |  | -    |                                                         |  |  |                           | 
|Exercised                        |  |                   | (20,550 | ) |                                 |  | 2.01 |                                                         |  |  |                           | 
|Forfeited                        |  |                   | -       |   |                                 |  | -    |                                                         |  |  |                           | 
|                                 |  |                   |         |   |                                 |  |      |                                                         |  |  |                           | 
|Outstanding at December 31, 2016 |  |                   | 473,367 |   |                                 |  | 4.58 |                                                         |  |  | 5.10                      | 
|                                 |  |                   |         |   |                                 |  |      |                                                         |  |  |                           | 
|Exercisable at December 31, 2016 |  |                   | 342,742 |   |                                 |  | 3.80 |                                                         |  |  | 4.36                      | 



The aggregate
intrinsic value in the table above represents the total intrinsic value that would have been received by the option holders had
all option holders exercised their options on December 31, 2016. This amount is changed based on the market value of the
Company's ordinary shares. Total intrinsic value of options exercised during the years ended December 31, 2015 and 2016 was
$ 210 and $ 112, respectively. As of December 31, 2016, there was $ 60 of unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the Magic's plans. This cost is expected to be recognized over a period of
approximately three years.



The options
outstanding as of December 31, 2016, have been separated into ranges of exercise price categories, as follows:



|Ranges of 
Exercise price |  | Options
 outstanding |         |  | Weighted
average
remaining
contractual life |  |      | Weighted
average
exercise price |  |  | Options

exercisable |  |  | Weighted
average
exercise price of exercisable options |        
|------------------------- |  | -------------------- | ------- |  | ------------------------------------------- |  | ---- | ------------------------------- |  |  | -------------------- |  |  | ------------------------------------------------------ | -------
|                          |  |                      |         |  | (Years)                                     |  |      | $                               |  |  |                      |  |  | $                                                      |        
|0-1                       |  | 1,075                |         |  | 2.24                                        |  |      | -                               |  |  | 1,075                |  |  | -                                                      |        
|1.01-2                    |  |                      | 20,000  |  |                                             |  | 1.98 |                                 |  |  | 1.12                 |  |  |                                                        | 20,000 
|2.01-3                    |  |                      | 106,667 |  |                                             |  | 2.69 |                                 |  |  | 2.31                 |  |  |                                                        | 106,667
|3.01-4                    |  |                      | 165,625 |  |                                             |  | 4.77 |                                 |  |  | 4.00                 |  |  |                                                        | 165,625
|4.01-5                    |  |                      | -       |  |                                             |  | -    |                                 |  |  | -                    |  |  |                                                        | -      
|5.01-6                    |  |                      | 75,000  |  |                                             |  | 6.61 |                                 |  |  | 6.00                 |  |  |                                                        | -      
|6.01-7                    |  |                      | 50,000  |  |                                             |  | 7.87 |                                 |  |  | 6.89                 |  |  |                                                        | 21,875 
|7.01-8                    |  |                      | -       |  |                                             |  | -    |                                 |  |  | -                    |  |  |                                                        | -      
|8.01-9                    |  |                      | 55,000  |  |                                             |  | 7.35 |                                 |  |  | 8.01                 |  |  |                                                        | 27,500 
|                          |  |                      |         |  |                                             |  |      |                                 |  |  |                      |  |  |                                                        |        
|                          |  |                      | 473,367 |  |                                             |  | 5.10 |                                 |  |  | 4.58                 |  |  |                                                        | 342,742



F-76







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 15:- | Liability
                                         in respect of capital lease
| | --------- | ------------------------------------------------------------------------------



The following
are details of the Company's future minimum lease commitments in respect of capital leases as of December 31, 2016:



|                                                |  | Minimum lease payments |     |  | Interest |  |    | Present value of minimum lease payment | 
|----------------------------------------------- |  | ---------------------- | --- |  | -------- |  | -- | -------------------------------------- | 
|                                                |  |                        |     |  |          |  |    |                                        | 
|First year (included in other accounts payable) |  |                        | 438 |  |          |  | 25 |                                        | 
|Second year                                     |  |                        | 118 |  |          |  | 10 |                                        | 
|                                                |  |                        |     |  |          |  |    |                                        | 
|Total                                           |  |                        | 556 |  |          |  | 35 |                                        | 



| | Note 16:- | EMPLOYEE
                                         BENEFIT LIABILITIES
| | --------- | ---------------------------------------------------------------------



Employee
benefits consist of post-employment benefits, other long-term benefits and termination benefits.



| | a. | Post-employment benefits:
| | -- | -------------------------

According
to the labor laws and Severance Pay Law in Israel, the Company is required to pay compensation to an employee upon dismissal or
retirement or to make current contributions in defined contribution plans pursuant to section 14 to the Severance Pay Law, as
specified below. The Company's liability is accounted for as a post-employment benefit. The computation of the Company's employee
benefit liability is made according to the current employment contract based on the employee's salary and employment term which
establish the entitlement to receive the compensation.



The post-employment
employee benefits are normally financed by contributions classified as defined benefit plan or as defined contribution plan, as
detailed below.



| | 1) | Defined contribution plans:
| | -- | ---------------------------



Section
14 to the Severance Pay Law, 1963 applies to part of the compensation payments, pursuant to which the fixed contributions paid
by the Group into pension funds and/or policies of insurance companies release the Group from any additional liability to employees
for whom said contributions were made. These contributions and contributions for benefits represent defined contribution plans.



| | 2) | Defined
                                         benefit plans:
| | -- | ---------------------------------------------------------------



The
Group accounts for that part of the payment of compensation that is not covered by contributions in defined contribution plans,
as above, as a defined benefit plan for which an employee benefit liability is recognized and for which the Group deposits amounts
in central severance pay funds and in qualifying insurance policies.



According
to Matrix’s agreements with one of its senior officer, he is entitled to an adaptation bonus in the amount of 12 salaries.
This liability has been recognized as a defined benefit.



F-77







|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES TO THE CONSOLIDATED
    FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 16:- | EMPLOYEE
                                         BENEFIT LIABILITIES (Cont.)
| | --------- | -----------------------------------------------------------------------------



| | b. | Composition of defined benefit plans:
| | -- | -------------------------------------



|                              |  | January 1, |         |   | December 31, | 
|----------------------------- |  | ---------- | ------- | - | ------------ | 
|                              |  | 2015       |         |   | 2015         | 
|Defined benefit obligation    |  |            | 76,236  |   |              | 
|Fair value of plan assets     |  |            | (73,159 | ) |              | 
|                              |  |            |         |   |              | 
|Net defined benefit liability |  |            | 3,077   |   |              | 



| | Note 17:- | Commitments
                                         and Contingencies
| | --------- | ----------------------------------------------------------------------



| | a. | Liens:
| | -- | ------



A lien has
been incurred by Formula over certain portion of its investments in outstanding shares of Matrix, Magic and Sapiens, in pursuant
to financial institution credit agreement entered on January 2014 and with respect to the Secured Bonds issued by Formula in September
2015 on the TASE.



| | b. | Guarantees:
| | -- | -----------



| | 1. | The Group has provided certain
                                         bank guarantees in an aggregate of approximately $ 20,800 as security for its subsidiary
                                         companies' performance of various contracts with customers and suppliers. If the subsidiaries
                                         were to breach certain terms of such contracts, the customers could demand that the banks
                                         providing the guarantees distribute the amounts claimed to be due.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | The Group has provided bank guarantees
                                         in an aggregate of approximately $ 4,650 as security for its subsidiary companies'
                                         rent to be paid for offices. If such subsidiaries were to breach certain terms of their
                                         leases, the lessors could demand that the banks providing the guarantees distribute the
                                         amounts claimed to be due.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | As of December 31, 2016, the
                                         Group had restricted bank deposits of $ 261 in favor of bank guarantees.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | As of December 31, 2016, the
                                         Group has restricted bank deposits of $ 255 in favor of subsidiary companies' various
                                         contracts with customers.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Covenants:
| | -- | ----------



In connection
with the Group's credit facility agreements, primarily Formula and Matrix, with various financial institutions, the Group committed
to the following:



| | i) | Matrix
| | -- | ------



In the context
of Matrix engagements with banks for receiving credit facilities, Matrix has undertaken to maintain the following financial covenants,
as they will be expressed in its financial statements, as described:



| | a) | The total rate of Matrix debts
                                         and liabilities to banks with the addition of debts in respect of debentures that have
                                         been and/or will be issued by it and shareholders' loans that have been and/or will be provided by it (collectively, "the debts")
will not exceed 40% of its total balance sheet.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-78









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 17:- | Commitments
                                         and Contingencies(Cont.)
| | --------- | -----------------------------------------------------------------------------



| | b) | The ratio of Matrix debts less
                                         cash to the annual EBITDA will not exceed 3.5.
| | -- | ----------------------------------------------------------------------------------------------------------------------

| | d) | Matrix equity shall not be lower
                                         than NIS 275,000 (approximately $ 71,521) at all times.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------

| | d) | Matrix balances of cash and
                                         short-term investments in its balance sheet shall not be lower than NIS 50,000 (approximately
                                         $ 13,004).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e) | In the event that Formula ceases
                                         to hold 30% of Matrix share capital or is no longer the largest shareholder in Matrix,
                                         the credit may be placed for immediate repayment.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f) | Matrix has committed that the
                                         shareholder's interest of Matrix IT-Systems shall never be below 50.1%
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | g) | Matrix will not create any pledge
                                         on all or part of its property and assets in favor of any third party and will not provide
                                         any guarantee to secure any third party's debts as they are today and as they will be
                                         without the banks' consent (except for a first rate fixed pledge on an asset which acquisition
                                         will be financed by a third party and which the pledge will be in his favor).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h) | Matrix will not sell and/or
                                         transfer all or part of its assets to others in any manner whatsoever without the banks'
                                         advance written consent, unless it is done in the ordinary course of business.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i) | Matrix committed not to distribute
                                         dividends that will cause its equity (when measured based on International Financial
                                         Reporting Standards ("IFRS") to be less than NIS 275,000 (approximately $ 71,521).
                                         As of December 31, 2016, Matrix's equity was approximately NIS 631,252 (approximately
                                         $ 164,175, as measured based on IFRS).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii) | Formula
| | --- | -------



| | 1. | Liability to Financial Institution
| | -- | ----------------------------------



In the
context of Formula's credit facility from a financial institution, Formula has undertaken to maintain the following financial
covenants, as they will be expressed in its financial statements, as described:



| | a) | Formula shareholders' equity
                                         (not including minority interests) shall not be less than $ 160,000 at all times.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) | The ratio of Formula shareholders'
                                         equity (not including minority interests) to total consolidated assets will not be less
                                         than 20%.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) | The ratio of Company’s
                                         financial debts less cash, short-term deposit and short-term marketable securities to
                                         the annual EBITDA will not exceed 3.5 (all based on the company’s consolidated
                                         financial statements).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d) | The ratio of Company's financial
                                         debts less cash, short-term deposit and short-term marketable securities to the total
                                         assets will not exceed 30% (all based on the company’s consolidated financial statements).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e) | Formula's liabilities to banks
                                         and other financial institutions in its standalone balance sheet shall not be higher
                                         than NIS 450,000 (approximately $ 117,035).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-79









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 17:- | Commitments
                                         and Contingencies(Cont.)
| | --------- | -----------------------------------------------------------------------------



| | f) | Formula will not create any
                                         pledge on all or part of its property and assets in favor of any third party and will
                                         not provide any guarantee to secure any third party's debts as they are today and as
                                         they will be without the financial institution's consent.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g) | Formula will not sell and/or
                                         transfer all or part of its assets to others in any manner whatsoever without the financial
                                         institution's advance written consent, unless it is done in the ordinary course of business.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Debentures
| | -- | ----------



Series
A Secured Debentures and Series B Convertible Debentures contain, in addition to standard terms and obligations, including among
others, the following obligations:



| | a) | a covenant not to distribute
                                         dividends unless (i) Formula shareholders' equity (not including minority interests)
                                         shall not be less than $ 250 million, (ii) Formula's net financial indebtedness (financial
                                         indebtedness net of cash, marketable securities, deposits and other liquid financial
                                         instruments) shall not exceed 65% of net CAP (which is defined financial indebtedness,
                                         net, plus shareholders equity), (iii) the amount of the distributions shall be equal
                                         to profits for the years ended December 31, 2014 and 2015 and 75% of profits accrued
                                         from January 1, 2016 until the distribution and (iv) no event of default shall have occurred.;
                                         and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Financial covenants, including
                                         (i) the equity attributable to the shareholders of Formula, as reported in Formula's
                                         annual or quarterly financial statements, will not be less than $ 160 million, (ii) Formula's
                                         net financial indebtedness (financial indebtedness net of cash, marketable securities,
                                         deposits and other liquid financial instruments) shall not exceed 65% of net CAP (which
                                         is defined as financial indebtedness, net, plus shareholders equity) and (iii) at all
                                         times, Formula's cash balance will not be less than the annual interest payment (compounded)
                                         for the unpaid principal amount of the Series B debentures.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| | c) | Standard events of default
                                         including among others:
| | -- | -------------------------------------------------------------------------------------------
| |    |                                                                                            

| | i. | suspension of trading of the
                                         debentures on the TASE over a period of 60 days.
| | -- | ----------------------------------------------------------------------------------------------------------------------

| | ii. | If the rating of the debentures
                                         is less than BBB- by Standard and Poors Maalot or equivalent rating of other rating agencies
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | iii. | failure to have the debentures
                                         rated over a period of 60 days
| | ---- | ------------------------------------------------------------------------------------------------------

| | iv. | If there is a change in control
                                         without consent of the rating agency; and
| | --- | ------------------------------------------------------------------------------------------------------------------

| | v. | If Formula fails to continue
                                         to control any of its subsidiaries;
| | -- | ---------------------------------------------------------------------------------------------------------



As of December 31, 2016, Matrix
and Formula are in compliance with the above financial covenants.



F-80









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 17:- | Commitments
                                         and Contingencies(Cont.)
| | --------- | -----------------------------------------------------------------------------



| | d. | Legal proceedings:
| | -- | ------------------



| | 1. | In August 2009, an Israeli software
                                         company and one of its owners initiated an arbitration proceeding against Magic and one
                                         of its subsidiaries, claiming an alleged breach of a non-disclosure agreement between
                                         the parties (the “First Arbitration”). The software company sought damages
                                         in the amount of approximately NIS 52 million (approximately $ 13.4 million). The arbitrator
                                         rendered his decision in January 2015 and determined the damages that Magic should pay
                                         the plaintiffs an amount of $ 2.3 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In September 2016, the same software company filed a lawsuit for the sum of NIS 34,106 against Magic and one of its subsidiaries,
in the context of the First Arbitration. In the lawsuit, the software company claims that warning letters that Magic has sent
to its clients in Israel and abroad, warning the clients against the possibility that the conversion procedure offered by the
software company may amount to an infringement of Magic’s copyrights (the "Warning Letters") may have caused it
irreparable damages resulting from the loss profit of potential business transactions. The lawsuit is based on the decision given
in the First Arbitration, in which it was decided that the Warning Letters constituted a breach of a non-disclosure agreement
signed between the parties and awarded certain damages to the software company.



The software
company claims that the First Arbitration awarded it damages for only the years 2009 and 2010, and they are allowed to sue for
damages relating to the years 2011 through 2016 in separate proceedings. On January 23, 2017, Magic filed its statement of defense,
maintaining, on various grounds, that the new lawsuit must be dismissed. The plaintiffs filed their response on April 2, 2017.
In view of the nature of the claims, both factual and legal, that were raised in the proceedings, the likelihood of an expert-based
ruling and given the preliminary stage of the proceeding, it is impossible at this stage to properly evaluate the prospect of
the lawsuit being successful.



| | 2. | On August 27, 2015, a wholly-owned
                                         subsidiary of Sapiens was summoned to a hearing at a court in Amsterdam in connection
                                         with a claim initiated against it by one of its customers.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although
the software system provided by the subsidiary has been used by the customer since 2008, the customer claims that the software
system furnished to the customer did not comply with the requirements of the customer and that the subsidiary failed to correct
errors in the software systems in accordance with the service level agreement between the parties. The remedies sought by the
customer are (i) termination of all contracts with the subsidiary and (ii) refund of all amounts paid by the customer to the subsidiary
under the foregoing contracts plus damages in an aggregate amount of approximately € 21,500.



F-81









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 17:- | Commitments
                                         and Contingencies(Cont.)
| | --------- | -----------------------------------------------------------------------------



As of the
date of publication of these financial statements, the legal proceedings are at its early stage and Sapiens has included in its
financial statements a provision which reflects the current estimate of the potential outcome of the foregoing claim.



| | 3. | On February 26, 2017, a bill
                                         of indictment was submitted by the Israeli Antitrust Authority against a subsidiary of
                                         Matrix (the "Sub") and against a junior employee of the Sub, claiming that
                                         the junior employee and as follows the Sub were allegedly a party in a binding agreement
                                         and also by "obtaining by fraud", in one indictment regarding a tender of $
                                         360.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | In addition to the above-described
                                         legal proceedings, from time to time, Formula and/or its subsidiaries and affiliates
                                         are subject to legal, administrative and regulatory proceedings, claims, demands and
                                         investigations in the ordinary course of business, including claims with respect to intellectual
                                         property, contracts, employment and other matters. The Group accrues a liability when
                                         it is both probable that a liability has been incurred and the amount of the loss can
                                         be reasonably estimated. Significant judgment is required in the determination of both
                                         the probability and as to whether a loss is reasonably estimable. These accruals are
                                         reviewed at least quarterly and adjusted to reflect the impact of negotiations, settlements,
                                         rulings, advice of legal counsel and other information and events pertaining to a particular
                                         matter. The Group intends to defend itself vigorously against the above claims, and it
                                         generally intends to vigorously defend any other legal claims to which it is subject.
                                         While for most litigation, the outcome is difficult to determine, to the extent that
                                         there is a reasonable possibility that the losses to which the Group may be subject could
                                         exceed the amounts (if any) that it has already accrued, the Group attempts to estimate
                                         such additional loss, if reasonably possible, and disclose it (or, if it is an immaterial
                                         amount, indicate accordingly). The aggregate provision that the Group has recorded for
                                         all other legal proceedings (other than the particular material proceedings described
                                         above) is not material.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | Furthermore, in respect of its
                                         ordinary course legal, administrative and regulatory proceedings (that is, other than
                                         the particular material proceedings described above), the Group estimates, in accordance
                                         with the procedures described above, that as of the current time there is no reasonable
                                         possibility that it will incur material losses exceeding the non-material amounts already
                                         recognized.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | Operating lease commitments:
| | -- | ----------------------------



The following
are details of the Company's future minimum lease commitments for facilities and equipment, office space and motor vehicles under
non-cancelable operating leases as of December 31, 2016:



F-82









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 17:- | Commitments
                                         and Contingencies(Cont.)
| | --------- | -----------------------------------------------------------------------------



|2017                |  |  | 26,166 | 
|------------------- |  |  | ------ | 
|2018                |  |  | 15,536 | 
|2019                |  |  | 10,144 | 
|2020                |  |  | 6,525  | 
|2021 and Thereafter |  |  | 4,311  | 
|                    |  |  |        | 
|                    |  |  | 62,682 | 



Rent expenses
for the years 2015 and 2016, were approximately $ 22,701 and $ 25,411 respectively.



The Company
leases motor vehicles under a cancelable lease agreement. The Company has an option to be released from this lease agreement,
which may result in penalties ranging between one and three times lease monthly cost.



| | f. | Royalty commitments:
| | -- | --------------------



Sapiens
Technologies (1982) Ltd. ("Sapiens Technologies"), a wholly owned subsidiary of Sapiens incorporated in Israel, was
partially financed under programs sponsored by the Israel Innovation Authority (formerly the Office of the Chief Scientist) ("OCS")
for the support of certain research and development activities conducted in Israel. In exchange for participation in the programs
by the OCS, Sapiens Technologies agreed to pay 3.5% of total net consolidated license and maintenance revenue and 0.35% of the
net consolidated consulting services revenue related to the software developed within the framework of these programs based on
an understanding with the OCS reached in January 2012. The royalties will be paid up to a maximum amount equaling 100%-150% of
the grants provided by the OCS, linked to the dollar, and for grants received after January 1, 1999, bear annual interest at a
rate based on LIBOR.



Royalty
expenses in Sapiens, after being adjusted to comply with IFRS, amounted to $ 136 and $ 0 in 2015 and 2016, respectively. Royalty
expenses in Sapiens consolidated and are included in cost of revenues.



As of December 31, 2016, Sapiens
had a contingent liability to pay royalties of $7,119



| | g. | Insurance:
| | -- | ----------



The Company
and its subsidiaries and affiliates insure themselves in bodily injury and property damage insurance policies, including third
party, professional liability and employer's liability insurance policies.



Formula,
Sapiens and Magic directors and officers (D&O) are insured under an "umbrella" policy for insurance of directors
and officers including D&O side A DIC policy (another layer of protection for officers) acquired by the Company for itself
and its subsidiaries, for a period of 12 months from June 17, 2015.



F-83









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 18:- | Equity
| | --------- | ------



The
composition of the Company's share capital is as follows:



|                                          |  | December 31, 2015 |            |  | December 31, 2016 | 
|----------------------------------------- |  | ----------------- | ---------- |  | ----------------- | 
|                                          |  | Authorized        |            |  | Issued            | 
|                                          |  |                   |            |  |                   | 
|Ordinary shares,
    NIS 1 par value each |  |                   | 25,000,000 |  |                   | 



|                                          |  | January 1, 2015 |           
|----------------------------------------- |  | --------------- | ----------
|                                          |  | Authorized      |           
|                                          |  |                 |           
|Ordinary shares,
    NIS 1 par value each |  |                 | 25,000,000



| | a. | Formula's Ordinary Shares, par
                                         value NIS 1 per share, are traded on the TASE and Formula's ADSs, each representing one
                                         ordinary share, are traded on the NASDAQ.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Formula holds 568,620 of its
                                         ordinary shares.
| | -- | --------------------------------------------------------------------------------------

| | c. | In December 2013, Formula declared
                                         a cash dividend of approximately $ 4,563 (or $ 0.31 per share) to shareholders of record
                                         on January 20, 2014 that was payable on February 6, 2014.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In June 2014, Formula declared
                                         a cash dividend of approximately $ 7,065 (or $ 0.48 per share) to shareholders of record
                                         on July 14, 2014 that was payable on July 31, 2014.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | In December 2014, Formula declared
                                         a cash dividend of approximately $ 7,875 (or $ 0.535 per share) to shareholders of record
                                         on January 19, 2015 that was payable on February 4, 2015.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | In June 2015, Formula declared
                                         a cash dividend of approximately $ 5,008 (or $ 0.34 per share) to shareholders of record
                                         on July 20, 2015 that was payable on August 6, 2015.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | In January 2016, Formula declared
                                         a cash dividend of approximately $ 5,008 (or $ 0.34 per share) to shareholders of record
                                         on January 20, 2016 that was payable on February 4, 2016.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | In June 2016, Formula declared
                                         a cash dividend of approximately $ 5,008 (or $ 0.34 per share) to shareholders of record
                                         on July 13, 2016 that was payable on July 28, 2016.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | In December 2016, Formula declared
                                         a cash dividend of approximately $ 7,070 (or $ 0.48 per share) to shareholders of record
                                         on December 30, 2016 that was payable on January 12, 2017.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | For information concerning Formula
                                         employees and officers share-based plan, see Note 14.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------



F-84









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 19:- | TaxesON INCOME
| | --------- | --------------



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



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



Taxable
income of Israeli companies is subject to tax at the rate of 26.5% in 2014 and 2015, and 25% in 2016.



In December
2016, the Israeli Parliament approved the 2016 Amendment which reduced the corporate income tax rate to 24% (instead of 25%) effective
from January 1, 2017 and to 23% effective from January 1, 2018.



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



Certain
of Formula's Israeli subsidiaries have been granted "Approved Enterprise" and "Preferred Enterprise" status
pursuant to the Law, which provides certain tax benefits including tax exemptions and reduced tax rates. Income not eligible for
Approved Enterprise and Preferred Enterprise benefits is subject to corporate tax at the rate that would have otherwise been applicable
on the Approved or Preferred Enterprise’s income.



The entitlement
to the above benefits is conditional upon the fulfillment of the conditions stipulated by the Laws and regulations. Should any
of Formula's Israeli subsidiaries fail to meet such requirements in the future, income attributable to their relevant entity's
Approved Enterprise or Preferred Enterprise programs could be subject to the statutory Israeli corporate tax rate, and the entity
could be required to refund a portion of the tax benefits already received with respect to such programs. As of December 31, 2016,
management believes that these Israeli subsidiaries are in compliance with all of the conditions required by the Law.



Approved
enterprise tax regime



Under Approved
Enterprise track, A Company is tax exempt in the first two years/six years/ten years of the benefit period (dependent on the development
area) and subject to tax at the reduced rate of 10%-25% for a period of five/eight years (if the benefit period qualifying for
tax exemption is two years) or one year/four years (if the benefit period qualifying for tax exemption is six years)/for the remaining
benefit period (dependent on the level of foreign investment).



Under the
terms of the Approved Enterprise program, income that is attributable to one of Sapiens’ Israeli subsidiaries was exempt
from income tax for a period of two years commencing 2014.



F-85









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 19:- | TaxesON INCOME (Cont.)
| | --------- | ----------------------



| |  | Preferred enterprise tax regime
| |  | -------------------------------



In August
2013, the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 which
includes Amendment 71 to the Law for the Encouragement of Capital Investments ("the Amendment") was enacted. Per the
Amendment, the tax rate on preferred income from a preferred enterprise in 2014 and thereafter will be 16% (in development area
A - 9%). As for changes in tax rates resulting from the enactment of Amendment 73 to the Law, see below. Certain of Formula Israeli
subsidiaries under Sapiens and Magic had filed a request to apply the new benefits under the 2011 Amendment and therefore subjected
to the amended tax rate of 16%.



The Amendment
also prescribes that any dividends distributed to individuals or foreign residents from the preferred enterprise's earnings as
above will be subject to tax at a rate of 20%.



New Amendment-
Technological preferred enterprise



On December
29, 2016, a new legislation amended was enacted to the Investment Law, effective as of January 1, 2017, as
part of the Economic Efficiency Law (Legislative Amendments for Applying the Economic Policy for the 2017 and 2018 Budget
Years), 2016, which includes Amendment 73 to the Law for the Encouragement of Capital Investments ("the 2017 Amendment"),
was published.



Under the
2017 Amendment a new status of “Preferred Technology Enterprise” was introduced to the Investment Law. Under the 2017
Amendment, a Preferred Technology Enterprise which is located in areas other than Development Zone A will be subject to tax at
a rate of 12% on profits derived from intellectual property. The implementation of the 2017 Amendment is subject to regulations
to be promulgated by the Finance Minister by March 31, 2017. As such regulations have not yet been promulgated and as the definitive
criteria to determine the tax benefits have not yet been established, it cannot be concluded that the legislation with respect
to Technological Preferred Enterprises had been enacted or substantively enacted as of that date. Accordingly, the above changes
in the tax rates were not taken into account in the computation of deferred taxes as of December 31, 2016. Under the transition
provisions of the new legislation, the Formula subsidiaries may decide to irrevocably implement the new law while waiving benefits
provided under the current law or to remain subject to the current law. Formula and its subsidiaries are examining the impact
of the 2017 Amendment and the degree to which they will qualify as a Preferred Technology Enterprise and the amount of Preferred
Technology Income that they may have, or other benefits that they may receive, from the 2017 Amendment.



F-86









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 19:- | TaxesON INCOME (Cont.)
| | --------- | ----------------------



| | 3. | Tax benefits under the Israeli
                                         Law for the Encouragement of Industry (Taxes), 1969:
| | -- | ----------------------------------------------------------------------------------------------------------------------------



It is Formula's
management's belief that certain of its Israeli investees currently qualify as an "Industrial Company," within the meaning
of the Law for the Encouragement of Industry (Taxes), 1969 (the "Industrial Encouragement Law"). That Industrial Encouragement
Law defines an "Industrial Company" as a company that is resident in Israel and that derives at least 90% of its income
in any tax year, other than income from defense loans, capital gains, interest and dividends, from an enterprise whose major activity
in a given tax year is industrial production. Under the Industrial Encouragement Law, these Israeli subsidiaries are entitled
to amortization of the cost of purchased know-how and patents over an eight-year period for tax purposes as well as accelerated
depreciation rates on equipment and buildings. Eligibility for the benefits under the Industrial Encouragement Law is not subject
to receipt of prior approval from any governmental authority.



| | 4. | Foreign Exchange Regulations:
| | -- | -----------------------------



Under the Foreign Exchange
Regulations, certain Israeli subsidiaries of Formula calculate their tax liability in U.S. Dollars according to certain orders.
The tax liability, as calculated in U.S. Dollars is translated into NIS according to the exchange rate as of December 31st of
each year.



| | 5. | Structural changes in Matrix
                                         :
| | -- | -----------------------------------------------------------------------



On March 27, 2014, a tax ruling
was signed determining that from December 31, 2012 as part of a merger procedure 23 companies wholly owned directly or indirectly
by Matrix IT will transfer all their assets and liabilities, subject to the provisions of section 103 and section 104 of the Israeli
Income Tax Ordinance.



On August 21, 2014, a tax
ruling was signed determining that from December 31, 2013 as part of the merger procedures, 7 companies wholly owned directly
or indirectly by Matrix IT will transfer all their assets and liabilities, subject to the provisions of section 103 and section
104 of the Tax income.



On August 22, 2016, a tax
ruling was signed determining that from December 31, 2015 as part of the merger procedures, 5 companies wholly owned directly
or indirectly by Matrix IT will transfer all their assets and liabilities, subject to the provisions of section 103 of the Tax
income.



On December 29, 2016 Matrix
applied for a merger process as an extension of the above mentioned merger for 4 additional companies holly owned directly or
indirectly by Matrix IT, subject to the provisions of section 103 of the Israeli Income Tax Ordinance. The approval is pending.



F-87









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 19:- | TaxesON INCOME (Cont.)
| | --------- | ----------------------



| | b. | Non-Israeli investees:
| | -- | ----------------------



Non-Israeli
investees are taxed according to the tax laws in their respective country of residence. Neither Israeli income taxes, foreign
withholding taxes nor deferred income taxes were provided in relation to undistributed earnings of the non-Israelis subsidiaries.
This is because the Group intends to permanently reinvest undistributed earnings in the foreign subsidiaries in which those earnings
arose. If these earnings were distributed to Israel in the form of dividends or otherwise, the Group may be subject to additional
Israeli income taxes (subject to an adjustment for foreign tax credits) and non-Israeli withholding taxes.



The amount
of undistributed earnings of foreign subsidiaries and affiliates that are considered to be reinvested as of December 31, 2016
and 2015 was $ 47,354, and $42,002, respectively. However, a determination of the amount of the unrecognized deferred tax liability
for temporary difference related to those undistributed earnings of foreign subsidiaries is not practicable due to the complexity
of the structure of our group of investees for tax purposes and the difficulty of projecting the amount of future tax liability.



| | c. | Net operating loss carried forward:
| | -- | -----------------------------------



Formula



Formula
stand-alone had cumulative losses for tax purposes as of December 31, 2016 totaling approximately $ 61,960 (as of December
31, 2015, the amount was $ 61,060), which can be carried forward and offset against taxable income in the future for an indefinite
period.



Matrix



Matrix had
cumulative losses for tax purposes as of December 31, 2016 totaling approximately $ 34,890 (as of December 31, 2015, the
amount was $ 40,720), which can be carried forward and offset against taxable income in the future for an indefinite period.



Magic



As of December
31, 2016, Magic and its subsidiaries had operating loss carry forwards of $ 17,183 (as of December 31, 2015, the amount was $ 19,012),
which can be carried forward and offset against taxable income in the future for an indefinite period.



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



F-88









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 19:- | TaxesON INCOME (Cont.)
| | --------- | ----------------------



Sapiens



As of December
31, 2016, certain subsidiaries of Sapiens had tax loss carry-forwards totaling approximately $ 24,177 (as of December 31,
2015, the amount was $ 29,050). Most of these carry-forward tax losses have no expiration date.



Insync



Insync didn’t
have cumulative losses for tax purposes as of December 31, 2016 (as of December 31, 2015, the amount was $ 49).



Formula,
its subsidiaries and its affiliates have cumulative losses for tax purposes as of December 31, 2016 totaling approximately $ 145,870
(as of December 31, 2015, the amount was $ 157,441 ), of which $ 118,997 was in respect of companies in Israel which
can be carried forward and offset against taxable income in the future for an indefinite period (as of December 31, 2015, the
amount was $ 131,245), and approximately $ 26,873 of which was in respect of companies abroad (as of December 31, 2015,
that amount was $ 26,196).



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



Formula
and its subsidiaries are routinely examined by various taxing authorities. Below is a summary of the income tax assessments of
Formula and its subsidiaries:



Formula



Formula
has received final tax assessments (or assessments that are deemed final) through the tax year 2012.



Matrix



Matrix has
received final tax assessments (or assessments that are deemed final) through the tax year 2013. Matrix's subsidiaries have received
final tax assessments (or assessments that are deemed final) through the tax year 2012.



Magic



Magic and
its Israeli subsidiaries have received final tax assessments (or assessments that are deemed final) through the year 2012.



Sapiens



Tax assessments
filed by part of Sapiens' Israeli subsidiaries through the year ended December 31, 2011 are considered to be final (or are deemed
final).



F-89









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 19:- | TaxesON INCOME (Cont.)
| | --------- | ----------------------



| | e. | Deferred tax assets (liabilities),
                                         net:
| | -- | --------------------------------------------------------------------------------



| | 1. | Composition, net:
| | -- | -----------------



|                                                                   |  | December 31, |        
|------------------------------------------------------------------ |  | ------------ | -------
|                                                                   |  | 2015         |        
|                                                                   |  |              |        
|Net operating losses carried forward                               |  | $            | 8,839  
|Allowances, reserves and intangible assets                         |  |              | (12,347
|Capitalized software costs                                         |  |              | 490    
|Differences in measurement basis
    (cash basis for tax purposes) |  |              | (3,302 
|                                                                   |  |              |        
|Total                                                              |  | $            | (6,320 



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



|                         |  | December 31, |        
|------------------------ |  | ------------ | -------
|                         |  | 2015         |        
|                         |  |              |        
|Other non-current assets |  | $            | 16,347 
|Long-term liabilities    |  |              | (22,667
|                         |  |              |        
|                         |  | $            | (6,320 



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



|                  |  | Year
                                         ended December
                                         31, |       
|----------------- |  | --------------------------------------------------------------------------------------------------------- | ------
|                  |  | 2015                                                                                                      |       
|                  |  |                                                                                                           |       
|Domestic (Israel) |  | $                                                                                                         | 51,735
|Foreign           |  |                                                                                                           | 14,603
|                  |  |                                                                                                           |       
|Total             |  | $                                                                                                         | 66,338



| | g. | Taxes on income (tax benefit)
                                         consist of the following:
| | -- | ------------------------------------------------------------------------------------------------



|               |  | Year
                                         ended December
                                         31, |       
|-------------- |  | --------------------------------------------------------------------------------------------------------- | ------
|               |  | 2015                                                                                                      |       
|               |  |                                                                                                           |       
|Current taxes  |  | $                                                                                                         | 15,350
|Deferred taxes |  |                                                                                                           | 634   
|               |  |                                                                                                           |       
|Total          |  | $                                                                                                         | 15,984



F-90









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 19:- | TaxesON INCOME (Cont.)
| | --------- | ----------------------



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



The following
table presents reconciliation between the theoretical tax expense, assuming that all income was taxed at statutory tax rates,
and the actual income tax expense, as recorded in the Company's statements of income:



|                                                                                                                                                       |  | Year
                                         ended December
                                         31, |       
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------- | ------
|                                                                                                                                                       |  | 2015                                                                                                      |       
|                                                                                                                                                       |  |                                                                                                           |       
|Income before income
    taxes, as per the statement of operations                                                                                     |  | $                                                                                                         | 66,338
|                                                                                                                                                       |  |                                                                                                           |       
|Statutory tax rate in Israel                                                                                                                           |  |                                                                                                           | 26.5  
|                                                                                                                                                       |  |                                                                                                           |       
|Tax computed at the statutory tax rate                                                                                                                 |  |                                                                                                           | 17,579
|                                                                                                                                                       |  |                                                                                                           |       
|Non-deductible expenses                                                                                                                                |  |                                                                                                           | 2,091 
|Effect of different tax rates                                                                                                                          |  |                                                                                                           | (54   
|Effect of "Approved, Beneficiary or Preferred Enterprise"
    status                                                                                   |  |                                                                                                           | (2,406
|Group's share of earnings of companies accounted for
    at equity                                                                                     |  |                                                                                                           | -     
|Deferred taxes on current losses (utilization of carry
    forward losses) and temporary differences for which a valuation allowance was provided, net |  |                                                                                                           | 1,676 
|Effect of change in Israel tax rates                                                                                                                   |  |                                                                                                           | -     
|Tax-deductible costs, not included in the accounting
    costs                                                                                         |  |                                                                                                           | (733  
|Taxes in respect of prior years                                                                                                                        |  |                                                                                                           | (1,284
|Other                                                                                                                                                  |  |                                                                                                           | (885  
|                                                                                                                                                       |  |                                                                                                           |       
|Taxes on income                                                                                                                                        |  |                                                                                                           | 15,984



F-91









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 19:- | TaxesON INCOME (Cont.)
| | --------- | ----------------------



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



A reconciliation
of the beginning and ending amount of total unrecognized tax benefits in Formula's subsidiaries is as follows:



|Balance as of January 1, 2015                      |  |  | 1,625 |  
|-------------------------------------------------- |  |  | ----- | -
|                                                   |  |  |       |  
|Increase due to consolidation in a subsidiary (1)  |  |  | 154   |  
|Decrease related to prior years' tax positions     |  |  | (326  | )
|Increase related to current year
    tax positions |  |  | 1,039 |  
|                                                   |  |  |       |  
|Balance as of December 31, 2015                    |  |  | 2,492 |  
|                                                   |  |  |       |  
|Increase due to consolidation in a subsidiary      |  |  | 227   |  
|Decrease related to prior years' tax positions     |  |  | (286  | )
|Increase related to current year
    tax positions |  |  | 847   |  
|                                                   |  |  |       |  
|Balance as of December 31, 2016                    |  |  | 3,280 |  



| | (1) | The amount initially consolidated
                                         as part of the acquisition of subsidiary in 2015 is net of Tax Deducted at Source assets
                                         in an amount of $ 635
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Group
recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. For the years
ended December 31, 2015 and 2016, the amounts recognized, on a consolidated basis, for interest and penalties expenses related
to uncertain tax positions were $ 224 and $68, respectively.
In addition, the Group's consolidated liability for unrecognized tax benefits including accrued interest and penalties related
to uncertain tax positions was $ 422 and $490 at December 31, 2015 and 2016, respectively, which is included within income
tax accrual in the Group's consolidated balance sheets.



The entire
balance of unrecognized tax benefits, if recognized, would reduce the Company's annual effective tax rate.



F-92









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 20:- | Supplementary
                                         Financial Statement Information
| | --------- | --------------------------------------------------------------------------------------



Balance
Sheets:



| | a. | Other accounts receivable and
                                         prepaid expenses:
| | -- | ----------------------------------------------------------------------------------------



Composition:

|                                           |  | January 1, |        |  | December 31, |  
|------------------------------------------ |  | ---------- | ------ |  | ------------ | -
|                                           |  | 2015       |        |  | 2015         |  
|                                           |  |            |        |  |              |  
|Government departments                     |  | $          | 14,005 |  |              | $
|Employees                                  |  |            | 448    |  |              |  
|Prepaid expenses and advances to suppliers |  |            | 17,379 |  |              |  
|Restricted deposits                        |  |            | 633    |  |              |  
|Related Parties                            |  |            | 848    |  |              |  
|Other                                      |  |            | 1,157  |  |              |  
|                                           |  |            |        |  |              |  
|Total                                      |  | $          | 34,470 |  |              | $



| | b. | Liabilities to Banks and other
                                         financial institutions:
| | -- | -----------------------------------------------------------------------------------------------



|                                                                                                    |  | December 31,  |  |              |  | January 1, |        |  | December 31, |  
|--------------------------------------------------------------------------------------------------- |  | ------------- |  | ------------ |  | ---------- | ------ |  | ------------ | -
|                                                                                                    |  | 2016          |  |              |  | 2015       |        |  | 2015         |  
|                                                                                                    |  | Interest rate |  | Linkage      |  |            |        |  |              |  
|                                                                                                    |  | %             |  | basis        |  |            |        |  |              |  
|                                                                                                    |  |               |  |              |  |            |        |  |              |  
|Bank credit in NIS                                                                                  |  | 2.2           |  | NIS-Unlinked |  | $          | 378    |  |              | $
|Bank credit in USD                                                                                  |  | 3-6           |  | USD-Unlinked |  |            | 2,853  |  |              |  
|Short-term bank loans                                                                               |  | 1.6-2.35      |  | NIS-Unlinked |  |            | 15,313 |  |              |  
|Current maturities of long-term loans from banks and
    other financial institutions (see Note 11) |  | 2.6-5.85      |  | NIS-Unlinked |  |            | 26,127 |  |              |  
|Accumulated interest on long-term loans from other
    financial institutions (see Note 11)         |  | 2.6-5.5       |  | NIS-Unlinked |  |            | 1,372  |  |              |  
|Other                                                                                               |  |               |  |              |  |            | -      |  |              |  
|                                                                                                    |  |               |  |              |  |            |        |  |              |  
|Total                                                                                               |  |               |  |              |  | $          | 46,043 |  |              | $



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



Composition:

|                                                   |  | January 1, |        |  | December 31, |  
|-------------------------------------------------- |  | ---------- | ------ |  | ------------ | -
|                                                   |  | 2015       |        |  | 2015         |  
|                                                   |  |            |        |  |              |  
|Government institutions                            |  | $          | 15,094 |  |              | $
|Customer advances                                  |  |            | 187    |  |              |  
|Accrued royalties to the OCS (Note 15f)            |  |            | 788    |  |              |  
|Accrued expenses and other current
    liabilities |  |            | 14,864 |  |              |  
|                                                   |  |            |        |  |              |  
|Total                                              |  | $          | 30,933 |  |              | $



F-93









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 20:- | Supplementary
                                         Financial Statement Information (Cont.)
| | --------- | ----------------------------------------------------------------------------------------------



d. Non-controlling
interest in material partially owned subsidiaries:



|               |  | January 1, |         |  | December 31, |  
|-------------- |  | ---------- | ------- |  | ------------ | -
|               |  | 2015       |         |  | 2015         |  
|               |  |            |         |  |              |  
|Matrix         |  | $          | 83,389  |  |              | $
|Sapiens        |  |            | 178,132 |  |              |  
|Magic Software |  |            | 105,962 |  |              |  
|Other          |  |            | 41      |  |              |  
|               |  |            |         |  |              |  
|               |  | $          | 367,524 |  |              | $



| | e. | Financial income and expenses:
| | -- | ------------------------------



Composition:

|                                                                              |  | Year
                                         ended December
                                         31, |       
|----------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- | ------
|                                                                              |  | 2015                                                                                                      |       
|                                                                              |  |                                                                                                           |       
|Financial expenses:                                                           |  |                                                                                                           |       
|                                                                              |  |                                                                                                           |       
|Business combination and redeemable non-controlling
    interests revaluation |  | $                                                                                                         | 1,204 
|Bank charges, interest and foreign exchange differences                       |  |                                                                                                           | 6,370 
|Interest expenses on short-term and long-term loans                           |  |                                                                                                           | 6,830 
|Financial costs related to Debentures                                         |  |                                                                                                           | 551   
|                                                                              |  |                                                                                                           | 14,955
|Financial income:                                                             |  |                                                                                                           |       
|                                                                              |  |                                                                                                           |       
|Income from marketable securities                                             |  |                                                                                                           | 1,122 
|Interest income from deposits
    and foreign exchange differences            |  |                                                                                                           | 4,300 
|                                                                              |  |                                                                                                           | 5,422 
|                                                                              |  |                                                                                                           |       
|Total                                                                         |  | $                                                                                                         | (9,533



F-94









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 20:- | Supplementary
                                         Financial Statement Information (Cont.)
| | --------- | ----------------------------------------------------------------------------------------------



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



The Company
operates in the software services and proprietary software products and related services through four directly held entities:
Matrix, Sapiens, Magic and Insync.

Matrix



Matrix provides
software solutions and services, software development projects, outsourcing, integration of software systems and services –
all in accordance with its customers' specific needs. Matrix also provides upgrading and expansion of existing software systems.



Matrix operates
through its directly and indirectly held subsidiaries in the following segments: (1) Software solutions and services in Israel
(Information Technology – IT); (2) Software solutions and services in the U.S (Information Technology – IT) (3) Learning
and integration; (4) Computer infrastructure and integration solutions; and, (5) Software product marketing and support.



Software
solutions and services in Israel:



The software
solutions and services in Israel provided by Matrix consist mainly of providing tailored software solutions and upgrading and
expanding existing software systems. These services include, among others, developing customized software, adapting software to
the customer's specific needs, implementing software and modifying it based on the customer's needs, outsourcing,
project management, software testing and QA and integrating all or part of the above
elements. The scope of work invested in each element varies from one customer to the other.



Software
solutions and services in U.S:



Activity
in this sector is mainly providing solutions and services of Governance Risk and Compliance ("GRC") experts, including
activities on the following topics: risk management, management and prevention of fraud, Anti-Money Laundering and securing compliance
with the regulations on these issues, through Matrix-IFS (formerly Exzac Inc.), a wholly owned subsidiary of Matrix, as well as
providing solutions and specialized technological services in areas such as: portals, BI (Business Intelligence) DBA (Data Base
Administration), CRM (Customer Relation Management) and EIM (Enterprise Information Management), and in addition, the activity
in this segment includes IT help desk services specializing in healthcare and software product distribution services particularly
IBM products. The activity in this segment is performed mostly through Matrix IFS and Xtivia Technologies Inc,  wholly owned
subsidiaries of Matrix.



F-95









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 20:- | Supplementary
                                         Financial Statement Information (Cont.)
| | --------- | ----------------------------------------------------------------------------------------------



Learning
and integration:



Matrix's
activities in this segment consist of operating a network of high-tech training and instruction centers which provide application
courses, professional training courses and advanced professional studies in the high-tech industry, courses
of soft skills and management training and provision of training and implementation of computer systems.



Computer
infrastructure and integration solutions:



Matrix's
activities in this segment is primarily providing computer solutions to computer and communications
infrastructures, marketing and sale of computers and peripheral equipment to business customers, providing related services, and
cloud computing solutions(through the business specializing
unit of the Company - Cloud Zone) and a myriad of services regarding Database services and Big data services (through the specialized
business unit Data zone).



Software
product marketing and support:



Matrix's
activities in this segment include marketing, distributing and support for various software products the principal of which are
CRM, computer systems management infrastructures, web world content management, database and data warehouse mining, application
integration, database and systems, data management and software development tools.



Sapiens



Sapiens
is a leading global provider of proprietary software solutions for the insurance industry, with an emerging focus on the broader
financial services sector. Sapiens offerings include a broad range of software solutions and services, comprised of (i) core software
solutions for the insurance industry, including Property & Casualty/General Insurance ("P&C") and Life, Annuities
and Pensions ("L&P") products, and record keeping software solutions for providers of Retirement Services (ii) variety
of technology based solution including business decision management solutions for the financial services industry, including insurance,
banking and capital markets and (iii) global Services including project delivery and implementation of the Company' software solutions.



Sapiens
has developed scalable, configurable, rule-based core software platforms which offer its clients comprehensive and function-rich
solutions. Sapiens solutions allow its customers to support new delivery channels such as mobile and social, rapidly deploy new
products, and improve operational efficiency. As its software is customizable to match specific business requirements, it supports
its customers' operations across different market segments, geographies and regulatory regimes. In addition, its software solutions
enable compliance with complex and rapidly evolving regulations in the insurance and wider financial services industry.



F-96









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 20:- | Supplementary
                                         Financial Statement Information (Cont.)
| | --------- | ----------------------------------------------------------------------------------------------



Sapiens
technology-based solutions include application development and business decision management platforms. Its application development
platforms allow for the deployment of tailor-made solutions that address unique business needs for which pre-packaged software
solutions may not be available. Its business decision management platform, Sapiens DECISION, allows business professionals to
design, simulate, implement, change and analyze the business logic that drives financial operations and compliance in a business-friendly
format and environment. Its platform facilitates the swift deployment of new or changed business logic that originates from regulatory
updates or market changes, reduces costs and improves efficiency by shortening the software development lifecycle. This platform
empowers the organization's business users as they manage their business strategy, rules and logic by using business terms rather
than programming language. Sapiens' insurance solutions are deployed at leading insurance carriers globally. Sapiens' service
offerings include a standard consulting offering that helps customers make better use of IT in order to achieve their business
objectives.



Magic



Magic is
a global provider of proprietary application development and business process integration software solutions and related professional
services, and a vendor of IT outsourcing services.



Magic
software solutions are used by customers to develop, deploy and integrate on-premise, mobile and cloud-based business applications
quickly and cost effectively. In addition, its technology enables enterprises to accelerate the process of delivering business
solutions that meet current and future needs and allow customers to dramatically improve their business performance and return
on investment. Its software solutions include application platforms for developing and deploying specialized and high-end large-scale
business applications (Magic xpa application platform, formerly branded uniPaaS and Appbuilder) and an integration platform that
allows the integration and interoperability of diverse solutions, applications and systems in a quick and efficient manner (Magic
xpi business and process integration platform, formerly branded iBOLT). These solutions enable Magic customers to improve their
business performance and return on investment by supporting the affordable and rapid delivery and integration of business applications,
systems and databases. Note 18: -Supplementary Financial Statement Information (Cont.)



Using its
products solutions, enterprises and independent software vendors can accelerate time-to-market by rapidly building integrated
solutions, deploying them in multiple environments while leveraging existing IT resources. In addition, its solutions are scalable
and platform-agnostic, enabling its customers to build solutions by specifying their business logic requirements in a commonly
used language rather than in computer code, and to benefit from seamless platform upgrades and cross-platform functionality without
the need to re-write applications. Magic technology also enables future proof protection and supports current market trends such
as the development of mobile applications that can be deployed on a variety of smartphones and tablets, and cloud environments.



With respect
to IT outsourcing services, Magic offers a vast range of professional services in the areas of infrastructure design and delivery,
application development, technology consulting planning and implementation services, support services and supplemental outsourcing
and staffing services.



F-97









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | Note 20:- | Supplementary
                                         Financial Statement Information (Cont.)
| | --------- | ----------------------------------------------------------------------------------------------



Magic products
and services are available through a global network of regional offices, independent software vendors, system integrators, distributors
and value added resellers as well as original equipment manufacturers and consulting partners in approximately 50 countries.



Insync



InSync is
a U.S based national supplier of employees to Vendor Management Systems (VMS) Workforce Management Program accounts. Insync specializes
in providing professionals in the following areas; Accounting and Finance, Administrative, Customer Service, Clinical, Scientific
and Healthcare, Engineering, Manufacturing and Operations, Human Resources, IT Technology, LI/MFG, and Marketing and Sales. InSync
currently supports more than 30 VMS program customers with employees in over 40 states.



The Company
evaluates the performances of each of its directly held subsidiaries based on operating income/loss. Headquarters and finance
expenses of Formula are allocated proportionally among the subsidiaries:



Goodwill in material partially owned subsidiaries:





|               |  | January 1, |         |  | December 31, |  
|-------------- |  | ---------- | ------- |  | ------------ | -
|               |  | 2015       |         |  | 2015         |  
|               |  |            |         |  |              |  
|Matrix         |  | $          | 156,224 |  |              | $
|Sapiens        |  |            | 213,093 |  |              |  
|Magic Software |  |            | 55,490  |  |              |  
|               |  |            |         |  |              |  
|               |  | $          | 424,807 |  |              | $





F-98









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 20:- | Supplementary
                                         Financial Statement Information (Cont.)
| | --------- | ----------------------------------------------------------------------------------------------



|                                                                             |  | Matrix |         |  | Sapiens |  |         | Magic |  |  | Insync  |  |  | Adjustments |        |  | Total | 
|---------------------------------------------------------------------------- |  | ------ | ------- |  | ------- |  | ------- | ----- |  |  | ------- |  |  | ----------- | ------ |  | ----- | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Year ended December 31, 2016:                                                |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Revenues from external customers                                             |  |        | 660,012 |  |         |  | 216,190 |       |  |  | 198,096 |  |  |             | 34,323 |  |       | 
|Inter-segment revenues                                                       |  |        | 2,578   |  |         |  | -       |       |  |  | 3,550   |  |  |             | -      |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Total Revenues                                                               |  |        | 662,590 |  |         |  | 216,190 |       |  |  | 201,646 |  |  |             | 34,323 |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Unallocated corporate expenses                                               |  |        | -       |  |         |  | -       |       |  |  | -       |  |  |             | -      |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Depreciation and amortization                                                |  |        | 6,513   |  |         |  | 14,079  |       |  |  | 11,608  |  |  |             | 245    |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Operating income (loss)                                                      |  |        | 46,220  |  |         |  | 26,326  |       |  |  | 17,520  |  |  |             | 1,060  |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Financial income (expense) net                                               |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Group's share of earnings (losses) of companies accounted for at equity, net |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Taxes on income                                                              |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Net income                                                                   |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Year ended December 31, 2015:                                                |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Revenues from external customers                                             |  |        | 583,661 |  |         |  | 185,123 |       |  |  | 174,491 |  |  |             | 29,919 |  |       | 
|Inter-segment revenues                                                       |  |        | 2,921   |  |         |  | -       |       |  |  | 1,539   |  |  |             | -      |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Revenues                                                                     |  |        | 586,582 |  |         |  | 185,123 |       |  |  | 176,030 |  |  |             | 29,919 |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Unallocated corporate expenses                                               |  |        | -       |  |         |  | -       |       |  |  | -       |  |  |             | -      |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Depreciation and amortization                                                |  |        | 6,144   |  |         |  | 14,127  |       |  |  | 9,885   |  |  |             | 280    |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Operating income (loss)                                                      |  |        | 38,421  |  |         |  | 22,273  |       |  |  | 19,946  |  |  |             | 426    |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Financial income (expense) net                                               |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Group's share of earnings (losses) of companies accounted for at equity, net |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Taxes on income                                                              |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|                                                                             |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 
|Net income                                                                   |  |        |         |  |         |  |         |       |  |  |         |  |  |             |        |  |       | 



F-99









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 20:- | Supplementary
                                         Financial Statement Information (Cont.)
| | --------- | ----------------------------------------------------------------------------------------------



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



| | 1. | The
                                         Company's non-current assets are located as follows:
| | -- | -------------------------------------------------------------------------------------------------



|              |  | December 31, |       
|------------- |  | ------------ | ------
|              |  | 2015         |       
|              |  |              |       
|Israel        |  | $            | 18,620
|United States |  |              | 910   
|Europe        |  |              | 1,559 
|Japan         |  |              | 371   
|Other         |  |              | 543   
|              |  |              |       
|Total         |  | $            | 22,003



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



The Company's
revenues classified by geographic area (based on the location of customers) are as follows:



|               |  | Year
                                         ended December
                                         31, |        
|-------------- |  | --------------------------------------------------------------------------------------------------------- | -------
|               |  | 2015                                                                                                      |        
|               |  |                                                                                                           |        
|Israel         |  | $                                                                                                         | 570,614
|International: |  |                                                                                                           |        
|United States  |  |                                                                                                           | 252,526
|Europe         |  |                                                                                                           | 112,169
|Japan          |  |                                                                                                           | 30,009 
|Other          |  |                                                                                                           | 7,876  
|               |  |                                                                                                           |        
|Total          |  | $                                                                                                         | 973,194



F-100









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | Note 20:- | Supplementary
                                         Financial Statement Information (Cont.)
| | --------- | ----------------------------------------------------------------------------------------------



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



The following
table presents the computation of basic and diluted net earnings per share for the Company:



|                                                                             |  | Year
                                         ended December
                                         31, |       
|---------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------- | ------
|                                                                             |  | 2015                                                                                                      |       
|                                                                             |  |                                                                                                           |       
|Numerator:                                                                   |  |                                                                                                           |       
|Net income basic earnings
    per share - income available to shareholders   |  | $                                                                                                         | 19,842
|                                                                             |  |                                                                                                           |       
|Amount for diluted earnings
    per share - income available to shareholders |  | $                                                                                                         | 19,528
|                                                                             |  |                                                                                                           |       
|Weighted average shares outstanding                                          |  |                                                                                                           |       
|Denominator for basic net earnings per share                                 |  |                                                                                                           | 14,071
|Effect of dilutive securities                                                |  |                                                                                                           | 594   
|                                                                             |  |                                                                                                           |       
|Denominator for diluted net
    earnings per share                           |  |                                                                                                           | 14,665
|                                                                             |  |                                                                                                           |       
|Basic net earnings per share                                                 |  |                                                                                                           | 1.41  
|                                                                             |  |                                                                                                           |       
|Diluted net earnings per share                                               |  |                                                                                                           | 1.33  



| | NOTE 21:- | Transition
                                         to IFRS
| | --------- | -----------------------------------------------------------



These financial
statements for the year ended December 31, 2016 are the Group’s first consolidated financial statements prepared in accordance
with IFRS. The date of transition to IFRS is January 1, 2015. For periods up to and including the year ended December 31, 2015,
the Group prepared its consolidated financial statements in accordance with U.S. GAAP.



Accordingly,
the Group has prepared financial statements that comply with IFRS applicable as of December 31, 2016, together with the comparative
period data for the year ended December 31, 2015, as described in the summary of significant accounting policies (Note 2). In
preparing the financial statements, the Group’s opening consolidated statement of financial position was prepared as of
January 1, 2015, the Group’s date of transition to IFRS. This note explains the principal adjustments made by the Group
in representing its U.S. GAAP financial statements, including the statement of financial position as of January 1, 2015 and the
financial statements for the year ended December 31, 2015, in order to comply with IFRS.



As a first-time
adopter of IFRS, the Group applied IFRS 1 First-time Adoption of International Financial Reporting Standards. The Standard contains
a number of voluntary and mandatory exemptions from the requirement to retrospectively apply IFRS, which the Group has applied
as of January 1, 2015.



F-101









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data





| | NOTE 21:- | Transition
                                         to IFRS(Cont.)
| | --------- | ------------------------------------------------------------------



The Group
has applied the mandatory exceptions and certain optional exemptions as set out below:



Business combinations
—



| | a) | With respect to the business combination                                          of Matrix
                                                            and Sapiens, which were consolidated as subsidiaries under the U.S. GAAP in                                          the
                                                            Company’s consolidated statements of financial position before the date of the transition to IFRS, the Company elected
                                                            not to apply IFRS 3 Business Combinations retrospectively. As a result, assets recognized and liabilities assumed in past
                                                            business combinations under U.S. GAAP have remained unchanged at the date of transition.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







| | b) | With respect to the business combination
                                         of Magic, which was not consolidated as a subsidiary under U.S. GAAP in the Company’s
                                         consolidated statements of financial position before the date of the transition to IFRS,
                                         the Company has not applied IFRS 3 Business Combinations retrospectively. As a result,
                                         the deemed cost of Magic’s goodwill as of the transition date was null, reflecting
                                         that the Company’s interests in Magic’s adjusted net assets, in accordance
                                         with IFRS, were higher than its historical cost in Magic shares.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-102









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 21:- | Transition
                                         to IFRS(Cont.)
| | --------- | ------------------------------------------------------------------



Reconciliation
of statements of financial position as of January 1, 2015 (date of transition to IFRS) and December 31, 2015:



|                                                                      |  |      |  | As of January 1, 2015
    (date of transition to IFRS) |          
|--------------------------------------------------------------------- |  | ---- |  | ------------------------------------------------------ | ---------
|                                                                      |  | Note |  | U.S. GAAP                                              |          
|ASSETS                                                                |  |      |  |                                                        |          
|CURRENT ASSETS:                                                       |  |      |  |                                                        |          
|Cash and cash equivalents                                             |  |      |  | $                                                      | 107,416  
|Short-term deposits                                                   |  |      |  |                                                        | 6,454    
|Marketable securities                                                 |  |      |  |                                                        | 15,784   
|Trade receivables                                                     |  |      |  |                                                        | 195,287  
|Other accounts receivable and
    prepaid expenses                    |  |      |  |                                                        | 31,297   
|Inventories                                                           |  |      |  |                                                        | 2,259    
|Total  current
    assets                                             |  |      |  |                                                        | 358,497  
|                                                                      |  |      |  |                                                        |          
|LONG-TERM
    RECEIVABLES:                                            |  |      |  |                                                        |          
|Marketable Securities                                                 |  |      |  |                                                        | 33,748   
|Deferred taxes                                                        |  | iii  |  |                                                        | 17,901   
|Prepaid
    expenses and other accounts receivable                    |  |      |  |                                                        | 10,287   
|Total long-term
    receivables                                       |  |      |  |                                                        | 61,936   
|                                                                      |  |      |  |                                                        |          
|INVESTMENTS
    IN COMPANIES ACCOUNTED FOR AT EQUITY                  |  |      |  |                                                        | 169,143  
|SEVERANCE
    PAY FUND                                                |  | iv   |  |                                                        | 65,322   
|PROPERTY,
    AND EQUIPMENT, NET                                      |  |      |  |                                                        | 20,126   
|INTANGIBLE
    ASSETS, NET                                            |  |      |  |                                                        | 76,870   
|GOODWILL                                                              |  | ii   |  |                                                        | 373,230  
|Total assets                                                          |  |      |  | $                                                      | 1,125,124
|LIABILITIES
    AND EQUITY                                            |  |      |  |                                                        |          
|CURRENT LIABILITIES:                                                  |  |      |  |                                                        |          
|Liabilities to banks and other
    financial institutions             |  |      |  | $                                                      | 43,190   
|Trade payables                                                        |  |      |  |                                                        | 52,693   
|Deferred revenue                                                      |  |      |  |                                                        | 34,556   
|Dividend payable                                                      |  |      |  |                                                        | 7,876    
|Employees and payroll accrual                                         |  |      |  |                                                        | 63,172   
|Other accounts payable                                                |  |      |  |                                                        | 23,325   
|Liabilities in respect of business
    combinations                   |  |      |  |                                                        | 1,782    
|Redeemable
    non-controlling interests                              |  | vi,x |  |                                                        | -        
|Total current
    liabilities                                         |  |      |  |                                                        | 226,594  
|                                                                      |  |      |  |                                                        |          
|LONG-TERM  LIABILITIES:                                               |  |      |  |                                                        |          
|Liabilities to banks and other
    financial institutions             |  |      |  |                                                        | 108,203  
|Other long term liabilities                                           |  | vii  |  |                                                        | 6,204    
|Deferred taxes                                                        |  |      |  |                                                        | 32,605   
|Deferred revenues                                                     |  |      |  |                                                        | 4,838    
|Liability in respect of business
    combinations                     |  |      |  |                                                        | 825      
|Liability in respect of capital
    lease                             |  |      |  |                                                        | 903      
|Redeemable non-controlling
    interests                              |  | vi,x |  |                                                        | -        
|Employee benefit liabilities                                          |  | viii |  |                                                        | 77,975   
|Total long-term
    liabilities                                       |  |      |  |                                                        | 231,553  
|                                                                      |  |      |  |                                                        |          
|REDEEMABLE
    NON-CONTROLLING INTEREST                               |  | x    |  |                                                        | 14,626   
|                                                                      |  |      |  |                                                        |          
|EQUITY                                                                |  | ix   |  |                                                        |          
|Share capital                                                         |  |      |  |                                                        | 4,184    
|Additional paid-in capital                                            |  |      |  |                                                        | 135,582  
|Accumulated earnings                                                  |  |      |  |                                                        | 249,758  
|Accumulated other comprehensive
    loss                              |  |      |  |                                                        | (1,305   
|Treasury
    shares                                                   |  |      |  |                                                        | (259     
|Total equity
    attributable to Formula Systems (1985) shareholders' |  |      |  |                                                        | 387,960  
|Non-controlling
    interests                                         |  |      |  |                                                        | 264,391  
|Total equity                                                          |  |      |  |                                                        | 652,351  
|Total liabilities,
    redeemable non-controlling interest and equity |  |      |  | $                                                      | 1,125,124



F-103









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 21:- | Transition
                                         to IFRS(Cont.)
| | --------- | ------------------------------------------------------------------



|                                                                      |  |      |  | As of December 31, 2015 |          
|--------------------------------------------------------------------- |  | ---- |  | ----------------------- | ---------
|                                                                      |  | Note |  | U.S. GAAP               |          
|ASSETS                                                                |  |      |  |                         |          
|CURRENT ASSETS:                                                       |  |      |  |                         |          
|Cash and cash equivalents                                             |  |      |  | $                       | 132,603  
|Short-term deposits                                                   |  |      |  |                         | 11       
|Marketable securities                                                 |  |      |  |                         | 11,011   
|Trade receivables                                                     |  |      |  |                         | 176,665  
|Other accounts receivable and
    prepaid expenses                    |  |      |  |                         | 32,584   
|Inventories                                                           |  |      |  |                         | 4,610    
|Total current
    assets                                              |  |      |  |                         | 357,484  
|                                                                      |  |      |  |                         |          
|LONG-TERM
    RECEIVABLES:                                            |  |      |  |                         |          
|Marketable Securities                                                 |  |      |  |                         | -        
|Deferred taxes                                                        |  | iii  |  |                         | 13,164   
|Prepaid
    expenses and other accounts receivable                    |  |      |  |                         | 8,945    
|Total long-term
    receivables                                       |  |      |  |                         | 22,109   
|                                                                      |  |      |  |                         |          
|INVESTMENTS
    IN COMPANIES  ACCOUNTED FOR AT EQUITY                 |  |      |  |                         | 451,433  
|SEVERANCE
    PAY FUND                                                |  | iv   |  |                         | 54,631   
|PROPERTY,
    AND EQUIPMENT, NET                                      |  |      |  |                         | 14,199   
|INTANGIBLE
    ASSETS, NET                                            |  |      |  |                         | 4,920    
|GOODWILL                                                              |  |      |  |                         | 162,173  
|Total assets                                                          |  |      |  | $                       | 1,066,949
|LIABILITIES
    AND EQUITY                                            |  |      |  |                         |          
|CURRENT LIABILITIES:                                                  |  |      |  |                         |          
|Liabilities to banks and other
    financial institutions             |  |      |  | $                       | 59,069   
|Debentures                                                            |  | v,x  |  |                         | -        
|Trade payables                                                        |  |      |  |                         | 58,105   
|Deferred revenue                                                      |  |      |  |                         | 25,335   
|Dividend payable                                                      |  | x    |  |                         | 4        
|Employees and payroll accrual                                         |  |      |  |                         | 51,390   
|Other accounts payable                                                |  | x    |  |                         | 16,715   
|Liabilities in respect of business
    combinations                   |  |      |  |                         | 1,193    
|Redeemable
    non-controlling interests                              |  | vi,x |  |                         | -        
|Total current
    liabilities                                         |  |      |  |                         | 211,811  
|                                                                      |  |      |  |                         |          
|LONG-TERM  LIABILITIES:                                               |  |      |  |                         |          
|Liabilities to banks and other
    financial institutions             |  |      |  |                         | 102,845  
|Debentures, net of current
    maturities                             |  | v    |  |                         | 58,284   
|Other long term liabilities                                           |  |      |  |                         | -        
|Deferred taxes                                                        |  | iii  |  |                         | 67,010   
|Deferred revenues                                                     |  |      |  |                         | 4,396    
|Liability in respect of business
    combinations                     |  |      |  |                         | 2,405    
|Liability in respect of capital
    lease                             |  |      |  |                         | 494      
|Redeemable non-controlling
    interests                              |  | vi,x |  |                         | -        
|Accrued
    severance pay, net                                        |  | iv   |  |                         | 67,409   
|Total long-term
    liabilities                                       |  |      |  |                         | 302,843  
|                                                                      |  |      |  |                         |          
|REDEEMABLE
    NON-CONTROLLING INTEREST                               |  | x    |  |                         | 14,594   
|                                                                      |  |      |  |                         |          
|EQUITY                                                                |  | ix   |  |                         |          
|Share capital                                                         |  |      |  |                         | 4,184    
|Additional paid-in capital                                            |  |      |  |                         | 129,021  
|Accumulated earnings                                                  |  |      |  |                         | 318,348  
|Accumulated other comprehensive
    loss                              |  |      |  |                         | (1,576   
|Treasury
    shares                                                   |  |      |  |                         | (259     
|Total equity attributable to Formula Systems
    (1985) shareholders’ |  |      |  |                         | 449,718  
|Non-controlling
    interests                                         |  |      |  |                         | 87,983   
|Total equity                                                          |  |      |  |                         | 537,701  
|Total liabilities,
    redeemable non-controlling interest and equity |  |      |  | $                       | 1,066,949



F-104









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 21:- | Transition
                                         to IFRS(Cont.)
| | --------- | ------------------------------------------------------------------



Reconciliation
of the consolidated statement of profit or loss for the year ended December 31, 2015:



|                                                                                 |  |         |  | Year ended December
    31, 2015 |        
|-------------------------------------------------------------------------------- |  | ------- |  | -------------------------------- | -------
|                                                                                 |  | Note    |  | U.S. GAAP                        |        
|Revenues                                                                         |  |         |  |                                  |        
|Proprietary software products and related
    services                           |  |         |  | $                                | 136,577
|Software services                                                                |  |         |  |                                  | 613,978
|                                                                                 |  |         |  |                                  |        
|Total revenues                                                                   |  |         |  |                                  | 750,555
|                                                                                 |  |         |  |                                  |        
|Cost of revenues:                                                                |  |         |  |                                  |        
|Proprietary software products and related services                               |  |         |  |                                  | 81,454 
|Software services                                                                |  | iv      |  |                                  | 520,295
|                                                                                 |  |         |  |                                  |        
|Total cost of revenues                                                           |  |         |  |                                  | 601,749
|                                                                                 |  |         |  |                                  |        
|Gross profit                                                                     |  |         |  |                                  | 148,806
|                                                                                 |  |         |  |                                  |        
|Research and development expenses, net                                           |  |         |  |                                  | 7,488  
|Selling, marketing, general and administrative expenses                          |  | iv,viii |  |                                  | 94,722 
|Other expenses (income), net                                                     |  |         |  |                                  | 2      
|                                                                                 |  |         |  |                                  |        
|Operating income                                                                 |  |         |  |                                  | 46,594 
|                                                                                 |  |         |  |                                  |        
|Financial Expenses                                                               |  | v,x     |  |                                  | (8,984 
|Financial Income                                                                 |  | x       |  |                                  | -      
|Group's share of earnings (losses)
    of companies accounted for at equity, net |  |         |  |                                  | 65,096 
|                                                                                 |  |         |  |                                  |        
|Income before taxes on income                                                    |  |         |  |                                  | 102,706
|Taxes on income                                                                  |  | iii     |  |                                  | 10,988 
|                                                                                 |  |         |  |                                  |        
|Net income                                                                       |  |         |  | $                                | 91,718 
|                                                                                 |  |         |  |                                  |        
|Attributable to:                                                                 |  |         |  |                                  |        
|Redeemable non-controlling interests                                             |  | vi      |  |                                  | 255    
|Equity holders of the Company                                                    |  |         |  |                                  | 73,077 
|Non-controlling interests                                                        |  |         |  |                                  | 18,386 
|                                                                                 |  |         |  | $                                | 91,718 
|                                                                                 |  |         |  |                                  |        
|Net earnings per share attributable to Formula Systems
    (1985) Shareholders   |  |         |  |                                  |        
|                                                                                 |  |         |  |                                  |        
|Basic earnings per share                                                         |  |         |  | $                                | 5.23   
|                                                                                 |  |         |  |                                  |        
|Diluted earnings per share                                                       |  |         |  | $                                | 4.99   



*Immaterial adjustment of comparative data, see Note 21(i).



F-105









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 21:- | Transition
                                         to IFRS(Cont.)
| | --------- | ------------------------------------------------------------------



Notes to the
adjustments and reclassifications made in order to comply with IFRS:



| | i. | Immaterial adjustment
                                         of comparative data :
| | -- | ------------------------------------------------------------------------------------



In the reporting
period, an error was discovered in Matrix consolidated financial statements regarding the accounting treatment of liabilities
of put options granted to non-controlling interest during the years 2011-2015 which effected its results for those years. The
Company has evaluated the materiality of the error in relation to its financial statements for the aforementioned years and after
consideration of quantitative and qualitative factors, the Company has concluded that the error is not sufficiently material to
require the reissuance of restated consolidated financial statements of the Company for 2015.



The above
correction has been included in the comparative data in these consolidated financial statements presented in accordance with U.S
GAAP by marking the corrected items "immaterial adjustment of comparative data".



The effects
of comparable data adjustments are presented in the tables below:



| | 1) | Consolidated statements of financial
                                         position presented in accordance with U.S GAAP:
| | -- | -----------------------------------------------------------------------------------------------------------------------------



|                                                                                   |  | As previously reported |         |  | The change |  |        | As presented in these financial statements | 
|---------------------------------------------------------------------------------- |  | ---------------------- | ------- |  | ---------- |  | ------ | ------------------------------------------ | 
|                                                                                   |  | USD in thousands       |        
|As of January 1, 2015:                                                             |  |                        |         |  |            |  |        |                                            | 
|                                                                                   |  |                        |         |  |            |  |        |                                            | 
|Redeemable non-controlling
    interests                                           |  |                        | 10,313  |  |            |  | 4,313  |                                            | 
|Issued share capital and reserves
    of the majority equity holder of the company |  |                        | 137,090 |  |            |  | (1,508 | )                                          | 
|Retained earnings                                                                  |  |                        | 249,998 |  |            |  | (240   | )                                          | 
|Non-controlling interests                                                          |  |                        | 266,956 |  |            |  | (2,565 | )                                          | 
|Total equity                                                                       |  |                        | 656,664 |  |            |  | (4,313 | )                                          | 
|                                                                                   |  |                        |         |  |            |  |        |                                            | 
|As of December 31, 2015:                                                           |  |                        |         |  |            |  |        |                                            | 
|                                                                                   |  |                        |         |  |            |  |        |                                            | 
|Redeemable non-controlling interests                                               |  |                        | 10,029  |  |            |  | 4,565  |                                            | 
|Issued share capital and reserves
    of the majority equity holder of the company |  |                        | 130,520 |  |            |  | (1,499 | )                                          | 
|Retained earnings                                                                  |  |                        | 318,688 |  |            |  | (340   | )                                          | 
|Non-controlling interests                                                          |  |                        | 90,709  |  |            |  | (2,726 | )                                          | 
|Total equity                                                                       |  |                        | 542,266 |  |            |  | (4,565 | )                                          | 



F-106









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 21:- | Transition
                                         to IFRS(Cont.)
| | --------- | ------------------------------------------------------------------



| | 2) | In the consolidated statements
                                         of other comprehensive income:
| | -- | ------------------------------------------------------------------------------------------------------



|                                                                                  |  | As been reported |         |  | change |  |       | As presented in these
    financial statements | 
|--------------------------------------------------------------------------------- |  | ---------------- | ------- |  | ------ |  | ----- | ---------------------------------------------- | 
|                                                                                  |  | USD in thousands |        
|Year ended December 31, 2015:                                                     |  |                  |         |  |        |  |       |                                                | 
|                                                                                  |  |                  |         |  |        |  |       |                                                | 
|Finance expenses                                                                  |  |                  | 8,254   |  |        |  | 730   |                                                | 
|Income before taxes on income                                                     |  |                  | 103,436 |  |        |  | (730  | )                                              | 
|Net income attributable
    to:                                                   |  |                  |         |  |        |  |       |                                                | 
|Equity holders of the Company                                                     |  |                  | 73,705  |  |        |  | (628  | )                                              | 
|redeemable non- controlling interests                                             |  |                  | 255     |  |        |  | -     |                                                | 
|Non-controlling interests                                                         |  |                  | 18,488  |  |        |  | (102  | )                                              | 
|Total net income                                                                  |  |                  | 92,448  |  |        |  | (730  | )                                              | 
|Net earnings per share attributable to equityholders
    of the Company (in USD): |  |                  |         |  |        |  |       |                                                | 
|Basic net earnings                                                                |  |                  | 5.24    |  |        |  | (0.01 | )                                              | 
|Diluted net earnings                                                              |  |                  | 5.00    |  |        |  | (0.01 | )                                              | 



| | ii. | Business combination – Consolidation
                                         of Sapiens and Magic
| | --- | --------------------------------------------------------------------------------------------------



Under the
U.S. GAAP, consolidation of companies is based on holding more than 50% of the outstanding voting shares of that entities. According
to IFRS, consolidation is based on effective control (“de facto control”) which exists when the parent company’s
rights in such entities are sufficient to give it power to have the practical ability to direct the relevant activities of such
entities even where it does not have more than 50% of the voting power therein.



From December
23, 2014 until September 30, 2015, Sapiens, up to that point a consolidated subsidiary of the Company, issued 1,077,003 shares
following the exercise of options by Sapiens employees that resulted in the Company’s interest in Sapiens' outstanding common
shares being diluted from 50.2% to 49.1%. Following the dilution, and in accordance with U.S. GAAP, the Company’s investment
in Sapiens was measured under the equity method of accounting due to loss of control. The gain recognized in relation of the Company’s
loss of control in Sapiens and the related re-measurement of the investment to fair value amounted to $ 56,369 and was presented
in the income statement as equity in gains of affiliated companies, net.



On March
5, 2014, Magic, up to that point a consolidated subsidiary of the Company, completed a follow-on public offering of its ordinary
shares on the NASDAQ. Magic issued 6,900,000 shares resulted in the Company’s interest in Magic’s outstanding ordinary
shares being diluted from 51.6% to 45.0%. Following the dilution and in accordance with U.S. GAAP, the Company’s investment
in Magic was measured under the equity method of accounting due to loss of control. The gain recognized in relation of the Company’s
loss of control in Magic and the related re-measurement of the investment to fair value amounted to $ 83,520 offset by $ 16,361
of deferred tax expenses, both presented in the income statement as equity in gains of affiliated companies, net.



F-107









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 21:- | Transition
                                         to IFRS(Cont.)
| | --------- | ------------------------------------------------------------------





Under the
IFRS, the Company Management has concluded that despite the lack of absolute majority of voting power at the general meetings
of shareholders of Sapiens and Magic, in accordance with IFRS 10, these investees are still controlled by the Company. The conclusion
regarding the existence of control as of January 1, 2015 and during the twelve months period ended 31 December 2015 and 2016,
in line with IFRS 10 (See Note 2 (2)).



With respect
to the business combination of Magic, which was not consolidated as a subsidiary under U.S. GAAP in the Company’s consolidated
statements of financial position before the date of the transition to IFRS, the Company has not applied IFRS 3 Business Combinations
retrospectively. As a result, the deemed cost of Magic’s goodwill as of the transition date was null, reflecting that the
Company’s interests in Magic’s adjusted net assets, in accordance with IFRS, were higher than its historical cost
in Magic shares. This resulted in a decrease in “investments in company’s accounted for at equity” as of January
1, 2015 and December 31, 2015 by $ 168,665 and $ 172,919, respectively, of which $ 84,570 was recorded against retained earnings
reflecting the reduction in the deemed cost of the investment in Magic, and the reminder of it against consolidation of Magic’s
net assets (after being adjusted to comply with IFRS). The related measurement in the statements of profit or loss for the year
ended December 31, 2015 decreased by $ 1,519 reflecting the elimination of the amortization of the excess costs recorded under
U.S. GAAP with respect to the Company’s investment in Magic, and by $ 393 reflecting the elimination of the effects of dilutions
in the Company’s holdings in Magic that recorded through profit or loss, in accordance with the equity method of accounting,
under the U.S. GAAP.



With respect
to the business combination of Sapiens and Matrix, which were consolidated as subsidiaries under the U.S. GAAP in the Company’s
statements of financial position before the date of the transition to IFRS, the Company has not applied IFRS 3 Business Combinations
retrospectively. As a result, assets recognized and liabilities assumed in the past business combinations under U.S. GAAP have
remained unchanged at the date of transition.



| | iii. | Deferred taxes
| | ---- | --------------





Under
the U.S. GAAP, the Company has recognized deferred tax liabilities with respect to its investments measured under the equity method
of accounting (Magic Software as of January 1, 2015 and Magic Software and Sapiens as of December 31, 2015). In addition, the Company
recorded deferred tax assets, primarily with respect to its net operating loss carry forward, which were offset against the above
mentioned deferred tax liabilities on each of the respective dates. Under the IFRS, the Company does not recognized any deferred
tax assets or liabilities with respect to its subsidiaries undistributed profits since it controls the timing of the reversal and
it is not probable that it will reverse in the foreseeable future. As a result, deferred tax liabilities with respect of the above
decreased by $ 16,361 and $ 63,524 as of January 1, 2015 and December 31, 2015, respectively against profit or loss under Group's
share of earnings (losses) of companies accounted for at equity, net.

Additionally, the Company decreased the deferred tax asset related to the post-employment benefit in an amount
of $ 2,775 and $ 3,000 as of 1 January 2015 and 31 December 2015, respectively.







| | iv. | Post-employment benefits
| | --- | ------------------------



In accordance
with U.S. GAAP, the Group’s liability for severance pay with respect to its Israeli employees (for the period for which the
employees were not included under section 14 of the Severance Pay Law) was calculated pursuant to the Severance Pay Law, based
on the most recent salary of the employees, multiplied by the number of years of employment as of the reporting date. The Group’s
plan assets, which cover part of this obligation, were presented as an asset on the Company's consolidated statements of financial
position, based on its cash-surrendered value. In accordance with IFRS, the liability for severance pay is measured using the projected
unit credit method and actuarial assumptions (which include rates of employee turnover and future salary increases based on the
estimated timing of payment), and is presented based on discounted expected future cash flows. The liability for severance pay
shown in the statement of financial position, is net of the fair value of the plan assets. Remeasurements of the net liability
are recognized in other comprehensive income in the period in which they occur.





F-108











|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 21:- | Transition
                                         to IFRS(Cont.)
| | --------- | ------------------------------------------------------------------





The Company has
elected to recognize all cumulative actuarial gains and losses as at the date of transition in retained earnings. The Group is
not required to re-compute the unrecognized portion of actuarial gains and losses from the inception of the defined benefit plans.
Instead, the Group applies IAS 19 Employee Benefits from the date of transition. Therefore, at the date of transition, the Group
recognizes the pension obligations in accordance with IAS 19 Employee Benefits and no unrecognized actuarial gains and losses are
presented at the transition date. The Group’s net liability for severance pay as of January 1, 2015 and December 31, 2015,
decreased by $ 10,713 and $ 11,662, retrospectively, as a result from the different measurement. The related cost in the statements
of profit or loss and other comprehensive income for the year ended December 31, 2015 decreased by $ 1,799 and $ 416, respectively,
and the related deferred tax expenses recorded in the consolidated statements of profit or loss increased by $ 553.



| | v. | Convertible debentures and short-term interest payable
| | -- | ------------------------------------------------------



During 2015, the
Company issued the Series B Convertible Debentures which are convertible into ordinary shares of Formula. In accordance with the
U.S. GAAP, Series B Convertible Debentures were classified as part of the Company's liabilities in the consolidated statements
of financial position. In accordance with IFRS, the conversion option contained in Series B Convertible Debentures is considered
an equity component and therefore an amount of $ 1,248 as of January 1, 2015 and December 31, 2015 was reclassified to equity.
The related remeasurment in the statements of profit or loss for the year ended December 31, 2015 increased by $ 93.



| | vi. | Redeemable non-controlling interests
| | --- | ------------------------------------



Under U.S. GAAP, redeemable non-controlling
interests were classified as mezzanine equity on the consolidated statements and measured at each reporting period at the higher
of their redemption amount or the non-controlling interest book value. The differences in the amount of the redeemable non-controlling
interests were recorded in profit or loss and included in “Net income attributable to redeemable non-controlling interests”.



In accordance with IFRS, redeemable non-controlling interests are classified as financial liability on the
consolidated statements of financial position ($ 4,266 and $ 10,958 short-term and long-term, respectively, as of January 1, 2015
and $ 4,673 and $ 14,078 short-term and long-term, respectively, as of December 31, 2015), and measure based on the present value of the consideration to be
transferred upon the exercise of the put option. The changes in the amount of the liability are carried to profit or loss under
“Financial expenses or income”. If the Group does not have present ownership, the interests are accounted for using
the partial recognition method. Accordingly, a portion of net profit attributable to non-controlling interests is still allocated
to the non-controlling interest, under “Redeemable non-controlling interests” ($ 864 in 2015) but at the end of the
reporting period the non-controlling interests are reclassified as a financial liability. The difference between non-controlling
interests at the end of the reporting period and the present value of the liability is recognized directly in equity of the Group,
under “Adjustment to redeemable non-controlling interests”. If the option is exercised in subsequent periods, the consideration
paid upon exercise is treated as settlement of the liability. If the option expires, the liability is settled and it is a portion
of the investment in the subsidiary disposed of, without loss of control therein.



| | vii. | Liability to the OCS in respect of government grants
| | ---- | ----------------------------------------------------







In accordance
with U.S. GAAP, grants from the OCS in respect of research and development which embed a commitment for royalty payments to the
State of Israel that are contingent on execution of future sales deriving from the development, were recorded as an offset from
the related research and development expenses when the Company or its investees were entitled to such grants. The liability for
repayment with a corresponding charge to expense that is included in the cost of sales were recorded when the payment of royalties
to OCS was triggered by the respective revenues. In accordance with IFRS, government grants received from the OCS are recognized
upon receipt as a liability if future economic benefits are expected from the research project that will result in royalty-bearing
sales. A liability for the loan is first measured at fair value using a discount rate that reflects a market rate of interest.
The difference between the amount of the grant received and the fair value of the liability is accounted for as a Government grant
and recognized as a reduction of research and development expenses. After initial recognition, the liability is measured at amortized
cost using the effective interest method. Amounts paid as royalties are recognized as settlement of the liability.



As a result,
short-term and long-term liability to OCS in the Company’s consolidated statements of financial position as of January 1,
2015 and December 31, 2015 was totally increased by $ 2,987 and $ 2,618, respectively. The related costs in the statements of
profit or loss for the year ended December 31, 2015 decreased by $ 369.



| | viii. | Share-based compensation
| | ----- | ------------------------



The Company
has share-based payment awards that vest in installments based on service conditions only. Under the U.S. GAAP, the Company recognized
its share-based compensation expenses in accordance with the straight-line method. In accordance with the IFRS, the Company is
using the accelerated method. As a result, as of January 1, 2015 and December 31, 2015, additional paid-in capital increased on
the aggregate by $ 4,340 and $ 2,909, respectively against the Company’s accumulated earnings. Share-based compensation
expenses decreased by $ 849 for the year ended December 31, 2015 compared to the expense reported under U.S. GAAP.



F-109









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 21:- | Transition
                                         to IFRS(Cont.)
| | --------- | ------------------------------------------------------------------



| | ix. | Reconciliation between the total
                                         equity attributable to Formula’s shareholders as reported under the U.S. GAAP as
                                         of January 1, 2015 and December 31, 2015 compared to the amounts reported in accordance
                                         with IFRS.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|                                                                                                                                                                                                       |  | ShareCapital                |       |  | Additionalpaid-incapital |   |         | Retainedearnings |  |   | Accumulatedothercomprehensiveloss |   |  | Treasuryshares(cost) |        |   | Total Equityattributable toFormula’sshareholders |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ----- |  | ------------------------ | - | ------- | ---------------- |  | - | --------------------------------- | - |  | -------------------- | ------ | - | ------------------------------------------------ | -
|                                                                                                                                                                                                       |  | As
    of January 1, 2015   |      
|As
                                         reported in the Company’s consolidated financial statements as of December 31,
                                         2015 in accordance with U.S. GAAP: |  | $                           | 4,184 |  |                          | $ | 135,582 | *                |  | $ | 249,758                           | * |  | $                    | (1,305 | ) |                                                  | $
|Transition
    to IFRS:                                                                                                                                                                                |  |                             |       |  |                          |   |         |                  |  |   |                                   |   |  |                      |        |   |                                                  |  
|Formula’s share-based
    compensation                                                                                                                                                                 |  |                             | -     |  |                          |   | 4,340   |                  |  |   | (4,340                            | ) |  |                      | -      |   |                                                  |  
|Changes in subsidiaries’
    deemed cost to comply with IFRS                                                                                                                                           |  |                             | -     |  |                          |   | (33,421 | )                |  |   | (46,124                           | ) |  |                      | -      |   |                                                  |  
|Deferred
    tax liabilities                                                                                                                                                                           |  |                             | -     |  |                          |   | -       |                  |  |   | 16,361                            |   |  |                      | -      |   |                                                  |  
|                                                                                                                                                                                                       |  |                             | -     |  |                          |   | (29,081 | )                |  |   | (34,103                           | ) |  |                      | -      |   |                                                  |  
|                                                                                                                                                                                                       |  |                             |       |  |                          |   |         |                  |  |   |                                   |   |  |                      |        |   |                                                  |  
|As
    of January 1, 2015 in accordance with IFRS:                                                                                                                                                     |  | $                           | 4,184 |  |                          | $ | 106,501 |                  |  | $ | 215,655                           |   |  | $                    | (1,305 | ) |                                                  | $
|                                                                                                                                                                                                       |  |                             |       |  |                          |   |         |                  |  |   |                                   |   |  |                      |        |   |                                                  |  
|                                                                                                                                                                                                       |  | As
    of December 31, 2015 |      
|As
    reported in the Company’s consolidated financial statements as of December 31, 2015  in accordance with U.S. GAAP:                                                                              |  | $                           | 4,184 |  |                          | $ | 129,021 | *                |  | $ | 318,348                           | * |  | $                    | (1,576 | ) |                                                  | $
|Transition
    to IFRS as of January 1, 2015:                                                                                                                                                          |  |                             | -     |  |                          |   | (29,081 | )                |  |   | (34,103                           | ) |  |                      | -      |   |                                                  |  
|                                                                                                                                                                                                       |  |                             |       |  |                          |   |         |                  |  |   |                                   |   |  |                      |        |   |                                                  |  
|Transition
    to IFRS:                                                                                                                                                                                |  |                             |       |  |                          |   |         |                  |  |   |                                   |   |  |                      |        |   |                                                  |  
|Formula’s share-based
    compensation                                                                                                                                                                 |  |                             | -     |  |                          |   | (1,431  | )                |  |   | 1,431                             |   |  |                      | -      |   |                                                  |  
|Net gain from deconsolidation
    of Sapiens                                                                                                                                                           |  |                             | -     |  |                          |   | -       |                  |  |   | (56,369                           | ) |  |                      | -      |   |                                                  |  
|Embedded conversion option
    of convertible debentures                                                                                                                                               |  |                             | -     |  |                          |   | 1,248   |                  |  |   | -                                 |   |  |                      | -      |   |                                                  |  
|Other
    adjustments                                                                                                                                                                                  |  |                             | -     |  |                          |   | (811    | )                |  |   | 949                               |   |  |                      | (1,652 | ) |                                                  |  
|                                                                                                                                                                                                       |  |                             | -     |  |                          |   | (994    | )                |  |   | (53,989                           | ) |  |                      | (1,652 | ) |                                                  |  
|                                                                                                                                                                                                       |  |                             |       |  |                          |   |         |                  |  |   |                                   |   |  |                      |        |   |                                                  |  
|As
    of December 31, 2015 in accordance with IFRS:                                                                                                                                                   |  | $                           | 4,184 |  |                          | $ | 98,946  |                  |  | $ | 230,256                           |   |  | $                    | (3,228 | ) |                                                  | $



*Immaterial adjustment of comparative data, see Note 21(i).



F-110









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 21:- | Transition
                                         to IFRS(Cont.)
| | --------- | ------------------------------------------------------------------



| | x. | Certain
                                         reclassifications have been made to the consolidated statements of financial position.
                                         Such reclassifications affect the presentation of certain items in the consolidated statement
                                         of financial position, and have no impact on net income or equity of the Group:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under the
U.S. GAAP, redeemable non-controlling interests were presented as a separate mezzanine equity item on the consolidated statements.
In accordance with IFRS, redeemable non-controlling interests are classified as financial liability on the consolidated statements
of financial position ($ 4,266 and $ 10,958 short-term and long-term, respectively, as of January 1, 2015 and $ 4,673 and $ 14,078
short-term and long-term, respectively, as of December 31, 2015).



Finance expenses
and income - In accordance with U.S. GAAP, financial income and expense were presented net in the Company’s consolidated
statements of profit or loss (although presented separately in a note). Under the IFRS, the Company has separately classified
financial income and expense in its consolidated financial statements.



Accumulate
short-term interest related to debentures ($ 213 as of December 31, 2015) has reclassified from “Other accounts payable”,
as presented under the U.S. GAAP, to “Debentures” (under short-term liabilities) to conform with the current year
presentation in the consolidated statements of financial position.



Dividend
payable to non-controlling interests was reclassified from “Dividend payable”, as presented under U.S. GAAP, to “Other
accounts payable” to conform with the current year presentation in the consolidated statements of financial position.



| | NOTE 22:- | SUBSEQUENT
                                         EVENTS
| | --------- | ----------------------------------------------------------



| | i. | In January 2017, The Company acquired
                                         all of the share capital of Michpal, an Israeli-based company that develops, sells and
                                         support a proprietary on-premise payroll software solution for processing traditional
                                         payroll stubs to Israeli companies and payroll service providers. Formula paid a purchase
                                         price of $ 22.1.million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ii. | On February 14, 2017, Sapiens
                                         entered into a share purchase agreement with StoneRiver Group L.P. (or the "Seller")
                                         and StoneRiver, Inc. (or "StoneRiver"), for the acquisition of all of the issued
                                         and outstanding share capital of StoneRiver. Sapiens consummated the acquisition in the
                                         first quarter in 2017. StoneRiver is a Denver, Colorado- based provider of technology
                                         solutions and services to the insurance industry.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-111









|FORMULA SYSTEMS (1985) LTD.                               
|----------------------------------------------------------
|AND ITS SUBSIDIARIES                                      
|NOTES
    TO THE CONSOLIDATED FINANCIAL STATEMENTS        
|U.S. dollars in thousands, except share and per share data



| | NOTE 22:- | SUBSEQUENT
                                         EVENTS (Cont.)
| | --------- | ------------------------------------------------------------------



The
acquisition consideration is approximately $100 million in cash, subject to certain adjustments based on working capital, transaction
expenses, unpaid debt and certain litigation matters. Immediately prior to closing, Sapiens purchased a representations and warranties
insurance policy covering certain indemnifiable damages under the agreement (which is referred to as the "Insurance").
The Insurance provides for coverage of $ 12,500 in the aggregate and its term is in general three years (except with respect to
certain fundamental representations and warranties, as to which the term of the Insurance is six years). In addition, two escrow
funds were established by StoneRiver, for the purpose of enabling the indemnification of the Company for certain damages that
are not fully recovered under the Insurance: (i) an escrow fund of $ 500 for a period of one year and (ii) an escrow fund of $
2,000 for a period of 18 months.



| | iii. | On February 28, 2017, Sapiens (via its wholly-owned subsidiary,
Sapiens Americas Corporation, or the Borrower) entered into a secured credit agreement, or the Credit Agreement, with HSBC Bank
USA, National Association, (or the "Lender") as financing for, the acquisition of StoneRiver. Pursuant to the Credit
Agreement, Sapiens borrowed $40 million, or the Bank Loan, for a five- year term. The Bank Loan will mature in February 2022 and
is payable in equal consecutive quarterly principal installments of principal and accrued interest. The Borrower is entitled to
prepay the Bank Loan at any time (on any interest payment date) without penalty upon notice to the Lender. The Bank Loan bears
interest at the rate of LIBOR plus 1.85%.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The repayment
of the Bank Loan is secured by first priority liens over: (i) substantially all assets of the Borrower and its U.S subsidiaries;
and (ii) the shares of the Borrower held by Sapiens International Corporation B.V. Certain affiliated entities of the Borrower
have guaranteed the repayment of the Bank Loan. The Credit Agreement contains customary representations and warranties, affirmative
covenants and negative covenants, which include, without limitation, restrictions on indebtedness, liens, investments, and certain
dispositions with respect to the property secured by the lien. The Credit Agreement also contains customary events of default
that entitle the Lender to cause any or all of Sapiens indebtedness to become immediately due and payable and to foreclose on
the lien, and includes customary grace periods before certain events are deemed events of default.



| | iv. | Subsequent to the balance sheet
                                         date, Sapiens received a letter from one of its significant customers, in which the customer
                                         alleged that Sapiens has materially breached a software development project agreement
                                         between them. Sapiens informed the customer that it has not materially breached any of
                                         its obligations under the agreement and that the customer itself has materially breached
                                         the agreement. Work on the project has been halted due to the dispute. Sapiens believes
                                         that this does not have an impact on its financial statements for the year ended December
                                         31, 2016.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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F-112