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FORM 20-F
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

|o  | REGISTRATION
  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
  1934;
|-- | ---------------------------------------------------------------------------------------------------
|   |                                                                                                    
|OR
|   |                                                                                                    
|x  | ANNUAL
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934             
|   | For the
  fiscal year ended December 31, 2003;                                                     
|   |                                                                                                    
|OR
|   |                                                                                                    
|o  | TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934         
|   | For the
  transition period from __________ to ___________                                         

Commission File Number: 0-29442

|FORMULA SYSTEMS (1985) LTD.                                                                   
|----------------------------------------------------------------------------------------------
|(Exact name of registrant as specified in its charter)                                        
|                                                                                              
|Israel                                                                                        
|(Jurisdiction of incorporation or organization)                                               
|                                                                                              
|3 Abba Eban Boulevard, Herzlia 46725, Israel                                                  
|(Address of principal executive offices)                                                      
|                                                                                              
|Securities
  registered or to be registered pursuant to Section 12(b) of the Act:             
|None                                                                                          
|                                                                                              
|Securities
  registered or to be registered pursuant to Section 12(g) of the Act:             
|American Depositary Shares
Ordinary Shares, NIS 1 par value                                   
|(Title of class)                                                                              
|                                                                                              
|Securities
  for which there is a reporting obligation pursuant to Section 15(d) of the
  Act:
|American Depositary Shares
Ordinary Shares, NIS 1 par value                                   
|(Title of Class)                                                                              

As of December
31, 2003, the registrant had 10,800,000 outstanding ordinary shares, NIS 1 par
value, of which 575,327_were represented by American depositary shares as of
such date.

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

Yes xNo
o

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

Item 17 oItem
18 x

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P A R T I===========

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

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

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

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

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

1

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TABLE OF CONTENTS

|ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                           | 3 
|--------------------------------------------------------------------------------------- | --
|ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                         | 3 
|ITEM 3. KEY INFORMATION                                                                 | 3 
|ITEM 4. INFORMATION ON THE COMPANY                                                      | 16
|ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                    | 47
|ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                      | 63
|ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                               | 72
|ITEM 8. FINANCIAL INFORMATION                                                           | 77
|ITEM 9. THE OFFER AND LISTING                                                           | 78
|ITEM 10. ADDITIONAL INFORMATION                                                         | 80
|ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS                    | 92
|ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.                        | 93
|ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.                               | 93
|ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
  OF PROCEEDS | 93
|ITEM 15. CONTROLS AND PROCEDURES                                                        | 93
|ITEM 16. [RESERVED]                                                                     | 94
|ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT                                              | 94
|ITEM 16B. CODE OF ETHICS                                                                | 94
|ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                        | 94
|ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                    | 95
|ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
  PURCHASERS      | 95
|ITEM 17. FINANCIAL STATEMENTS                                                           | 96
|ITEM 18. FINANCIAL STATEMENTS                                                           | 96
|ITEM 19. EXHIBITS                                                                       | 96
|Exhibit Index                                                                           | 99

2

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ITEM 1. IDENTITY OF DIRECTORS, SENIOR
MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED
TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A.     Selected
Financial Data

The
following tables present our consolidated statement of operations and balance
sheet data for the periods and as of the dates indicated.  We derive the consolidated statement of
operations data for the years ended December 31, 2001, 2002 and 2003, and
the balance sheet data as at December 31, 2002 and 2003 from our consolidated
financial statements included elsewhere in this annual report.  Our consolidated financial statements have
been audited by Ziv Haft certified public accountants (Isr.) BDO member firm.
The consolidated income statement data for the years ended December 31, 1999
and 2000  and the consolidated balance
sheet data for the years ended December 31, 1999, 2000 and 2001 is derived
from our audited financial statements not included in this annual report. You
should read the selected consolidated financial data together with our
consolidated financial statements included elsewhere in this annual report. See
Item 5. Operating and Financial Review and Prospects.

3

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|                                                 |  | Year Ended December 31,               |        
|------------------------------------------------ |  | ------------------------------------- | -------
|                                                 |  |                                       |        
|                                                 |  | 2003                                  |        
|                                                 |  |                                       |        
|                                                 |  | $                                     |        
|                                                 |  | (In thousands, except per share data) |        
|Consolidated
  Statement of Operations
  Data:   |  |                                       |        
|                                                 |  |                                       |        
|Revenues                                         |  | $                                     | 366,830
|Cost of revenues                                 |  |                                       | 230,500
|                                                 |  |                                       |        
|Gross profit                                     |  |                                       | 136,330
|Research and development
  costs, net            |  |                                       | 17,368 
|Selling, general and
  administrative expenses   |  |                                       | 107,103
|Restructuring and
  non-recurring costs          |  |                                       | --     
|                                                 |  |                                       |        
|Operating income (loss)                          |  |                                       | 11,859 
|Financial income
  (expenses), net               |  |                                       | (3,676 
|Gain on realization of
  shareholdings,net       |  |                                       | 2,756  
|Other expenses, net                              |  |                                       | 90     
|                                                 |  |                                       |        
|Income (loss) before taxes
  on income           |  |                                       | 10,849 
|Taxes on income                                  |  |                                       | 2,540  
|Equity in losses of affiliated companies, net    |  |                                       | (1,071 
|Minority interest in losses
  (profit), net      |  |                                       | (4,118 
|                                                 |  |                                       |        
|Net income (loss)                                |  |                                       | 3,120  
|Earnings
  (loss) per share:                     |  |                                       |        
|Basic earnings (loss)                            |  |                                       | 0.29   
|Diluted earnings (loss)                          |  |                                       | 0.24   
|                                                 |  |                                       |        
|Weighted average number of shares
  outstanding: |  |                                       |        
|Basic                                            |  |                                       | 10,037 
|Diluted                                          |  |                                       | 10,285 

|                                   |  | As of December 31, |        
|---------------------------------- |  | ------------------ | -------
|                                   |  | 2003               |        
|                                   |  |                    |        
|                                   |  | $                  |        
|                                   |  | (In thousands)     |        
|Consolidated
  Balance Sheet Data: |  |                    |        
|Total assets                       |  |                    | 528,915
|Total liabilities                  |  |                    | 284,660
|Shareholders equity               |  |                    | 176,004

B.     Capitalization
and Indebtedness

Not applicable.

4

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C.      Reasons for
the Offer and Use of Proceeds

Not applicable.

D.      Risk Factors

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

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

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

| | acquisitions and dispositions of companies
  and consolidation of our subsidiaries;                            
|- | ---------------------------------------------------------------------------------------------------------------
|  |                                                                                                                
| | the size,
  time and recognition of revenue from significant contracts;                                        
|  |                                                                                                                
| | timing of
  product releases;                                                                                  
|  |                                                                                                                
| | 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;                                                                               
|  |                                                                                                                
| | increases in
  selling and marketing expenses, as well as other operating expenses;                            
|  |                                                                                                                
| | adverse
  economic conditions and currency fluctuations;                                                       
|  |                                                                                                                
| | the global
  business slow-down and the decline in capital spending in the information
  technology sector; and
|  |                                                                                                                
| | consolidation
  of our customers.                                                                              

5

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

Capital spending on information technology,
or IT, solutions has declined significantly. This global trend affected our
operating results. If IT spending continues to slow down, our business might be
seriously harmed.

We have
been affected by global economic changes, in particular the sharp decline in
capital spending in the information technology sector and the IT business
slow-down in North America and Europe, as well as in Israel.  Uncertainties in the North American,
European and Israeli markets have influenced the purchasing patterns of leading
software developers who delayed their planned orders and caused developers to
reduce the amount of their planned license commitments. These changes in
purchasing patterns in the IT industry directly affect our operating results.
Our revenues decreased from $402.5 million in 2000 to $387.7 million in 2001
and to $283.3 million in 2002. In 2003, as a result of a slight recovery of the
market, and the impact of the consolidation of the results of operations of
Sapiens International Corporation N.V., this trend changed, and our revenues increased
to $366.8 million. However, due to the IT business slow-down, we cannot assure
you that we will be able to continue increasing our revenues or keep our
revenues at the same level as in 2003.

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

One of our
major assets is comprised of debentures issued to us by Formula Vision
Technologies (F.V.T.) Ltd., or Formula Vision, in December 2001 and March 2002,
in connection with the sale of private companies held by us to Formula Vision.
In January 2004, we  exchanged a portion
of the debentures for 59.4% of Formula Visions outstanding share capital.
Following the exchange of a portion of the debentures, the aggregate amount of
the debentures is $43.2 million. We evaluate, periodically, the quality of the
indebtedness, the financial strength of Formula Vision and its ability to meet
the repayment schedule of the loan. However, in the event that Formula Vision
fails to repay the loan under the terms of the debentures, our business,
financial condition and results of operations would be materially adversely
affected.

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

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

6

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

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

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

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

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

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

7

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Any future acquisitions of companies or
technologies may distract our management and disrupt our business.

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

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

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

Our
business strategy involves raising capital for our subsidiaries through public
or private offerings. Our ability to raise capital for our subsidiaries depends
upon market and other conditions which are beyond our control. If we fail to
raise capital for our subsidiaries, it may hinder their growth. We may
therefore be required to seek alternative capital raising methods, including
borrowing money on terms which are not favorable to us. In the past, due to
difficulties we encountered in raising capital for our subsidiaries, we were
required to borrow monies from banks. Difficulties in raising capital on
favorable terms, may materially and adversely affect our business, operating
results and financial condition.

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

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

8

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Some of our
assets, consisting of approximately 50% of outstanding share capital of our
subsidiaries, Matrix IT Ltd. and BluePhoenix Solutions Ltd., are pledged to
banks. If we are unable to repay the debt, the lenders could foreclose on our
assets that are subject to liens and sell these holdings to satisfy the debt.

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

We intend
to continue to focus our efforts on selling proprietary software solutions in
international markets. We expect to continue devoting significant resources to
these efforts. If we are unable to continue achieving market acceptance for our
solutions or otherwise continue to successfully penetrate international markets,
our business will be harmed. In 2002 and 2003, we received approximately 45%
and 53% of our total revenues from customers located outside of Israel. The
expansion of our existing operations and entry into additional international
markets will require significant management attention and financial resources.
We are subject to a number of risks customary for international operations,
including:

| | changing
  product and service requirements in response to the formation of economic and
  marketing unions, including the European Union;
|- | ------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                           
| | economic or
  political changes in international markets;                                                                                 
|  |                                                                                                                                           
| | greater
  difficulty in accounts receivable collection and longer collection periods;                                                     
|  |                                                                                                                                           
| | unexpected
  changes in regulatory requirements;                                                                                          
|  |                                                                                                                                           
| | difficulties
  and costs of staffing and managing foreign operations;                                                                     
|  |                                                                                                                                           
| | the
  uncertainty of protection for intellectual property rights in some countries;                                                       
|  |                                                                                                                                           
| | multiple and
  possibly overlapping tax structures; and                                                                                   
|  |                                                                                                                                           
| | currency and
  exchange rate fluctuations.                                                                                                

If we fail to address
the strain on our resources caused by changes in our company, we will be unable to effectively manage our
business.

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

9

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

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

If we fail to
estimate accurately the costs of fixed-price contracts, we may incur losses.

We derive a
portion of our revenues from engagements on a fixed-price basis. We price these
commitments upon estimates of future costs. We bear the risk of faulty
estimates and cost overruns in connection with these commitments. Our failure
to accurately estimate the resources required for a fixed-price project, to
accurately anticipate potential wage increases, or to complete our contractual
obligations in a manner consistent with the project plan could materially
adversely affect our business, operating results, and financial condition. In
addition, we may agree to a price before the design specifications are
finalized, which could result in a fixed price that is too low, resulting in
lower margins or losses to us.

If our tools or
solutions do not function efficiently, we may incur additional expenses.

In the
course of providing our software solutions, we conduct testing to detect the
existence of failures, errors and bugs. In addition, we have instituted a
quality assurance procedure for correcting errors and bugs in our tools. The
amount of failures, errors and bugs detected to date, and the cost of
correcting them, have not been significant. However, if our solutions fail to
function efficiently or if errors or bugs are detected in our tools, we might
incur significant expenditures in an attempt to remedy the problem. The
consequences of failures, errors, and bugs could have a material adverse effect
on our business, operating results, and financial condition.

If we fail to satisfy
our customers expectations regarding our solutions, our contracts may be
cancelled and we may be the subject of damages claims.

In the
event that we fail to satisfy our customers expectations from the results of
the implementation of our solutions, or if we fail to timely deliver our
solutions to our customers, these customers may suffer damages. When this
occurs, customers can cancel our contracts. Any cancellation of a contract
could cause us to suffer damages, since we might not be paid for costs that we
incurred in performing services prior to the date of cancellation. In
addition, from time to time we may be subject to claims as a result of not
delivering our products on time or in a satisfactory manner. Such claims may
lead to material damages.

10

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

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

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

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

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

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

11

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

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

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

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

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

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

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

Dan
Goldstein, our chairman of the board, and his brother, Gad Goldstein, our
president and a member of our board, own, in the aggregate, 21.5% of our
outstanding ordinary shares.  As a
result, Dan Goldstein and Gad Goldstein are able to influence significantly the
outcome of those matters requiring shareholder approval, including the election
of directors and approval of significant corporate transactions. This share
ownership may have the effect of delaying or preventing a change in control. In
addition, potential conflicts of interest may arise in the event that we enter
into agreements or transactions with these persons. Although Israeli law
imposes certain procedures (including shareholder approval) for approval of
certain related party transactions, we cannot assure you that these procedures
will eliminate the possible detrimental effects of these conflicts of interest.
If certain transactions are not approved in accordance with required procedures
under applicable Israeli law, these transactions may be void or voidable. See
Item 7.B. Related Party Transactions Transactions between Formula and Formula
Vision.

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.

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 could adversely affect the market price of our
ordinary shares and American Depositary Shares, or ADSs. During 2002, for
example, the market price of our ADSs fluctuated between $8.16 and $16.92, and
in 2003, the market price of our ADSs fluctuated between $6.71 and $18.05. The
market price of the ordinary shares and the ADSs may fluctuate substantially
due to a variety of factors, including:

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

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

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

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

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

As of June
24, 2004, we had 10,800,000 ordinary shares outstanding, of which 462,036 were
represented by ADSs. Of the 10,800,000 shares outstanding, 2,332,263 shares are
held by affiliates. In addition, we have reserved 64,500 ordinary shares for
issuance under our option plans.  We
intend to register for resale these reserved ordinary shares upon issuance. If
a large number of our ordinary shares held by affiliates are sold in a short
period, the price of our ordinary shares would likely decrease.

We do not intend to pay dividends.

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

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

Although we
do not believe that we were a passive foreign investment company for U.S.
federal income tax purposes during 2003, we cannot assure you that we will not
be treated as a passive foreign investment company in 2004 or in future years.
We would be a passive foreign investment company if 75% or more of our gross
income in a taxable year is passive income. We would also be a passive foreign
investment company if at least 50% of our assets in a taxable year produce, or
are held for the production of, passive income. Passive income includes interest,
dividends, royalties, rents and annuities. If we are or become a passive
foreign investment company, many of you will be subject to adverse tax
consequences, including having gain realized on the sale of our ordinary shares
or ADSs be treated as ordinary income, as opposed to capital gain income, and
having potentially punitive interest charges apply to such sale proceeds.  A decline in the value of our ordinary
shares or ADSs may result in our being a PFIC. 
United States shareholders should consult with their own tax advisors
with respect to the United States tax consequences of investing in our ordinary
shares.

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For a
discussion of how we might be characterized as a PFIC and related tax
consequences, see Item 7. Taxation--United States Federal Income Tax
Considerations.

Our operating profit may decrease if the rate
of inflation in Israel exceeds the rate of devaluation of the New Israeli
Shekel against the dollar or against the euro.

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

Risks
Relating to Operations in Israel

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

Our
headquarters and principal research and development facilities are located in
Israel.  Although we generate
approximately 53% of our revenues from international markets, we are,
nonetheless, directly influenced by the political, economic and military
conditions affecting Israel. Major hostilities involving Israel or the
interruption or curtailment of trade between Israel and its present trading
partners could have a material adverse effect on our business, operating
results and financial condition. Furthermore, several countries restrict
business with Israeli companies. In addition, all nonexempt male adult citizens
of Israel, including some of our officers and employees, are obligated to
perform military reserve duty and are subject to being called for active duty
under emergency circumstances. While we have operated effectively under these
requirements since our incorporation, we cannot predict the full impact of such
conditions on us in the future, particularly if emergency circumstances occur.
If many of our employees are called for active duty, our operations in Israel
and our business may be adversely affected.

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

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

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

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

ITEM 4. INFORMATION ON THE COMPANY

A.      History
and Development of the Company

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

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

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

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Capital Expenditures
and Divestitures

Certain of
our investment and financing activities are described below. For additional
information relating to our investment and financing activities during 2002 and
2003, see Item 5.B. Liquidity and Capital Resources.

In March
2001, we completed a $10 million investment in convertible preferred shares of
Sapiens International Corporation N.V., or Sapiens, a publicly held company
traded on the Nasdaq National Market, representing approximately 24% of the
outstanding share capital of Sapiens on an as converted basis. Under the
agreement with Sapiens, we were also granted an option to invest up to an
additional $10 million on the same terms as our initial investment, subject to
certain adjustments. In December 2002, we exercised the option and invested $10
million in Sapiens in exchange for a discount conversion price of $0.83 per
common share. As part of the transaction, we converted all of our preferred
shares into common shares at the discount price. Since 2002, we purchased an
additional 916,217 shares of Sapiens in the open market for aggregate
consideration of $3.4 million. As a result, we currently hold 50.2% of Sapiens
outstanding share capital.

In
September 2001, we purchased 37.3% of the outstanding share capital of Liraz
Systems Ltd., or Liraz, an international software and services company publicly
traded on the TASE. The aggregate consideration we paid for this transaction
was $5.6 million. In October 2001, we published a special public tender offer
pursuant to which we purchased an additional 6.0% of the outstanding share
capital of Liraz for aggregate consideration of $589,000. During 2002, we purchased
514,832 shares of Liraz in the open market. Following these transactions, we
held 57.9% of Lirazs outstanding share capital. In November 2002, we sold to BluePhoenix
Solutions Ltd., or BluePhoenix, in a share exchange transaction, our
entire shareholdings in Liraz. For more information about this share exchange
transaction, see Restructuring of Our Corporate StructureSale of Liraz Shares
to BluePhoenix below.

Agreements with Shamrock, FIMI and IDB

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

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

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

In August
2000, an extraordinary general meeting of Formulas shareholders approved the
grant of additional options to Shandol to purchase 500,000 ordinary shares, to
ensure the availibility of ordinary shares for different purposes while
conducting various transactions, including the availability of ordinary shares,
if the above exchange options are exercised. In December 2003, Shandol
exercised these options to purchase 500,000 ordinary shares. The shares
purchased upon exercise of the options were sold by Shandol in transactions on
the TASE.

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

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

In
connection with the exercise of the option by Shamrock, we agreed to extend
until October 2006, the term of the put option with respect to the securities
held by Shamrock in ESI  Expert Systems Industries Ltd., or ESI, and in ESIs
subsidiaries. In addition, we agreed to extend the put option to securities
held by Shamrock in additional Formula Visions protfolio companies. It was
agreed that Shamrocks put option, if exercised, shall be exercised for cash.
We also agreed to extend until December 2005, the term of the option granted to
FIMI and IDB to exchange the securities held by them in Transtech Control Ltd.,
or Transtech, for Formulas ordinary shares. The options granted to Shamrock,
FIMI and IDB with respect to Sintecs shares were replaced in November 2002 by
options relating to Matrix shares, as described under Restructuring of Our
Corporate Structure - Sale of New Applicom, Sintec and Sivan to Matrix, below.

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

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Restructuring of Our Corporate Structure

In 1999, we
commenced a restructuring process, which continued through 2003, to simplify
our corporate structure and business environment by combining some smaller
subsidiaries to create a smaller number of larger subsidiaries with greater
operating efficiencies.  As part of the
restructuring process, we took the following steps:

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

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

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

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

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

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

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

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

In November
2001, Formula Vision exercised the option granted by Formula in July 2001, to
acquire the entire interest held by us in privately held companies. Under this
transaction, we transferred to Formula Vision our entire interest, including
related obligations, in the following companies: 51.0% interest in F.I.S.
Software Ltd., 78.0% interest in Formula Retail Solutions Ltd., 50.1% interest
in F.T.S.  Formula Telecom Solutions Ltd., 72.0% interest in N.I.P. Nikuv
International Projects Ltd., 36.0% interest in Enformia Software Ltd., 1.0%
interest in Babylon Ltd., 0.85% interest in Demantra Ltd., 100.0% interest in
Forsoft Export (1999) Ltd., 80.3% interest in Airport Systems Technologies
Ltd., 68.0% interest in Transtech Control Ltd., 50.0% interest in ESI, 34.0%
interest in GeoSim Systems Ltd., 100.0% interest in Shandol, our interest in
the first and second venture capital funds, Formula Ventures and our 100.0%
interest in the funds management company, Formula Ventures Ltd. The aggregate
consideration paid by Formula Vision was $58.9 million, reflecting the book
value of the transferred companies as of June 30, 2001, plus amounts invested
by Formula prior to the closing of the transaction.

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

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

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

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

In January
2004, Formula exchanged approximately $35 million of the aggregate amount of
the debentures for 38,000,000 shares of Formula Vision issued to Formula and
constituting 59.4% of the outstanding share capital of Formula Vision. The
price per share was NIS 4.11 ($0.93) which reflects the average closing price
of Formula Visions shares on the TASE during the 30 days preceding Formulas
resolution approving the transaction. Following the exchange of a portion of
the debentures, the outstanding amount of the debentures is $43.2 million.  Management believes that by holding a
controlling interest in Formula Vision, Formula would benefit from capital
gains generated by Formula Vision from realization of its assets. Based on this
determination, it was in the best interests of Formula to exchange a portion of
the debentures for a 59.4% interest in Formula Vision. For more information,
see Item 7.B. Related Party Transactions Transactions between Formula and
Formula Vision.

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

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

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

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

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

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

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

During the fourth quarter of 2003, the
selling shareholders exercised the put options described above and sold to us
an aggregate of 4,224,956 shares of Matrix for aggregate consideration of $10
million.

As part of
the sale of the shares of New Applicom, Sintec and Sivan to Matrix, we
published in October 2002, cash tender offers for the shares of New Applicom,
Sintec and Sivan not owned by us. As a result, Sintecs shares ceased to be
traded on the TASE. Following the closing of the tender offers, we sold to
Matrix the shares that we purchased in the tender offers for the same purchase
price we paid for the tendered shares; $3.7 for each New Applicom share, $0.8 for
each Sintec share and $0.15 for each Sivan share. In November 2002, Matrix
published tender offers for the shares of New Applicom and Sivan held by the
public. In June 2003, Matrix published an additional tender offer to purchase
the shares of New Applicom, in which Matrix purchased the remaining outstanding
share capital of New Applicom held by the public. In January 2004, Matrix
published an additional tender offer to purchase the shares of Sivan, in which
Matrix purchased the remaining outstanding share capital of Sivan held by the
public. Matrix currently holds the entire share capital of New Applicom, Sintec
and Sivan.

22

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B.      Business
Overview

General

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

IT Services

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

Proprietary Software Solutions

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

The Formula Group

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

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

|                                                                                               | strategic
  planning;                                         
|----------------------------------------------------------------------------------------------- | --------------------------------------------------------------
|                                                                                                |                                                               
|                                                                                               | marketing
  policies;                                         
|                                                                                                |                                                               
|                                                                                               | senior
  management recruitment;                              
|                                                                                                |                                                               
|                                                                                               | investment
  and budget policy;                               
|                                                                                                |                                                               
|                                                                                               | financing policies;
  and                                     
|                                                                                                |                                                               
|                                                                                               | overall
  ongoing monitoring of each subsidiarys performance.
|                                                                                                |                                                               
|We
  promote the synergy and cooperation among our subsidiaries by encouraging the
  following:
|                                                                                                |                                                               
|                                                                                               | transfer of
  technology and expertise;                       
|                                                                                                |                                                               
|                                                                                               | leveling of
  human resources demand;                         
|                                                                                                |                                                               
|                                                                                               | combining
  skills for specific projects;                     
|                                                                                                |                                                               
|                                                                                               | formation of
  critical mass for large projects; and          
|                                                                                                |                                                               
|                                                                                               | cross-selling
  to the groups customer base.                 

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

Our Subsidiaries

Matrix

Matrix IT
Ltd. is one of the largest IT companies operating in Israel, according to Duns
100 Israel Largest Enterprises 2003. 
Matrix provides advanced IT services to over 500 large corporations and
organizations in Israel. Matrixs offerings to the local IT market in Israel
include:

Software development and integration services,
including:

| | Overall
  planning, analysis, design, development, maintenance and integration of
  large-scale IT projects;
|- | ------------------------------------------------------------------------------------------------------------

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

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| | Migration of legacy systems - Matrix
  provides migration services for legacy systems, adapting them to new
  technologies, like Internet and e-commerce environments. Matrix performs downsizing
  of legacy information systems to Unix, Linux and Windows NT open
  environments, while adapting computerized processes to the customers
  business strategy.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                    
| | Consulting and professional services 
  Matrix performs all areas of IT services, including systems analysis and design, software development, testing, training and
  assimilation of software systems and software products, infrastructures,
  systems management and maintenance.                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                    
| | Outsourcing -Matrix is engaged in
  outsourcing contracts for performance of a defined portion of applications
  development, maintenance, operations and management of software and computer
  facilities for customers systems. Outsourcing a portion or all of their IT
  functions enables customers to focus on their core business.                         

Software
Products Distribution

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

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

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

Computer Hardware and IT Infrastructure

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

| | IBM
  Mainframe systems and storage devices;
|- | --------------------------------------------

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

Matrix also
provides its customers with network and infrastructure services for these
platforms.

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

Computer Training

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

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

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

Markets

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

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

Customers

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

Magic

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

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Magic
Core Technology

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

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

In
addition, Magic provides customers with an extensive framework for business
integration, called the iBOLT Integration Suite. The iBOLT Integration Suite
enables companies to utilize their existing business processes and legacy
investments, and rapidly customize solutions to meet specific enterprise needs.
iBOLT provides affordable enterprise application integration to mid-sized businesses
and system integrators.  As a
comprehensive suite for application integration, iBOLT allows the simple
integration and interoperability of diverse solutions, including legacy
applications in a quick and efficient manner. iBOLT has been identified by
leading industry analysts as a challenger in the market for enterprise
application integration solutions.

As
a comprehensive suite for application integration, iBOLT includes a robust set
of capabilities for handling integration and exchanging transactions in a
heterogeneous environment.  It includes
support for business process management, monitoring and real time
reporting.

iBOLT
provides integration and connectivity capabilities that include database
interoperability, the ability to work with multiple databases in the same
process, and the capacity to deploy on a range of systems on varied platforms.
iBOLT also includes an assortment of smart connectors and adapters and
ready-to-use components.

Magic
development and integration products empower customers to significantly improve
their business performance and return on investments by enabling the affordable
and rapid integration of diverse applications, systems and databases to
streamline business processes.

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

Enabling
Business

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

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

Development
communities have become increasingly disjointed, creating an even greater need
for a development environment that provides open interfaces to leading
technologies and standards. Magics eDeveloper and iBOLT products provide
developers with the ability to rapidly build integrated applications in a more
productive manner, lowering IT maintenance costs and decreasing time-to-market.

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

Professional
Services

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

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Strategic
Alliances

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

Vertical
Solutions

Magic
also develops, markets, and supports, through its subsidiaries, vertical
applications, including long-term care, criminal justice, and multi-facility
car and truck rental management solutions.

| | Healthcare -
  Advanced Answers on Demand, Inc. develops and markets application software
  targeted at the long-term care industry. This comprehensive solution is
  designed to meet the management information needs of retirement homes,
  nursing homes, assisted living facilities, continuing care retirement communities,
  and home health and rehabilitation agencies.                     
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                      
| | Rental Car
  Leasing - CarPro Systems Ltd. develops, markets and sells CarPro, a solution
  that includes more than 90% of the functions usually required by
  multi-facility car and truck rental companies worldwide. CarPro can manage
  such varied functions as purchasing and selling vehicles, reservations
  management, leasing and rental arrangements, and fleet control and
  management.
|  |                                                                                                                                                                                                                                                                                                                                                                                                      
| | Banking -
  Nextstep Infotech PVT Ltd. develops and markets Cheq Mate, a banking
  application that provides most of the functionality needed to run a retail
  branch, including support for various deposit types, advances, time deposits,
  bank guarantees, letters of credit and portfolio management.                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                      
| | Professional
  Services - CoreTech is an information technology consulting firm offering
  flexible and creative solutions in the areas of infrastructure design and
  delivery, application development, technology planning and implementation
  services, and supplemental staffing.                                                                                                              

Markets
and Customers

Magic markets and sells its products and
services in approximately 50 countries worldwide.  Industries that are significantly represented in the Magic
community base include finance, retail, media, telecommunications, manufacturing, tourism, and government
agencies.  Tens of thousands of
end-users run their business systems on Magic technology. These include
adidas-Salomon, Allstate, Athlon Group, Bank of France, Fiat, Nintendo, Club
Med, Compass Group PLC, Financial Times, Gannet Media, Hitachi, John Menzies
Distribution, Kodak, Matsushita, McDonalds, McKesson HBOC, Menzies World
Cargo, Merrill Lynch, Minolta, Nestle Nespresso, Philip Morris, Steelcase,
State of Washington, and the United Nations.

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BluePhoenix

BluePhoenix
Solutions Ltd. (formerly known as Crystal Systems Solutions Ltd.) develops and
markets unique enterprise information technology, or IT, modernization
solutions that enable companies to automate the process of modernizing and
upgrading their mainframe and distributed IT infrastructure and to effectively
compete in todays environment.  In
1997, BluePhoenix gained international recognition and global presence by
introducing the C-MILL conversion tool, which was developed based on
BluePhoenixs generic modernization technology.  BluePhoenix delivered C-MILL together with consulting services,
training, and support as a comprehensive conversion solution to solve the
millennium problem.  Until 1999,
BluePhoenix derived substantially all of its revenues from the provision of
year 2000 conversion projects. In 1999, BluePhoenix began focusing on the
development and marketing of new automated software renovation tools.

The
combination of BluePhoenixs comprehensive set of products and tools with its
expert services methodology provides an efficient and cost-effective process
for extending the return on investment of existing enterprise IT assets.  BluePhoenix solutions, which include technology
for Understanding, Presentment, Migration,
Remediation, and Redevelopment,
allow companies to fully leverage their current systems and applications, speed
up and reduce the cost of the renewal process, and effectively update their
systems in order to adapt to new business demands.

BluePhoenix
solution portfolio includes invasive and non-invasive software products,
software tools and support services that address the most pressing challenges
organizations and companies face today.

BluePhoenix
solutions enable companies to:

| | better
  understand and manage their IT systems and resources;                                                 
|- | ---------------------------------------------------------------------------------------------------------------
| | easily
  integrate packaged applications and build customized applications;                                    
| | significantly
  decrease maintenance, human resource, and technology costs;                                    
| | quickly
  migrate to modern databases, platforms, applications, and programming
  languages;                   
| | substantially
  transform applications and databases in order to address regulatory and
  business changes; and
| | directly
  gain access to cutting edge technology and new business channels.                                   

BluePhoenixs
comprehensive enterprise technologies span mainframe, midrange, and
client/server computing platforms. BluePhoenix has enhanced its expertise
through the successful completion of projects for many large organizations over
the past 17 years, establishing credibility and achieving international
recognition and presence. Based on BluePhoenix technology and that of its
affiliates, BluePhoenix develops and markets software products, tools, and
related methodologies. BluePhoenix delivers its tools and methodologies
together with training and support in order to provide enterprises with
comprehensive solutions, primarily for the modernization of existing IT
systems.

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Among
the various alternatives to modernization, such as renewing legacy systems,
buying packaged software, or rebuilding entire applications, enterprise
IT modernization, or EIM, has proven to be the most efficient and
viable way for companies to protect their existing investments. BluePhoenix
provides a range of solutions designed to efficiently address the challenge of
retaining the business knowledge built into the application code while updating
the system to reflect new requirements.

The
EIM market is divided into the following categories: enterprise IT understanding,
enterprise IT presentment, enterprise IT migration, enterprise IT remediation, and enterprise IT redevelopment.
BluePhoenix provides solutions for each market area, as follows:

Enterprise IT UnderstandingBluePhoenix understanding
solutions provide automated, detailed mapping of system-wide IT activity and
the interconnections between all software components. This detailed road map
serves as the basis for optimizing the reuse of existing IT systems, tailoring
the modernization plan for the companys unique IT environment and corporate
requirements, and reducing future ongoing maintenance costs. BluePhoenix IT Discovery
application portfolio management system provides fast and convenient access to
application inventory, dependency, and operational information. This tool
performs the complete audit necessary to enable companies to define and analyze
all application assets in order to make informed decisions about ongoing
modernization activities.

Enterprise IT PresentmentBluePhoenixenterprise
IT presentment solutions enable companies to more effectively use
the large amount of information produced by batch reports generated from legacy
systems. The presentment process extracts and manages report and document
content and then selectively redisplays it in graphical form over the Web. The
results are easy to access, read, and distribute, fully secure, and do not
require large amounts of storage space. BluePhoenixPowerTextprovides companies with the ability
to define XML (Extensible Markup Language)-based data views from their existing
reports. Each data view can be associated with an XSL (Extensible Stylesheet
Language) definition used to create a graphical presentation of the data.

Enterprise IT MigrationBluePhoenix comprehensive,
integrated set of enterprise IT migration solutions enable companies to
standardize and consolidate their IT systems by automatically converting and
redeploying applications, databases, platforms, programming languages, and data
that are implemented on outdated computing platforms.

Buying
a packaged application or rebuilding one can often be an expensive and risky
proposition. Therefore, companies often look toward migrating their existing
applications. This option is much more cost-effective and time-efficient as it
leverages their existing investments in custom applications. Additionally,
BluePhoenix migration solutions enable companies to operate their IT systems
independently, without relying on previous technology support providers. Thus,
the migration process provides significant cost savings on development,
maintenance, and human resources. BluePhoenix enterprise IT migration
suite includes the following solutions:

| | DBMSMigratorAn
  automated migration tool that converts applications from nonrelational
  databases, such as IDMS, ADABAS, and VSAM, to relational databases, such as
  DB2 and Oracle.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | PlatformMigratorAn
  automated migration tool that converts a range of platforms, including VSE,
  MVS, and Bull GCOS, and can be customized to fit the unique IT
  configuration and business rules of each customer site.                    
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                 
| | LanguageMigratorAn
  automated migration tool for converting 4GLs (fourth generation languages).
  BluePhoenix tool is currently capable of converting COBOL, ADSO and COOL:Gen.                                                               
|  |                                                                                                                                                                                                                                                 
| | DataMigratorA
  Windows-based tool for migrating data between various data system
  environments. Coupled with a step-by-step proven methodology, the tool
  provides a fully structured but still versatile automated data migration
  process
|  |                                                                                                                                                                                                                                                 
| | eXperantoA
  software product that enables mainframe applications to operate via the Web
  and other technology channels.                                                                                                                      

Enterprise IT Remediation
BluePhoenix integrated set of enterprise IT remediation solutions enable
companies to extend the life of their existing IT systems when faced with
ongoing regulatory changes and new business requirements. BluePhoenix remediation
solutions address a variety of corporate needs and include:

| | BluePhoenix RemediatorThe
  core technology used by all of the BluePhoenix remediation solutions.
  BluePhoenix Remediator uses a rule-driven approach to automate data field
  adjustment and identify code associated with various data fields.                                          
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                             
| | GTIN/UPCEnablerA
  comprehensive solution that ensures the success of GTIN (global trade
  identification number) and 2005 Sunrise compliance projects. The tool
  accelerates the compliance process and provides enhanced control over
  large-scale changes.                            
|  |                                                                                                                                                                                                                                                                                             
| | EuroEnablerA
  highly automated, rules-based tool that enables a step-by-step, comprehensive
  euro conversion process. The tool fully preserves system and data integrity
  and helps maintain the usual level of system application development and
  maintenance throughout the process.
|  |                                                                                                                                                                                                                                                                                             
| | LiraEnablerA
  rule-based tool that enables a step-by-step, comprehensive Turkish Lira
  conversion process. LiraEnabler provides several distinct benefits that
  simplify the transition effort and assure the success of the redenomination
  project.                                  

Enterprise IT RedevelopmentBluePhoenix
enterprise
IT redevelopmentsuite enables companies to efficiently mine, reuse,
and rewrite their existing applications, thus incrementally redeveloping their
legacy systems, extending them into new technologies, and saving on development
and programmer costs. BluePhoenix enterprise IT redevelopment solutions include:

| | AppBuilder -BluePhoenix
  primary redevelopment environment used for managing, maintaining, and reusing
  the complicated applications needed by large businesses. Enterprises using
  AppBuilder can build, deploy, and maintain large-scale custom-built business
  applications for years without being dependent on any particular technology.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34

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| | Visual MainWin for the Unix and Linux
  platforms (formerly MainWin)An advanced
  application-porting platform that enables IT organizations to develop
  applications in Visual C++ and deploy them natively on Unix and Linux without
  the investment that is usually associated with such an undertaking.                                                                                    
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                   
|  | BluePhoenix
  subsidiary, Mainsoft, has entered into a licensing agreement with Microsoft,
  pursuant to which Microsoft granted Mainsoft access to specified Microsoft
  source code, including new versions, service packs, and upgrade releases for
  Windows. Microsoft also granted Mainsoft distribution rights to the Windows
  object code licensed as a component in Mainsofts products.
|  |                                                                                                                                                                                                                                                                                                                                                                                                   
| | Visual MainWin for the J2EE platformThis
  new product, launched in February 2004 is a cross-platform development
  solution that bridges the .NET/J2EE divide, enabling Visual Basic .NET and C#
  developers to develop J2EE Web Applications and Web services using the Visual
  Studio .NET development environment.                                                                         

In 2003,
BluePhoenix completed the acquisition of the entire outstanding share capital
of Liraz Systems Ltd. Lirazs business includes the operations of BluePhoenix
Solutions B.V. and its international subsidiaries. Through its subsidiaries,
Liraz develops and markets the AppBuilder. Lirazs large install base includes
leading international banks and financial institutions, whose information systems
operate in various legacy environments.

Following
the Liraz acquisition, utilizing the combined broad technology offering and
worldwide marketing capabilities of the two companies, BluePhoenix became a
leading global player in the enterprise IT modernization market. In March 2003,
Gartner, Inc., a leading technology market analyst, placed BluePhoenix in the
leader quadrant of the legacy modernization market. BluePhoenix provides its
products and services worldwide through 12 offices in 10 countries, 5 full
service delivery centers, and representatives.

Customers

BluePhoenix
provides its modernization solutions directly or through strategic partners,
such as IBM, Capgemini, EDS, Cook Systems, Temenos, Millennium and TACT. Additionally,
from time to time, other IT services companies license the technologies for use
in modernization projects in various markets. BluePhoenix customers include,
among others:

35

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|Financial Services |                          | Insurance |   | Other
  Industries                    
|------------------ | ------------------------ | --------- | - | --------------------------------------
|                   |                          |           |   |                                       
|                   |                          |           |   |                                       
|                  | CharlesSchwab            |           |  | Alecta (Sweden)                       
|                  | CitiBank (USA)           |           |  | AXA (UK)                              
|                  | Credit Suisse            |           |  | LACERA (USA)                          
|                  | Fidelity                 |           |  | LBS
  (Germany)                       
|                  | Friends Provident
  (UK) |           |  | Mutual of
  America                   
|                  | FSB (Sweden)             |           |  | National
  Nederlanden
  (Netherlands)
|                  | Merrill Lynch
  (USA)    |           |  | Phoenix (Israel)                      
|                  | RSI (Spain)              |           |   |                                       
|                  | SDC (Denmark)            |           |   |                                       
|                   |                          |           |   |                                       
|                   |                          |           |   |                                       
|                   |                          |           |   |                                       

Sapiens

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

Solutions and Services

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

| | Policy INSIGHT -Policy
  INSIGHT is a fully functional, general insurance policy administration
  solution that makes it easier for brokers and agents to do business with
  carriers. This web-enabled solution reduces the cost of doing business
  through automation and optimizes risk selection through the use of rules
  based underwriting. Policy INSIGHT is designed to improve internal
  efficiencies by automating policy lifecycle processes and by allowing
  business analysts to quickly respond to changing rate and regulation issues.
  The solution also provides functionality supporting the rapid development and
  launch of new products to keep pace with competitive pressures and market
  opportunities.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Life&Pensions
  INSIGHT -Sapiens Life&Pensions INSIGHT is a powerful and
  comprehensive life and pensions solution that serves companies administering
  life insurance, pension funds, health insurance and saving plans. The system
  has life, pension and health insurance modules. It includes product
  management, individual and collective policy administration and funds
  revaluation with full unit link management. Life&Pensions INSIGHT offers
  exceptional advantages in addressing emerging trends in the life and pensions
  insurance sector:
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The system provides total integration between the insured,
  their insurance companies, involved agents or brokers and life insurance and
  pension funds personnel.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The system is dynamic, highly customizable and can easily
  accommodate any change to organizational administrative processes.                                      
| |  | The system is Web-enabled and thus is able to benefit from
  the advantages of the Internet and company intranet.                                                   
| |  | The system is multi-company, multi-currency and
  multi-language.                                                                                                   

| | MediRisk INSIGHT -MediRisk
  INSIGHT is an underwriting solution for life, health and disability
  insurance. It reduces a customers costs by automating a larger portion of
  the process of evaluating the risks of new business and by streamlining the
  procedures for handling new business. By using this solution, an insurance
  company can make underwriting assessments on new cases sooner and achieve
  greater consistency in its decision-making. Sapiens markets MediRisk INSIGHT on the
  basis of licensing and distribution agreements with MediRisk Solutions Ltd.,
  which developed the solution and holds the intellectual property rights to
  it.                                                                                                                                                                                                                                                                        
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Reinsurance INSIGHT
  - Reinsurance INSIGHT is a sophisticated solution for the insurance market,
  designed to support carriers and reinsurers in the management of all types of
  reinsurance for the general (property and casualty) and life insurance
  markets, according to the rapidly changing requirements of the international
  reinsurance market. This state-of-the-art, web-enabled solution streamlines
  and reduces the cost of handling all reinsurance functions through
  automation. The solution is based on ACORD (Association for Cooperative Operations
  Research and Development) standards and B2B XML technology, and is designed
  for a multi- language, multi- currency, multi- company environment.
  Reinsurance INSIGHT comprises 5 modules: reinsurance configuration and
  calculations, technical accounting, financial accounting and credit control,
  underwriting and statistical and actuarial analysis.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Claims INSIGHT -Claims
  INSIGHT is a solution that effectively manages and streamlines the
  information flow of claim handling across an insurance providers entire
  organization. This solution uses highly accessible business rules and
  messaging standards and allows the use of a companys existing information
  assets. Thus, the solution improves operational efficiency and enables better
  and more versatile customer service capabilities, with the goal being a
  significant reduction in the total claims payout.                                                                                                                                                                                                                                                                                                                                                                                                           

37

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| | Closed Books INSIGHT -Closed
  Books INSIGHT is a solution for life insurance companies seeking ways to
  reduce the cost of maintaining long-term closed books of business, that is,
  lines of business that are no longer current. We provide customizable
  solutions that enable
  companies to efficiently administer policies and claims relating to closed
  books. Lower ongoing cost of ownership is achieved by replacing old systems
  (which reflect out-dated business models and working practices with long
  processing cycles and limited on-line functionality) with modern technology
  and a Web browser user interface
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Sapiens
solutions are built on Sapiens eMerge.Sapiens eMerge is a
data-driven, rules-based, enterprise-scale transaction engine that facilitates
business process integrity, application scalability and high performance. Its
foundation is a rules-based development tool and repository that impose
easily-coded business rules, lending unconventional speed, visibility, agility
and cost-effectiveness to the business software life cycle. The use of Sapiens
eMerge reduces the complexity of
programming so that new applications and modifications of existing ones can be
produced in a much shorter time than through conventional programming.

Outsourcing and IT Services

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

Customers

Sapiens
global, blue-chip customer base is built on years of trust and on-time
delivery. Customers include Allianz Group, AXA, Liverpool Victoria, Menora,
Norwich Union, OneBeacon, Principal Financial, Prudential, Abbey National, ING
and Occidental Fire & Casualty, among others.

38

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nextSource Inc.

nextSource Inc. designs,
develops and implements web-based, high quality, innovative human capital
management solutions. These offerings allow customers to save money while
managing the business processes related to sourcing, procuring, and accounting
of their workforce.

nextSources
human capital management solutions include:

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

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Formula Vision

Formula
Vision Technologies (F.V.T.) Ltd. is a managing and holding company, guiding a
group of privately held IT companies with innovative, proprietary technologies
and solutions targeting international markets. Formula Vision holds a
controlling interest in some of these privately held companies and a minority
interest in the other members of the group.

Formula
Visions affiliated companies provide IT solutions for broadly diverse sectors,
including telecom and broadcast, aviation, travel, insurance, retail, customer
relations management, 3D-modeling, software testing, system reliability
applications which meet the demand for Web-based systems, legacy mainframe and
mobile networks.  Formula Vision
provides its affiliated companies with guidance and support at all levels 
management, strategy, technology, marketing, business intelligence and finance.

Formula
Visions companies have built their success on a solid customer base and
strategic partnerships with Fortune 500 multinationals, systems integrators,
media groups, and service and solution providers worldwide, such as IBM,
Oracle, Sun, Cap Gemini Ernst & Young, Peoplesoft, Lockheed Martin and
Microsoft.

Formula
Visions principal affiliated companies include:

FIS
Software

FIS
Software Ltd.focuses on developing and delivering global
software solutions that enable life and pensions companies to run their
businesses more efficiently.  FIS
solutions are based on ALIS, the companys flagship product. ALIS is a single
packaged, comprehensive and modular software platform that incorporates all
activities along the policy lifecycle and enables insurers to manage life
insurance, pensions and investment products, for individual and group clients
in line with the territorial legislation and regulations. Founded in 1984, FIS
established its international business in 1999 and employs 320 insurance domain
experts and IT software professionals across offices in the UK, France, Spain,
Holland, Greece, Israel, South Africa and Australia. Formula Insurance
Solutions clients include AXA, Unum Provident, Fidelity Investments, Merrill
Lynch, Sun Life, CNP Insurance, Pearl, Swiss Life, Scottish Equitable, Bright
Grey, AMP, NPI, Ethiniki, Clal and Eliahu. FIS also has a number of strategic
partnerships with leading systems integrators and consulting firms such as IBM
and TCS.

F.T.S.
- Formula Telecom Solutions

F.T.S. -
Formula Telecom Solutions Ltd. is a global provider of convergent telecom
management solutions for mobile, fixed-line, and advanced services operators.
F.T.S. provides a range of versatile solutions to the market, which include
convergent real-time prepaid and postpaid billing and CRM, order management,
infrastructure management, electronic bill presentment and payment software, as
well as state-of-the-art call center implementations. F.T.S. solutions range
from stand-alone modules, through adjunct next-generation platforms, to
complete integrated end-to-end systems, offered on a fixed-price basis.  F.T.S. customers include, among others,
MobilTel, Freenet.de and PT-Mobile 8.

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Babylon

Babylon
Ltd. is a leading provider of information access and translation software.
Babylons software provides users with immediate answers to vital questions
from multiple sources. Babylon offers 25 dictionaries in 13 languages,
professional glossaries from commercial companies and premium content providers
(like CNET News, Britannica, Amazon and Accuweather) and thousands of user
contributed glossaries in specific areas of expertise. The company currently
has over 24 million registered users, growing at a rate of 15,000 new users a
day.

Babylons
corporate solutions have also successfully penetrated the corporate market,
empowering corporations with mission critical information. These solutions
enable unified and simplified access to internal information sources (such as
product catalogs, ERP, CRM and corporate MIS systems) as well as external
sources (like the Internet), providing a one-click productivity tool that
improves the efficiency and effectiveness of decision-making. Babylons customers
include Ernst & Young, UPS, Coca-Cola, Gillette/Braun, Philips, Ford, AEG,
Aventis, Agis, BASF, Deutsche Bank, Amdocs, IBM, Ericsson, Fujitsu Siemens,
Nike, Pfizer, and 3M.

Clockwork
Solutions

Clockwork
Solutions Ltd. modeling tools provide life cycle system-engineering solutions
for capital-intensive major industrial companies, military organizations and
government agencies throughout the world. Clockwork focuses on the defense,
process & petrochemical and power industries, offering products and
services to customers such as the US Army, US Air Force, Raytheon, Lockheed
Martin, General Dynamics, GE Aircraft Engines, GE Energy, DOW Chemical, Conoco
Philips, Chevron Texaco and the Israeli Defense Forces. Clockworks solutions
improve the economic performance of systems by reducing costs, increasing
production, and operating with greater effectiveness.

Clockworks
propriety technology and modeling platform, SPAR, tracks the behaviors of
systems over time, exposing effects of equipment aging, maintenance policies,
and operating procedures. These unique capabilities enable the users of SPAR technology
to relate cause and effect, to quantify risks, and to guide capital investment
and major operation and maintenance improvements.

Sintec
Media

Sintec
Media Ltd. is a developer and manufacturer of broadcast management
systems.  Sintec Medias product, OnAir, is an all-in-one software system
designed to meet the rapidly changing management needs of broadcasters. OnAir
is intended for small stations as well as entire networks and station groups,
operating multi-channels over multiple regions and time zones. OnAir
features a set of powerful sales and content-inventory tools that increase
efficiency and raise profits. Sintec Medias customers include the BBC,
Canadian Broadcasting Company (CBC) and RTL.

41

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Transtech

Transtech
Control Ltd. is a market-leading provider of comprehensive airfield control and
management systems. Transtechs systems comprise a wide range of solutions,
applications, and products for critical airfield operational elements.
Transtechs airfield lighting control system is currently operating at more
than 100 international, domestic and military airports worldwide. Transtechs innovative ground surveillance system addresses the
industrys urgent needs by enhancing airport safety and accommodating increased
capacity. The system overcomes the limitations and problems inherent in
traditional surveillance systems using technologies based on unique radar and
optical sensors.   Transtechs systems
have been installed in various airports, including JFK Airport, New Denver
Airport, Beijing Airport, New Bangkok Airport and San Paolo Airport.

Sales and
Marketing

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

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

| |                         |      | Software
  Services |  | Proprietary
  Software Products |  | Total |        
| | ----------------------- | ---- | ------------------- |  | ------------------------------- |  | ----- | -------
| |                         |      |                     |  |                                 |  |       |        
| | Year ended December 31, |      | $ thousands         | 
| |                         |      |                     | 
| |                         | 2003 |                     |  | 196,782                         |  |       | 170,048
| |                         |      |                     |  |                                 |  |       |        
| |                         | 2002 |                     |  | 171,342                         |  |       | 111,968
| |                         |      |                     |  |                                 |  |       |        
| |                         | 2001 |                     |  | 208,946                         |  |       | 178,736

42

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

| |                                                         | Year
  ended December 31, |        
| | ------------------------------------------------------- | ------------------------- | -------
| |                                                         |                           |        
| |                                                         | 2003                      |        
| |                                                         |                           |        
| |                                                         | $ thousands               |        
| |                                                         |                           |        
| |                                                         |                           |        
| | Israel                                                  |                           |        
| |                                                         |                           |        
| | International:                                          |                           |        
| |                                                         |                           |        
| | United States                                           |                           |        
| |                                                         |                           |        
| | Other (includes various countries, mainly in 
  Europe) |                           |        
| |                                                         |                           |        
| |                                                         |                           | 195,722
| |                                                         |                           |        
| | Total                                                   |                           |        
| |                                                         |                           |        

Competition

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

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

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

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

43

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

Magics
principal competitors in the market for the eDeveloper technology are Visual
Basic (Microsoft), Progress, Delphi and Jbuilder (Borland), Oracle, Compuware,
Lansa and packaged applications such as SAP and PeopleSoft.  The principal
competitors in the market for our iBOLT Integration Suite are WebMethods,
Tibco, Seeburger, IBMs WebSphere, Microsofts BizTalk, Axway and Mercator.

BluePhoenixs
principal competitors consist of system integrators and tool vendors, including
leading software developers, who enable customers to replace or modernize their
legacy systems. Major system integrators in the market include IBM, Capgemini,
and EDS. In addition, BluePhoenix faces competition from niche companies
operating in each of the five principal areas of the enterprise IT
modernization market (enterprise IT understanding, migration, remediation,
redevelopment, and presentment). For example, Micro Focus International markets
its solutions to the COBOL market, Software Technologies addresses the
Natural/ADABAS arena, and other competitors focus on collecting sufficient
information about application portfolios to enable improved working processes.
Other solution developers provide legacy and distributed repository solutions
that are important for a variety of modernization processes.

Sapiens
competitors in the market for solutions offered to
the insurance industry fall into several categories. Examples of competitors
whose activities we believe are limited to their home country are ePolicy
Solutions, Taliant, OneShield, Ascendant One, Insurity, The Innovation Group,
Duck Creek and AQS in the United States; Marlborough Sterling Group, Unisys,
Sherwood and RebusIs in the United Kingdom; Falmeyer (FJA) and COR AG Insurance
Technologies in Germany. Examples of large integrators that have decided to
enter the insurance field are Electronic Data Systems and CSC (companies that
also have customer or alliance relationships with us in other fields). An
example of a competitor that is a local integrator is Ness Technologies in
Israel.

Sapiens
competitors in the business rule engines and management marketplace include
Fair-Isaac (Blaze), Computer Associates, Pegasystems, Haley, Corticon and
Versata.

Transtechs
competitors in the market of airfield lighting control systems are Siemens and
Honeywell, and in the ground surveillance systems market, Transtechs
competitors are Sensis and Raytheon.

44

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F.T.S.
principal competitors are Amdocs Ltd., Convergys Corp., CSG Systems
International Inc., Portal Software Inc., ADC Telecommunications Inc. and LHS
Group Inc. (formerly known as the SchlumbergerSema Group).

FIS
principal competitors are Marlborough Stirling, TIA (The Insurance
Application), Fineos Corporation, and RebusIS.

Software
Development

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

Intellectual
Property Rights

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

C.Organizational
Structure

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

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The
following table presents certain information regarding the control and
ownership of our significant subsidiaries, as of June 24, 2004.

|Subsidiary                                   |  | Country of Incorporation |                              | Percentage Of
  Ownership | 
|-------------------------------------------- |  | ------------------------ | ---------------------------- | ------------------------- | 
|                                             |  |                          |                              |                           | 
|                                             |  |                          |                              |                           | 
|Matrix
  IT Ltd.                             |  |                          | Israel                       |                           | 
|                                             |  |                          |                              |                           | 
|Magic
  Software Enterprises Ltd.            |  |                          | Israel                       |                           | 
|                                             |  |                          |                              |                           | 
|BluePhoenix
  Solutions Ltd.                 |  |                          | Israel                       |                           | 
|                                             |  |                          |                              |                           | 
|Sapiens International Corporation N.V.       |  |                          | Netherlands Antilles Islands |                           | 
|                                             |  |                          |                              |                           | 
|nextSource
  Inc.                            |  |                          | United States                |                           | 
|                                             |  |                          |                              |                           | 
|Formula Vision Technologies (F.V.T.) 
  Ltd. |  |                          | Israel                       |                           | 

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

D.Property, Plants and Equipment

Our
corporate headquarters, as well as the research and development and sales and
marketing headquarters of a majority of our subsidiaries, are located in
Herzlia, Israel.  We lease approximately
70,000 square feet of office space in Herzlia, pursuant to a lease which will
expire on October 31, 2005 with an option to extend for an additional 36
months. In addition, several of our subsidiaries lease approximately65,000 square feet of office space in another building in Herzlia
pursuant to leases ending in December 2006, with an option to extend for an
additional 24 or 48 months. We also lease approximately 130,000 square feet of
office space in several other locations in Israel.

We
own a 34,000 square feet facility in Or-Yehuda, Israel used for office space
of Magic.

In
addition, Sapiens leases approximately 45,000 square feet of office space in
Rechovot, Israel and several of our subsidiaries lease approximately 184,000
square feet of office space and sales and support premises in the United
States, Europe and Asia.

The
aggregate amount we paid pursuant to our lease agreements in 2003 was
approximately $10.3 million.

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

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overview

Formula
is the parent company of subsidiaries and affiliates, referred to collectively
as the Formula Group. We are principally engaged in
providing software consulting services, developing proprietary software
products and providing computer-based business solutions.  We currently hold a controlling interest in
five publicly traded subsidiaries: BluePhoenix, Magic, Matrix, Sapiens and
Formula Vision. In addition, we wholly own nextSource. We consolidate the
results of operations of our subsidiaries with ours. Our operating results are
directly influenced by the consolidation and cessation of consolidation of our
subsidiaries. This could cause significant fluctuations of our consolidated
operating results. As a result, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and you should not
rely on these comparisons as indications of our future performance.

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

In
the first quarter of 2003, our interest in Sapiens exceeded 50% of Sapiens outstanding
share capital. As a result, we began consolidating Sapiens results of
operations. The consolidation of Sapiens contributed, among others, to the
increase in our revenues in 2003 and in our selling, general and administrative
expenses.

In
January 2004, we acquired a controlling interest in Formula Vision and
accordingly began consolidating Formula Visions results of operations,
beginning with the first quarter of 2004. Formula Visions revenues in the
first quarter of 2004 were $13.5 million and its net loss was $2.8 million.

One
of our major assets is comprised of debentures issued to us by Formula Vision,
in December 2001 and March 2002, in connection with the sale of the private
companies held by us to Formula Vision. In January 2004, we exchanged a portion
of the debentures for 59.4% of Formula Visions outstanding share capital. Following the exchange of a portion of the
debentures, the aggregate amount of the debentures is $43.2
million. We evaluate, periodically, the quality of the
indebtedness, the financial strength of Formula Vision and its ability to meet
the repayment schedule of the loan.
However, our financial
condition could be seriously harmed in the event that Formula Vision fails to repay the loan under the terms of the
debentures.

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

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

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

Our functional
and reportingcurrency

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

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

Critical
Accounting Policies

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

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Revenue
Recognition

The revenue
recognition policy of each of our significant subsidiaries is material because our revenue is a key component of our
results of operations. Our revenue recognition
determines the timing of certain expenses, such as commissions and royalties.
We follow very specific and detailed guidelines in measuring revenue; however,
certain judgments affect the application of our revenue policy. Revenue results
are difficult to predict and any shortfall in revenue or delay in recognizing
revenue could cause our operating results to vary significantly from quarter to
quarter and could result in future operating losses. Should changes in conditions cause our
subsidiaries managements to determine that these guidelines are not met for
certain future transactions, revenue recognized for any reporting period could
be adversely affected.

Revenues
derived from direct software license agreements are recognized in accordance
with Statement of Position (SOP) 97-2 Software Revenue Recognition (as
amended by SOP
98-4 and SOP 98-9), upon delivery of the software when collection is probable,
the license fee is otherwise fixed or determinable and persuasive evidence of
an arrangement exists. When a project involves significant modification of
software, revenue is generally recognized according to the percentage of
completion method. Under this method, estimated revenue is generally accrued
based on costs incurred to date as a percentage of total updated estimated
costs. If our
subsidiaries do not accurately estimate the resources required or the scope of
work to be performed, or do not manage their projects properly within the
planned periods of time or satisfy their obligations under the contracts, then
future margins may be significantly and negatively affected or losses on
existing contracts may need to be recognized. Any such resulting reductions in
margins or contract losses could be material to our results of operations. Our
subsidiaries recognize contract losses, if any, in the period in which they
first become evident.

We recognize revenues from projects
billed on a time and material basis, based on SOP 81-1 Accounting for
Performance of Construction - Type and Certain Production - Type Contracts,
using contract accounting on a percentage of completion method, based on the
relationship of actual costs incurred to total costs estimated to be incurred
over the duration of the contract. Provision for estimated losses on
uncompleted contracts is made in the
period in which such losses are first determined, in the amount of the
estimated loss on the entire contract. As of December 31, 2003, no such estimated losses were
identified.

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

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

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

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

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Impairment
of Goodwill

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

Debentures

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

A.       OperatingResults

Years
Ended December 31, 2002 and 2003

Revenues.  Revenues increased 29% from $283.3 million in 2002 to $366.8 million in 2003. The increase
in revenues was mainly attributable to the consolidation of Sapiens results of
operations beginning with the first quarter of 2003, the significant increase
in nextSources revenues and an increase in demand for certain of our products
and services. Revenues from the two categories of our operation were as follows:  Revenues from the delivery of software
services increased from $171.3 million in 2002 to $196.8
million in 2003. Revenues from the sale of proprietary software solutions
increased from $112.0 million in 2002to $170.0 million in 2003.

Cost
of Revenues.  Cost of
revenues consists primarily of wages and related expenses and hardware and
other materials costs.  Cost of revenues
increased 23% from $186.9 million in 2002 to $230.5
million in 2003.  As a percentage of
revenues, cost of revenues decreased from 66% in 2002 to 63% in 2003. The increase in cost of revenues was primarily due to the consolidation of Sapiens results of operations beginning with
the first quarter of 2003 and the increase in cost of revenues of nextSource
due to the increase in its volume of activities.

Software
Development Costs, net.  Software development costs consist primarily of wages and related
expenses and, to a lesser degree, consulting fees we pay to independent
contractors engaged in research and development.  Software development costs, net, consist of software development
costs, gross, less capitalized software costs. 
Software developments costs, gross, in 2003 and 2002 were $27.6 million
and $20.4 million.  In 2003, we
capitalized software costs of $10.2 million compared to $4.4 million in
2002.  Software development costs, net,
increased 9% from $16.0 million in 2002 to $17.4 million
in 2003.  As a percentage of revenues,
software development costs, net decreased from 5.6% in 2002 to 4.7% in
2003.  The increase in software
development costs was attributed primarily to the
consolidation of Sapiens results of operations which was offset by the
decrease in software development costs of BluePhoenix and Magic, due to efficiency
measures taken by them. Amortization of capitalized software costs were $8.1
million in 2003 and $5.1 million in 2002, which amounts were included in cost
of revenues.

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Selling,
General and Administrative Expenses.  Selling, general and administrative expenses
consist primarily of severance and related expenses, travel expenses, selling
expenses, rent, utilities, depreciation,
amortization and professional fees.  Selling,
general and administrative expenses increased from $85.3 million in 2002 to
$107.1 million in 2003.  As a percentage
of revenues, selling, general and administrative expenses remained relatively
the same in 2002 and 2003.  The increase
in selling, general and administrative expenses was primarily attributable to
the consolidation of Sapiens results of operations.

Restructuring
Costs.We had no restructuring costs in 2003
compared to restructuring costs of $1.8
million in 2002.Restructuring costs in 2002 consist
primarily of wages and relocation expenses, as well as expenses incurred by
Magic related to closing of branches.

Operating
Income (Loss).  In 2003,
we had operating income of $11.9 million compared to operating loss of $6.7
million in 2002. The operating income in 2003 is attributable to the improvement
in the operating results of our subsidiaries Magic, BluePhoenix and Matrix
which were offset by the operating loss of Sapiens.The operating loss in 2002 is attributable to the operating
loss of certain of our subsidiaries which were harmed
by the global and local slow-down.

Financial
Income (Expenses), net. 
Financial expenses, net in 2003 were $3.7 million compared to financial
income, net of $3.6 million in 2002. 
Financial income (expenses), net, is influenced by various factors, including
our cash balance, changes in the exchange rate of the NIS against the dollar,
as well as changes in the Israeli CPI.

Other
Expenses, net.  Other
expenses, net in 2003 and 2002 were $90,000 and $2.1 million.  Other expenses, net in 2002
was caused primarily by a partial write off of an investment by BluePhoenix.

Gain
on Realization of Shareholdings.  Gain on realization of shareholdings in 2003
was $2.8 million compared to $4.7 million in 2002.  Gain on realization of
shareholdings in 2003 was primarily attributable to the sale of a
portion of Magic shares in the market which resulted in gain to Formula of
$722,000, gain from a decrease in our shareholdings in Matrix due to the
issuance of Matrix shares to former shareholders of New Applicom and the
issuance of Matrix shares to the shareholders of an acquired company resulting
in gain of $1.1 million, the sale of Matrix warrants in the market which
resulted in gain of $300,000 and the sale of Level 8 shares by BluePhoenix which
resulted in gain of $376,000 to BluePhoenix.Gain on realization of shareholdings in 2002 was attributable to the sale of
Level 8 shares by BluePhoenix which resulted in gain of $5.5 million to
BluePhoenix.

Taxes
on Income.  Taxes on
income in 2003 were $2.5 million compared to $2.0 million in
2002.  Our effective tax rate relates to
a portion of our earnings that we derive from capital gains. These capital
gains are partly offset by other capital gains that are tax exempt, as well as by a portion of earnings derived from operations
that are tax exempt under the Law of Encouragement of Capital Investments,
1959. Taxes on income are also attributable to certain
of our subsidiaries that had taxable income.

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Companys
Equity in Results of Affiliates, net.  Our equity in losses of affiliates, net were
$1.1 million in 2003 compared to $2.3
million in 2002.  Our equity in losses
of affiliates, net  relates to
affiliates of BluePhoenix.

Minority
Interest, net.  Minority
interest, net, includes the minority interest in companies which are not wholly
owned by the Formula Group during each of the periods indicated.
Minority interest in profits of subsidiaries in 2003 was $4.1 million compared
to minority interest in losses of subsidiaries
of $2.4 million in 2002. This increase in minority
interest, net is attributable to the profits of our subsidiaries Magic,
BluePhoenix and Matrix which was offset by a loss at Sapiens.

Years Ended December 31, 2002 and 2001

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

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

Software
Development Costs, net. Software
developments costs, gross, in 2002 and 2001 were $20.4 million and
$31.1million.  In 2002, we capitalized
software costs of $4.4 million compared to $9.9 million in 2001.  Software development costs, net, decreased
25% from $21.3 million in 2001 to $16.0 million in
2002.  As a percentage of revenues,
software development costs, net were 5.5% in 2001
and 5.6% in 2002.  The decrease in software development costs was attributed primarily to the sale to Formula Vision, at the
end of 2001, of certain of our privately-held subsidiaries characterized by
substantial research and development activities. Amortization of
capitalized software costs were $5.1 million in 2002 and $6.6 million in 2001,
which amounts were included in cost of revenues.

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

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Restructuring
Costs. Restructuring costs consist primarily of
wages and relocation expenses, as well as expenses related to closing of
branches. Restructuring costs were $11.0 million in 2001 and $1.8 million in 2002. Restructuring costs in 2002 reflect primarily Magics restructuring
costs. Magic, BluePhoenix and New Applicom contributed $6.6 million, $2.8
million and $1.5 million to the restructuring costs in 2001.

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

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

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

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

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

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

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

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Impact of Inflation and Currency Fluctuations on Results of Operations

Most
of our revenues from sale of our products and services are in dollars and euros or are
linked to the dollar or the euro, while a substantial portion of our expenses,
principally salaries and related personnel expenses, are in new Israeli
shekels, or NIS. As a result, we are exposed to the risk that the rate of
inflation in Israel exceeds the rate of devaluation of the NIS in relation to the dollar or the
euro or that the timing of this devaluation lags behind inflation in Israel.
This would have the effect of increasing the dollar or euro cost of our
operations and decreasing our operating profit. In recent years, the rate of devaluation
of the NIS against the dollar and the rate of devaluation of the NIS against
the euro have exceeded the rate of inflation, a reversal from prior years. 2003
was an exceptional year in which the Israeli consumer price index decreased by
2%. We cannot predict any future trends in the rate of inflation in Israel or
the rate of devaluation of the NIS against the dollar or against the euro. If
the dollar or euro cost of our operations in Israel increases, our operating profit will be adversely affected. From
time to time, we enter into hedging transactions to decrease the risk of
financial exposure from fluctuations in the exchange rate of the dollar and the
euro against the NIS. However, we cannot assure you that these measures
adequately protect us from adverse effects arising from the impact of inflation
in Israel.

Political,
Economic and Military Conditions in Israel

Our
headquarters and principal research and development facilities are located in
Israel.  Although we generate approximately 53% of our revenues from
international markets, we are, nonetheless, directly influenced by the political, economic and military conditions
affecting Israel.Major hostilities involving Israel or the interruption or curtailment
of trade between Israel and its present trading partners could have a material
adverse effect on our business, operating results and financial condition.
Furthermore, several countries restrict business with Israeli companies. In
addition, all nonexempt male adult citizens of Israel, including some of our
officers and employees, are obligated to perform military reserve duty and are
subject to being called for active duty under emergency circumstances. While we
have operated effectively under these requirements since our incorporation, we
cannot predict the full impact of such conditions on us in the future,
particularly if emergency circumstances occur. If many of our employees are
called for active duty, our operations in Israel and our business may be
adversely affected.

B.Liquidity and
Capital Resources

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

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Cash

At
December 31, 2003 we had cash and cash equivalents and short-term investments
of $102.2 million and at December 31, 2002, we had cash and cash equivalents
and short-term investments of $102.7 million.
At December 31, 2003, we had indebtedness to banks of $89.6 million, of which $67.7 million was current liabilities and $21.9
million was long-term liabilities. At December 31, 2002, we had indebtedness to
banks of $95.3 million, of which $87.7 million was
current liabilities and $7.6 million was
long-term liabilities.

Formula
has entered into credit facilities with several banks, pursuant to which
Formula may borrow from time to time, on a short-term basis, up to an aggregate
of $37.0 million. Formulas loan agreements contain a number of conditions and
limitations on the way in which Formula can operate its business, including
limitations on its ability to raise debt and sell or acquire assets; and
prohibition on distribution of dividends at rates that exceed prevailing rates
in other companies operating in our area of activity.  The
loan agreements also contain various covenants which require Formula to
maintain certain financial ratios related to shareholders equity and operating results that
are customary for companies of comparable size. In addition, the loans provided
by the banks will be repayable, at the discretion of the banks, in the event
that Dan Goldstein or Gad Goldstein cease to serve in their current positions
in Formula.

Some
of Formulas assets, consisting of approximately 50% of the outstanding share
capital of our subsidiaries, Matrix and BluePhoenix, are pledged to banks.

Our
subsidiaries maintain credit facilities with banks in accordance with their
cash requirements. These credit facilities include, inter alia, certain
covenants related to their operations, such as maintaining a minimum level of
shareholders equity and reaching certain operating results targets. Some of
our subsidiaries assets are pledged to the lender banks. If any of our
subsidiaries does not meet the covenants specified in its credit agreement, and
a waiver with respect to the fulfillment of such covenant has not been received
from the lender
bank, the lender bank may foreclose
on the pledged assets to satisfy the debt.

Cash
flow provided by operating activities in 2003 was $12.3 million compared to cash flow provided by operating activities of $5.0 million in 2002.

Financing
activities

Cash
flow used in financing activities in 2003 was $4.6 million compared to cash flow provided by financing activities of
$64.8 million in 2002. This was mainly the result of the following
transactions:

In
2002, BluePhoenix through its subsidiaries, repurchased 104,465 of its shares
for an aggregate of $238,000.

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In
May 2002, we completed a public offering pursuant to a prospectus in Israel of
$14.8 million of debentures. Options to purchase an aggregate of 2 million of
our ordinary shares were attached to the debentures. The debentures are payable
in a lump sum in three years, but can be redeemed earlier by the holders at a
predetermined redemption price. The nominal interest rate for each year during
the three-year term is approximately 5.77%, payable at the end of the
three-year period. Principal and interest on the debentures are linked to the
Israeli consumer price index. In June 2003, we repurchased $2.4 million
aggregate principal amount of the debentures, leaving $14.5 million aggregate
principal amount of debentures outstanding. The associated options had a term of one year and were exercisable at a
price of $15.8 per ordinary share, linked to the Israeli consumer price index. On May 31, 2003 the options expired. None of
these options were exercised.

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

During
2002, we repurchased 324,780 of Formulas ordinary shares in the open market
for aggregate consideration of $3.4 million. During 2003, we sold 300,000
Formula ordinary shares on the TASE for aggregate consideration of $4.8
million.

In
the first quarter of 2003, Magic distributed a dividend to its shareholders of
40 cents per share. The aggregate amount distributed by Magic was $11.8
million.

During
2003, Shandol exercised options to purchase 500,000 ordinary shares of Formula
for an aggregate exercise price of $7.9 million.

In
December 2003, Sapiens completed an offering in Israel of convertible
debentures and warrants exercisable into common shares of Sapiens, resulting in
gross proceeds to Sapiens of approximately $17.1 million.

Recent
financing activities

In
the first quarter of 2004, non-affiliates of Sapiens exercised options,
resulting in gross proceeds of approximately $1.6 million to Sapiens.

In
March 2004, BluePhoenix completed a $5 million private placement to
institutional investors. Under the terms of this transaction, BluePhoenix issued to the
institutional investors convertible debentures, bearing interest at an annual
rate of 2%. In addition, the institutional investors were granted warrants with
an aggregate exercise price of $2.85 million exercisable into BluePhoenix
ordinary shares. The warrants are exercisable during a period of 5 years
commencing in September 2004. Under certain circumstances, the institutional
investors may increase their investment by an additional $3 million of
debentures and receive warrants on the same terms as the initial warrants,
exercisable into such number of BluePhoenix ordinary shares equal to 50% of the
ordinary shares into which the debentures are convertible.

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In April
2000, F.I.D. Holdings Ltd. and Israel Discount Bank Ltd. invested $15 million
in eZoneXchange.com, Inc., a subsidiary of Sapiens. This private placement was
accompanied by a put/call agreement, under which the participating investors
were granted the right to require Sapiens to repurchase their shares in eZone,
beginning in May 2004, in exchange for cash and Sapiens common shares. In
February 2001, eZones operations were discontinued and Sapiens agreed to a
partial exercise of the put option, resulting in a payment to the investors of
$4.5 million. In March 2004, Sapiens entered into a new agreement with the
investors which replaced the put/call agreement and extended the period in
which Sapiens may fulfill the terms of the put option. Sapiens agreed to issue
to the investors, in a private placement, 750,000 common shares and warrants to
purchase an additional 350,000 common shares that are exercisable through
December 31, 2007. In addition, Sapiens agreed to pay the investors by May 1,
2005, in two annual installments, an aggregate of $8.6 million plus interest at
an annual rate of 7.5%.

Investment
activities

Net
cash used in investing activities in 2003 were $7.5
million and were comprised of the following transactions:

During
2003, we purchased shares of several of our subsidiaries in the open
market, as follows: 64,600 shares of BluePhoenix for an aggregate purchase price of
$150,539, 776,154 shares of Magic for an aggregate purchase price of $911,923,
1,401,189 shares of Sapiens for an aggregate purchase price of $1.2 million and
30,396 shares of Matrix for an aggregate purchase price of $46,398.

During
the fourth quarter of 2003, we purchased an aggregate of 4,224,956 shares of
Matrix for an aggregate purchase price of $10 million, under put options we
granted in October 2002 to selling shareholders of New Applicom and Sintec.

During
2003, we sold in the open market 346,364 ordinary shares of Magic for aggregate
consideration of $1.4 million, and warrants of Matrix for aggregate
consideration of $350,000.

During
2003, our subsidiaries capitalized software development costs in an aggregate
amount of $10.2 million.

As
a result of the consolidation of Sapiens in 2003, we increased our positive net
cash to $20.5 million.

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

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

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

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

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

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

Net
cash used in investing activities during 2002 and 2003 related
primarily to the purchase of fixed assets, investments in subsidiaries and
affiliates and acquisitions of new companies by us and our subsidiaries.

Recent
investment activities

In
2004, we sold in the open market, 231,182 shares of Magic for aggregate consideration of $1.6 million, and
2,600,000 shares of Matrix for aggregate consideration of $6.1 million.

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

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Commitments and Contingent Liabilities

Liens

We have
pledged securities, consisting of approximately 50% of the outstanding share
capital of our subsidiaries, Matrix and BluePhoenix, as well as bank accounts in favor of banks
under our credit facilities with those banks.

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

Guarantees

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

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

Other Contractual Commitments

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

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

In
connection with the purchase of shares of New Applicom and
Sintec from
third parties prior to selling these shares to Matrix in October 2002, we
granted the sellers certain put options to sell to us Matrixs shares that they
received in exchange for the shares of New Applicom and Sintec. During the fourth quarter of 2003, the selling shareholders exercised
the put options described above and sold to us an aggregate of 4,224,956 shares
of Matrix for aggregate consideration of $10 million. For more information, see Item 4.A. History and Development of the Company-Capital Expenditures and Divestitures-Sale of New Applicom, Sintec and Sivan to Matrix.

59

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

We
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.B. Related Party
TransactionsIndemnification of Office Holders.

Related
Party Transactions

In
January 2004, Formula acquired 59.4% of the outstanding share capital of
Formula Vision in exchange for approximately $35 million of the debentures
issued by Formula to Formula Vision in 2001. The price per share was NIS 4.11
($0.93) which reflects the average closing price of Formula Visions shares on
the TASE during the 30 days preceding Formulas resolution approving the
transaction. This transaction is considered a related party transaction since
Dan Goldstein serves as the chairman of the board of directors and the chief
executive officer of Formula and Formula Vision and was at the time of
consummation of the transaction, a controlling shareholder of Formula Vision.
In addition, Gad Goldstein serves as a director of Formula and Formula Vision.
For more information, see Item 7.B. Related Party Transactions Transactions
between Formula and Formula Vision. We believe that the price per Formula Visions share paid by Formula in
this transaction reflects a fair value of the shares. We do not believe that the impact of this
transaction on our results of operations would have been different if the
transaction would have been made with a third party not affiliated with us.

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

Effective
Corporate Tax Rates in Israel

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

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On
January 1, 2003, Israels tax laws underwent a significant tax reform
(Amendment 132 to the Income Tax Ordinance (New Version) - 1961), referred to
as the new law.
The underlying principle of the new law
is to broaden the categories of taxable income, and reduce the tax rates
imposed on employment income. Among the key provisions of this reform
legislation are (i) changes which may result in the imposition of taxes on
dividends received by an Israeli company from its foreign subsidiaries; and
(ii) the introduction of the controlled foreign corporation concept according
to which an Israeli company may become subject to Israeli taxes on certain
income of a non-Israeli subsidiary if the subsidiarys primary source of income
is passive income (such as interest, dividends, royalties, rental income or
capital gains). An Israeli company that is subject to Israeli taxes on the
income of its non-Israeli subsidiaries will receive a credit for income taxes
paid by the subsidiary in its country of residence.

C.Research and
Development, Patents and Licenses

In
2003, we spent on research and development activities $17.4 million, in 2002 we
spent $16 million and in 2001 we spent $21.3 million. The increase in the
amount spent on research and development activities in 2003 compared to 2002,
relates primarily to the consolidation of Sapiens. However, the increase was
partially offset by a decrease in the research and development expenditures of
certain of our subsidiaries as part of a cost restructuring measures taken by
these companies. The decrease in the amount spent on research and development
activities in 2002 compared to 2001, relates primarily to the sale to Formula
Vision at the end of 2001, of certain of our privately-held subsidiaries
characterized by substantial research and development activities.  For a description of our research and
development activities, see Item 4.B. Business Overview-Software Development.

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

D.Trend Information

We have been affected by global economic changes, in particular the
sharp decline in capital spending in the information technology sector and the
IT business slow-down in North America and Europe, as well as in Israel. Uncertainties in
the North American, European and Israeli markets have influenced the purchasing
patterns of leading software developers who delayed their planned orders and
caused developers to reduce the amount of their planned license commitment.
These changes in purchasing patterns in the IT industry affected directly the
operating results of some of our subsidiaries, which in turn affected our
consolidated operating results. Our revenues decreased from $402.5 million in
2000 to $387.7 million in 2001 and to $283.3 million in 2002. In 2003, as a
result of a slight recovery of the market, and the impact of the consolidation
of the results of operations of Sapiens, this trend changed, and our revenues
increased to $366.8 million. We cannot know whether the global market will
recover in the future, and how the economic conditions will continue to affect
our business.

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

E.      Off-Balance
Sheet Arrangements

We
do not have any off-balance sheet arrangements.

F.      Tabular
Disclosure of Contractual Obligations

The
following table summarizes our contractual obligations and commitments as of
December 31, 2003.

|                                                                               |  | Payment due by period |        
|------------------------------------------------------------------------------ |  | --------------------- | -------
|                                                                               |  |                       |        
|                                                                               |  | Total                 |        
|                                                                               |  |                       |        
|                                                                               |  | $ in thousands        |        
|                                                                               |  |                       |        
|                                                                               |  |                       |        
|Long
  term debt obligations                                                   |  |                       | 83,837 
|                                                                               |  |                       |        
|Lease
  obligations                                                            |  |                       | 35,076 
|                                                                               |  |                       |        
|Liability
  in respect of the acquisition
  of activities                      |  |                       | 2,149  
|                                                                               |  |                       |        
|Other
  long-term liabilities reflected on
  our balance sheet under U.S. GAAP |  |                       | 18,555 
|                                                                               |  |                       |        
|                                                                               |  |                       |        
|Total                                                                          |  |                       | 139,617

|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(1) | Other
  obligations include unrealized gains and sevarance pay, the due date of which
  is unknown.
|    |                                                                                                    

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.Directors and
Senior Management

The
following table describes information about our directors and senior management
as of June 24, 2004.

|Name                                                                                                                                                              |  | Age |  | Position                                      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --- |  | ----------------------------------------------
|                                                                                                                                                                  |  |     |  |                                               
|Dan Goldstein                                                                                                                                                     |  | 50  |  | Chairman of the Board, Chief Executive Officer
|Gad Goldstein                                                                                                                                                     |  | 45  |  | President, Director                           
|Shai Beilis                                                                                                                                                       |  | 56  |  | Director                                      
|Shlomo Nass                                                                                                                                                       |  | 44  |  | Director                                      
|Prof. Moshe Zviran (1)                                                                                                                                            |  | 48  |  | Director                                      
|Daphna Kedmi (1)                                                                                                                                                  |  | 51  |  | Director                                      
|Bruria Gross Prushansky                                                                                                                                           |  | 51  |  | Secretary and General Counsel                 
|Naamit Salomon                                                                                                                                                    |  | 40  |  | Vice President, Finance                       
|                                                                                                                                                                  |  |     |  |                                               
|                                                                                                                                                                  | 
|                                                                                                                                                                 
|(1)       Outside
  director. See Item 6.C. Board Practices
  Outside Directors; Audit Committee,
  Internal Auditor, Approval of Certain Transactions, below.
|                                                                                                                                                                  |  |     |  |                                               

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

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

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

Shlomo Nass has served as one of our directors since April 2003.  Mr. Nass is the president, a
partner and a director of I.G.B. - Israel Global Business investment group
companies.Mr. Nass performs various public duties, including serving as a
member of the excutive committee of Bar-Ilan University, as a member of the
court of appeal of the Institute of Certified Public Accountants and as a
member of various entities and committees of the Institute of Certified Public
Accountants. Mr. Nass also served as a member of the Israeli Securities
Authority (as a public representative). 
Mr. Nass holds a B.Sc. degree in economics and accounting, and an LL.B
degree, both from the Bar-Ilan University.  Mr. Nass is a certified public accountant, a member of the Israeli Bar and holds a Ph.D. in law.

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

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

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

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

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B.Compensation

In
2003, we paid to our directors and officers (eight persons) aggregate direct
remuneration of approximately $847,800. This amount includes amounts set aside or accrued to
provide post-employment benefits.

This
amount does not include the following:

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

The
amount also includes payment of directors fees to our non-employee directors.
Our employee directors do not receive fees for their services as directors. In
2003, we paid an aggregate amount of $64,758 for post-employment benefits for
our executive officers and directors.

In
November 2000, options to purchase 16,000 ordinary shares were granted to
certain of our officers under the 2000 share option plan. No director has been
granted options under this plan.  The
exercise price of the options is $30.8 
per share, as indexed to the Israeli CPI. All of these options are currently
exercisable. These
options expire on the fifth anniversary of the date of grant.

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

C.Board Practices

Pursuant
to our articles of association, directors are elected at the annual general
meeting of shareholders by a vote of the holders of a majority of the voting
power represented at the meeting. Our board is comprised of 6 persons, of which
3 have been determined to be independent within the meaning of the applicable
Nasdaq requirements. The board includes two outside directors mandated under
Israeli law and subject to additional criteria to help ensure their
independence. See -Outside Directors, below. We compensate our outside
directors in accordance with the regulations promulgated under the Israeli
Companies Law, 1999, referred to as the Companies Law. We compensate Mr. Shlomo
Nass in the same amounts we compensate our outside directors.  Each director, except for the outside
directors , holds office until the next annual general meeting of shareholders.
Officers are appointed by our board of directors. For information regarding the employment agreements
of our officers, see Item 6.B. Compensation.

Outside
Directors

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

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

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

| | the majority of shares voted at the meeting, including at least
  one-third of the shares of non-controlling shareholders voted at the meeting,
  vote in favor of election of the director; or
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | the total number of shares of non-controlling shareholders voted
  against the election of the director does not exceed one percent of the
  aggregate voting rights in the company.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
initial term of an outside director is three years and may be extended for an
additional three years. The independent directors appointed before the new
Companies Law became effective shall serve as outside directors for a term of
five years commencing upon their appointment in accordance with the provisions
of the Israeli Companies Ordinance [New Version] 1983. These directors may not
be reappointed until after two years have passed from the conclusion of their
term. At present, Ms. Daphna Kedmi and Prof. Moshe Zviran serve as our outside
directors, each of which to hold office until January 2005.

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

An
outside director is entitled to compensation as provided in regulations
promulgated under the Companies Law and is otherwise prohibited from receiving
any compensation, directly or indirectly, in connection with services provided
as an outside director.

Audit
Committee

The
Companies Law requires public companies to appoint an audit committee,
comprised of at least three directors, including all of the outside directors.
The chairman of the board of directors, any director employed by or otherwise
providing services to the company, and a controlling shareholder or any
relative of a controlling shareholder, may not be a member of the audit
committee.

In
addition, under the applicable NASDAQ rules, we are currently required to have
at least two independent directors and to maintain an audit committee, which
two out of three of its members are independent of management. Our outside
directors qualify as independent directors under the applicable NASDAQ rules
and those of the Securities and Exchange Commission. We have established an audit committee,
consisting of the two outside directors, Prof. Moshe Zviran and Daphna Kedmi,
as well as Shlomo Nass. The board has agreed that Shlomo Nass is an audit
committee financial expert as defined by applicable SEC regulations. See Item
16A. Audit Committee Financial Expert.

Under
the Companies Law, the audit committee is responsible for overseeing the
business management practices of the company in consultation with the companys
internal auditor and the independent auditor, making recommendations to the
board to improve such practices and approving related party transactions as
required by law. In accordance with the Sarbanes-Oxley Act and Nasdaq
requirements, our audit committee is directly responsible for the appointment,
compensation, retention and oversight of our independent auditors. In addition,
the audit committee is responsible for assisting the board in monitoring our
financial statements and the effectiveness of our internal controls. We are in
the process of implementing a formal audit committee charter embodying these
responsibilities.

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Internal
Auditor

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

Exculpation,
Insurance and Indemnification of Directors and Officers

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

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

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

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

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

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

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

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

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

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

Approval
of Certain Transactions under the Companies Law

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

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

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

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

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

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D.Employees

We
have approximately 3,500 full-time employees, of whom approximately 3,100 are software
professionals.  In 2002, we had the same approximate number of employees. In 2001, we had approximately 3,700 full-time employees, of whom approximately 3,300 were software professionals.  The number of our employees in 2002 and 2003
remained relatively the same as a result of an increase in the number of
employees of Matrix and nextSource in 2003 that was offset by a decrease in the
number of employees of Magic and Sapiens due to restructuring measures taken by
these subsidiaries including closing of branches and business lines. The
decrease in the number of employees in 2002 compared to 2001 relates primarily
to the sale of certain of our privately-held subsidiaries to Formula Vision, at
the end of 2001.

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

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E.Share Ownership

The
following table presents information regarding the ownership of our ordinary
shares by the persons listed in the table under Directors and Senior
Management, as of June 24, 2004.

|                                                        |  | Shares beneficially owned |           | Options to purchase
  ordinary shares        |     
|------------------------------------------------------- |  | ------------------------- | --------- | -------------------------------------------- | ----
|                                                        |  |                           |           |                                             
|Name                                                    |  | Number                    |           | Percentage of outstandingordinary shares (1) |     
|                                                        |  |                           |           |                                              |     
|Dan Goldstein                                           |  |                           | 2,000,034 |                                              | 18.5
|Gad Goldstein                                           |  |                           | 325,000   |                                              | 3.0 
|All directors and officers as a
  group (8 persons) (2) |  |                           | 2,332,263 |                                              | 21.6

|    |                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Percentages in the above
  table are based on 10,800,000 ordinary shares outstanding as of June 24, 2004.                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                 
|(2) | Each
  of the directors and executive officers not separately identified in the
  above table beneficially owns less than one percent of our outstanding
  ordinary shares (including options held by each of these persons) and have
  therefore not been separately disclosed.
|    |                                                                                                                                                                                                                                                                                 
|(3) | All
  of these options are currently exercisable at an
  exercise price of $30.8 per share, as indexed to the Israeli CPI. These options expire in November 2005.                                                                                                               
|    |                                                                                                                                                                                                                                                                                 

Arrangements
Involving the Issue or Grant of Options to Purchase Shares

The 2000 Share Option Plan

In
November 2000, we adopted a share option plan under which we may grant options
to purchase up to an aggregate of 300,000 ordinary shares to employees and
members of our management. Of these options, we granted in November 2000,
options to purchase 64,500 ordinary shares to certain of our employees,
including options to purchase 16,000 shares granted to certain of our officers
and directors. The exercise price of these options is $30.8 per share, as
indexed to the Israeli CPI. The options vested over a three-year period from
the date of grant. The options expire on the fifth anniversary of the date of
grant.  As of June 24, 2004, none of
these options has been exercised.

Option Plans of Our Subsidiaries

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

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Options
Granted to Shandol

On
August 10, 2000, an extraordinary general meeting of shareholders approved the
grant of options to Shandol, a subsidiary of Formula at that date, to purchase
500,000 ordinary shares. Shandol exercised these options in December 2003 and
sold the shares in transactions on the TASE. The exercise price of the options
was at a price per share that reflects the average price of an ordinary share
on the TASE during the 14 trading days preceding the notice of exercise. These
options were in addition to options to purchase 1,000,000 ordinary shares
previously granted to Shandol and exercised by Shandol in November 2001.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.Major Shareholders

The
following table presents information regarding the ownership of our ordinary
shares at June 24, 2004 by each person known to us to be the beneficial owner
of more than 5% of our ordinary shares based on information provided to us by
the holders or disclosed in public filings with the Securities and Exchange
Commission.  Except where we indicated
otherwise, we believe, based on information furnished by these owners, that the
beneficial owners of our shares listed below have sole investment and voting
power with respect to the shares.

|Name and Address              |  | Shares Beneficially
  Owned |  | Percent of
  Class (1) |     
|----------------------------- |  | --------------------------- |  | ---------------------- | ----
|                              |  |                             |  |                        |     
|Dan Goldstein (2)             |  | 2,000,034                   |  |                        | 18.5
|                              |  |                             |  |                        |     
|Bank Leumi LeIsrael B.M. (3) |  | 845,639                     |  |                        | 7.8 

|    |                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Ordinary
  shares deemed beneficially owned by virtue of the right of any person or group
  to acquire these ordinary shares within 60 days of June 24, 2004, are treated as outstanding only for the purposes of determining the
  percent owned by this person or group. Percentages in the above table are based on 10,800,000 ordinary shares
  outstanding as of June 24, 2004.
|(2) | In January 2002, Dan
  Goldstein purchased 850,000 ordinary shares from Shamrock Holdings of
  California Inc.                                                                                                                                                                                                                                                                      
|(3) | Bank
  Leumi LeIsrael B.M. is publicly traded on the TASE. The major shareholder of
  Bank Leumi is the Government of Israel 
  (36..9%). Shlomo Eliahu Holdings holds a 10%  interest in Bank Leumi, Otzar Hityashvut Hayehudim holds a 4.9%
  interest and Bank Hapoalim holds 5.4%.                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                     

As
of June 24, 2004, 10,800,000 ordinary shares were issued and outstanding,
excluding 24,780 ordinary shares that we purchased during 2002. At that date,
we had approximately 15 shareholders of record. All of our ordinary shares
have equal voting rights. However, under applicable Israeli law, the shares we
hold have no voting rights and, therefore, are excluded from the number of our
outstanding shares.

As
of June 24, 2004, 462,036 ADSs were issued and outstanding pursuant to a
depositary agreement with The Bank of New York, representing 462,036 of our
ordinary shares. As of that date, there were 13 registered holders of ADSs in
the United States.

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B.Related Party
Transactions

Purchase
of Sintec Media Shares by Formula Vision

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

Purchase
of T-Soft Shares by Formula Vision

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

Options
Granted to Shandol

On
August 10, 2000, an extraordinary general meeting of shareholders approved the
grant of options to Shandol, a subsidiary of Formula at that date, to purchase
500,000 ordinary shares. Shandol exercised these options in December 2003 and
sold the shares in transactions on the TASE. The aggregate exercise price of
the options was $7.9 million and was calculated at a price per share that
reflects the average price of an ordinary share on the TASE during the 14
trading days preceding the notice of exercise.

Registration
Rights Agreements

In
1997, Formula, Dan Goldstein, Gad Goldstein, Aaron Crystal and an
additional shareholder, referred to collectively as the holders, entered into a
registration rights agreement with BluePhoenix. Under this registration rights
agreement, the holders have certain registration rights with respect to their
BluePhoenix shares, beginning January 31, 1998. BluePhoenix has agreed that,
beginning January 31, 1998, at the request of the holders of a majority of the
shares held by the holders, and on no more than two occasions, BluePhoenix will
file a registration statement under the Securities Act of 1933, as amended,
referred to as the Securities Act, for an offering of the shares with respect
to which registration is requested. In addition, if BluePhoenix otherwise
proposes to register its ordinary shares under the Securities Act, these
holders may request that BluePhoenix register their shares as well, subject to
certain limitations. BluePhoenix shall bear all fees and expenses in connection
with the registration, except that the holders will pay all fees and expenses of
their own counsel and all underwriting discounts and commissions relating to
their shares. In accordance with this agreement, in May 2004, BluePhoenix
included 100,000 BluePhoenix shares held by each of Dan Goldstein, Gad
Goldstein and Aaron Crystal, in a registration statement on Form F-3 filed by
BluePhoenix under the Securities Act.

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In
October 2002, Formula and other shareholders of Liraz entered into a
registration rights agreement with BluePhoenix as part of a share exchange
agreement with those shareholders. Under this agreement, BluePhoenix agreed that, until October 12, 2005,
at the request of the holders of at least 20% of the shares issued to Liraz
shareholders under the share exchange agreement, and no more than once, BluePhoenix
will, subject to certain limitations, file a registration statement under the
Securities Act for an offering of their shares with respect to which
registration is requested. In addition, if BluePhoenix otherwise proposes to register its
ordinary shares under the Securities Act, these holders may request that BluePhoenix
registers their shares as well, subject to certain limitations. BluePhoenix
shall bear all expenses in connection with the registration, provided that all underwriting commissions shall be paid by the
holders selling shares with respect to their shares sold. In accordance with this agreement, in May
2004, BluePhoenix included 100,000 BluePhoenix shares held by Arie Kilman, in a
registration statement on Form F-3 filed by BluePhoenix under the Securities
Act.

Voting
Agreement

Messrs.
Dan Goldstein and Gad Goldstein have entered into voting agreements that
require them to vote the ordinary shares of BluePhoenix held by them as
instructed by Formula. The voting agreements may be terminated by either party
upon a prior notice.

Transactions
between Formula and Formula Vision

In
July 2001, Formula granted to Formula Vision, an option to purchase our
interests in certain privately-held companies. On November 28, 2001, Formula
Vision exercised the option. Accordingly, we transferred to Formula Vision our
entire interest, including related obligations, in certain companies for
aggregate consideration of $58.9 million. Under the agreement with Formula
Vision, Formula Vision issued to us in December 2001, a series of 5-year
debentures of $58.9 million in the aggregate, linked to the Israeli CPI and bearing an interest at an
annual rate of 5%. On March 31, 2002, we lent to Formula Vision an additional
$19.4 million in consideration for a series of debentures with similar terms of
the debentures issued in December 2001.

Formula
is entitled, during a 3-year period ending in November 2004, to repurchase from
Formula Vision up to 10% of the sold shares of the transferred companies, at
the same purchase price set out in the agreement between the parties.  As part of the agreement between us and
Formula Vision, we also transferred to Formula Vision our rights and obligations
with respect to the transferred companies under our agreements with each of
Shamrock, FIMI and IDB. This series of transactions is considered a
related party transaction since Dan Goldstein serves as the chairman of the
board of directors and the chief executive officer of Formula and Formula Vision
and was at that time, a controlling shareholder of Formula Vision. In addition,
Gad Goldstein serves as a director of Formula and Formula Vision.

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In
January 2004, Formula Vision issued to Formula 38,000,000 shares representing
59.4% of Formula Visions outstanding share capital in exchange for $35 million
of the amount of the debentures. The transaction was approved by Formulas
audit committee and by its board of directors. The price per share reflects the
average closing market price of Formula Visions share on the TASE during the
30 days preceding the date of approval of the transaction by Formulas board of
directors. In connection with this transaction,
following the receipt by Formula Vision of the opinion of the Israeli Securities
Authority, referred to as the ISA, regarding this transaction, Formula Vision
informed its shareholders that it was the ISAs  opinion that the said transaction requires the approval of
Formulas shareholders with the special majority required under the Israeli law
for approval of related party transactions. In the  absence of such approval, if required,  Formula may revoke the transaction, and may also claim damages
from Formula Vision, without revoking the transaction, provided Formula Vision
knew of Messrs. Goldsteins personal interest in the said transaction and knew,
or should have known, about the absence of such approval. The  ISAs opinion was based on the assumption
that Messrs. Goldsteins ability to direct Formulas activity derives mainly
from their substantial holdings in Formula, and as such, their positions as
office holders cannot be viewed as unrelated to their shareholdings.

The
Company is of the view, based on its legal counsels opinion, that Messrs.
Goldstein do not hold a controlling interest in Formula under the law.

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

Indemnification
of Office Holders

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

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

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

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

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

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

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 2003
was approximately $120,000.

Other
Transactions

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

C.      Interests of Experts and Counsel

Not applicable.

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ITEM 8. FINANCIAL INFORMATION

A.Consolidated
Statements and Other Financial Information

Financial
Statements

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

Legal
Proceedings

We
are not involved in any 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. We are also not involved in any material legal proceedings,
except as described below.

In
October 2003, a former New Applicom shareholder filed an application with the
Tel Aviv, Jaffa District Court to approve a claim filed by him against Matrix,
as a class action. The claim relates to the acquisition of New Applicom shares,
which Matrix consummated in June 2003. The shareholder alleges that the share
price Matrix paid to New Applicoms shareholders in the tender offer was lower
than the fair price of New Applicom shares. The maximum amount of the claim is
approximately $1.2 million in the aggregate. Under Israeli law, the courts
approval is required for the plaintiff to represent all of the shareholders of
New Applicom who sold their shareholdings to Matrix pursuant to the tender
offer. The plaintiff has applied for such approval in the lawsuit. We believe
that the allegations against Matrix in this proceed are without merit and
accordingly, filed an application to strike out the claim in limine.

In
July 2003, a former Liraz shareholder filed an application with the Tel Aviv,
Jaffa District Court to approve a claim filed by him against BluePhoenix, as a
class action. The claim relates to the acquisition of Liraz shares, which
BluePhoenix completed in March 2003. The shareholder alleges that the share
price BluePhoenix paid to Lirazs shareholders in the tender offer and in a
subsequent mandatory purchase was lower than the fair price of Liraz shares.
The maximum amount of the claim is approximately $5.8 million in the aggregate.
In the lawsuit, the plaintiff has applied for the courts approval to represent
all of the shareholders of Liraz who sold their shareholdings pursuant to the
tender offer and the mandatory acquisition. A preliminary hearing is scheduled
for October 2004. We believe that the allegations against BluePhoenix in this
proceeding are without merit and intend to vigorously defend the claim and
contest the allegations made therein.

Dividend
policy

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

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B.Significant Changes

In
January 2004, we acquired a controlling interest in Formula Vision and
accordingly began consolidating Formula Visions results of operations,
beginning with the first quarter of 2004. This has impacted our revenues,
operating income and net incme. In the first quarter of 2004, our revenues were
$109.1 million and our net income was $2.6 million. Formula Visions revenues
in the first quarter of 2004 were $13.5 million and its net loss was $2.8
million.

Except
as described above and disclosed elsewhere in this annual report, there has
been no material change in our financial
position since December 31, 200

ITEM 9. THE OFFER AND LISTING

A.      Offer andListing Details

Price
Range of Ordinary Shares

The
following table shows the high and low closing price for our ordinary shares on
the TASE, for the periods indicated. 
The exchange rate reported by the Bank of Israel on June 24, 2004 was NIS 4.509 = $1.00.

|                |                          | Closing Price Per Sharein NIS |       
|--------------- | ------------------------ | ----------------------------- | ------
|                |                          |                               |       
|Calendar Period |                          | High                          |       
|                |                          |                               |       
|                |                          |                               |       
|1999            |                          |                               | 189.90
|2000            |                          |                               | 355.00
|2001            |                          |                               | 151.30
|2002            |                          |                               | 75.80 
|                | First
  Quarter          |                               |       
|                | Second Quarter           |                               |       
|                | Third Quarter            |                               |       
|                | Fourth Quarter           |                               |       
|2003            |                          |                               | 79.40 
|                | First
  Quarter          |                               |       
|                | Second Quarter           |                               |       
|                | Third Quarter            |                               |       
|                | Fourth Quarter           |                               |       
|2004            |                          |                               |       
|                | First
  Quarter          |                               |       
|                | January                  |                               |       
|                | February                 |                               |       
|                | March                    |                               |       
|                | April                    |                               |       
|                | May                      |                               |       
|                | June
  (through June 24) |                               |       
|                |                          |                               |       

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Price
Range of American Depositary Shares

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

|                |                          | Closing Price Per Sharein $ |      
|--------------- | ------------------------ | --------------------------- | -----
|                |                          |                             |      
|Calendar Period |                          | High                        |      
|                |                          |                             |      
|                |                          |                             |      
|1999            |                          |                             | 47.94
|2000            |                          |                             | 92.19
|2001            |                          |                             | 38.00
|2002            |                          |                             | 16.92
|                | First
  Quarter          |                             |      
|                | Second Quarter           |                             |      
|                | Third Quarter            |                             |      
|                | Fourth Quarter           |                             |      
|2003            |                          |                             | 18.05
|                | First
  Quarter          |                             |      
|                | Second Quarter           |                             |      
|                | Third Quarter            |                             |      
|                | Fourth Quarter           |                             |      
|2004            |                          |                             |      
|                | First
  Quarter          |                             |      
|                | January                  |                             |      
|                | February                 |                             |      
|                | March                    |                             |      
|                | April                    |                             |      
|                | May                      |                             |      
|                | June
  (through June 24) |                             |      
|                |                          |                             |      

B.Plan of Distribution

Not applicable.

C.Markets

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

D.Selling Shareholders

Not applicable.

E.Dilution

Not applicable.

F.Expenses of the Issue

Not applicable.

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ITEM 10.
ADDITIONAL INFORMATION

A.       Share
Capital

Not applicable.

B.       Memorandum
and Articles of Association

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

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

Description
of Our Share Capital

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

Dividend
and Liquidation Rights

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

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Redemption
provisions

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

Voting,
Shareholder Meetings and Resolutions

Holders
of our ordinary shares have one vote for each ordinary share held on all
matters submitted to the vote of shareholders. These voting rights may be
affected by the grant of any special voting rights to the holders of a class of
shares with preferential rights that may be authorized in the future.

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

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

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

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

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

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Transfer
of Shares

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

Modification
of Class Rights

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

Election
of Directors

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

Anti-Takeover
Provisions; Mergers and Acquisitions under Israeli Law

Mergers

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

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Tender
Offers

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

C.Material Contracts

We
consider our investment in Sapiens and the transactions with Formula Vision as
material contracts. For a summary of the terms of these contracts, see Item 4.A. Information on the Company  Capital Expenditures and
Divestitures.

D.Exchange Controls

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

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

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E.Taxation

Israeli
Taxation

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

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

Under
current Israeli law, individual or corporate shareholders (which are not
subject to the provisions of the Inflationary Adjustments Law), selling our
ordinary shares are subject to a 15% tax rate on any capital gain accrued after
January 1, 2003 when
certain conditions are met.
However, foreign residents are exempt from capital gains tax on the sale of
traded securities of Israeli companies. 
The foregoing does not apply to companies or individuals which
are subject to Chapter II of the Income Tax (Inflationary Adjustments) Law,
1985. In general, Chapter II of the Inflationary Adjustments Law applies to all
Israeli companies and individuals, except for those companies which comply with
all of the following: (i) they do not generate any business income; (ii) they
do not apply for a deduction of financing expenses; and (iii) they are held
only by individuals. Notwithstanding the foregoing, dealers in securities in
Israel are taxed at regular tax rates applicable to business income. We
obtained a ruling from the Israeli income tax authorities confirming that
capital gains received upon sale of ADSs will be subject to the same treatment
as capital gains received upon sale of our ordinary shares.

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

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

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United
States Federal Income Tax Considerations

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

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

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

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

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

Taxation on Distributions on the Ordinary
Shares or ADSs

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

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

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

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

Taxation on Disposition of the Ordinary
Shares or ADSs

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

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

Tax Consequences if We are a Passive Foreign
Investment Company

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

| |  | The QEF regime applies
  if the United States holder elects to treat us as a  qualified electing fund (QEF) for the first taxable year in
  which the United States holder owns our ordinary shares or ADSs or in which
  we are a PFIC, whichever is later, and if we comply with certain reporting
  requirements.  If the QEF regime
  applies, then each year that we are a PFIC such United States holder will
  include in its gross income a proportionate share of the our ordinary
  earnings (which is taxed as ordinary income) and net capital gain (which is
  taxed as long-term capital gain), subject to a separate election to defer
  payment of taxes, which deferral is subject to an interest charge.  These amounts would be included in income
  by an electing United States holder for its taxable year in which our taxable
  year ends, whether or not such amounts are actually distributed to the United
  States holder.  A United States
  holders basis in our ordinary shares or ADSs for which a QEF election has
  been made would be increased to reflect the amount of any taxed but
  undistributed income.  Generally, a
  QEF election allows an electing United States holder to treat any gain
  realized on the disposition of his ordinary shares or ADSs as capital gain.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   | Once made, the QEF
  election applies to all subsequent
  taxable years of the United States holder in which it holds our ordinary
  shares or ADSs and for which we are a PFIC, and can be revoked only with the
  consent of the Internal Revenue Service. 
  The QEF election is made by attaching a completed Internal Revenue
  Service Form 8621, including the PFIC annual information statement, to a
  timely filed United States federal income tax return.  Even if a QEF election is not made, a U.S.
  person who is a shareholder in a PFIC must file a completed Internal Revenue
  Service Form 8621 every year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

88

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | If a
  QEF election is made after the first taxable year in which a United States
  holder holds our ordinary shares or ADSs and we are a PFIC, then special
  rules would apply.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | A second regime, the
  mark-to-market regime, may be elected so long as our ordinary shares or
  ADSs are publicly traded.  Pursuant to
  this regime, an electing United States holders ordinary shares or ADSs are
  marked-to-market each year and the United States holder recognizes as ordinary income or loss an amount equal to
  the difference as of the close of the
  taxable year between the fair market value of our ordinary shares or ADSs and
  the United States holders adjusted tax basis therein.  Losses are allowed only to the extent of
  net mark-to-market gain previously included by the United States holder under
  the election for prior taxable years. 
  An electing United States holders adjusted basis in our ordinary
  shares or ADSs is increased by income recognized under the mark-to-market
  election and decreased by the deductions allowed under the election.                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   | Under
  the mark-to-market election, gain on the sale of our ordinary shares or ADSs
  is treated as ordinary income, and loss on the sale of our ordinary shares or
  ADSs, to the extent the amount of loss does not exceed the net mark-to-market
  gain previously included, is treated as ordinary loss.  The mark-to-market election applies to the
  tax year for which the election is made and all later tax years, unless the
  ordinary shares or ADSs cease to be marketable or the Internal Revenue
  Service consents to the revocation of the election.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   | If
  the mark-to-market election is made after the first taxable year in which a
  United States holder holds our ordinary shares or ADSs and we are a PFIC,
  then special rules would apply.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | A United States holder
  making neither the QEF election nor the mark-to-market election is subject to
  the excess distribution regime. 
  Under this regime, excess distributions are subject to special tax
  rules.  An excess distribution is
  either (1) a distribution with respect to ordinary shares or ADSs that is
  greater than 125% of the average distributions received by the United States
  holder from us over the shorter of either the preceding three years or such
  United States holders holding period for our ordinary shares or ADSs, or (2)
  100% of the gain from the disposition of our ordinary shares or ADSs
  (including gain deemed recognized if the ordinary shares or ADSs are used as
  security for a loan).                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   | Excess distributions must be allocated ratably to each day that a
  United States holder has held our ordinary shares or ADSs.  A United States holder must include
  amounts allocated to the current taxable year and to any period prior to the
  first day of the first taxable year for which we are a PFIC in its gross
  income as ordinary income for the current taxable year.  All amounts allocated to other years of
  the United States holder would be taxed at the highest tax rate for each such
  prior year applicable to ordinary income. 
  The United States holder also would be liable for interest on the
  deferred tax liability for each such other year calculated as if such liability
  had been due with respect to each such other year.  A United States holder that is an individual is not allowed a
  deduction for interest on the deferred tax liability.  The portions of distributions that are not
  characterized as excess distributions are subject to tax in the current
  year under the normal tax rules of the Code.

89

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A United States person who
  inherits shares or ADSs in a foreign corporation that was a PFIC in the hands
  of the decedent (who was not a non resident alien and did not make either of
  the elections described above), is denied the otherwise available step-up in
  the tax basis of such shares or ADSs to fair market value at the date of
  death.  The U.S. person steps into the
  shoes of the decedent and will be subject to the rules described above.

We believe that in 2003 we were not a PFIC and currently we expect that
we will not be a PFIC in 2004.  However,
PFIC status is determined as of the end of the taxable year and is dependent on
a number of factors, including the value of our assets and the amount and type
of our gross income.  Therefore, there
can be no assurance that we will not become a PFIC for the current fiscal year
ending December 31, 2004 or in a future year. 
We will notify United States holders in the event we conclude that we
will be treated as a PFIC for any taxable year to enable United States holders
to consider whether or not to elect to treat us as a QEF for United States
federal income tax purposes or to mark to market the ordinary shares or ADSs
or to become subject to the excess distribution regime.

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

Information Reporting and Backup Withholding

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

Non-United States holders of Ordinary Shares
or ADSs

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

90

---

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

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

F.      Dividend
and Paying Agents

Not applicable.

G.      Statement by
Experts

Not applicable.

H.      Documents
On Display

Formula
files annual and submits special reports and other information with the SEC.
You may inspect and copy such material at the public reference facilities
maintained by the SEC, 450 Fifth Street, N.W., 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, 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference room.

91

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The
SEC maintains an Internet website 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.

Formulas
ADSs are quoted on the NASDAQ National Market. You may inspect reports and
other information concerning Formula at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

Information
about Formula is also available on its website at http://www.formulasystems.com.
Such information on our website is not part of this annual report.

As
a foreign private issuer, Formula is exempt from the rules under the Exchange
Act prescribing the furnishing and content of proxy statements, and Formulas
officers, directors and principal shareholders are exempt from the reporting
and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act. In addition, Formula is not required under the Exchange Act to
file periodic reports and financial statements with the Securities and Exchange
Commission as frequently or as promptly as United States companies whose
securities are registered under the Exchange Act.

I.       Subsidiary
Information

Not applicable.

ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Currency
Exchange Rate Fluctuations and Impact of Inflation

In
light of the nature of Formulas activities, Formula invests its cash and cash
equivalents in short term deposits. As of December 31, 2003, Formula invested substantially all
of the cash it held in dollar accounts bearing interest based on LIBOR and in
NIS accounts bearing interest based on the Israeli prime rate. In addition,
Formula has outstanding short-term loans in dollars and NIS. In May 2002,
Formula issued debentures to the public. Principal and
interest on those debentures are linked to the Israeli CPI. One of our major
assets is comprised of debentures issued to us by Formula Vision.These
debentures are also linked to the Israeli CPI.

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

92

---

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

Fluctuations in
Market Price of Securities We Hold

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

ITEM 12. DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES.

Not applicable.

93

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P A R T   II===========

ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

Not applicable.

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

Not applicable.

ITEM 15.
CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures.  Our chief executive officer and principal
financial officer are responsible for establishing and maintaining our
disclosure controls and procedures. These controls and procedures were designed
to ensure that information required to be disclosed in the reports that we file
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the SEC. We evaluated these disclosure controls and procedures under
the supervision of our chief executive officer and principal financial officer
as of December 31, 2003. Based on this evaluation, our chief executive officer
and principal financial officer concluded that our disclosure controls and
procedures are effective in timely alerting them to information required to be
disclosed in our periodic reports to the SEC.

(b)
Internal Control Over Financial Reporting.  There were no changes in our internal
control over financial reporting that occurred during the year ended December
31, 2003 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

ITEM 16.
[RESERVED]

ITEM 16A. AUDIT
COMMITTEE FINANCIAL EXPERT

Our board
of directors has agreed that Mr. Shlomo Nass, a member of our audit committee
and an independent member of our board of directors pursuant to the Nasdaq
requirements, is an audit committee financial expert, as defined by applicable
SEC regulations.

ITEM 16B. CODE
OF ETHICS

Formula
has adopted a code of business conduct and ethics applicable to its executive
officers, directors and all other employees. A copy of the code is available to
every Formula employee, investors and others upon request to its general
counsel. Any waiver of this code for executive officers or directors will be
disclosed through the filing of a Form 6-K.

ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

Policy
on Pre-Approval of Audit and Non-Audit Services of Independent Auditors

Our
audit committee is responsible for the oversight of our independent auditors
work. The audit committees policy is to pre-approve all audit and non-audit
services provided by Ziv Haft certified public accountants (Isr.)
BDO member firm. These services may include audit services, audit-related
services, tax services and other services, as further described below. The
audit committee sets forth the basis for its pre-approval in detail, listing
the particular services or categories of services which are pre-approved, and
setting forth a specific budget for such services. Additional services may be
pre-approved by the audit committee on an individual basis. Once services have
been pre-approved, Ziv Haft certified public accountants (Isr.) BDO
member firm and our management then report to the audit committee on a periodic
basis regarding the extent of services actually provided in accordance with the
applicable pre-approval, and regarding the fees for the services performed.

94

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Principal
Accountant Fees and Services

Formula
paid the following fees for professional services rendered by Ziv Haft
certified public accountants (Isr.) BDO member firm, for the years ended
December 31:

|                   |  | 2003             |     | 2002 | 
|------------------ |  | ---------------- | --- | ---- | 
|                   |  |                  |     |      | 
|                   |  | ($ in thousands) |    
|Audit Fees         |  |                  | 211 |      | 
|Audit-Related Fees |  |                  | --  |      | 
|Tax Fees           |  |                  | 7   |      | 
|All Other Fees     |  |                  | --  |      | 
|                   |  |                  |     |      | 
|Total              |  |                  | 218 |      | 

The
audit fees for the years ended December 31, 2003 and 2002 were for professional
services rendered for the audits of our annual consolidated financial
statements, review of our consolidated quarterly financial statements,
statutory audits of Formula and its subsidiaries, issuance of comfort letters,
consents and assistance with review of documents filed with the SEC.

The
audit-related fees for the year ended December 31, 2002 were for accounting
consultations and audits in connection with a debenture offering we consummated
in Israel.

Tax
fees for the years ended December 31, 2003 and 2002 were for services related
to the preparation of tax returns and claims for refund.

ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Not applicable.

95

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ITEM 17.
FINANCIAL STATEMENTS

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

ITEM 18.
FINANCIAL STATEMENTS

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

ITEM 19.
EXHIBITS

|Exhibit No. |  |                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                     
|            |  |                                                                                                                                                                     
|1.1         |  | Memorandum of Association*                                                                                                                                          
|            |  |                                                                                                                                                                     
|1.2         |  | Articles of Association as amended on January 7, 2001**                                                                                                             
|            |  |                                                                                                                                                                     
|2           |  | The description of terms of debentures
  issued by the Registrant in May 2002, contained in Section 2.3 of the
  prospectus of the Registrant dated May 23, 2002 ***
|            |  |                                                                                                                                                                     
|4.1         |  | Agreement dated October 1, 1999 between the Registrant and Shamrock
  Holdings of California Inc.****                                                               
|            |  |                                                                                                                                                                     
|4.2         |  | Agreement dated January 24, 2001 among the Registrant, Sapiens
  International Corporation N.V. and Yarnfield International Limited**                               
|            |  |                                                                                                                                                                     
|4.3         |  | Amendment to the agreement among the Registrant, Sapiens
  International Corporation N.V. and Yarnfield International Limited, dated
  October 20, 2002             
|            |  |                                                                                                                                                                     
|4.4         |  | Agreement dated December 30, 2001 between the Registrant and Formula
  Vision Technologies (F.V.T.) Ltd. (English summary accompanied by Hebrew
  original)*****    
|            |  |                                                                                                                                                                     
|4.5         |  | Agreement dated December 15, 2003 between the Registrant and Formula
  Vision Technologies (F.V.T.) Ltd.                                                            
|            |  |                                                                                                                                                                     
|4.6         |  | Form of the 1997 Share Option Plan (English translation from Hebrew
  original)*                                                                                    
|            |  |                                                                                                                                                                     
|4.7         |  | Form of the 2000 Share Option Plan (English translation from Hebrew
  original)**                                                                                   
|            |  |                                                                                                                                                                     
|4.8         |  | Letter of Indemnification, dated February 14, 2002*****                                                                                                             

96

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|            |  |                                                                                                                                                
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                
|            |  |                                                                                                                                                
|            |  |                                                                                                                                                
|8           |  | List of Subsidiaries                                                                                                                           
|            |  |                                                                                                                                                
|12.1        |  | Certification of the Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act                                                        
|            |  |                                                                                                                                                
|12.2        |  | Certification of the Principal Financial Officer pursuant to §302 of the Sarbanes-Oxley Act                                                    
|            |  |                                                                                                                                                
|13.1        |  | Certification of the Chief Executive
  Officer pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of
  the Sarbanes-Oxley Act    
|            |  |                                                                                                                                                
|13.2        |  | Certification of the Principal Financial
  Officer pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of
  the Sarbanes-Oxley Act

---

97

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FORMULA SYSTEMS
(1985) LTD.

(An Israeli corporation)

2003 Annual Report

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

2003 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

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

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

______________________

_____________

______

---

---

Independent Auditors Report

To the Shareholders of

FORMULA SYSTEMS
(1985) LTD.

We have audited the consolidated balance sheets of Formula Systems
(1985) Ltd. and its subsidiaries (the Company) as of December 31, 2003 and
2002 and the consolidated statements of operations, changes in shareholders
equity and cash flows for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We
did not audit the financial statements of certain subsidiaries, whose
consolidated assets constitute approximately 29.25% and 18.54% of total
consolidated assets as of December 31, 2003 and 2002, respectively, and whose
consolidated revenues constitute approximately 31.82%, 21.82% and 30% of total
consolidated revenues for the years ended December 31, 2003, 2002 and 2001,
respectively.  The financial statements
of those subsidiaries were audited by other auditors, whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
in respect of those subsidiaries is based solely on the reports of the other
auditors.

We conducted our audits in accordance with the standards issued by the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform our audit so as to obtain reasonable assurance
as to whether the financial statements are free of material misstatement. An
audit includes the examination, on a test basis, of evidence supporting the
amounts and disclosures in the financial statements. An audit also includes the
assessment of the accounting principles adopted and significant estimates made
by management, as well as an evaluation of the overall presentation in the
financial statements. We believe that our audits and the reports of the other
independent auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the reports of other auditors,
the consolidated financial statements present fairly, in all material respects,
the consolidated financial position of the Company as of December 31, 2003 and
2002, and the related consolidated results of operations and cash flows for
each of the three years in the period ended December 31, 2003, in conformity
with generally accepted accounting principles as applied in the United States
of America.

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

As discussed in Note 17, there were public reports in early
2004 that Microsoft source code was leaked to the Internet with source traces
coming from the Companys subsidiary. While the Companys subsidiary believes
its relationship with Microsoft will continue on terms acceptable to the
Companys subsidiary, a change in the relationship could materially adversely
affect the Companys subsidiary business, result of operations, and financial
condition.

Tel-Aviv, Israel

June 28, 2004

| | Ziv Haft                           
| | -----------------------------------
| |                                    
| | Certified Public Accountants (Isr.)
| |                                    
| | BDO member firm                    

F- 1

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                    |  | December 31,            |        
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  | 2003                    |        
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  | (U.S. $ in
  thousands) |        
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         |        
|ASSETS                                                                                                                              |  |                         |        
|CURRENT ASSETS:                                                                                                                     |  |                         |        
|Cash
  and cash equivalents                                                                                                         |  |                         | 93,456 
|Short-term
  investments                                                                                                            |  |                         | 8,773  
|Trade receivables (net of allowances for doubtful debts of $7,090 and $5,365
       as of December 31, 2002 and 2003, respectively) |  |                         | 93,298 
|Other
  current assets (Note 15A)                                                                                                   |  |                         | 18,846 
|Inventories                                                                                                                         |  |                         | 2,635  
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         | 217,008
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         |        
|LONG-TERM INVESTMENTS, LOANS AND RECEIVABLES:                                                                                       |  |                         |        
|Loan
  and other investments (Note 3)                                                                                               |  |                         | 3,308  
|Investments
  in affiliates (Note 4)                                                                                                |  |                         | 3,373  
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         | 6,681  
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         |        
|DEBENTURES (Note 2I)                                                                                                                |  |                         | 80,246 
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         |        
|SEVERANCE PAY FUND (Note 9)                                                                                                         |  |                         | 11,113 
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         |        
|PROPERTY AND EQUIPMENT, NET (Notes 5 and 15B)                                                                                       |  |                         | 25,756 
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         |        
|GOODWILL (Note 1I)                                                                                                                  |  |                         | 145,672
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         |        
|OTHER ASSETS, NET (Note 6)                                                                                                          |  |                         | 42,439 
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         |        
|                                                                                                                                    |  |                         | 528,915
|                                                                                                                                    |  |                         |        

F- 2

---

---

FORMULA
SYSTEMS (1985) LTD.

(An Israeli Corporation)

|                                                                                                                                                                                                                           |  | December 31,            |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  | 2003                    |        
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  | (U.S. $ in
  thousands) |        
|                                                                                                                                                                                                                           |  |                         |        
|LIABILITIES AND SHAREHOLDERS
  EQUITY                                                                                                                                                                                     |  |                         |        
|CURRENT LIABILITIES:                                                                                                                                                                                                       |  |                         |        
|Liabilities
  to banks and others (Notes 7, 8 and 15C)                                                                                                                                                                     |  |                         | 67,723 
|Trade
  payables                                                                                                                                                                                                           |  |                         | 31,327 
|Other
  accounts payable (Note 15D)                                                                                                                                                                                        |  |                         | 71,092 
|Debenture
  (Note 2J)                                                                                                                                                                                                      |  |                         | 14,160 
|Restructuring
  accrual                                                                                                                                                                                                    |  |                         | -      
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  |                         | 184,302
|                                                                                                                                                                                                                           |  |                         |        
|LONG-TERM LIABILITIES:                                                                                                                                                                                                     |  |                         |        
|Debentures
  (Note 8)                                                                                                                                                                                                      |  |                         | 50,983 
|Provision
  for losses in formerly owned investee                                                                                                                                                                          |  |                         | 1,971  
|Deferred
  taxes                                                                                                                                                                                                           |  |                         | 942    
|Customer
  advances                                                                                                                                                                                                        |  |                         | 2,312  
|Liabilities
  to banks and others (Note 7)                                                                                                                                                                                 |  |                         | 21,900 
|Liability
  in respect of the acquisition of activities                                                                                                                                                                    |  |                         | 2,149  
|Accrued
  severance pay (Note 9)                                                                                                                                                                                           |  |                         | 15,642 
|Unrealized
  gains (Note 11)                                                                                                                                                                                               |  |                         | 4,459  
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  |                         | 100,358
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  |                         |        
|MINORITY INTEREST                                                                                                                                                                                                          |  |                         | 68,251 
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  |                         |        
|COMMITMENTS AND CONTINGENCIES (Note 12)                                                                                                                                                                                    |  |                         |        
|                                                                                                                                                                                                                           |  |                         |        
|SHAREHOLDERS EQUITY (Note 13):                                                                                                                                                                                            |  |                         |        
|Share
  capital - ordinary shares of NIS 1 par value (authorized - December
       31, 2003 and 2002 - 25,000,000 shares; issued:
  December 31, 2003 -
       10,824,780 shares; December 31, 2002 -
  10,324,780 shares) |  |                         | 3,215  
|Additional
  paid-in capital                                                                                                                                                                                               |  |                         | 99,275 
|Retained
  earnings                                                                                                                                                                                                        |  |                         | 91,067 
|Accumulated
  other comprehensive loss                                                                                                                                                                                     |  |                         | (17,294
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  |                         | 176,263
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  |                         |        
|Cost
  of 24,780 Treasury shares                                                                                                                                                                                           |  |                         | (259   
|                                                                                                                                                                                                                           |  |                         |        
|Total
  shareholders equity                                                                                                                                                                                               |  |                         | 176,004
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  |                         |        
|                                                                                                                                                                                                                           |  |                         | 528,915
|                                                                                                                                                                                                                           |  |                         |        

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

F- 3

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                              |  | Year ended
  December 31,                         |        
|------------------------------------------------------------- |  | ------------------------------------------------- | -------
|                                                              |  |                                                   |        
|                                                              |  | 2003                                              |        
|                                                              |  |                                                   |        
|                                                              |  | (U.S. $ in
  thousands, except per share amounts) |        
|                                                              |  |                                                   |        
|                                                              |  |                                                   |        
|Revenues (Note 15E)                                           |  |                                                   | 366,830
|Cost of
  revenues                                            |  |                                                   | 230,500
|                                                              |  |                                                   |        
|Gross
  profit                                                |  |                                                   | 136,330
|Research and
  development costs, net                         |  |                                                   | 17,368 
|Selling,
  general and administrative expenses                |  |                                                   | 107,103
|Restructuring
  and non-recurring costs (Note 15F)            |  |                                                   | -      
|                                                              |  |                                                   |        
|Operating
  income (loss)                                     |  |                                                   | 11,859 
|Financial
  (expenses) income, net (Note 15G)                 |  |                                                   | (3,676 
|Gain on
  realization of shareholdings, net (Note 15I)        |  |                                                   | 2,756  
|Other
  expenses, net (Note 15H)                              |  |                                                   | (90    
|                                                              |  |                                                   |        
|Income
  (loss) before taxes on income                        |  |                                                   | 10,849 
|Taxes on
  income (Note 14)                                   |  |                                                   | 2,540  
|                                                              |  |                                                   |        
|                                                              |  |                                                   | 8,309  
|Equity in
  losses of affiliated companies, net               |  |                                                   | (1,071 
|Minority
  interest in losses (earnings) of subsidiaries, net |  |                                                   | (4,118 
|                                                              |  |                                                   |        
|Net
  income (loss)                                           |  |                                                   | 3,120  
|                                                              |  |                                                   |        
|                                                              |  |                                                   |        
|Earnings (loss) per share (Note 15K):                         |  |                                                   |        
|Basic                                                         |  |                                                   | 0.29   
|                                                              |  |                                                   |        
|                                                              |  |                                                   |        
|Diluted                                                       |  |                                                   | 0.24   
|                                                              |  |                                                   |        
|                                                              |  |                                                   |        
|Weighted average number of shares outstanding                 |  |                                                   |        
|(Note 15K):                                                   |  |                                                   |        
|Basic                                                         |  |                                                   | 10,037 
|                                                              |  |                                                   |        
|                                                              |  |                                                   |        
|Diluted                                                       |  |                                                   | 10,285 
|                                                              |  |                                                   |        

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

F- 4

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY

|                                                                                                   |  | Share
  Capital                 |   | Additional
  paid-in
  Capital |  | Retained
  Earnings |   | Accumulated
  other
  comprehensive
  income (loss) |   | Cost of
  Treasury
  Shares |   | Total  |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------- | - | ------------------------------ |  | ------------------- | - | --------------------------------------------------- | - | --------------------------- | - | ------ | -
|                                                                                                  
|Number of
  Shares                                                                                 |  | Amount                         
|                                                                                                   |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|                                                                                                   |  | (U.S. $ in
  t h o u s a n d s) |  
|                                                                                                   |  |                                 |  
|Balance as
  of January 1, 2001                                                                    |  | 9,322,103                       |   | 2,874                          |  | 74,583              |   | 157,185                                             |   | (4,970                      | ) | -      |  
|Changes
  during 2001:                                                                             |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|Net
  loss                                                                                         |  | -                               |   | -                              |  | -                   |   | (59,861                                             | ) | -                           |   | -      |  
|Currency
  translation adjustments                                                                 |  | -                               |   | -                              |  | -                   |   | -                                                   |   | (11,993                     | ) | -      |  
|                                                                                                   |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|Total
  comprehensive loss                                                                         |  | -                               |   | -                              |  | -                   |   | -                                                   |   | -                           |   | -      |  
|Issuance
  of share capital                                                                        |  | 1,000,000                       |   | 226                            |  | 12,091              |   | -                                                   |   | -                           |   | -      |  
|Exercise
  of employee share options                                                               |  | 2,677                           |   | 1                              |  | 44                  |   | -                                                   |   | -                           |   | -      |  
|Deferred
  compensation                                                                            |  | -                               |   | -                              |  | 1,637               |   | -                                                   |   | -                           |   | -      |  
|Capital fund arising from transactions between Formula and certain
            controlling parties |  | -                               |   | -                              |  | 1,575               |   | -                                                   |   | -                           |   | -      |  
|Dividend
  in kind                                                                                 |  | -                               |   | -                              |  | -                   |   | (6,971                                              | ) | -                           |   | -      |  
|                                                                                                   |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|Balance
  as of December 31, 2001                                                                  |  | 10,324,780                      |   | 3,101                          |  | 89,930              |   | 90,353                                              |   | (16,963                     | ) | -      |  
|Changes
  during 2002:                                                                             |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|Net
  loss                                                                                         |  | -                               |   | -                              |  | -                   |   | (2,406                                              | ) | -                           |   | -      |  
|Currency
  translation adjustments                                                                 |  | -                               |   | -                              |  | -                   |   | -                                                   |   | (6,734                      | ) | -      |  
|                                                                                                   |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|Total
  comprehensive loss                                                                         |  | -                               |   | -                              |  | -                   |   | -                                                   |   | -                           |   | -      |  
|Issuance
  of options in connection with debenture                                                 |  | -                               |   | -                              |  | 1,056               |   | -                                                   |   | -                           |   | -      |  
|Deferred
  compensation                                                                            |  | -                               |   | -                              |  | 214                 |   | -                                                   |   | -                           |   | -      |  
|Purchase
  of treasury stock                                                                       |  | (324,780                        | ) | -                              |  | -                   |   | -                                                   |   | -                           |   | (3,398 | )
|Elimination of tax benefit resulting from issuance expenses                                        |  | -                               |   | -                              |  | (1,804              | ) | -                                                   |   | -                           |   | -      |  
|                                                                                                   |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|Balance
  as of December 31, 2002                                                                  |  | 10,000,000                      |   | 3,101                          |  | 89,396              |   | 87,947                                              |   | (23,697                     | ) | (3,398 | )
|                                                                                                   |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|Changes
  during 2003:                                                                             |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|Net
  Income                                                                                       |  | -                               |   | -                              |  | -                   |   | 3,120                                               |   | -                           |   | -      |  
|Currency
  translation adjustments                                                                 |  | -                               |   | -                              |  | -                   |   | -                                                   |   | 6,403                       |   | -      |  
|                                                                                                   |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|Total
  comprehensive loss                                                                         |  | -                               |   | -                              |  | -                   |   | -                                                   |   | -                           |   | -      |  
|Deferred
  compensation                                                                            |  | -                               |   | -                              |  | 406                 |   | -                                                   |   | -                           |   | -      |  
|Proceeds
  from sale of treasury stock                                                             |  | 300,000                         |   | -                              |  | 1,657               |   | -                                                   |   | -                           |   | 3,139  |  
|Exercise
  of share options                                                                        |  | 500,000                         |   | 114                            |  | 7,816               |   | -                                                   |   | -                           |   | -      |  
|                                                                                                   |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  
|Balance
  as of December 31, 2003                                                                  |  | 10,800,000                      |   | 3,215                          |  | 99,275              |   | 91,067                                              |   | (17,294                     | ) | (259   | )
|                                                                                                   |  |                                 |   |                                |  |                     |   |                                                     |   |                             |   |        |  

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

F- 5

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                       |  | Year ended
  December 31, |        
|------------------------------------------------------------------------------------------------------ |  | ------------------------- | -------
|                                                                                                       |  |                           |        
|                                                                                                       |  | 2003                      |        
|                                                                                                       |  |                           |        
|                                                                                                       |  | (U.S. $ in
  thousands)   |        
|                                                                                                       |  |                           |        
|CASH
  FLOWS FROM OPERATING ACTIVITIES:                                                                |  |                           |        
|Net
  income (loss)                                                                                    |  |                           | 3,120  
|Adjustments to reconcile net income (loss) to net cash provided by
            operating
  activities: |  |                           |        
|Impairment and write down of investments in investees and loans                                        |  |                           | 915    
|Minority
  interest in earnings (losses) of consolidated subsidiaries                                  |  |                           | 4,118  
|Equity
  in losses of affiliated companies, net                                                        |  |                           | 1,071  
|Depreciation
  and amortization                                                                        |  |                           | 18,547 
|Increase
  (decrease) in accrued severance pay, net                                                    |  |                           | (620   
|Loss
  (gain) from sale of property and equipment                                                      |  |                           | (26    
|Gain on realization of shareholdings and expiration of options                                         |  |                           | (2,756 
|Amortization
  of deferred warrant compensation                                                        |  |                           | 456    
|Erosion, change in accrued interest and capital loss on debentures                                     |  |                           | 3,583  
|Erosion (appreciation) in value of long term loans and deposits,
  net                                 |  |                           | (1,659 
|Deferred
  taxes                                                                                       |  |                           | 827    
|Accrued
  interest on redeemable shares in a subsidiary                                                |  |                           | 320    
|Gain
  on payment of convertible subordinated notes                                                    |  |                           | (61    
|Increase
  (decrease) in marketable securities                                                         |  |                           | (991   
|Changes
  in operating assets and liabilities:                                                         |  |                           |        
|Decrease
  (increase) in inventories                                                                   |  |                           | (265   
|Decrease
  (increase) in trade receivables                                                             |  |                           | (12,649
|Decrease
  (increase) in other accounts receivable                                                     |  |                           | 7,913  
|Increase
  (decrease) in trade payables                                                                |  |                           | 2,927  
|Increase (decrease) in other accounts payable and restructuring accrual                                |  |                           | (12,475
|                                                                                                       |  |                           |        
|Net
  cash provided by operating activities                                                            |  |                           | 12,295 
|                                                                                                       |  |                           |        

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

F- 6

---

---

FORMULA
SYSTEMS (1985) LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                           |  | Year ended
  December 31, |        
|---------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                                                           |  |                           |        
|                                                                                                           |  | 2003                      |        
|                                                                                                           |  |                           |        
|                                                                                                           |  | (U.S. $ in
  thousands)   |        
|                                                                                                           |  |                           |        
|CASH
  FLOWS FROM INVESTING ACTIVITIES:                                                                    |  |                           |        
|Acquisition
  of newly-consolidated subsidiaries (Appendix C)                                              |  |                           | 20,481 
|Proceeds from realization of investment in previously-consolidated
            subsidiaries
  (Appendix D) |  |                           | 12     
|Investment
  in debentures                                                                                 |  |                           | -      
|Proceeds
  from repayment of debentures                                                                    |  |                           | 301    
|Sale
  of marketable securities, net                                                                       |  |                           | (2,665 
|Cash
  pledged                                                                                             |  |                           | -      
|Purchase
  of property and equipment                                                                       |  |                           | (4,887 
|Fulfillment
  of guarantees                                                                                |  |                           | -      
|Proceeds
  from sale of property and equipment                                                             |  |                           | 1,246  
|Investment
  in and loans to affiliated and other companies                                                |  |                           | (1,685 
|Proceeds from sale of investments in and loans to affiliated companies                                     |  |                           | 1,581  
|Purchase
  of an activity by a consolidated company                                                        |  |                           | (429   
|Purchase
  of know-how by consolidated companies                                                           |  |                           | -      
|Investment
  in bank deposits, net                                                                         |  |                           | 18     
|Additional
  investment in previously consolidated company                                                 |  |                           | -      
|Capitalization
  of software development and other costs                                                   |  |                           | (10,172
|Purchase
  of minority interest in subsidiaries                                                            |  |                           | (23,599
|Proceeds
  from realization of investment in subsidiaries                                                  |  |                           | 2,846  
|Proceeds
  from investments in short term bank deposits, net                                               |  |                           | 9,400  
|Dividends
  received from affiliated companies                                                             |  |                           | -      
|                                                                                                           |  |                           |        
|Net
  cash used in investing activities                                                                    |  |                           | (7,552 
|                                                                                                           |  |                           |        
|CASH
  FLOWS FROM FINANCING ACTIVITIES:                                                                    |  |                           |        
|Acquisition of newly - consolidated subsidiaries (Appendix E)                                              |  |                           | -      
|Proceeds
  from sale of call warrants                                                                      |  |                           | 1,386  
|Issuance
  of convertible debt                                                                             |  |                           | 20,977 
|Purchase
  of treasury stock                                                                               |  |                           | -      
|Issuance
  of treasury stock                                                                               |  |                           | 4,796  
|Issuance
  of share capital                                                                                |  |                           | -      
|Exercise
  of share options                                                                                |  |                           | 7,930  
|Dividend
  to minority shareholders in subsidiaries                                                        |  |                           | (4,831 
|Short-term
  bank credit, net                                                                              |  |                           | (41,344
|Repayment
  of long-term loans                                                                             |  |                           | (5,061 
|Receipt
  of long-term loans                                                                               |  |                           | 19,581 
|Issuance
  in a subsidiary to minority shareholders, net                                                   |  |                           | 479    
|Convertible
  debt issuance expenses in a subsidiary                                                       |  |                           | (1,496 
|Payment
  of convertible subordinated notes in a subsidiary                                                |  |                           | (4,144 
|Payment
  of issuance expenses in a subsidiary                                                             |  |                           | (361   
|Debenture
  redemption                                                                                     |  |                           | (2,484 
|Purchase of treasury stock in a subsidiary by a subsidiary thereof                                         |  |                           | -      
|                                                                                                           |  |                           |        
|Net
  cash used in financing activities                                                                    |  |                           | (4,572 
|                                                                                                           |  |                           |        
|                                                                                                           |  |                           |        
|Effect of exchange rate changes on cash and cash equivalents                                               |  |                           | 2,724  
|                                                                                                           |  |                           |        
|                                                                                                           |  |                           |        
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                       |  |                           | 2,895  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                             |  |                           | 90,561 
|                                                                                                           |  |                           |        
|CASH
  AND CASH EQUIVALENTS AT END OF YEAR                                                                 |  |                           | 93,456 
|                                                                                                           |  |                           |        

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

F- 7

---

---

FORMULA
SYSTEMS (1985) LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Appendix A - Supplemental cash flow
information:

|                                         |  | Year ended
  December 31, |      
|---------------------------------------- |  | ------------------------- | -----
|                                         |  |                           |      
|                                         |  | 2003                      |      
|                                         |  |                           |      
|                                         |  | (U.S. $ in
  thousands)   |      
|                                         |  |                           |      
|                                         |  |                           |      
|Cash paid during the year in respect of: |  |                           |      
|Interest                                 |  |                           | 6,547
|                                         |  |                           |      
|                                         |  |                           |      
|Income
  tax                             |  |                           | 4,652
|                                         |  |                           |      

Appendix
B - Non-cash activities:

|                                                                                                                                   |  | Year ended December 31, |      
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -----
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  | 2003                    |      
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  | (U.S. $ in thousands)   |      
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Transfer of
  investments and loans against debentures                                                                             |  |                         | -    
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Purchase of
  fixed assets against trade payables                                                                                  |  |                         | 80   
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Investment
  in a consolidated company against issuance of share
       capital to minority shareholders of
  consolidated company |  |                         | 5,101
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Realization
  of investment in a consolidated company against
       accounts receivable                                           |  |                         | -    
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Purchase of
  activity against long term liability                                                                                 |  |                         | -    
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Investment
  in affiliates and other companies, recorded against
       accounts payable                                           |  |                         | 807  
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Purchase of shares from minority shareholders of subsidiary, against
       accounts payable                                       |  |                         | -    
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Realization
  of convertible debenture in a subsidiary                                                                             |  |                         | 229  
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Purchase of
  shares from minority shareholders of subsidiary
       against debentures                                            |  |                         | -    
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Realization
  of investment in an exchange shares transaction                                                                      |  |                         | -    
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Purchase of
  technology from affiliated company against loan                                                                      |  |                         | 1,917
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Purchase of intellectual property rights against settlement of loan                                                                |  |                         | 642  
|                                                                                                                                   |  |                         |      
|                                                                                                                                   |  |                         |      
|Warrants
  issued as consideration for purchase of activity                                                                        |  |                         | 121  
|                                                                                                                                   |  |                         |      

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

F- 8

---

---

FORMULA
SYSTEMS (1985) LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Appendix C - Acquisition of
newly-consolidated subsidiaries:

|                                                                                   |  | Year ended
  December 31, |        
|---------------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                                   |  |                           |        
|                                                                                   |  | 2003                      |        
|                                                                                   |  |                           |        
|                                                                                   |  | (U.S. $ in
  thousands)   |        
|                                                                                   |  |                           |        
|Assets and liabilities of subsidiaries consolidated as of
       acquisition date: |  |                           |        
|Working
  capital (other than cash and cash equivalents)                           |  |                           | (12,519
|Liabilities
  arising from purchase of an activity                                 |  |                           | -      
|Investment
  in affiliates and others including loans                              |  |                           | (19,014
|Property
  and equipment                                                           |  |                           | 4,074  
|Other assets and deferred expenses                                                 |  |                           | 23,748 
|Goodwill
  arising upon acquisition                                                |  |                           | 14,379 
|Short-term
  bank credit                                                           |  |                           | (207   
|Long-term
  liabilities                                                            |  |                           | (8,887 
|Convertible
  debentures                                                           |  |                           | (12,099
|Minority
  interest at acquisition date                                            |  |                           | (9,030 
|Share capital and call warrants issued to previous shareholders                    |  |                           | (926   
|Capital
  gain from merger transaction                                             |  |                           | -      
|                                                                                   |  |                           |        
|Total                                                                              |  |                           | (20,481
|                                                                                   |  |                           |        

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

|                                                                                   |  | Year ended December 31, |       
|---------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                   |  |                         |       
|                                                                                   |  | 2003                    |       
|                                                                                   |  |                         |       
|                                                                                   |  | (U.S. $ in thousands)   |       
|                                                                                   |  |                         |       
|Assets and liabilities of consolidated subsidiaries as of date 
       realization |  |                         |       
|Working
  capital (other than cash and cash equivalents)                           |  |                         | (330  
|Debtor
  in respect of sale of companies                                           |  |                         | -     
|Investment
  in affiliate (including loans)                                        |  |                         | 2,613 
|Loans
  to others                                                                  |  |                         | -     
|Property
  and equipment                                                           |  |                         | (360  
|Other
  assets and deferred expenses                                               |  |                         | (67   
|Goodwill                                                                           |  |                         | (2,133
|Long-term
  liabilities                                                            |  |                         | 201   
|Loss
  (gain) from realization of investments in subsidiaries                      |  |                         | (27   
|Minority
  interest                                                                |  |                         | 91    
|Dividend
  in kind                                                                 |  |                         | -     
|Debentures                                                                         |  |                         | -     
|Unrealized
  gain                                                                  |  |                         | -     
|                                                                                   |  |                         |       
|Total                                                                              |  |                         | (12   
|                                                                                   |  |                         |       

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

F- 9

---

---

FORMULA
SYSTEMS (1985) LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

|                                                                                   |  | Year ended
  December 31, |  
|---------------------------------------------------------------------------------- |  | ------------------------- | -
|                                                                                   |  |                           |  
|                                                                                   |  | 2003                      |  
|                                                                                   |  |                           |  
|                                                                                   |  | (U.S. $ in
  thousands)   |  
|                                                                                   |  |                           |  
|                                                                                   |  |                           |  
|Assets and liabilities of subsidiaries consolidated as of
       acquisition date: |  |                           |  
|Working
  capital (other than cash and cash equivalents)                           |  |                           | -
|Goodwill
  realized                                                                |  |                           | -
|Minority
  interest at acquisition date                                            |  |                           | -
|Unrealized
  gain                                                                  |  |                           | -
|                                                                                   |  |                           |  
|Total                                                                              |  |                           | -
|                                                                                   |  |                           |  

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

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

F- 10

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note
1 - Summary of Significant Accounting Policies:

|A. | General:                                                                                                                                                                                                                                                                                                                                                                        
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                 
|   | Formula
  Systems (1985) Ltd. (Formula) was incorporated in Israel in 1985. Since
  1991, the Companys shares have been traded on the Tel Aviv Stock Exchange
  (the TASE) and since 1997, through American Depositary Shares (ADS) under
  the symbol FORTY on the NASDAQ National Market in the United States. Each ADS
  represents one ordinary share of the Company.
|   |                                                                                                                                                                                                                                                                                                                                                                                 
|   | Formula, through its subsidiaries (collectively, the
  Company or the Group) is engaged
  in the development,
  production and marketing of information technology (IT) solutions and
  services. The Group operates in
  two principal business segments, IT Services and Proprietary Software
  Solutions. For a description of the segments - see Note 15J.            
|   |                                                                                                                                                                                                                                                                                                                                                                                 
|   | The following table presents certain information regarding the
  control and ownership of Formulas significant subsidiaries and material
  investments, as of the dates indicated:                                                                                                                                                                                             

| |                                                                                              |  | Percentage of ownership and control | 
| | -------------------------------------------------------------------------------------------- |  | ----------------------------------- | 
| |                                                                                              |  |                                     | 
| |                                                                                              |  | December 31,
  2003                 | 
| |                                                                                              |  |                                     | 
| | Name of Investee or subsidiary:                                                              |  | %                                   | 
| |                                                                                              |  |                                     | 
| |                                                                                              |  |                                     | 
| | Matrix
  IT Ltd.  (Matrix)                                                                 |  | 72.15                               | 
| | BluePhoenix
  Solutions Ltd. (BluePhoenix)
  (formerly  Crystal Systems Solutions Ltd.) |  | 58.8                                | 
| | Magic
  Software Enterprises Ltd. (Magic)                                                  |  | 52.9                                | 
| | nextSource
  Inc.                                                                            |  | 100                                 | 
| | Sapiens
  International Corporation N.V.
       (Sapiens)                                  |  | 50.69                               | 
| |                                                                                              |  |                                     | 

| | The above list consists only of active companies that
  are held directly by Formula.
| | -------------------------------------------------------------------------------------

F-11

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|A. | General (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Accounting Principles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The
  financial statements have been prepared in accordance with generally accepted
  accounting principles (GAAP) as applied in the United States.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Functional and Reporting Currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The currency
  of the primary economic environment in which the operations of Formula and
  most of its subsidiaries are conducted is the New Israeli Shekel (NIS). The
  functional currency of the remaining subsidiaries is the United States dollar
  (dollar). Formula has elected to use the dollar as its reporting currency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The
  financial statements of Formuls and most of its subsidiaries whose functional
  currency is the NIS have been translated into dollars under the principles
  described in Financial Accounting Standards Board Statement No. 52, Foreign
  Currency Translation. Assets and liabilities have been translated at
  period-end exchange rates.  The
  results of operations have been translated at the exchange rates at on the
  dates on which the transactions occurred or at average exchange rates.
  Differences resulting from translation are presented under shareholders
  equity, in the item accumulated other comprehensive income (loss).
  Accordingly, the financial statements of subsidiaries whose functional
  currency is the dollar are presented in the consolidated financial statements
  at their original amounts.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Use of Estimates and Assumptions in the Preparation of the Financial
  Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities, the disclosure of
  contingent assets and liabilities as of the dates of the financial statements
  and the reported amounts of revenues and expenses during the reporting
  periods.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The actual
  results may differ from these estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|B. | Principles of Consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The
  consolidated financial statements include the Formulas financial statements
  as well as those of its subsidiaries in which it has a controlling interest.
  Inter-company transactions and balances have been eliminated on
  consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|C. | Cash and Cash Equivalents:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Cash
  equivalents are considered by the Company to be highly-liquid investments,
  including, inter alia, short-term deposits with banks, the maturity of which
  did not exceed three months at the time of deposit and which are
  unrestricted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-12

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|D. | Investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Investments
  in affiliates over which the Company exercises significant influence are
  accounted for under the equity method. Investments in non-marketable
  securities of companies in which the Company does not have the ability to
  exercise significant influence over operating and financial policy are
  recorded at cost. Investments in marketable securities are classified as
  trading, and unrealized gains or losses thereon are reported in the
  statement of income in accordance with Statement of Financial Accounting Standards
  (SFAS) No. 115 Accounting for Certain Investments in Debt and Equity
  Securities. See Note 1I in respect of the treatment of goodwill. Investments
  in other companies are accounted for under the cost method.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Investments
  are periodically reviewed to determine whether an impairment in value has
  occurred that is of a non-temporary nature, in which case the investment is
  written down to its fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|E. | Provision
  for Doubtful Accounts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | The provision for doubtful
  accounts was calculated on the basis of specific receivables, where, in the
  opinion of Group management, doubt exists as to their collectability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|F. | Inventory:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Inventory is
  comprised of hardware and software.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Inventory is
  valued at the lower of cost or market value. Cost is determined on the first
  in - first out basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|G. | Debentures:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Debentures
  from investments sales relate to the transaction carried out on December 31,
  2001. The debentures were issued by Formula Vision Technologies (F.V.T.) Ltd.
  (Formula Vision), in connection with the sale of non-public companies held
  by Formula to Formula Vision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Formula
  evaluates periodically, the financial strength of Formula Vision and its
  ability to meet the repayment schedule of the loan (see Note 2I).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|H. | Property and Equipment, net:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Property and
  equipment are stated at cost, net of accumulated depreciation. Depreciation
  is calculated by the straight-line method over their estimated useful
  lives.  The following are the annual
  depreciation rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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

F-13

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|I. | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Goodwill
  reflects the excess of the purchase price of subsidiaries acquired over the
  fair value of net assets acquired. Until December 31, 2001, goodwill was
  amortized in equal annual installments, over a period of 10 years. In the
  event it was determined that goodwill is not recoverable, its book value was
  written off and charged to the statement of operations as goodwill
  impairment.                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In July
  2001, the Financial Accounting Standards Board (FASB) issued Statement of
  Financial Accounting Standards No. 142, Goodwill and Other Intangible
  Assets (SFAS 142). SFAS 142 requires goodwill to be tested for impairment
  on an annual basis and more frequently in certain circumstances, and written
  down when impaired rather than being amortized as required by previous
  accounting standards. Furthermore, SFAS 142 requires purchased intangible
  assets other than goodwill to be amortized over their useful lives unless
  those lives are determined to be indefinite.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | SFAS 142 is
  effective for fiscal years beginning after December 15, 2001. In accordance
  with SFAS 142, the Company ceased amortizing goodwill totaling $105 million
  as of the beginning of 2002.                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | During 2002
  the Company completed its transitional impairment review of goodwill. Based
  on the impairment tests performed, there was no impairment of goodwill as of
  January 1, 2002. The Company has selected December 31st as the
  date on which it will perform its annual goodwill impairment test. As of
  December 31, 2003 and 2002, no impairment was required. There can be no
  assurance that future goodwill impairment tests will not result in a charge
  to net income.                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The
  following table presents the impact of SFAS 142 on net earnings (loss) and
  net earnings (loss) per share had the accounting standard been in effect
  during the years 2001-2003 (in US$thousands, except per-share amounts):                                                                                                                                                                                                                                                                                                                                                                       

| |                                                     |  | Year ended
  December 31, |      
| | --------------------------------------------------- |  | ------------------------- | -----
| |                                                     |  |                           |      
| |                                                     |  | (U.S. $ in thousands)     |      
| |                                                     |  |                           |      
| |                                                     |  | 2003                      |      
| |                                                     |  |                           |      
| | Net earnings
  (loss) as reported                   |  |                           | 3,120
| | Amortization
  of goodwill                          |  |                           | -    
| |                                                     |  |                           |      
| | Net
  earnings (loss) as adjusted                   |  |                           | 3,120
| | Basic net
  earnings (loss) per share as reported   |  |                           | 0.29 
| | Basic net
  earnings (loss) per share as adjusted   |  |                           | 0.29 
| | Diluted net
  earnings (loss) per share as reported |  |                           | 0.24 
| | Diluted net
  earnings (loss) per share as adjusted |  |                           | 0.24 

F-14

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|J. | Software Development Costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Development
  costs of software, which is intended for sale, are incurred after the
  establishment of the technological feasibility of the relevant product, and
  capitalized. Technological feasibility is determined when detailed program
  design is completed and verified in accordance with the provisions of SFAS No.
  86, Accounting for the Costs of Computer Software to Be Sold, Leased, or
  Otherwise Marketed of the FASB.                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Software
  development costs incurred before technological feasibility has been
  established are charged to the statement of income when incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Amortization
  of capitalized software development costs begins when the product is
  available for general release to customers. Annual amortization is calculated
  according to the higher of the straight-line method over the remaining useful
  life of the product or based on the ratio of current gross revenues to
  current and anticipated future gross revenues. At present, amortization is
  computed under the straight-line method, mainly over a period of 3 years.
  During the year ended December 31, 2003, consolidated subsidiaries
  capitalized software development costs aggregating $10.2 million (2002 - $4.4
  million, 2001 - $9.9 million) and amortized capitalized software development
  costs aggregating $8.1 million (2002 - $5.1 million, 2001 - $6.6 million).                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Management
  estimates that the total capitalized costs do not exceed the net realizable
  value of the software product.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | In the event
  that unamortized software development costs exceed the net realizable value
  of the product, they are written down to net realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|K. | Other Intangible Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Other
  intangible assets are comprised of distribution rights and acquired
  technology 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. Distribution rights and
  acquired technology are amortized over a period of 5 and 8 years,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|L. | Impairment in Value of Long-Lived Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The
  Companys long-lived assets are reviewed for impairment in accordance with
  Statement of Financial Accounting Standard No. 144, Accounting for the
  Impairment or Disposal of Long-lived Assets (SFAS No. 144), whenever
  events or changes in circumstances indicate that the carrying amount of an
  asset may not be recoverable. The recoverability of assets held and used is
  measured by a comparison of the carrying amount of the assets to the future
  undiscounted cash flows expected to be generated by the assets. If such
  assets are considered to be impaired, the impairment to be recognized is
  measured by the amount by which the carrying amount of the assets exceeds the
  fair value of the assets. As of December 31, 2003 and 2002, no impairment
  losses have been identified.

F-15

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|L. | Impairment in Value of Long-Lived Assets (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In 2001, the
  Groups long-lived assets were reviewed for impairment in accordance with
  Statement of Financial Accounting Standard No. 121 Accounting for the
  Impairment of Long-lived Assets. Based on managements analysis, impairment
  losses of $1,279 thousand were identified in 2001.                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|M. | Revenue Recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Revenues
  derived from direct software license agreements are recognized in accordance
  with Statement of Position (SOP) 97-2 Software Revenue Recognition (as
  amended by SOP 98-4 and SOP 98-9), upon delivery of the software when
  collection is probable. Where the license fee is otherwise fixed or
  determinable it constitutes persuasive evidence that an arrangement exists.                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | When a
  project involves significant modification of software, revenue is generally
  recognized according to the percentage of completion method. Under this
  method, estimated revenue is generally accrued based on costs incurred to
  date as a percentage of the total updated estimated costs.                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | The Company
  recognizes revenues from projects as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | (ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Revenues
  from consulting services, consist of billable hours for services provided,
  are recognized as the services are rendered.                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Revenues
  from maintenance and training contracts are recognized relatively over the
  contract period.                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Revenues
  from sale of hardware are recognized when the merchandise is delivered to the
  customer, provided no significant vendor obligations remain.                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In November
  2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue
  No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No.
  00-21 provides guidance on how to account for arrangements that involve the
  delivery or performance of multiple products, services and/or rights to use
  assets. The provisions of EITF Issue No. 00-21 are applicable for revenue
  arrangements entered into in fiscal periods beginning after June 15, 2003.

F-16

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---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|M. | Revenue Recognition (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Additionally,
  companies will be permitted to apply the consensus guidance in this issue to
  all existing arrangements as the cumulative effect of a change in accounting
  principle in accordance with APB Opinion No. 20, Accounting Changes. The
  adoption of EITF Issue No. 00-21 did not have a material impact upon the
  Companys consolidated financial position, cash flows or results of
  operations.                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Management
  believes that the Companys revenue recognition policies are in accordance
  with the Securities and Exchange Commission Staff Accounting Bulletin
  No. 101 and SAB 104, Revenue Recognition in Financial Statements.                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|N. | Government Grants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Royalty-bearing
  grants from the Government of Israel for the funding of research and
  development projects are recognized at the time that the Company is entitled
  to such grants on the basis of the related costs incurred, and are recorded
  as a deduction from research and development costs.                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company
  also received non-royalty-bearing grants from the Fund for the Encouragement
  of Marketing Activity. These grants are recognized at the time the Company is
  entitled to such grants, on the basis of the costs incurred, and included as
  a deduction from selling, marketing, general and administrative expenses.                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|O. | Provision for Warranty:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In
  light of the past experience, Formula and the majority of its subsidiaries do
  not record any provision for warranties in respect of their products and
  services. Some subsidiaries record a provision for warranties, based on past
  experience.                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|P. | Advertising Costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company
  records advertising expenses as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Q. | Gain on Realization of Shareholdings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Gain on
  realization of shareholdings includes the results of realization of the
  Companys shareholdings in investees arising either on the sale of such
  shareholdings or from the issuance of stock by the investees to third parties,
  which is recognized in accordance with the provisions of Staff Accounting
  Bulletin (SAB) No. 51 issued by the Securities and Exchange Commission. The
  Company charges to the statement of operations such results, provided that
  the conditions stipulated by SAB 51 for recognition have been met.

F-17

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---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|R. | Deferred Income Taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Formula and
  its subsidiaries account for income taxes in accordance with Statement of
  Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS
  No. 109). This Statement prescribes the use of the liability method whereby
  deferred tax assets and liability account balances are determined based on
  the differences between the financial reporting and tax bases of assets and
  liabilities and are measured using the enacted tax rates and laws that will
  be in effect when the differences are expected to reverse. Formula and its
  subsidiaries provide a valuation allowance, where necessary, in order to
  reduce deferred tax assets to an amount that is more likely than not to be
  realized.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|S. | Earnings (Loss) Per Share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Earnings
  (loss) per share (EPS) are calculated in accordance with the provisions of
  SFAS No. 128 of the FASB (SFAS 128). SFAS 128, Earnings per Share
  requires the presentation of both basic and diluted EPS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Basic net
  earnings (loss) per share are calculated on the basis of the weighted average
  number of common shares outstanding during each year. The diluted earnings
  (loss) per share are calculated on the basis of the weighted average number
  of common shares outstanding during each year, plus the dilutive potential
  common shares considered outstanding during the year.                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|T. | Treasury Shares Held by the Company:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Shares of
  the Company that are held by the Company (treasury shares) are presented as a
  reduction of shareholders equity, at their cost to the Company. Gains and
  losses sale of these shares, net of related income taxes, are carried to
  additional paid-in capital and to return on earnings, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|U. | Concentration of Credit Risks - Allowance for Doubtful Accounts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Most of the
  Groups cash and cash equivalents and short-term investments as of December
  31, 2003 and 2002 were deposited with Israeli, U.S. and European banks. The
  Company is of the opinion that the credit risk in respect of these balances
  is remote.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Most of the
  Groups sales are made in Israel, North America and Europe, to a large number
  of customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-18

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---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|U. | Concentration of Credit Risks - Allowance for Doubtful Accounts
  (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Groups
  trade receivables are derived from sales to large, solid organizations
  located mainly in Europe, North America and Israel. The Group performs
  ongoing credit evaluations of its customers and has established an allowance
  for doubtful accounts based upon factors relating to the credit risk of
  specific customers and other information. In certain circumstances, the
  Company may require letters of credit, other collateral or additional
  guarantees. From time to time, the Company sells certain of its accounts
  receivable to financial institutions, within the normal course of business.
  Where receivables are sold without recourse to the Company, the relevant
  receivable is de-recognized and cash recorded. Where receivables are sold
  with full or partial recourse to the Company, the receivable is not
  de-recognized and a liability reflecting the obligation to the financial
  institution is recorded within financial debts until the Companys liability
  is discharged through the financial institution receiving payment from the
  customer.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Formula and
  its subsidiaries had no off-balance-sheet concentration of credit risk such
  as foreign exchange contracts, options contracts or other foreign hedging
  arrangements as of December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The
  provision for doubtful accounts charged to general and administrative
  expenses amounted to $14,000, $2.8 million and $3.8 million in the years
  2003, 2002 and 2001, respectively, and was determined for specific debts were
  doubt existed as to their collectability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Debentures
  (see Note 1G).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|V. | Options Granted to Employees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company
  accounts for its Employee Stock Option Plans using the treatment prescribed
  by Accounting Principles Board Opinion No. 25, Accounting for Stock
  Issued to Employees (APB 25) and FASB issued Interpretation No. 44,
  Accounting for Certain Transactions Involving Stock Compensation (FIN
  44).  Under APB 25, the cost of
  compensation for employee stock option plans is measured using the intrinsic
  value based method of accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | In October
  1995, the FASB issued Statement No. 123, Accounting for Stock-Based
  Compensation (SFAS 123).  This
  Statement, effective as of the 1997 financial statements, established a fair
  value based method of accounting for employee stock options or similar equity
  instruments, and encourages the adoption of that method for stock
  compensation plans. SFAS 148 Accounting for Stock Based Compensation
  amended SFAS 123 to provide alternative methods of transition for a voluntary
  change to the fair value based method of accounting for such plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | However, it
  also allows companies to account for those plans, so far as concerns options
  granted to employees, using the accounting treatment prescribed by
  APB 25.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-19

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---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|V. | Options
  Granted to Employees (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company has elected to
  account for share option plans according to APB 25 and FIN 44 and has
  accordingly complied with the disclosure requirements set forth in
  SFAS 123 for companies electing to apply APB 25.                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Compensation costs in
  respect of such plans in the net amounts of $193 thousand, $239 thousand and
  $2,817 thousand, respectively, were charged to income in 2003, 2002 and 2001.
  Had the compensation costs in respect of the Companys plans been determined
  based on the fair value at the grant date, consistent with the method of
  SFAS 123 as amended by SFAS 148, the Companys net income and earnings
  per share would have been decreased to the pro-forma amounts indicated below:

| |                                                                                                                                                                  |  | Year Ended
  December 31                           |       
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ------
| |                                                                                                                                                                  |  |                                                    |       
| |                                                                                                                                                                  |  | 2003                                               |       
| |                                                                                                                                                                  |  |                                                    |       
| |                                                                                                                                                                  |  | (U.S. $ in
  thousands except per share
  amounts) |       
| |                                                                                                                                                                  |  |                                                    |       
| |                                                                                                                                                                  |  |                                                    |       
| | Net income
  (loss), as reported                                                                                                                                 |  |                                                    | 3,120 
| |                                                                                                                                                                  |  |                                                    |       
| | Add:
  Stock-based employee compensation expenses
       included in reported net income, net of related
  tax
       effects                                    |  |                                                    | 193   
| |                                                                                                                                                                  |  |                                                    |       
| | Less: Total
  stock-based employee compensation
       expenses determined under the fair value based
  method
       for all awards, net of related tax effects |  |                                                    | (1,832
| |                                                                                                                                                                  |  |                                                    |       
| | Pro-forma
  net income (loss)                                                                                                                                    |  |                                                    | 1,481 
| |                                                                                                                                                                  |  |                                                    |       
| |                                                                                                                                                                  |  |                                                    |       
| | Earnings
  (loss) per share:                                                                                                                                     |  |                                                    |       
| |                                                                                                                                                                  |  |                                                    |       
| | Basic
  - as reported                                                                                                                                            |  |                                                    | 0.29  
| |                                                                                                                                                                  |  |                                                    |       
| |                                                                                                                                                                  |  |                                                    |       
| | Basic
  - pro forma                                                                                                                                              |  |                                                    | 0.12  
| |                                                                                                                                                                  |  |                                                    |       
| |                                                                                                                                                                  |  |                                                    |       
| | Diluted
   as reported                                                                                                                                          |  |                                                    | 0.24  
| |                                                                                                                                                                  |  |                                                    |       
| |                                                                                                                                                                  |  |                                                    |       
| | Diluted
  - pro forma                                                                                                                                            |  |                                                    | 0.09  
| |                                                                                                                                                                  |  |                                                    |       

|W. | Comprehensive Income:                                                                                                                                                                                                                                                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                               
|   | The
  comprehensive income presented in shareholders equity includes, in addition
  to net income (loss), translation gains and losses in respect of the
  translation of the financial statements of subsidiaries that were not denoted
  in NIS or dollars and translation adjustments resulting from the translation
  from a functional currency to a reporting currency.

F-20

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FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|X. | Financial Instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The application
  of SFAS 133 - Accounting for Derivative Instruments and Hedging Activities
  and related pronouncements and interpretations, did not have any material
  impact on the Companys consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Y. | Recently Issued Accounting Pronouncement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In April
  2003, the FASB issued FAS 149, Amendment of FASB Statement No. 133 on
  Derivative and Hedging Activities which improves financial reporting by (1)
  requiring that contracts with comparable characteristics be accounted for
  similarly, and (2) clarifying when a derivative contains a financing
  component that warrants special reporting in the statement of cash flows.
  SFAS 149 is not expected to have a material impact on the Companys financial
  statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | In May 2003,
  the FASB issued SFAS 150, Accounting For Certain Financial Instruments with
  Characteristics of Both Liabilities and Equity which establishes standards
  in respect of the classification and measurement of certain financial
  instruments with characteristics of both liabilities and equity. The
  statement requires that an issuer classify a financial instrument as a
  liability (or an asset in some circumstances) if, at inception, the monetary
  value of the obligation is based solely or predominantly on a fixed monetary
  amount known at inception, variations in something other than the fair value
  of the issuers equity shares or variations inversely related to changes in
  the fair value of the issuers equity shares. This statement is effective for
  financial instruments entered into or modified after May 31, 2003, and
  otherwise is effective at the beginning of the first interim period beginning
  after June 15, 2003. The adoption of SFAS 150 did not have a material impact
  on the Companys financial position or results of operations.

F-21

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---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|Y.                             | Recently Issued Accounting Pronouncement (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                               | In January
  2003, the FASB issued Interpretation No. 46, Consolidation of Variable
  Interest Entities (FIN 46). The objective of FIN 46 is to improve
  financial reporting by companies involved with variable interest entities. A
  variable interest entity is a corporation, partnership, trust, or any other
  legal structure used for business purposes that either (a) does not have
  equity investors with voting rights, or (b) has equity investors that do not
  provide sufficient financial resources for the entity to support its
  activities. FIN 46 requires a variable interest entity to be consolidated by
  a company if that company is subject to a majority of the risk of loss from
  the variable interest entitys activities or entitled to receive a majority
  of the entitys residual returns. FIN 46 also requires disclosures about
  variable interest entities that the company is not required to consolidate
  but in which it has a significant variable interest. The consolidation
  requirements of FIN 46 apply immediately to variable interest entities
  created after January 31, 2003. The consolidation requirements apply to older
  entities in the first fiscal year or interim period ending after March 15,
  2004. Certain of the disclosure requirements apply to all financial
  statements issued after January 31, 2003, regardless of when the variable
  interest entity was established. As of December 31, 2003, the Company does
  not expect the adoption of FIN 46 to have any impact on its consolidated
  financial statements.
|                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Note 2 - Certain Transactions:
|                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|A.                             | In September 1999, Formula
  entered into an agreement with Shamrock Holdings of California Inc.
  (Shamrock), under which Formula granted Shamrock an option, until March
  2000, to invest in companies in which Formula holds, directly or indirectly,
  at least 25% of the outstanding equity. In addition, Formula granted to
  Shamrock an option to exchange the securities it purchased under the above
  option for Formulas ordinary shares, exercisable within a 45 day period,
  beginning upon the elapse of 27 months from the date of purchase of the
  securities or from the date of the agreement, such period to vary based on
  the securities involved. The exchange rate was to be based upon the original
  price paid for the securities subject to the exchange and the market price on
  the TASE of Formulas ordinary shares at the time of the exchange, subject to
  certain requisite adjustments. Notwithstanding the above, the Company had the
  discretion to purchase the securities to be exchanged for cash instead of
  exchanging them for Formulas ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                               | In October
  1999, Formula entered into agreements with the First Israel Mezzanine
  Investors Ltd. (FIMI) and Israel Discount Bank (IDB), each on the same terms
  in all material respects as the agreement with Shamrock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-22

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---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|A. | (cont.) :                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In September
  1999, an extraordinary general meeting of Formulas shareholders approved the
  issuance to Shandol Ltd. (Shandol), one of Formula Visions subsidiaries,
  of options to purchase 1,000,000 ordinary shares in order to ensure the
  availability of ordinary shares, if the above exchange option is exercised.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In August
  2000, an extraordinary general meeting of shareholders approved the grant of
  additional options to Shandol to purchase 500,000 ordinary shares, to ensure
  the availability of ordinary shares for different purposes while conducting
  various transactions, including the availability of ordinary shares, if the
  above exchange option is exercised (see note 13.A.8).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In November
  2001 and January 2002, Shamrock exercised the exchange option with respect to
  its investment in certain companies in the Group. In consideration for the
  securities held by Shamrock, Shandol transferred to Shamrock 1,000,000 of
  Formulas ordinary shares and an aggregate of approximately $1.6 million. In
  January 2002, Shamrock sold these shares to Dan and Gad Goldstein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In April
  2002, FIMI and IDB exercised the exchange option with respect to their
  investment in certain companies in the Group in an aggregate amount of $4.7
  million (including accrued interest). In connection therewith, the Company
  entered into an agreement with FIMI and IDB, pursuant to which the Company
  exchanged the amount of $4.7 million for a convertible debenture that was
  issued by Formula. The convertible debenture may be converted into Formulas
  ordinary shares during a 4-year period. The conversion price will be $19 per
  share, subject to adjustments, but in no event less than a minimum price
  agreed between the parties. The principal of the convertible debenture will
  be repayable in semi-annual installments beginning 30 months from the date of
  issuance of the debenture, unless FIMI and IDB request to postpone this date
  until the end of the 4-year period. The principal bears interest at an annual
  rate of 5% to be paid quarterly.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In connection with the
  exercise of the option by Shamrock, the Company agreed to extend until
  October 2006, the term of the option with respect to the securities held by
  Shamrock in ESI-Expert Systems Industries Ltd. (ESI)
and in ESIs  subsidiaries.  In  addition,  the  Company  agreed to extend  the put option to  securities  held by
Shamrock in addition
Formula Visions portfolio companies.  It was agreed that Shamrocks put option, if exercised,  shall be exercised
for cash.. The Company also agreed to extend until December 2005 the term of
  the option granted to FIMI and IDB to exchange the securities held by them in
  Transtech Control Ltd. (Transtech) 
  for Formulas ordinary shares.                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The options
  granted to Shamrock, FIMI and IDB with respect to Sintec Advanced
  Technologies Ltd. (Sintec) shares were replaced in November 2002 by options
  relating to Matrix shares, as described in Note 2M.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-23

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions:

|A. | (cont.) :                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | As part of
  the agreement between the Company and Formula Vision (see Note 2I), the
  Company transferred to Formula Vision the Companys rights and obligations
  with respect to the transferred companies under the Companys agreements with
  Shamrock, FIMI and IDB. These companies include ESI and Transtech. If either
  Shamrock, FIMI or IDB exercises the option to exchange the securities in the
  transferred companies for Formulas shares and to the extent exercised,
  Formula Vision assumes all the rights and undertakings in connection with the
  exercise of the option.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|B. | In January 2001, as a
  result of a tender offer to purchase all of Formula Visions shares held by
  the public, Formula purchased 5,556,406 of Formula Visions shares
  representing 21.5% of its share capital, for an aggregate consideration of
  approximately $12 million. As a result, Formula increased its holding in
  Formula Vision to 74.5%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|C. | In March 2001, the Company
  completed a $10 million investment in convertible preferred shares of
  Sapiens, a publicly held company traded on the Nasdaq National Market,
  representing approximately 24% of Sapiens outstanding share capital on a
  converted basis. Under the agreement with Sapiens, Formula was also granted
  an option to invest up to an additional $10 million on the same terms as its
  initial investment, subject to certain adjustments. In December 2002, Formula
  exercised the option and invested $10 million in Sapiens in exchange for a
  discount conversion price of $0.83 per common share. As part of the
  transaction, Formula converted all of its preferred shares into common shares
  at the discount price. During 2002 Formula purchased an additional 1,924,211
  shares of Sapiens in the open market for aggregate consideration of $1.6
  million. As a result, Formula held 47.48% of Sapiens outstanding share
  capital. Through the first quarter of 2003, Formula increased its holding in
  Sapiens to 50% and started to consolidate Sapiens.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|D. | On
  March 20, 2001, Formula
  Vision distributed its holdings in Magic 
  and Sivan Training and Systems Ltd. (Sivan) as a dividend in kind to
  its shareholders. As a result, Formula
  received
  6,700,315 ordinary shares of Magic (representing  a shareholding
  interest of 22.7% in Magic) and 8,144,604 ordinary shares of Sivan
  (representing a shareholding interest of 63% in Sivan).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-24

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|E. | During the period from May
  2001through July 2001, Formula acquired from
  ForSoft Ltd. (ForSoft) its entire interest in certain providers of software
  solutions for niche markets, for aggregate consideration of approximately $18
  million. As part of the transaction Formula acquired from  ForSoft and from ForSofts subsidiaries
  their entire holdings in ForSoft Export (1999) Ltd. (100%), nextSource Inc.
  (formerly ForSoft Inc.) (100%), Formula Retail Solutions Ltd. (78%), F.T.S. -
  Formula Telecom Solutions Ltd. (50.1%), F.I.S Software Ltd. (51.1%) and N.I.P
  Nikuv International Projects Ltd. (74%). The total consideration is equal to
  the book  value of ForSofts
  investments in these companies.                                                  
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|F. | In July 2001, Formula
  announced that its investment in Formula Visions shares would be distributed
  to its shareholders as a dividend in kind. At the distribution date - August
  28, 2001, Formula distributed its holdings in Formula Visions shares
  representing 72% of Formula Visions share capital, such that each holder of
  one of Formulas shares was entitled to two of Formula Visions shares,
  subject to withholding at source as required by law.                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|G. | In August 2001, Formula
  entered into an agreement with Matrix, formerly Romtec Electronics Ltd. and
  its former controlling shareholders. According to the agreement, Matrix
  allotted to Formula 23,788,151 ordinary shares of Matrix, representing
  following the allotment 85% of Matrixs outstanding share capital, in
  consideration for 13,045,870 ordinary shares of ForSoft. It was agreed, inter
  alia, that at the date of the closing of the transaction, Matrixs
  shareholders equity will be $8,000 thousand the source of which being liquid
  assets, and that Matrix will be devoid of any activity and/or assets, except
  for those mentioned above.                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In connection with this
  transaction, Formula agreed to guarantee a loan in the amount of $8.34
  million extended by a commercial bank to the principal shareholders of
  Matrix. In addition, the borrowers pledged to the bank the shares they hold
  in Matrix. During the three-year loan period, the borrowers are prohibited
  from selling Matrixs shares to their affiliated parties. Formula undertook
  to pay to the bank at the termination of the loan period, the difference, if
  any, between the loan amount and the sale proceeds of the pledged Matrix
  shares. An unrealized gain in the amount of $3,078 thousand was created and
  it will be realized at the earlier of a decrease in Formulas guarantee or
  the end of 3 years from the time of the transaction.

F-25

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|H. | In
  September 2001, Formula
  purchased
  37.3% of the outstanding share capital of Liraz Systems Ltd. (Liraz), an
  international software and services company publicly traded on the TASE. The
  aggregate consideration Formula
  paid
  for this transaction was $5.6 million. In October 2001, Formula published a special public tender offer
  pursuant to which the Company purchased an additional 6.0% of the outstanding
  share capital of Liraz for aggregate consideration of $589,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|I. | In November 2001, Formula
  Vision exercised the option granted by Formula in July 2001, to acquire the
  entire interest held by Formula in privately held companies. Under this
  transaction, Formula transferred to Formula Vision its entire interest,
  including related obligations, in the following companies: 51% interest in
  F.I.S. Software Ltd., 78.0% interest in Formula Retail Solutions Ltd., 50.1%
  interest in F.T.S. - Formula Telecom Solutions Ltd., 72.0% interest in N.I.P.
  Nikuv International Projects Ltd., 36.0% interest in Enformia Software Ltd.,
  1.0% interest in Babylon Ltd., 0.85% interest in Demantra Ltd., 100.0%
  interest in Forsoft Export (1999) Ltd., 80.3% interest in Airport Systems
  Technologies Ltd., 68.0% interest in Transtech, 50.0% interest in ESI, 34.0%
  interest in GeoSim System Ltd., 100.0% interest in Shandol , its interest in
  the first and second venture capital funds, Formula Ventures and its 100.0%
  interest in the funds management company and in Formula Ventures Ltd.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The
  aggregate consideration paid by Formula Vision was $58.9 million, reflecting
  the book value of the transferred companies as of June 30, 2001, plus amounts
  invested by Formula prior to the closing of the transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Under the terms of the
  agreement with Formula Vision, Formula Vision issued to Formula, in December
  2001, a series of debentures of $58.9 million in the aggregate, linked to the
  Israeli Consumer Price Index (CPI) and bearing an interest at an annual
  rate of 5%. Formula Vision is required to repay the debentures in five annual
  installments, subject to adjustments, based on the income of Formula Vision
  during each of the five years. The payments on account of the debentures plus
  linkage differences will be no less than 30% and no more than 70% of the
  income arising from the sale of the transferred companies in any calendar
  year.                                                                                                                                                                                                                                                                                                                                                                                  

F-26

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|I. | (cont.) :                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Income for these
  purposes is defined as the amounts received by Formula Vision, if any, in
  consideration for a sale of any of the transferred companies in any given
  calendar year, less selling expenses, as well as amounts received by Formula
  Vision from distributions to be made by any of the transferred companies in
  any given calendar year. Payments to be made on account of the debentures, in
  any given calendar year, shall be no less than 20% of the annual profit as
  recorded in the financial statements of Formula Vision. Any amounts which
  remain outstanding will be payable at the end of the 5-year period. In
  connection with this transaction, Formula lent to Formula Vision on March 31,
  2002 an additional $19.4 million and Formula Vision issued to Formula an
  additional series of debentures in that amount, with similar terms to the
  debentures issued in December 2001.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Through 2002, Formula
  Vision repaid $2.9 million as principal and $8.1 million as interest and
  linkage differences on the debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Through 2003, Formula
  Vision repaid $0.3 million as principal and $2.5 million as interest and
  linkage differences on the debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | In the event that during
  the term of the indebtedness, Formula Vision issues to a third party
  convertible debentures, Formula is entitled to convert the indebtedness into
  the same class of convertible debentures, having the same terms as the
  convertible debentures issued to the third party.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | In addition, Formula is
  entitled, during a 3-year period, to repurchase from Formula Vision up to 10%
  of the shares sold in each of the transferred companies, at the same purchase
  price set out in the agreement between the parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | As part of the agreement
  between Formula and Formula Vision, Formula transferred to Formula Vision its
  rights and obligations with respect to the transferred companies under its
  agreement with each of Shamrock, FIMI and IDB. If either of Shamrock, FIMI or
  IDB exercises the option to exchange the securities in the transferred
  companies for Formulas shares and to the extent exercised, Formula Vision assumed
  all the rights and undertakings in connection with the exercise of the
  option.                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|J. | On May 30, 2002, Formula
  consummated a public offering in Israel of $14.8 million of debentures.
  Options to purchase an aggregate of 2,000,000 Formulas ordinary shares were
  attached to the debentures. The proceeds from the public offering were $14.9
  million of which $13.8 million were allocated to the debentures and $1.1
  million were allocated to the options. The allocation was made on the basis
  of the average market price of the options in the first 3 trading days.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The
  debentures are repayable in a lump sum in three years, but can be redeemed
  earlier by the holders at a predetermined redemption price. The nominal
  interest rate for each year of the three-years, is approximately 5.77%,
  payable only after 3 years. Principal and interest on the debentures are
  linked to the CPI. In June 2003,
  Formula repurchased $2.4 million aggregate principal amount of the debenture,
  leaving $14.50 million aggregate principal amount of debentures outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                     

F-27

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|J. | (cont.) :                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The
  associated options were for a term of one year and were exercisable at a
  price of $15.8 per ordinary share. The exercise price of the options was also
  linked to the CPI. The options expired on May 30, 2003 (see Note 13D).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|K. | On July 30, 2002, Matrix
  consummated a public offering in Israel of $21 million debentures linked to
  the CPI and bearing interest at an annual rate of 4.95%, to be repaid on
  August 5, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The debentures are
  convertible at any day through July 17, 2005 to ordinary shares of Matrix.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Matrix received request
  for 96,194 packages in the aggregate amount of $19.6 million of which 30,000
  packages were requested by Matrix I.T. Systems Ltd. (a subsidiary of Matrix).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Options to
  purchase an aggregate of 10,000,000 ordinary shares of Matrix, were attached
  to the debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The associated options
  have a term of 3 years and are exercisable at a price of $1.69 (linked to the
  CPI) per Matrix ordinary share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The proceeds from the
  public offering were $13.4 million, of which $12.3 million were allocated to
  the debentures and $1.1 million were allocated to the options. The allocation
  was done on the basis of the average market price of the option in the first
  3 trading days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The
  debentures were issued at a discount, which is being amortized over the life
  of the debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Through
  2003, Matrix IT Systems Ltd. sold all of Matrixs convertible debentures held
  by it for an aggregate consideration of $4.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|L. | In November 2002, Formula
  sold to BluePhoenix, in a share exchange transaction, 3,912,999 ordinary
  shares of Liraz, representing Formulas entire 57.9% interest in Liraz. In
  consideration, BluePhoenix issued to Formula 2,343,113 BluePhoenix ordinary
  shares. The number of shares issued to Formula by BluePhoenix was calculated
  based on an exchange ratio of 1:1.67, such that BluePhoenix issued to Formula
  one BluePhoenix share for 1.67 shares of Liraz. The transaction was recorded
  at the carrying value in Formula accounts. In addition, BluePhoenix purchased
  from certain additional shareholders of Liraz an aggregate of 1,896,303 Liraz
  ordinary shares for BluePhoenix shares, based on the same exchange ratio as
  in the transaction between BluePhoenix and Formula. The transaction was
  recorded at the amount of $2.9 million. Consequent to the above, BluePhoenix
  owned approximately 86% of Lirazs outstanding share capital. Following this
  transaction, BluePhoenix purchased from the public all Lirazs remaining
  outstanding shares in two public tender offerings. In March 2003, Lirazs
  shares ceased to be traded on the TASE.

F-28

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|M. | In November 2002, Formula
  completed a sale to Matrix of its entire shareholdings in New Applicom Ltd.
  (New Applicom), Sintec and Sivan, publicly-held companies traded on the
  TASE, for an aggregate consideration of $29.7 million. Under this
  transaction, referred to as the sale transaction, Formula sold to Matrix
  3,870,498 shares of New Applicom, representing approximately 60.8% of New
  Applicoms outstanding share capital, for an aggregate of $16.9 million,
  15,330,309 shares of Sintec, representing Sintecs entire outstanding share
  capital, for an aggregate of $12.5 million, and 8,930,100 shares of Sivan,
  representing approximately 69% of Sivans outstanding share capital, for an
  aggregate of $0.3 million. The shares sold to Matrix in the sale transaction
  were comprised of (i) shares previously held by Formula (ii) shares that were
  purchased from third parties in October 2002; and (iii) shares that were
  bought in tender offers published in October 2002 in accordance with the sale
  agreement. The price per share for each of New Applicoms, Sintecs and
  Sivans shares previously held by Formula and those purchased from third
  parties was equal to the equity per share of each of the Companies. The
  transaction was recorded at the carrying value in Formula accounts.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The shares that Formula
  purchased from third parties in October 2002 and sold to Matrix under the
  sale transaction, were bought in the following transactions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | (ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | (iii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-29

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain Transactions (cont.):

|M. | (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | As part of
  the sale transaction, Formula published in October 2002, cash tender offers
  for the shares of New Applicom, Sintec and Sivan not owned by Formula. As a
  result, Sintecs shares ceased to be traded on the TASE. Following the
  closing of the tender offers, Formula sold to Matrix the shares that were
  purchased in the tender offers for the same purchase price which was paid for
  the shares; $3.69 for each New Applicoms share $0.84 for each Sintecs share
  and $0.15 for each Sivans share. In November 2002, Matrix published tender offers
  for the shares of New Applicom and Sivan held by the public, resulting a 74%
  interest in New Applicom and approximately 90% interest in Sivan. On June 5,
  2003 Matrix entered into an agreement with third parties to purchase
  1,117,876 New Applicoms shares, which accounted for 17.5% of its equity.
  Matrix paid for each share  NIS 15 in
  cash and 2 Matrix shares. After the completion of the transaction, Matrix
  held an 89.4% interest in New Applicom. On September 11, 2003 Matrix
  published a tender offer for the remaining shares of New Applicom. With the
  completion of the transaction, New Applicom became a private company owned by
  Matrix and its shares ceased to be traded on the TASE.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In February 2004, Matrix
  published a cash tender offer for the remaining shares of Sivan. As a result,
  Sivans shares ceased to be traded on the TASE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|N. | On November 11, 2002,
  the Board of Directors of Magic decided to distribute a cash dividend to its
  shareholders of $0.40 per share. The total amount distributed was $11,845
  thousand. On January 27, 2003, after receiving approval for a capital
  reduction from the Tel-Aviv District Court, Magic announced the distribution
  of the dividend, and the payment date was February 24, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|O. | In December 2003, Sapiens
  completed an offering of securities in Israel, resulting in gross proceeds to
  Sapiens of approximately $17.1 million. In this offering, Sapiens sold
  100,000 units of securities, each unit consisting of 800 unsecured
  convertible debentures (Series A), two options (Series A) exercisable into
  debentures (Series A) and six warrants (Series 1) exercisable into common
  shares of Sapiens. The debentures are linked to the dollar and bear interest
  at an annual rate of 6%. The debentures are convertible into Sapiens common
  shares during a period ending on November 21, 2009. Each NIS 27 (currently
  approximately $5.90) amount of debentures may be converted into one common
  share of Sapiens, subject to adjustments. Each warrant (Series 1) is
  exercisable into one common share of Sapiens at an exercise price of
  approximately $6.14. The warrants are exercisable during a period ending on
  November 21, 2007.                                                                                                                                                                                                                                                                                                                           

F-30

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|P.                                    | In April 2000, FID and
  Israel Discount Bank Ltd. invested $15 million in eZoneXchange.com, Inc., a
  subsidiary of Sapiens. This private placement was accompanied by a put/call
  agreement, under which the participating investors were granted the right to
  require Sapiens to repurchase their shares in eZone, beginning in May 2004,
  in exchange for cash and Sapiens common shares. In February 2001, eZone
  operations were discontinued and Sapiens agreed to a partial exercise of the
  put option, resulting in a payment to the investors of $4.5 million. In March
  2004, Sapiens entered into a new agreement with the investors which replaced
  the put/call agreement and extended the period in which Sapiens may fulfill
  the terms of the put option. Sapiens agreed to issue to the investors, in a
  private placement, 750,000 common shares and warrants to purchase an
  additional 350,000 common shares that are exercisable through December 31,
  2007. In addition, Sapiens agreed to pay the investors by May 1, 2005, in two
  annual installments, an aggregate of $8.6 million plus interest at an annual
  rate of 7.5%.
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Note 3 - Loans and Other Investments:
|                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|A.                                    | Comprise:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                              |  |               |  |         |  | December 31,          | 
| | ---------------------------- |  | ------------- |  | ------- |  | --------------------- | 
| |                              |  |               |  |         |  |                       | 
| |                              |  | Interest rate |  |         |  | 2003                  | 
| |                              |  |               |  | Linkage |  |                       | 
| |                              |  | %             |  | basis   |  | (U.S. $ in thousands) | 
| |                              |  |               |  |         |  |                       | 
| | Cost
  of shares (1)         |  |               |  |         |  | 1,760                 | 
| |                              |  |               |  |         |  |                       | 
| | Long-term
  prepaid expenses |  |               |  |         |  | 1,082                 | 
| |                              |  |               |  |         |  |                       | 
| | Deposit                      |  |               |  | CPI     |  | 250                   | 
| | Loan                         |  | 4             |  | CPI     |  | 216                   | 
| |                              |  |               |  |         |  |                       | 
| |                              |  |               |  |         |  | 466                   | 
| |                              |  |               |  |         |  |                       | 
| | Total                        |  |               |  |         |  | 3,308                 | 
| |                              |  |               |  |         |  |                       | 

| | (1) | During
  2003 and 2002 impairment losses on cost investments have been identified in
  the amounts of $862 thousand and $133 thousand
  respectively.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

F-31

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|B. | Maturity Dates:
|-- | ---------------

| |               |  | December 31,          |    
| | ------------- |  | --------------------- | ---
| |               |  |                       |    
| |               |  | 2003                  |    
| |               |  |                       |    
| |               |  | (U.S. $ in thousands) |    
| |               |  |                       |    
| |               |  |                       |    
| | First
  year  |  |                       | 72 
| | Second
  year |  |                       | 72 
| | Third
  year  |  |                       | 72 
| | Fourth
  year |  |                       | -  
| |               |  |                       |    
| | Total         |  |                       | 216
| |               |  |                       |    

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

| |                                                                  |  | December 31,          |       
| | ---------------------------------------------------------------- |  | --------------------- | ------
| |                                                                  |  |                       |       
| |                                                                  |  | 2003                  |       
| |                                                                  |  |                       |       
| |                                                                  |  | (U.S. $ in thousands) |       
| |                                                                  |  |                       |       
| | Investment in shares:                                            |  |                       |       
| | Cost                                                             |  |                       | 6,503 
| | Goodwill
  and allocated original excess cost **                 |  |                       | (272  
| |                                                                  |  |                       |       
| | Net
  asset value as of acquisition date                         |  |                       | 6,231 
| | Equity
  in post-acquisition undistributed retained losses, net  |  |                       | (5,982
| |                                                                  |  |                       |       
| | Net
  asset value as of the balance sheet
  date                 |  |                       | 249   
| | Balance
  of goodwill                                            |  |                       | -     
| |                                                                  |  |                       |       
| |                                                                  |  |                       | 249   
| |                                                                  |  |                       |       
| | Loans to affiliates:                                             |  |                       |       
| | Index-linked
  and interest-free *                               |  |                       | 196   
| | Linked
  to the dollar and bearing annual interest of LIBOR + 1% |  |                       | 2,928 
| |                                                                  |  |                       |       
| | Total                                                            |  |                       | 3,373 
| |                                                                  |  |                       |       

|   | *                                                                                                                                                                                                                   | No repayment date has been set.                                                                                                                                                              
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                     |                                                                                                                                                                                              
|   | **                                                                                                                                                                                                                  | As from January 1, 2002, the investment is being tested for
  impairment on an annual basis rather than amortizing the goodwill as required by previous accounting standards (see Note
  1I).
|   |                                                                                                                                                                                                                     |                                                                                                                                                                                              
|B. | Sapiens:                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                    
|   | During 2001, Formula completed a $10 million investment in Sapiens
  convertible preferred shares
  representing approximately 24% of Sapiens outstanding share capital on an as
  converted basis (see Note 2C).

F-32

---

---

FORMULA SYSTEMS (1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Investments in Affiliates (cont.):

|B.                               | Sapiens (cont.):                                                                                                                                                                                                                                                                                                       
|-------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                 |                                                                                                                                                                                                                                                                                                                        
|                                 | On December 15, 2002, Formula invested an additional $10 million in Sapiens
  and purchased in the open market 1,900,000 shares for a consideration of $1.6
  million. As a result, Formula increased its holding in Sapiens to 47.48%. In January 2003, Formula
  increased its holding in Sapiens
  to more than 50%.
|                                 |                                                                                                                                                                                                                                                                                                                        
|Note 5 - Property and Equipment:
|                                 |                                                                                                                                                                                                                                                                                                                        
|                                 | Comprise:                                                                                                                                                                                                                                                                                                              

| |                             |  | December
  31,        |       
| | --------------------------- |  | --------------------- | ------
| |                             |  |                       |       
| |                             |  | 2003                  |       
| |                             |  |                       |       
| |                             |  | (U.S. $ in thousands) |       
| |                             |  |                       |       
| | Cost:                       |  |                       |       
| | Computers
  and equipment   |  |                       | 52,041
| | Motor
  vehicles            |  |                       | 8,371 
| | Buildings                   |  |                       | 10,078
| | Leasehold
  improvements    |  |                       | 6,396 
| |                             |  |                       |       
| |                             |  |                       | 76,886
| |                             |  |                       |       
| | Accumulated
  Depreciation: |  |                       |       
| | Computers
  and equipment   |  |                       | 41,485
| | Motor
  vehicles            |  |                       | 3,996 
| | Buildings                   |  |                       | 2,283 
| | Leasehold
  improvements    |  |                       | 3,366 
| |                             |  |                       |       
| |                             |  |                       | 51,130
| |                             |  |                       |       
| | Undepreciated
  balance     |  |                       | 25,756
| |                             |  |                       |       

| | Depreciation
  expense totaled $7,251 thousand, $7,536 thousand and $12,363 thousand for the
  years ended December 31, 2003, 2002 and 2001, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                           
| | See Note 12
  with respect to pledges.                                                                                                                    

F-33

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6 - Other Assets, Net:

Comprised as follows:

|                                         |  | December
  31,        | 
|---------------------------------------- |  | --------------------- | 
|                                         |  |                       | 
|                                         |  | 2003                  | 
|                                         |  |                       | 
|                                         |  | (U.S. $ in thousands) | 
|                                         |  |                       | 
|Original
  amounts:                      |  |                       | 
|Capitalized
  software development costs |  | 83,027                | 
|Deferred
  expenses and others           |  | 8,548                 | 
|Deferred
  tax asset                     |  | 5,184                 | 
|                                         |  |                       | 
|                                         |  | 96,759                | 
|                                         |  |                       | 
|Accumulated
  amortization:              |  |                       | 
|Capitalized
  software development costs |  | 50,001                | 
|Deferred
  expenses and others           |  | 4,319                 | 
|Deferred
  tax asset                     |  | -                     | 
|                                         |  |                       | 
|                                         |  | 54,320                | 
|                                         |  |                       | 
|Amortized
  cost                         |  | 42,439                | 
|                                         |  |                       | 

Amortized
expenses totaled $10,573 thousand, $5,370 thousand and $6,600 thousand for the
years ended December 31, 2003, 2002 and 2001, respectively.

Note 7 -
Liabilities to Banks and Others:

A.        Composition:

|      |  | Interest
  rate     |  | Linkage
  basis |  | Long-term
  liabilities |        | Current maturities    |  | Total long-term
  liabilities net of
  current maturities |       | Total long-term
  liabilities net of
  current maturities | 
|----- |  | ------------------- |  | --------------- |  | ----------------------- | ------ | --------------------- |  | --------------------------------------------------------- | ----- | --------------------------------------------------------- | 
|      |  |                     |  |                 |  |                         |        |                       |  |                                                           |       |                                                           | 
|      |  | December
  31, 2003 |  |                 |  | December 31, 2003       |        | December 31, 2002     | 
|      |  |                     |  |                 |  |                         |        |                       | 
|      |  | %                   |  |                 |  | (U.S. $ in thousands)   |        | (U.S. $ in thousands) | 
|      |  |                     |  |                 |  |                         |        |                       | 
|      |  | 2-6.6               |  | Dollar          |  |                         | 26,134 |                       |  |                                                           | 6,334 |                                                           | 
|      |  | 4.3-8               |  | CPI             |  |                         | 3,153  |                       |  |                                                           | 1,242 |                                                           | 
|      |  | 0-12.4              |  | Others          |  |                         | 432    |                       |  |                                                           | 243   |                                                           | 
|      |  |                     |  |                 |  |                         |        |                       |  |                                                           |       |                                                           | 
|Total |  |                     |  |                 |  |                         | 29,719 |                       |  |                                                           | 7,819 |                                                           | 
|      |  |                     |  |                 |  |                         |        |                       |  |                                                           |       |                                                           | 

B.        Maturity Dates:

|                                  |  | December 31,          | 
|--------------------------------- |  | --------------------- | 
|                                  |  |                       | 
|                                  |  | 2003                  | 
|                                  |  |                       | 
|                                  |  | (U.S. $ in thousands) | 
|                                  |  |                       | 
|                                  |  |                       | 
|First
  year (current maturities) |  | 7,819                 | 
|Second
  year                     |  | 16,761                | 
|Third
  year                      |  | 4,975                 | 
|Fourth
  year                     |  | 42                    | 
|Fifth
  year                      |  | 30                    | 
|Sixth
  year and thereafter       |  | 92                    | 
|                                  |  |                       | 
|Total                             |  | 29,719                | 
|                                  |  |                       | 

F-34

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7 - Liabilities
to Banks and Others (cont.):C.        For details of
liens and guarantees, see Note 12.

Note 8 - Debentures:
Comprised as follows:

|                                        |  |         |  |          |   | December 31,          |       
|--------------------------------------- |  | ------- |  | -------- | - | --------------------- | ------
|                                        |  |         |  |          |   |                       |       
|                                        |  |         |  |          |   | 2003                  |       
|                                        |  |         |  | Interest |   |                       |       
|                                        |  | Linkage |  | rate     |   | (U.S. $ in thousands) |       
|                                        |  |         |  |          |   |                       |       
|                                        |  |         |  |          |   |                       |       
|Convertible
  debenture (see Note 2K)   |  | CPI     |  | 4.95     | % |                       | 21,221
|Convertible
  debenture (see
  Note 2A) |  | Dollar  |  | 5        | % |                       | 4,720 
|Convertible
  debentuere (see Note 2O)  |  | Dollar  |  | 6        | % |                       | 16,672
|Convertible
  debentuere (see Note 2P)  |  | Dollar  |  | 5        | % |                       | 11,505
|                                        |  |         |  |          |   |                       |       
|                                        |  |         |  |          |   |                       | 54,118
|                                        |  |         |  |          |   |                       |       
|Deferred
  issuance expenses, net       |  |         |  |          |   |                       | 1,955 
|                                        |  |         |  |          |   |                       |       
|                                        |  |         |  |          |   |                       | 52,163
|                                        |  |         |  |          |   |                       |       
|Current
  maturities (see Note 2A)      |  |         |  |          |   |                       | 1,180 
|                                        |  |         |  |          |   |                       |       
|                                        |  |         |  |          |   |                       | 50,983
|                                        |  |         |  |          |   |                       |       

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

| |                             |  | December
  31,        |  
| | --------------------------- |  | --------------------- | -
| |                             |  |                       |  
| |                             |  | 2003                  |  
| |                             |  |                       |  
| |                             |  | (U.S. $ in thousands) |  
| |                             |  |                       |  
| |                             |  |                       |  
| | Accrued
  severance pay     |  | 15,642                |  
| |                             |  |                       |  
| | Less -
  severance pay fund |  | (11,113               | )
| |                             |  |                       |  
| |                             |  | 4,529                 |  
| |                             |  |                       |  

|   | The Company
  may only make withdrawals from the managers insurance policies for the
  purpose of paying severance pay.                                                  
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                           
|B. | The expenses
  in respect of severance pay for the years ended December 31, 2003, 2002 and
  2001 were $5,216 thousand, $2,917 thousand and $4,933 thousand, respectively.

F-35

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10 - Employee
Option Plans in Subsidiaries:Certain
subsidiaries granted options to their employees to purchase shares in the
respective companies.  The options were
mainly granted in the
years 1999-2003. In general,
the options are exercisable 2-3
years after the date of grant and expire 7-10 years after grant.  Most of 
the options were granted as part of plans that were adopted in accordance
with the provisions of Section 102 of the Israeli Income Tax Ordinance,
which stipulate, inter alia, that the subsidiaries will be able to claim the
benefit that was charged to the employees as an expense for tax purposes, if
and when the employees become liable for tax on the said benefit. For further
information with rspect to expenses relating to the benefit to the employees,
and additional disclosure required by FAS 123, see Note 1V.

|A. | The
  following is a summary of the status of options plans in BluePhoenix as of
  December 31, 2003, 2002 and 2001 and changes during the years then ended:
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                       |  | Year ended
  December 31, 2003 |   | Year ended
  December 31, 2002        |  | Year ended
  December 31, 2001 |  
| | --------------------------------------------------------------------- |  | ------------------------------ | - | ------------------------------------- |  | ------------------------------ | -
| |                                                                       |  |                                |   |                                       |  |                                |  
| |                                                                       |  | Number
  of options            |   | Weighted
  Average
  Exercise
  Price |  | Number
  of options            |  
| |                                                                       |  |                                |   |                                       |  |                                |  
| |                                                                       |  |                                |   | $                                     |  |                                |  
| |                                                                       |  |                                |   |                                       |  |                                |  
| | Options
  outstanding at
  the beginning of the year                  |  | 1,347,260                      |   | 6.56                                  |  | 1,193,650                      |  
| | Changes
  during the year:                                            |  |                                |   |                                       |  |                                |  
| | Granted                                                               |  | 923,000                        |   | 3.03                                  |  | 353,560                        |  
| | Exercised                                                             |  | (35,267                        | ) | 2.33                                  |  | (90,000                        | )
| | Forfeited                                                             |  | (75,000                        | ) | 9.46                                  |  | (109,950                       | )
| |                                                                       |  |                                |   |                                       |  |                                |  
| | Options
  outstanding
            at the end of the
           year   |  | 2,159,993                      |   | 4.99                                  |  | 1,347,260                      |  
| |                                                                       |  |                                |   |                                       |  |                                |  
| |                                                                       |  |                                |   |                                       |  |                                |  
| | Options
  exercisable at
  year-end                                   |  | 1,233,575                      |   | 6.04                                  |  | 888,333                        |  
| |                                                                       |  |                                |   |                                       |  |                                |  
| | Weighted-average
  fair
  value of options granted
  during the year* |  | 0.54                           |   |                                       |  | 1.09                           |  
| |                                                                       |  |                                |   |                                       |  |                                |  

| | * | The fair
  value of each option that was granted is estimated on the date of grant,
  using the Black-Scholes option-pricing model with the following weighted
  average assumptions: dividend yield of 0% for all years; expected volatility:
  2003 - 66%, 2002 - 67%, 2001 - 61%, risk-free interest rate 2003 - 1.75%,
  2002  1.75%, 2001 - 3% and expected life: 2001, 2002 and 2003 -3 years.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-36

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

| |                              |  | Options
  Outstanding                         |           | Options
  Exercisable                             |      
| | ---------------------------- |  | --------------------------------------------- | --------- | ------------------------------------------------- | -----
| |                              |  |                                               |           |                                                   |      
| | Range of
  Exercise
  Prices |  | Number
  Outstanding
  at December
  31, 2003 |           | Weighted
  Average
  Remaining
  Contractual Life |      
| |                              |  |                                               |           |                                                   |      
| | $                            |  |                                               |           | Years                                             |      
| |                              |  |                                               |           |                                                   |      
| |                              |  |                                               |           |                                                   |      
| | 2.25                         |  |                                               | 416,000   |                                                   | 9.25 
| | 3.00                         |  |                                               | 116,000   |                                                   | 9.50 
| | 3.00                         |  |                                               | 255,660   |                                                   | 8.50 
| | 3.00                         |  |                                               | 80,000    |                                                   | 8.09 
| | 3.50                         |  |                                               | 70,000    |                                                   | 9.50 
| | 3.50                         |  |                                               | 47,000    |                                                   | 9.75 
| | 4.00                         |  |                                               | 200,000   |                                                   | 9.83 
| | 4.50                         |  |                                               | 68,333    |                                                   | 7.50 
| | 4.50                         |  |                                               | 10,000    |                                                   | 9.25 
| | 5.20                         |  |                                               | 139,500   |                                                   | 2.75 
| | 5.50                         |  |                                               | 13,000    |                                                   | 6.83 
| | 6.00                         |  |                                               | 28,000    |                                                   | 10.00
| | 6.50                         |  |                                               | 311,900   |                                                   | 2.21 
| | 6.50                         |  |                                               | 2,000     |                                                   | 10.00
| | 8.00                         |  |                                               | 92,000    |                                                   | 5.50 
| | 9.00                         |  |                                               | 10,000    |                                                   | 5.75 
| | 9.63                         |  |                                               | 70,000    |                                                   | 6.25 
| | 10.50                        |  |                                               | 230,600   |                                                   | 7.25 
| |                              |  |                                               |           |                                                   |      
| |                              |  |                                               | 2,159,993 |                                                   |      
| |                              |  |                                               |           |                                                   |      
| |                              |  |                                               |           |                                                   |      

|B. | The
  following table is a summary of the status of option plans in Magic as of
  December 31, 2003, 2002 and 2001:
|-- | -------------------------------------------------------------------------------------------------------------------

| |                                                                            |  | Year ended
  December 31, 2003 |   | Year ended
  December 31, 2002        |      | Year ended
  December 31, 2001 | 
| | -------------------------------------------------------------------------- |  | ------------------------------ | - | ------------------------------------- | ---- | ------------------------------ | 
| |                                                                            |  |                                |   |                                       |      |                                | 
| |                                                                            |  | Number of
  Options            |   | Weighted
  Average
  Exercise
  Price |      | Number of
  Options            | 
| |                                                                            |  |                                |   |                                       |      |                                | 
| |                                                                            |  |                                |   | $                                     |      |                                | 
| |                                                                            |  |                                |   |                                       |      |                                | 
| | Options outstanding at the
     beginning of the year                      |  | 2,751,937                      |   |                                       | 2.31 |                                | 
| | Granted                                                                    |  | 1,924,283                      |   |                                       | 2.57 |                                | 
| | Exercised                                                                  |  | (775,284                       | ) |                                       | 1.17 |                                | 
| | Cancelled                                                                  |  | -                              |   |                                       | -    |                                | 
| | Forfeited                                                                  |  | (554,530                       | ) |                                       | 3.35 |                                | 
| |                                                                            |  |                                |   |                                       |      |                                | 
| |                                                                            |  |                                |   |                                       |      |                                | 
| | Outstanding at the end of
     the year                                    |  | 3,346,406                      |   |                                       | 2.26 |                                | 
| |                                                                            |  |                                |   |                                       |      |                                | 
| |                                                                            |  |                                |   |                                       |      |                                | 
| | Exercisable at the end of
     the year                                    |  | 1,304,338                      |   |                                       | 1.92 |                                | 
| |                                                                            |  |                                |   |                                       |      |                                | 
| |                                                                            |  |                                |   |                                       |      |                                | 
| | Weighted average fair
     value of options granted
     during the year * |  |                                |   |                                       | 1.28 |                                | 
| |                                                                            |  |                                |   |                                       |      |                                | 

F-37

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

| |                             |  | Options
  Outstanding                           |           | Options
  Exercisable                               | 
| | --------------------------- |  | ----------------------------------------------- | --------- | --------------------------------------------------- | 
| |                             |  |                                                 |           |                                                     | 
| | Range of
  Exercise
  Price |  | Number
  Outstanding
  at
  December 31,
  2003 |           | Weighted
  Average
  Remaining
  Contractual
  Life | 
| |                             |  |                                                 |           |                                                     | 
| | $                           |  |                                                 |           | Years                                               | 
| |                             |  |                                                 |           |                                                     | 
| |                             |  |                                                 |           |                                                     | 
| | 0-1                         |  |                                                 | 619,875   |                                                     | 
| | 1-2                         |  |                                                 | 1,513,976 |                                                     | 
| | 2-3                         |  |                                                 | 57,904    |                                                     | 
| | 3-4                         |  |                                                 | 663,281   |                                                     | 
| | 4-5                         |  |                                                 | 425,459   |                                                     | 
| | 6-7                         |  |                                                 | 1,011     |                                                     | 
| | 10-11                       |  |                                                 | 55,900    |                                                     | 
| | 18-19                       |  |                                                 | 9,000     |                                                     | 
| |                             |  |                                                 |           |                                                     | 
| |                             |  |                                                 | 3,346,406 |                                                     | 
| |                             |  |                                                 |           |                                                     | 

|C. | The
  following is a  summary of the status
  of option plans in Matrix as of December 31, 2003 and 2002 and changes during
  the years then ended:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                    |  | Year ended
  December 31, 2003 |   | Year ended
  December 31, 2002        |     
| | ---------------------------------------------------------------------------------- |  | ------------------------------ | - | ------------------------------------- | ----
| |                                                                                    |  |                                |   |                                       |     
| |                                                                                    |  | Number of
  options            |   | Weighted
  Average
  Exercise
  Price |     
| |                                                                                    |  |                                |   |                                       |     
| |                                                                                    |  |                                |   | $                                     |     
| |                                                                                    |  |                                |   |                                       |     
| |                                                                                    |  |                                |   |                                       |     
| | Options
  outstanding at the beginning of
      the year                           |  | 3,183,840                      |   |                                       | 1.48
| | Changes during the year:                                                           |  |                                |   |                                       |     
| | Granted                                                                            |  | 2,483,562                      |   |                                       | 1.65
| | Exercised                                                                          |  | -                              |   |                                       | -   
| | Forfeited                                                                          |  | (2,400                         | ) |                                       | 1.60
| |                                                                                    |  |                                |   |                                       |     
| | Options
  outstanding at the end of the        year                                |  | 5,665,002                      |   |                                       | 1.62
| |                                                                                    |  |                                |   |                                       |     
| | Options
  exercisable at end of year                                               |  | 2,995,699                      |   |                                       | 1.61
| |                                                                                    |  |                                |   |                                       |     
| | Weighted
  average fair value of
             options
  granted during the year(*) |  |                                |   |                                       | 5.43
| |                                                                                    |  |                                |   |                                       |     

F-38

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

| |                              |  | Options
  Outstanding                       |  | Options
  Exercisable                             | 
| | ---------------------------- |  | ------------------------------------------- |  | ------------------------------------------------- | 
| |                              |  |                                             |  |                                                   | 
| | Range of
  Exercise
  Prices |  | Number
  Outstanding
  at December 31, 2003 |  | Weighted
  Average
  Remaining
  Contractual Life | 
| |                              |  |                                             |  |                                                   | 
| | $                            |  |                                             |  | Years                                             | 
| |                              |  |                                             |  |                                                   | 
| |                              |  |                                             |  |                                                   | 
| | 1.37                         |  | 558,738                                     |  | 6.67                                              | 
| | 1.60                         |  | 3,974,264                                   |  | 5.83                                              | 
| | 1.83                         |  | 1,132,000                                   |  | 6.67                                              | 
| |                              |  |                                             |  |                                                   | 
| |                              |  | 5,665,002                                   |  |                                                   | 
| |                              |  |                                             |  |                                                   | 

|D. | The
  following is a summary of the status of options plans in Sapiens as of
  December 31, 2003, 2002 and 2001 and changes during the years then ended:
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                   |  | Year ended
  December 31, 2003 |   | Year ended
  December 31, 2002        |       | Year ended
  December 31, 2001 | 
| | ----------------------------------------------------------------- |  | ------------------------------ | - | ------------------------------------- | ----- | ------------------------------ | 
| |                                                                   |  |                                |   |                                       |       |                                | 
| |                                                                   |  | Number of
  options            |   | Weighted
  Average
  Exercise
  Price |       | Number of
  options            | 
| |                                                                   |  |                                |   |                                       |       |                                | 
| |                                                                   |  |                                |   | $                                     |       |                                | 
| |                                                                   |  |                                |   |                                       |       |                                | 
| | Options outstanding at
      the beginning of the
      year      |  | **1,580,713                    |   |                                       | 11.25 |                                | 
| | Changes during the year:                                          |  |                                |   |                                       |       |                                | 
| |                                                                   |  |                                |   |                                       |       |                                | 
| | Granted                                                           |  | 157,600                        |   |                                       | 4.06  |                                | 
| | Exercised                                                         |  | (6,820                         | ) |                                       | 3.91  |                                | 
| | Forfeited                                                         |  | (172,998                       | ) |                                       | 14.05 |                                | 
| |                                                                   |  |                                |   |                                       |       |                                | 
| | Options
  outstanding
          at the end of the year            |  | **1,558,495                    |   |                                       | 10.25 |                                | 
| |                                                                   |  |                                |   |                                       |       |                                | 
| | Options exercisable at
  year-end                                 |  | 1,095,779                      |   |                                       | 11.86 |                                | 
| |                                                                   |  |                                |   |                                       |       |                                | 
| | Weighted-average fair
  value of options granted during the year* |  |                                |   |                                       | 2.30  |                                | 
| |                                                                   |  |                                |   |                                       |       |                                | 

F-39

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

| |                           |  | Options
  Outstanding                           |           | Options
  Exercisable                               | 
| | ------------------------- |  | ----------------------------------------------- | --------- | --------------------------------------------------- | 
| |                           |  |                                                 |           |                                                     | 
| | Range of
  Exercise Price |  | Number
  Outstanding
  at
  December 31,
  2003 |           | Weighted
  Average
  Remaining
  Contractual
  Life | 
| |                           |  |                                                 |           |                                                     | 
| | $                         |  |                                                 |           | Years                                               | 
| |                           |  |                                                 |           |                                                     | 
| |                           |  |                                                 |           |                                                     | 
| | -                         |  |                                                 | 102,100   |                                                     | 
| | 3.25-3.75                 |  |                                                 | 210,700   |                                                     | 
| | 4.06-5.70                 |  |                                                 | 844,562   |                                                     | 
| | 11.25-16.875              |  |                                                 | 175,080   |                                                     | 
| | 19.375-29.375             |  |                                                 | 54,675    |                                                     | 
| | 32.5-47.5                 |  |                                                 | 129,328   |                                                     | 
| | 61.25-69.375              |  |                                                 | 42,050    |                                                     | 
| |                           |  |                                                 |           |                                                     | 
| |                           |  |                                                 | 1,558,495 |                                                     | 
| |                           |  |                                                 |           |                                                     | 

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

| |                                                                                        |  | December 31,          | 
| | -------------------------------------------------------------------------------------- |  | --------------------- | 
| |                                                                                        |  |                       | 
| |                                                                                        |  | 2003                  | 
| |                                                                                        |  |                       | 
| |                                                                                        |  | (U.S. $ in thousands) | 
| |                                                                                        |  |                       | 
| |                                                                                        |  |                       | 
| | Gain
  resulting from Matrix - Note 2M                                                 |  | -                     | 
| | Gain
  resulting from the sale of certain companies to Formula Vision -
       Note 2I |  | 1,147                 | 
| | Gain
  resulting from a reverse acquisition of Matrix  Note 2G                        |  | 2,975                 | 
| | Gain
  resulting from Sintec Media Ltd.                                                |  | 227                   | 
| | Gain
  resulting from Sintec                                                           |  | -                     | 
| | Gain
  resulting from T-Soft                                                           |  | 110                   | 
| |                                                                                        |  |                       | 
| |                                                                                        |  | 4,459                 | 
| |                                                                                        |  |                       | 

F-40

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 11 - Unrealized Gains (cont.):     
|----------------------------------------
|                                        
|B.                                      
|                                        
|                                        
|                                        
|Note 12 - Commitments and Contingencies:
|                                        
|A.                                      
|                                        
|                                        
|                                        
|                                        
|B.                                      
|                                        
|                                        
|                                        
|                                        
|                                        
|C.                                      
|                                        
|                                        
|                                        
|                                        

F-41

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

F-42

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

F-43

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

F-44

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

|                      |  | U.S. $ in thousands | 
|--------------------- |  | ------------------- | 
|                      |  |                     | 
|                      |  |                     | 
|2004                  |  | 8,581               | 
|2005                  |  | 7,129               | 
|2006                  |  | 5,692               | 
|2007                  |  | 5,336               | 
|2008
  and thereafter |  | 8,338               | 
|                      |  |                     | 
|                      |  | 35,076              | 
|                      |  |                     | 

|                                | Rent
  expenses for the years ended December 31, 2003, 2002 and 2001, were approximately
  $10,293 thousand, $7,418 thousand and $8,365 thousand, respectively.
|------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                |                                                                                                                                                                
|Note 13 - Shareholders Equity:
|                               
|A.                              | Share Capital Authorized, Issued and Outstanding:                                                                                                              

| |                                         |  | December 31, 2003 |  | December 31, 2002 | 
| | --------------------------------------- |  | ----------------- |  | ----------------- | 
| |                                         |  |                   |  |                   | 
| |                                         |  | Authorized        |  | Issued            | 
| |                                         |  |                   |  |                   | 
| |                                         |  | NIS               |  | NIS               | 
| |                                         |  |                   |  |                   | 
| | Ordinary
  shares, NIS 1 par value each |  | 25,000,000        |  | 10,824,780        | 
| |                                         |  |                   |  |                   | 

| | 1. | The
  shares are traded on the TASE and through ADSs, each representing one ordinary
  share of NIS 1 par value, quoted on the NASDAQ National Market in the
  United States.  The closing price of
  the share on the TASE as
  of December 31, 2003, was NIS 75.80. The closing price of the ADS on the
  NASDAQ National Market on that date was $17.07.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                            
| | 2. | On
  June 25, 1998, Formula completed a public offering of its shares on the
  over-the-counter market in the U.S. Formula received $56 million, net, in
  exchange for 1,600,000 ADSs.  The
  offering price was $35 per share.                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                            
| | 3. | In
  November 1998, Formula raised approximately $3 million in a private placement
  of 107,100 of Formulas
  shares.                                                                                                                                                                                                                                     

F-45

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

F-46

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

F-47

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

| |                                                                                             |  | Year ended
  December 31, 2003 |  | Year ended
  December 31, 2002        |      | Year ended
  December 31, 2001 | 
| | ------------------------------------------------------------------------------------------- |  | ------------------------------ |  | ------------------------------------- | ---- | ------------------------------ | 
| |                                                                                             |  |                                |  |                                       |      |                                | 
| |                                                                                             |  |                                |  | Weighted
  Average
  Exercise
  Price |      |                                | 
| |                                                                                             |  | Number of                      |  |                                       |      | Number of                      | 
| |                                                                                             |  | Options                        |  | $                                     |      | Options                        | 
| |                                                                                             |  |                                |  |                                       |      |                                | 
| |                                                                                             |  |                                |  |                                       |      |                                | 
| | Outstanding
  options at the
     beginning of
  the year                                   |  | 64,500                         |  |                                       | 30.8 |                                | 
| | Changes during the   year:                                                                  |  |                                |  |                                       |      |                                | 
| | Granted                                                                                     |  | -                              |  |                                       | -    |                                | 
| | Exercised                                                                                   |  | -                              |  |                                       | -    |                                | 
| | Expired                                                                                     |  | -                              |  |                                       | -    |                                | 
| |                                                                                             |  |                                |  |                                       |      |                                | 
| | Outstanding
  options at
         the end of the year                                       |  | 64,500                         |  |                                       | 30.8 |                                | 
| |                                                                                             |  |                                |  |                                       |      |                                | 
| | Exercisable
  options at
      the
  end
  of the year                                      |  | 64,500                         |  |                                       | 30.8 |                                | 
| |                                                                                             |  |                                |  |                                       |      |                                | 
| |                                                                                             |  |                                |  |                                       |      |                                | 
| | Weighted avarage fair        value
  of options
          granted during the
          year |  |                                |  |                                       | -    |                                | 
| |                                                                                             |  |                                |  |                                       |      |                                | 

| | The following table summarizes information in respect of outstanding options as at December 31,
  2003:
| | -------------------------------------------------------------------------------------------------------

| |                           |  | Options Outstanding       |        | Options Exercisable                             | 
| | ------------------------- |  | ------------------------- | ------ | ----------------------------------------------- | 
| |                           |  |                           |        |                                                 | 
| | Range of
  exercise price |  | Number
  Outstanding
  at |        | Weighted Average
  Remaining
  Contractual Life | 
| |                           |  | December 31,              |        |                                                 | 
| | $                         |  | 2003                      |        | Years                                           | 
| |                           |  |                           |        |                                                 | 
| |                           |  |                           |        |                                                 | 
| | 30.8                      |  |                           | 64,500 |                                                 | 
| |                           |  |                           |        |                                                 | 

F-48

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 13 - Shareholders Equity (cont.):
|---------------------------------------
|                                       
|C.                                     
|                                       
|                                       
|                                       
|                                       
|                                       
|D.                                     
|                                       
|                                       
|                                       
|Note 14 - Taxes on Income:             
|                                       
|A.                                     
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       

F-49

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 14 - Taxes on Income (cont.):
|----------------------------------
|                                  
|A.                                
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|B.                                
|                                  
|                                  

F-50

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 14 - Taxes on Income (cont.):
|----------------------------------
|                                  
|C.                                
|                                  
|                                  
|                                  
|D.                                
|                                  
|                                  
|                                  
|E.                                
|                                  
|                                  

| |                                          |  | December
  31, |  
| | ---------------------------------------- |  | -------------- | -
| |                                          |  |                |  
| |                                          |  | 2003           |  
| |                                          |  |                |  
| |                                          |  |                |  
| | Net
  operating losses carried
  forward |  | 85,560         |  
| | Software
  development costs             |  | 1,080          |  
| | Allowances
  and reserves                |  | 5,465          |  
| |                                          |  |                |  
| |                                          |  | 92,105         |  
| | Valuation
  allowance                    |  | (85,335        | )
| |                                          |  |                |  
| |                                          |  | 6,770          |  
| |                                          |  |                |  

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

| |                                    |  | December 31,          |  
| | ---------------------------------- |  | --------------------- | -
| |                                    |  |                       |  
| |                                    |  | 2003                  |  
| |                                    |  |                       |  
| |                                    |  | (U.S. $ in thousands) |  
| |                                    |  |                       |  
| |                                    |  |                       |  
| | Stated
  in current assets         |  | 2,528                 |  
| | Stated
  in other assets           |  | 5,184                 |  
| | Stated
  in long term liabilities  |  | (942                  | )
| |                                    |  |                       |  
| | Total
  included in balance sheets |  | 6,770                 |  
| |                                    |  |                       |  

F-51

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 14 - Taxes on Income (cont.):
|----------------------------------
|                                  
|F.                                

| |                                             |  | Year ended December 31, |  
| | ------------------------------------------- |  | ----------------------- | -
| |                                             |  |                         |  
| |                                             |  | 2003                    |  
| |                                             |  |                         |  
| |                                             |  | (U.S. $ in
  thousands) |  
| |                                             |  |                         |  
| | Current
  taxes:                            |  |                         |  
| | In
  Israel                                 |  | 1,584                   |  
| | Abroad                                      |  | 924                     |  
| |                                             |  |                         |  
| |                                             |  | 2,508                   |  
| | Taxes
  in Israel in respect of prior years |  | (795                    | )
| | Deferred
  taxes,  net                      |  | 827                     |  
| |                                             |  |                         |  
| | Total                                       |  | 2,540                   |  
| |                                             |  |                         |  

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

| |                                                                                                 |  | Year ended December 31, |  
| | ----------------------------------------------------------------------------------------------- |  | ----------------------- | -
| |                                                                                                 |  |                         |  
| |                                                                                                 |  | 2003                    |  
| |                                                                                                 |  |                         |  
| |                                                                                                 |  | (U.S. $ in
  thousands) |  
| |                                                                                                 |  |                         |  
| |                                                                                                 |  |                         |  
| | Income
  (loss) before taxes on income, as per the statement
      of operations                |  | 10,849                  |  
| |                                                                                                 |  |                         |  
| | Theoretical
  tax - 36%                                                                         |  | 3,906                   |  
| | Additional
  tax (tax savings) in respect of:                                                   |  |                         |  
| | Non-deductible
  expenses (mainly amortization of goodwill)                                     |  | (162                    | )
| | Tax-exempt
  income (mainly relating to decrease in
         shareholdings)                     |  | (71                     | )
| | Tax-exempt
  income and reduced tax rates in companies
         which have approved enterprises |  | (74                     | )
| | Losses
  and timing differences for which deferred taxes were
         not recorded             |  | (55                     | )
| | Taxes
  in respect of previous years                                                            |  | (795                    | )
| | Effect
  of the Inflationary Adjustments Law                                                    |  | 41                      |  
| | Other                                                                                           |  | (250                    | )
| |                                                                                                 |  |                         |  
| | Taxes on income as per the statement of operations                                              |  | 2,540                   |  
| |                                                                                                 |  |                         |  
| |                                                                                                 |  |                         |  
| | Effective
  tax rate - in %                                                                     |  | 23.4                    |  
| |                                                                                                 |  |                         |  

F-52

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
|--------------------------------------------------------
|                                                        
|Balance Sheet:                                          
|                                                        
|A.                                                      
|                                                        
|                                                        

| |                                                                            |  | December 31,            | 
| | -------------------------------------------------------------------------- |  | ----------------------- | 
| |                                                                            |  |                         | 
| |                                                                            |  | 2003                    | 
| |                                                                            |  |                         | 
| |                                                                            |  | (U.S. $ in
  thousands) | 
| |                                                                            |  |                         | 
| |                                                                            |  |                         | 
| | Government
  departments                                                   |  | 5,380                   | 
| | Employees
  (1)                                                            |  | 1,084                   | 
| | Prepaid
  expenses and advances to suppliers                               |  | 6,753                   | 
| | Deferred
  taxes                                                           |  | 2,528                   | 
| | Affiliates                                                                 |  | 646                     | 
| | Accounts
  receivable resulting from realization of holdings in affiliates |  | 312                     | 
| | Other                                                                      |  | 2,143                   | 
| |                                                                            |  |                         | 
| | Total                                                                      |  | 18,846                  | 
| |                                                                            |  |                         | 

|   | (1)                                             | Some
  of these balances are linked to the CPI, and bear interest at an annual rate
  of 4%.
|-- | ----------------------------------------------- | --------------------------------------------------------------------------------------------
|   |                                                 |                                                                                             
|B. | The Companys Long-Lived Assets are as follows:

| |        |  | December
  31,          | 
| | ------ |  | ----------------------- | 
| |        |  |                         | 
| |        |  | 2003                    | 
| |        |  |                         | 
| |        |  | (U.S. $ in
  thousands) | 
| |        |  |                         | 
| | Israel |  | 20,879                  | 
| | U.S.A. |  | 2,036                   | 
| | Others |  | 2,841                   | 
| |        |  |                         | 
| |        |  | 25,756                  | 
| |        |  |                         | 

|C. | Liabilities to Banks and Others:
|-- | --------------------------------
|  
|   | Composition:                    

| |                                                         |  | Interest
  rate |  |          |  |                         |  |        | 
| | ------------------------------------------------------- |  | --------------- |  | -------- |  | ----------------------- |  | ------ | 
| |                                                         |  |                 |  |          |  | December 31,            | 
| |                                                         |  | December 31,    |  |          |  |                         |  |        | 
| |                                                         |  | 2003            |  |          |  | 2003                    |  | 2002   | 
| |                                                         |  |                 |  | Linkage  |  |                         |  |        | 
| |                                                         |  | %               |  | basis    |  | (U.S. $ in
  thousands) | 
| |                                                         |  |                 |  |          |  |                         | 
| |                                                         |  |                 |  |          |  |                         |  |        | 
| | Bank
  overdraft                                        |  | 6-10.5          |  | Unlinked |  | 6,179                   |  | 2,304  | 
| | Short-term
  bank loans                                 |  | 6-8             |  | Unlinked |  | 15,224                  |  | 59,811 | 
| | Short-term
  bank loans                                 |  | 1.6-3.6         |  | Dollar   |  | 19,215                  |  | 12,901 | 
| | Short-term
  bank loans                                 |  | 4.3-8.5         |  | CPI      |  | 14,441                  |  | 8,706  | 
| | Short-term
  bank loans                                 |  | 4.2-4.4         |  | Euro     |  | 3,665                   |  | 1,825  | 
| | Current
  maturities of long-term loans
     from banks |  |                 |  |          |  | 8,999                   |  | 2,205  | 
| |                                                         |  |                 |  |          |  |                         |  |        | 
| | Total                                                   |  |                 |  |          |  | 67,723                  |  | 87,752 | 
| |                                                         |  |                 |  |          |  |                         |  |        | 

F-53

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT
  INFORMATION (cont.):
|------------------------------------------------------------------
|                                                                  
|D.                                                                
|                                                                  
|                                                                  

| |                                                           |  | December 31,            | 
| | --------------------------------------------------------- |  | ----------------------- | 
| |                                                           |  |                         | 
| |                                                           |  | 2003                    | 
| |                                                           |  |                         | 
| |                                                           |  | (U.S. $ in
  thousands) | 
| |                                                           |  |                         | 
| |                                                           |  |                         | 
| | Employees
  and other wage and salary related liabilities |  | 24,961                  | 
| | Government
  departments                                  |  | 7,775                   | 
| | Prepaid
  income and customer advances                    |  | 18,809                  | 
| | Accrued
  royalties to the OCS (Note 12)                  |  | 2,404                   | 
| | Other
  payables and credit balances                      |  | 17,143                  | 
| |                                                           |  |                         | 
| | Total                                                     |  | 71,092                  | 
| |                                                           |  |                         | 

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

| |                 |  | Year ended December 31, | 
| | --------------- |  | ----------------------- | 
| |                 |  |                         | 
| |                 |  | 2003                    | 
| |                 |  |                         | 
| |                 |  | (U.S. $ in
  thousands) | 
| |                 |  |                         | 
| |                 |  |                         | 
| | Israel          |  | 171,108                 | 
| | International:  |  |                         | 
| | United
  States |  | 93,695                  | 
| | Other           |  | 102,027                 | 
| |                 |  |                         | 
| |                 |  | 195,722                 | 
| |                 |  |                         | 
| | Total           |  | 366,830                 | 
| |                 |  |                         | 

|   | Classification
  was based on the location of the customers.
|-- | ------------------------------------------------------------
|   |                                                             
|F. | Restructuring and Non-Recurring Costs:                      

| |                                            |  | Year ended December 31, |  
| | ------------------------------------------ |  | ----------------------- | -
| |                                            |  |                         |  
| |                                            |  | 2003                    |  
| |                                            |  |                         |  
| |                                            |  | (U.S. $ in
  thousands) |  
| |                                            |  |                         |  
| |                                            |  |                         |  
| | Wages
  and related expenses               |  |                         | -
| | Relocation
  expenses                      |  |                         | -
| | Expenses
  relating to closing of branches |  |                         | -
| | Other                                      |  |                         | -
| |                                            |  |                         |  
| | Total                                      |  |                         | -
| |                                            |  |                         |  

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

F-54

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|G.                                                                
|                                                                  
|                                                                  

| |                                                           |  | Year ended December 31, |  
| | --------------------------------------------------------- |  | ----------------------- | -
| |                                                           |  |                         |  
| |                                                           |  | 2003                    |  
| |                                                           |  |                         |  
| |                                                           |  | (U.S. $ in
  thousands) |  
| |                                                           |  |                         |  
| |                                                           |  |                         |  
| | Financing
  income                                        |  | 4,726                   |  
| | Financing
  costs related to long-term credit             |  | (3,347                  | )
| | Financing
  costs related to short-term credit and others |  | (6,046                  | )
| | Gain
  (loss) from marketable securities                  |  | 991                     |  
| |                                                           |  |                         |  
| | Total                                                     |  | (3,676                  | )
| |                                                           |  |                         |  

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

| |                                                                                                                         |  | Year ended December 31, |  
| | ----------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -
| |                                                                                                                         |  |                         |  
| |                                                                                                                         |  | 2003                    |  
| |                                                                                                                         |  |                         |  
| |                                                                                                                         |  | (U.S. $ in
  thousands) |  
| |                                                                                                                         |  |                         |  
| |                                                                                                                         |  |                         |  
| | Gain
  (loss) on sale of fixed
  assets, net                                                                            |  | 26                      |  
| | Dividend
  received from another company                                                                                |  | -                       |  
| | Provision
  for impairment in value of investment in affiliates
      and other companies and write-off of goodwill (1) |  | (915                    | )
| | Other                                                                                                                   |  | 799                     |  
| |                                                                                                                         |  |                         |  
| | Total                                                                                                                   |  | (90                     | )
| |                                                                                                                         |  |                         |  

| | (1) | In
  the year 2001,
  primarily includes the amortization
  of goodwill and depreciation in value of investments, in Magic - $22 million,
  in BluePhoenix - $4 million, in New Applicom - $5 million and the impairment
  of a convertible loan to Thougtbubble Productions Inc. amounting to
  approximatly $4.8 million.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-55

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|I.                                                                
|                                                                  
|                                                                  

| |                                                                                      |  | Year ended December 31, |  
| | ------------------------------------------------------------------------------------ |  | ----------------------- | -
| |                                                                                      |  |                         |  
| |                                                                                      |  | 2003                    |  
| |                                                                                      |  |                         |  
| |                                                                                      |  | (U.S. $ in
  thousands) |  
| |                                                                                      |  |                         |  
| |                                                                                      |  |                         |  
| | Loss
  from realization of Compubyte Computers (2 below)                             |  | -                       |  
| | Gain
  from realization of investment in Level 8                                     |  | 376                     |  
| | Gain
  (loss) from sale and decrease in shareholding
     percentage in Magic        |  | 722                     |  
| | Gain
  from realization of investment in the News Company                            |  | 409                     |  
| | Loss
  from exercise of employees stock options in Magic                             |  | (428                    | )
| | Gain
  from decrease in shareholding percentage in Matrix                            |  | 1,131                   |  
| | Gain
  (loss) from sale and decrease in shareholding
     percentage in New Applicom |  | (93                     | )
| | Gain
  from realization of investment in warrants in Matrix                          |  | 300                     |  
| | Gain
  from realization of unrealized gain in Matrix
  (see Note 2G)                 |  | 342                     |  
| | Gain
  (loss) on realization of other investments                                    |  | (3                      | )
| |                                                                                      |  |                         |  
| | Total                                                                                |  | 2,756                   |  
| |                                                                                      |  |                         |  

|   | 2.                                                                                                                                                                                                                                                                                                                           | Additional Information:                                                                                                                                                                                                                                                                                                                                                                 
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |                                                                                                                                                                                                                                                                                                                              | On
  November 7, 2001, Sintec, a subsidiary, signed an agreement in principle that
  obligates Sintec to sell its holdings in Compubyte Computers 1986 Ltd. to a third party for a consideration of $3,397
  thousand. In December 2001, the final agreement was signed between the two
  parties. As a result of this transaction, Sintec recorded a capital loss of
  $1,935 thousand.
|   |                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                         
|J. | Operating Segments:                                                                                                                                                                                                                                                                                                         
|  
|   | The
  Company operates in two principal business segments, IT Services and
  proprietary software solutions.                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                             
|   | Software Services                                                                                                                                                                                                                                                                                                           
|  
|   | The
  following is a list of the Groups principal activities: applications development, systems
  integration, migration of IT platforms, IT consulting, e-services,
  outsourcing, conversion services, application and implementation of ERP &
  CRM systems, imported software products and a training school.          
|  
|   | The
  Group provides these IT services across the full system development
  lifecycle, including the
  definition
  of business requirements, system analysis, technical specifications, coding,
  testing, training, implementation and maintenance.  The Company performs its projects on-site or at its own
  facilities.

F-56

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|J.                                                                
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  

F-57

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
  (cont.):
|------------------------------------------------------------------
|                                                                  
|J.                                                                
|                                                                  
|                                                                  

| |                              |  | Software
  Services     |   | Proprietary
  Software
  Products |   | Total   |  
| | ---------------------------- |  | ----------------------- | - | --------------------------------- | - | ------- | -
| |                              |  |                         |   |                                   |   |         |  
| |                              |  | (U.S. $ in
  thousands) |  
| |                              |  |                         |  
| | Revenues:                    |  |                         |   |                                   |   |         |  
| | 2003                         |  | 196,782                 |   | 170,048                           |   | 366,830 |  
| | 2002                         |  | 172,068                 |   | 113,121                           |   | 285,189 |  
| | 2001                         |  | 213,859                 |   | 182,745                           |   | 396,604 |  
| |                              |  |                         |   |                                   |   |         |  
| | Inter-segment sales:         |  |                         |   |                                   |   |         |  
| | 2003                         |  | -                       |   | -                                 |   | -       |  
| | 2002                         |  | 726                     |   | 1,153                             |   | 1,879   |  
| | 2001                         |  | 4,913                   |   | 4,009                             |   | 8,922   |  
| |                              |  |                         |   |                                   |   |         |  
| | Operating income (loss):     |  |                         |   |                                   |   |         |  
| | 2003                         |  | 8,289                   |   | 3,570                             |   | 11,859  |  
| | 2002                         |  | (1,435                  | ) | (5,251                            | ) | (6,686  | )
| | 2001                         |  | (10,416                 | ) | (46,878                           | ) | (57,294 | )
| |                              |  |                         |   |                                   |   |         |  
| | Financial income (expenses): |  |                         |   |                                   |   |         |  
| | 2003                         |  | (3,205                  | ) | (471                              | ) | (3,676  | )
| | 2002                         |  | 5,549                   |   | (1,944                            | ) | 3,605   |  
| | 2001                         |  | (7,302                  | ) | 9,982                             |   | 2,680   |  
| |                              |  |                         |   |                                   |   |         |  
| | Net income (loss)            |  |                         |   |                                   |   |         |  
| | 2003                         |  | 2,106                   |   | 1,014                             |   | 3,120   |  
| | 2002                         |  | (1,105                  | ) | (1,301                            | ) | (2,406  | )
| | 2001                         |  | (18,781                 | ) | (41,080                           | ) | (59,861 | )

F-58

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT
  INFORMATION (cont.):
|------------------------------------------------------------------
|                                                                  
|J.                                                                

| |                                |  | Software
  Services     |  | Proprietary
  Software
  Products |  | Total   | 
| | ------------------------------ |  | ----------------------- |  | --------------------------------- |  | ------- | 
| |                                |  |                         |  |                                   |  |         | 
| |                                |  | (U.S. $ in
  thousands) | 
| |                                |  |                         | 
| |                                |  |                         |  |                                   |  |         | 
| | Identifiable assets:           |  |                         |  |                                   |  |         | 
| | 2003                           |  | 147,248                 |  | 236,915                           |  | 384,163 | 
| | 2002                           |  | 155,908                 |  | 173,325                           |  | 329,233 | 
| |                                |  |                         |  |                                   |  |         | 
| | Identifiable liabilities:      |  |                         |  |                                   |  |         | 
| | 2003                           |  | 116,965                 |  | 116,179                           |  | 233,144 | 
| | 2002                           |  | 130,017                 |  | 54,332                            |  | 184,349 | 
| |                                |  |                         |  |                                   |  |         | 
| | Depreciation and amortization: |  |                         |  |                                   |  |         | 
| | 2003                           |  | 5,602                   |  | 12,945                            |  | 18,547  | 
| | 2002                           |  | 5,196                   |  | 7,710                             |  | 12,906  | 
| | 2001                           |  | 11,043                  |  | 18,852                            |  | 29,895  | 
| |                                |  |                         |  |                                   |  |         | 
| | Investments in fixed assets:   |  |                         |  |                                   |  |         | 
| | 2003                           |  | 1,924                   |  | 2,963                             |  | 4,887   | 
| | 2002                           |  | 1,740                   |  | 1,642                             |  | 3,382   | 

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

| |                                           |  | 2003                    |  | 2002    |   | 2001    |  
| | ----------------------------------------- |  | ----------------------- |  | ------- | - | ------- | -
| |                                           |  |                         |  |         |   |         |  
| |                                           |  | (U.S. $ in
  thousands) | 
| |                                           |  |                         | 
| | Revenues:                                 |  |                         |  |         |   |         |  
| | Revenues
  as above                       |  | 366,830                 |  | 285,189 |   | 396,604 |  
| | Less
  inter-segment transactions         |  | -                       |  | (1,879  | ) | (8,922  | )
| |                                           |  |                         |  |         |   |         |  
| | Revenues as per statement of
  operations |  | 366,830                 |  | 283,310 |   | 387,682 |  
| |                                           |  |                         |  |         |   |         |  

F-59

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT
  INFORMATION (cont.):
|------------------------------------------------------------------
|                                                                  
|J.                                                                

| |                                                        |  | 2003                    |   | 2002    |  
| | ------------------------------------------------------ |  | ----------------------- | - | ------- | -
| |                                                        |  |                         |   |         |  
| |                                                        |  | (U.S. $ in
  thousands) |  
| |                                                        |  |                         |  
| |                                                        |  |                         |   |         |  
| | Identifiable
  assets:                                 |  |                         |   |         |  
| | Total assets of operating
  segments                   |  | 384,163                 |   | 329,233 |  
| | Assets not
  identifiable to a particular segment      |  | 159,436                 |   | 170,611 |  
| | Elimination of
  inter-segment assets and other        |  | (14,684                 | ) | (32,599 | )
| |                                                        |  |                         |   |         |  
| | Total assets as per consolidated balance sheet         |  | 528,915                 |   | 467,245 |  
| |                                                        |  |                         |   |         |  
| |                                                        |  |                         |   |         |  
| | Identifiable liabilities:                              |  |                         |   |         |  
| | Total
  liabilities of operating segments              |  | 233,144                 |   | 184,349 |  
| | liabilities
  not identifiable to a particular segment |  | 65,730                  |   | 90,073  |  
| | Elimination of
  inter-segment liabilities and other   |  | (14,214                 | ) | (32,656 | )
| |                                                        |  |                         |   |         |  
| | Total liabilities as per
  consolidated balance sheet  |  | 284,660                 |   | 241,766 |  
| |                                                        |  |                         |   |         |  

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

| |                                                                                        |  | Year ended December 31, |  
| | -------------------------------------------------------------------------------------- |  | ----------------------- | -
| |                                                                                        |  |                         |  
| |                                                                                        |  | 2003                    |  
| |                                                                                        |  |                         |  
| |                                                                                        |  | (U.S. $ in
  thousands) |  
| |                                                                                        |  |                         |  
| |                                                                                        |  |                         |  
| | Amount
  for basic earnings (loss) per share -
  income available to shareholders      |  | 2,909                   |  
| |                                                                                        |  |                         |  
| | Effect
  of dilutive securities                                                        |  | (466                    | )
| |                                                                                        |  |                         |  
| | Amount
  for diluted earnings (loss) per share -
     income available to shareholders |  | 2,443                   |  
| |                                                                                        |  |                         |  
| |                                                                                        |  |                         |  
| | Weighted
  average shares outstanding                                                  |  |                         |  
| | Denominator
  for basic net earnings (loss) per share                                  |  | 10,037                  |  
| | Effect
  of dilutive securities                                                        |  | 248                     |  
| |                                                                                        |  |                         |  
| | Denominator
  for diluted net earnings (loss) per share                                |  | 10,285                  |  
| |                                                                                        |  |                         |  
| |                                                                                        |  |                         |  
| | Basic
  net earnings (loss) per share                                                  |  | 0.29                    |  
| |                                                                                        |  |                         |  
| |                                                                                        |  |                         |  
| | Diluted
  net earnings (loss) per share                                                |  | 0.24                    |  
| |                                                                                        |  |                         |  
| |                                                                                        |  |                         |  
| | *) Anti
  dilutive.                                                                    |  |                         |  

F-60

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE 15 - SUPPLEMENTARY FINANCIAL STATEMENT
  INFORMATION (cont.):
|------------------------------------------------------------------
|                                                                  
|K.                                                                
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Note 16 - Transactions with Related Parties:                      
|                                                                  
|A.                                                                
|                                                                  
|B.                                                                

F-61

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 16 - Transactions with Related Parties (cont.):
|----------------------------------------------------
|                                                    
|C.                                                  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|D.                                                  
|                                                    
|E.                                                  

F-62

---

---

FORMULA SYSTEMS
(1985) LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|Note 17 - Subsequent Events:
|----------------------------
|                            
|A.                          
|                            
|                            

| |                     |  | December
  31, 2003   | 
| | ------------------- |  | --------------------- | 
| |                     |  |                       | 
| |                     |  | (U.S. $ in thousands) | 
| |                     |  |                       | 
| | Total asset         |  | 110,163               | 
| | Total
  liabilities |  | 125,442               | 

|B. | On  February  13,  2004 there were  public  reports  that a leak of  Microsoft  source  code had  occurred  on the
Internet.  These reports  indicated that the source code contained trace  references to the Companys  subsidiary,
Mainsoft Corporation the Mainsoft servers and personnel.  Mainsofts  management team immediately adopted a policy
of full  cooperation  with local  authorities,  the FBI, and  Microsoft  in their  respective  investigation.  All
parties  conducting  investigations  have found no trace of a security  breach  after  that date.  While  Mainsoft
believes  its  relationship  with  Microsoft  will  continue  on terms  acceptable  to  Mainsoft,  a change in the
relationship  could  materially  adversely  affect  Mainsofts  business,  results  of  operation,  and  financial
condition.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|C. | In March
  2004, a subsidiary, as part of a private placement, issued convertible
  debentures and warrants to four institutional investors in a total amount of
  approximately $5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-63

---

---

CONSENT OF INDEPENDENT
AUDITORS

We
hereby consent to the use in the consolidated financial statements of Formula Systems
(1985) Ltd. constituting part of the Annual Report of Formula systems (1985) Ltd. on Form
20-F for the fiscal year ended December 31, 2003, of our report dated February 9, 2004,
relating to the consolidated financial statements of Sapiens International Corporation
N.V. for the year ended December 31, 2003 which are included in such consolidated
financial statements.

|June 28, 2004 
Tel-Aviv, Israel |  | Kost Forer Gabbay & Kasierer
A Member of Ernst & Young Global
|------------------------------- |  | -------------------------------------------------------------



---

---

SAPIENS INTERNATIONAL CORPORATION N.V.
AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003

IN U.S. DOLLARS

INDEX

|                                                 | Page           
|------------------------------------------------ | ---------------
|                                                 |                
|                                                
|Report of Independent Auditors                   | F - 2          
|                                                 |                
|Consolidated Balance Sheets                      | F - 3 - F - 4  
|                                                 |                
|Consolidated Statements of Operation             | F - 5          
|                                                 |                
|Statements of Changes in Shareholders
  Equity  | F - 6 - F - 7  
|                                                 |                
|Consolidated Statements of Cash Flows            | F - 8 - F - 9  
|                                                 |                
|Notes to the Consolidated Financial
  Statements | F - 10 - F - 41

- - - - - - - -

---

---

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

SAPIENS INTERNATIONAL CORPORATION N.V.

We have audited
the consolidated balance sheets of Sapiens International Corporation N.V. (the
Company) and its subsidiaries as of December 31, 2002 and 2003, and the
related consolidated statements of operations, changes in shareholders equity
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2002 and 2003, and the results
of their operations and cash flows for each of the three years in the period
ended December 31, 2003, in conformity with U.S. generally accepted
accounting principles.

As
discussed in Note 2j to the consolidated financial statements, the Company
adopted the provisions of Statement of Accounting Standard No. 141, Business
Combinations, and Statement of Accounting Standard No. 142, Goodwill and
Other Intangible Assets, effective January 1, 2002.

|                                   | /s/ KOST
  FORER GABBAY & KASIERER                            
|---------------------------------- | --------------------------------------------------------------
|                                   |                                                               
|Tel-Aviv, IsraelFebruary 9,
  2004 | KOST FORER
  GABBAY & KASIERERA Member of Ernst & Young Global
|                                   |                                                               

F - 2

---

---

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

|                                                                                                                                                                                     |  | December
  31, |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------
|                                                                                                                                                                                     |  |                |       
|                                                                                                                                                                                     |  | 2002           |       
|                                                                                                                                                                                     |  |                |       
|ASSETS                                                                                                                                                                               |  |                |       
|                                                                                                                                                                                     |  |                |       
|CURRENT
  ASSETS:                                                                                                                                                                    |  |                |       
|Cash
  and cash equivalents                                                                                                                                                          |  | $              | 22,001
|Marketable
  securities and short-term deposits (Note 3)                                                                                                                             |  |                | 1,652 
|Trade
  receivables (net of allowance for doubtful accounts of $4,001 and
             $529 as of December 31, 2002 and 2003,
  respectively) (Note 4)                               |  |                | 10,405
|Other
  receivables and prepaid expenses (Note 5)                                                                                                                                    |  |                | 5,842 
|                                                                                                                                                                                     |  |                |       
|                                                                                                                                                                                     |  |                |       
|Total
  current assets                                                                                                                                                               |  |                | 39,900
|                                                                                                                                                                                     |  |                |       
|                                                                                                                                                                                     |  |                |       
|PROPERTY AND
  EQUIPMENT, NET (Note 6)                                                                                                                                               |  |                | 3,426 
|                                                                                                                                                                                     |  |                |       
|                                                                                                                                                                                     |  |                |       
|OTHER
  ASSETS:                                                                                                                                                                      |  |                |       
|Capitalized
  software development costs, net of accumulated amortization of
             $21,072 and
  $24,881 as of December 31, 2002 and 2003, respectively
            (Note 8a) |  |                | 8,170 
|Goodwill
  (Note 7)                                                                                                                                                                  |  |                | 8,621 
|Other,
  net (Note 8)                                                                                                                                                                |  |                | 5,035 
|                                                                                                                                                                                     |  |                |       
|                                                                                                                                                                                     |  |                |       
|Total other
  assets                                                                                                                                                                 |  |                | 21,826
|                                                                                                                                                                                     |  |                |       
|                                                                                                                                                                                     |  |                |       
|Total assets                                                                                                                                                                         |  | $              | 65,152
|                                                                                                                                                                                     |  |                |       

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

F - 3

---

---

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

|                                                                                                                                                                                                                                                                                                                       |  | December
  31, |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  | 2002           |        
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                                                                                 |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|CURRENT
  LIABILITIES:                                                                                                                                                                                                                                                                                                 |  |                |        
|Short-term
  bank credit (Note 10a)                                                                                                                                                                                                                                                                                    |  | $              | 5,006  
|Current
  maturities of long-term debt (Note 10c)                                                                                                                                                                                                                                                                      |  |                | 4,477  
|Trade
  payables                                                                                                                                                                                                                                                                                                       |  |                | 2,578  
|Deferred
  revenues                                                                                                                                                                                                                                                                                                    |  |                | 3,683  
|Other
  liabilities and accrued expenses (Note 9)                                                                                                                                                                                                                                                                      |  |                | 14,541 
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|Total
  current liabilities                                                                                                                                                                                                                                                                                            |  |                | 30,285 
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|LONG-TERM
  LIABILITIES:                                                                                                                                                                                                                                                                                               |  |                |        
|Convertible
  debt, warrants and options (Note 10b)                                                                                                                                                                                                                                                                    |  |                | -      
|Other
  long-term liabilities (Note 10c)                                                                                                                                                                                                                                                                               |  |                | 7,787  
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  |                | 7,787  
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|REDEEMABLE
  SHARES IN A SUBSIDIARY (Note 1c)                                                                                                                                                                                                                                                                          |  |                | 11,185 
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|COMMITMENTS
  AND CONTINGENT LIABILITIES (Note 11)                                                                                                                                                                                                                                                                     |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|SHAREHOLDERS
  EQUITY (Note 14):                                                                                                                                                                                                                                                                                      |  |                |        
|Share
  capital:                                                                                                                                                                                                                                                                                                       |  |                |        
|Preferred
  shares: Authorized - None and 1,000,000 of 2.30 par value at
                 December
  31, 2002 and 2003; Issued and outstanding - None at
                 December 31,
  2002 and 2003                                                                                                                |  |                | -      
|Common
  shares: Authorized - 20,000,000 of 2.30 par value at December 31,
                 2002
  and 2003; Issued - 11,028,909 and 11,035,729 at December 31, 2002
                 and
  2003, respectively; Outstanding: 10,987,115 and 10,993,935 at
                 December
  31, 2002 and 2003, respectively |  |                | 23,773 
|Additional
  paid-in capital                                                                                                                                                                                                                                                                                           |  |                | 82,648 
|Deferred
  stock compensation                                                                                                                                                                                                                                                                                          |  |                | (21    
|Treasury
  shares                                                                                                                                                                                                                                                                                                      |  |                | (2,423 
|Note
  receivable from a related party shareholder                                                                                                                                                                                                                                                                     |  |                | (975   
|Accumulated
  other comprehensive loss                                                                                                                                                                                                                                                                                 |  |                | (3,820 
|Accumulated
  deficit                                                                                                                                                                                                                                                                                                  |  |                | (83,287
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|Total
  shareholders equity                                                                                                                                                                                                                                                                                           |  |                | 15,895 
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|                                                                                                                                                                                                                                                                                                                       |  |                |        
|Total
  liabilities and shareholders equity                                                                                                                                                                                                                                                                           |  | $              | 65,152 
|                                                                                                                                                                                                                                                                                                                       |  |                |        

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

F - 4

---

---

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

|                                                                                                  |  | Year ended
  December 31, |       
|------------------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                                  |  |                           |       
|                                                                                                  |  | 2001                      |       
|                                                                                                  |  |                           |       
|Revenues
  (Note 15b):                                                                            |  |                           |       
|Products                                                                                          |  | $                         | 33,924
|Consulting
  and other services                                                                   |  |                           | 29,511
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Total
  revenues                                                                                  |  |                           | 63,435
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Cost of
  revenues:                                                                               |  |                           |       
|Products                                                                                          |  |                           | 23,711
|Consulting
  and other services                                                                   |  |                           | 18,902
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Total cost
  of revenues                                                                          |  |                           | 42,613
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Gross profit                                                                                      |  |                           | 20,822
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Operating
  expenses:                                                                             |  |                           |       
|Research
  and development, net (Note 16a)                                                        |  |                           | 5,458 
|Selling,
  marketing, general and administrative, net                                             |  |                           | 28,725
|Restructuring
  costs (Note 1b)                                                                   |  |                           | -     
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Total
  operating expenses                                                                        |  |                           | 34,183
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Operating
  loss                                                                                  |  |                           | 13,361
|Financial
  expenses, net (Note 16b)                                                              |  |                           | 3,187 
|Other
  expenses (income), net                                                                    |  |                           | 665   
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Loss before
  taxes on income                                                                     |  |                           | 17,213
|Taxes on
  income (benefit) (Note 13)                                                             |  |                           | 726   
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           | 17,939
|Minority
  interest in earnings of a subsidiary                                                   |  |                           | 31    
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Net loss                                                                                          |  | $                         | 17,970
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Basic and
  diluted net loss per share (Note 2s)                                                  |  | $                         | 3.91  
|                                                                                                  |  |                           |       
|                                                                                                  |  |                           |       
|Weighted-average
  number of shares used in computing basic
       and diluted net loss per share |  |                           | 4,600 
|                                                                                                  |  |                           |       

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

F - 5

---

---

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

|                                                                              |  | Convertible Preferred
  shares |       | Common
  shares |   | Additional
  paid-in
  capital |  | Deferred
  stock
  compensation |        | Proceeds
  on
  account
  of shares |   | Treasury
  shares |   | Note
  receivable
  from a
  shareholder |        | Accumulated
  other
  comprehensive
  loss |   | Accumulated
  deficit |   | Total |     
|----------------------------------------------------------------------------- |  | ------------------------------ | ----- | --------------- | - | ------------------------------ |  | ------------------------------- | ------ | ----------------------------------- | - | ----------------- | - | ---------------------------------------- | ------ | ------------------------------------------ | - | --------------------- | - | ----- | ----
|                                                                              |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|                                                                              |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|Balance as of January 1,
  2001                                               |  | $                              | -     |                 | $ | 9,364                          |  | $                               | 71,945 |                                     | $ | (175              | ) | $                                        | 5,000  |                                            | $ | (2,423                | ) | $     | -   
|Total comprehensive loss:                                                     |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|Net loss                                                                      |  |                                | -     |                 |   | -                              |  |                                 | -      |                                     |   | -                 |   |                                          | -      |                                            |   | -                     |   |       | -   
|                                                                              |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|Other comprehensive loss:                                                     |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|Unrealized
  losses on available-for-
        sale marketable securities, net |  |                                | -     |                 |   | -                              |  |                                 | -      |                                     |   | -                 |   |                                          | -      |                                            |   | -                     |   |       | -   
|Foreign
  currency translation
        adjustments                            |  |                                | -     |                 |   | -                              |  |                                 | -      |                                     |   | -                 |   |                                          | -      |                                            |   | -                     |   |       | -   
|                                                                              |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|Other
  comprehensive loss                                                    |  |                                | -     |                 |   | -                              |  |                                 | -      |                                     |   | -                 |   |                                          | -      |                                            |   | -                     |   |       | -   
|                                                                              |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|Total
  comprehensive loss                                                    |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|                                                                              |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|Employee stock options
  exercised                                            |  |                                | -     |                 |   | 1                              |  |                                 | (1     | )                                   |   | -                 |   |                                          | -      |                                            |   | -                     |   |       | -   
|Compensation expense related
  to
     issuance of warrants to banks          |  |                                | -     |                 |   | -                              |  |                                 | 203    |                                     |   | -                 |   |                                          | -      |                                            |   | -                     |   |       | -   
|Amortization expense on
  re-priced
     options                              |  |                                | -     |                 |   | -                              |  |                                 | -      |                                     |   | 107               |   |                                          | -      |                                            |   | -                     |   |       | -   
|Issuance of Series F
  convertible
     Preferred shares and warrants, net  |  |                                | 6,361 |                 |   | -                              |  |                                 | 8,518  |                                     |   | -                 |   |                                          | (5,000 | )                                          |   | -                     |   |       | -   
|Common shares issued for a
  note to a
     related party                     |  |                                | -     |                 |   | 655                            |  |                                 | 320    |                                     |   | -                 |   |                                          | -      |                                            |   | -                     |   |       | (975
|Payment in respect of
  acquisition
     adjustment of Syspart                |  |                                | -     |                 |   | -                              |  |                                 | (471   | )                                   |   | -                 |   |                                          | -      |                                            |   | -                     |   |       | -   
|                                                                              |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|                                                                              |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     
|Balance as of December 31,
  2001                                             |  | $                              | 6,361 |                 | $ | 10,020                         |  | $                               | 80,514 |                                     | $ | (68               | ) | $                                        | -      |                                            | $ | (2,423                | ) | $     | (975
|                                                                              |  |                                |       |                 |   |                                |  |                                 |        |                                     |   |                   |   |                                          |        |                                            |   |                       |   |       |     

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

F - 6

---

---

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

|                                                                                                                          |  | Convertible
  Preferred
  shares |        | Common
  shares |   | Additional
  paid-in
  capital |  | Deferred
  stock
  compensation |        | Treasury
  shares |  | Note
  receivable
  from a
  shareholder |     | Accumulated
  other
  comprehensive
  loss |  | Accumulated
  deficit |        | Total | 
|------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | --------------- | - | ------------------------------ |  | ------------------------------- | ------ | ----------------- |  | ---------------------------------------- | --- | ------------------------------------------ |  | --------------------- | ------ | ----- | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Balance
  as of January 1, 2002                                                                                           |  | $                                | 6,361  |                 | $ | 10,020                         |  | $                               | 80,514 |                   |  | $                                        | (68 | )                                          |  | $                     | (2,423 | )     | 
|Total
  comprehensive loss:                                                                                               |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Net
  loss                                                                                                                |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Other
  comprehensive income:                                                                                             |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Unrealized
  losses on available-for-sale
               marketable
  securities, net                                     |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|Foreign
  currency translation adjustments                                                                                |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Other
  comprehensive income                                                                                              |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Total
  comprehensive loss                                                                                                |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Employee
  stock options exercised                                                                                        |  |                                  | -      |                 |   | 117                            |  |                                 | (105   | )                 |  |                                          | -   |                                            |  |                       | -      |       | 
|Amortization
  expense on re-priced options                                                                               |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | 47  |                                            |  |                       | -      |       | 
|Conversion
  of Series F Preferred shares and
          exercise of warrants                                              |  |                                  | (6,361 | )               |   | 13,636                         |  |                                 | 2,725  |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|Payment
  in respect of acquisition adjustment
          of Syspart                                                       |  |                                  | -      |                 |   | -                              |  |                                 | (486   | )                 |  |                                          | -   |                                            |  |                       | -      |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Balance
  as of December 31, 2002                                                                                         |  |                                  | -      |                 |   | 23,773                         |  |                                 | 82,648 |                   |  |                                          | (21 | )                                          |  |                       | (2,423 | )     | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Total
  comprehensive loss:                                                                                               |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Net
  loss                                                                                                                |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Other
  comprehensive income:                                                                                             |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Unrealized
  gains on available-for-sale
               marketable
  securities, net                                      |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|Foreign
  currency translation adjustments                                                                                |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Other
  comprehensive income                                                                                              |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Total
  Comprehensive loss                                                                                                |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Employee
  stock options exercised                                                                                        |  |                                  | -      |                 |   | 15                             |  |                                 | 12     |                   |  |                                          | -   |                                            |  |                       | -      |       | 
|Amortization
  expense on re-priced options                                                                               |  |                                  | -      |                 |   | -                              |  |                                 | -      |                   |  |                                          | 21  |                                            |  |                       | -      |       | 
|Issuance
  expenses related to the conversion
          of Series F Preferred shares
  and exercise
          of warrants |  |                                  | -      |                 |   | -                              |  |                                 | (44    | )                 |  |                                          | -   |                                            |  |                       | -      |       | 
|Payment
  in respect of acquisition adjustment
          of Syspart                                                       |  |                                  | -      |                 |   | -                              |  |                                 | (496   | )                 |  |                                          | -   |                                            |  |                       | -      |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Balance
  as of December 31, 2003                                                                                         |  | $                                | -      |                 | $ | 23,788                         |  | $                               | 82,120 |                   |  | $                                        | -   |                                            |  | $                     | (2,423 | )     | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Accumulated
  unrealized gain from available-
     for-sale marketable securities                                         |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Accumulated
  foreign currency translation
     adjustments                                                               |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|Accumulated
  other comprehensive loss                                                                                    |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 
|                                                                                                                          |  |                                  |        |                 |   |                                |  |                                 |        |                   |  |                                          |     |                                            |  |                       |        |       | 

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

F - 7

---

---

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

|                                                                                               |  | Year ended
  December 31, |        
|---------------------------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                                               |  |                           |        
|                                                                                               |  | 2001                      |        
|                                                                                               |  |                           |        
|Cash flows from operating activities:                                                          |  |                           |        
|Net loss                                                                                       |  | $                         | (17,970
|Adjustments to reconcile net loss to net cash provided by (used
     in) operating activities: |  |                           |        
|Depreciation, amortization and
  impairment                                                    |  |                           | 9,555  
|Amortization of deferred gain on sale -
  leaseback transaction                                |  |                           | (3     
|Gain on sale of marketable securities                                                          |  |                           | (124   
|Loss on sale of bonds                                                                          |  |                           | -      
|Loss (gain) on disposal of property and
  equipment                                            |  |                           | 417    
|Amortization expense on re-priced
  options                                                    |  |                           | 107    
|Decrease in trade receivables                                                                  |  |                           | 13,372 
|Decrease (increase) in other
  receivables and prepaid
          expenses                      |  |                           | (82    
|Decrease in deferred income taxes, net                                                         |  |                           | 50     
|Decrease in trade payables                                                                     |  |                           | (2,664 
|Increase (decrease) in deferred
  revenues                                                     |  |                           | (1,347 
|Decrease in other liabilities and
  accrued expenses                                           |  |                           | (4,230 
|Accrued interest on redeemable shares
  in a subsidiary                                        |  |                           | 270    
|Gain on payment of convertible
  subordinated notes                                            |  |                           | -      
|Minority interests in earnings of a
  subsidiary                                               |  |                           | 31     
|                                                                                               |  |                           |        
|                                                                                               |  |                           |        
|Net cash provided by (used in) operating activities                                            |  |                           | (2,618 
|                                                                                               |  |                           |        
|                                                                                               |  |                           |        
|Cash flows from investing activities:                                                          |  |                           |        
|Purchase of property and equipment                                                             |  |                           | (508   
|Increase in capitalized software
  development costs                                           |  |                           | (3,967 
|Decrease (increase) in restricted cash                                                         |  |                           | (2,500 
|Purchase of marketable securities and
  short-term deposits                                    |  |                           | (2,883 
|Proceeds from sale of marketable
  securities and short-term        deposits                   |  |                           | 5,573  
|Proceeds from sale of property and
  equipment                                                 |  |                           | 96     
|Payment for acquisition of IMA                                                                 |  |                           | (66    
|Payment for acquisition of Syspart                                                             |  |                           | -      
|Payment for acquisition of SAIC                                                                |  |                           | (41    
|                                                                                               |  |                           |        
|                                                                                               |  |                           |        
|Net cash used in investing activities                                                          |  |                           | (4,296 
|                                                                                               |  |                           |        

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

F - 8

---

---

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

|                                                                                                   |  | Year ended December 31, |       
|-------------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                                   |  |                         |       
|                                                                                                   |  | 2001                    |       
|                                                                                                   |  |                         |       
|Cash flows from financing activities:                                                              |  |                         |       
|Redemption of redeemable shares in
  subsidiary                                                    |  |                         | (4,234
|Proceeds from issuance of Series F
  convertible Preferred shares
          and warrants, net    |  |                         | 9,879 
|Conversion of Series F Preferred
  shares and exercise of
          warrants (issuance expenses) |  |                         | -     
|Proceeds from employee stock options
  exercised                                                   |  |                         | -     
|Proceeds from issuance of convertible
  debt, net                                                  |  |                         | -     
|Proceeds from issuance of options
  (Series A), net                                                |  |                         | -     
|Proceeds from issuance of warrants
  (Series 1), net                                               |  |                         | -     
|Increase (decrease) in short-term bank
  debt, net                                                 |  |                         | 772   
|Payment of convertible subordinated
  notes                                                        |  |                         | -     
|Principal payment of long-term
  liabilities                                                       |  |                         | (202  
|Proceeds from long-term bank loans                                                                 |  |                         | 211   
|Convertible debt issuance expenses                                                                 |  |                         | -     
|                                                                                                   |  |                         |       
|                                                                                                   |  |                         |       
|Net cash provided by financing activities                                                          |  |                         | 6,426 
|                                                                                                   |  |                         |       
|                                                                                                   |  |                         |       
|Effect of exchange rate changes on cash and cash equivalents                                       |  |                         | (463  
|                                                                                                   |  |                         |       
|                                                                                                   |  |                         |       
|Increase (decrease) in cash and cash equivalents                                                   |  |                         | (951  
|Cash and cash equivalents at the beginning of year                                                 |  |                         | 17,038
|                                                                                                   |  |                         |       
|                                                                                                   |  |                         |       
|Cash and cash equivalents at the end of year                                                       |  | $                       | 16,087
|                                                                                                   |  |                         |       
|                                                                                                   |  |                         |       
|Supplemental cash flow activities:                                                                 |  |                         |       
|Cash paid during the year for:                                                                     |  |                         |       
|Interest                                                                                           |  | $                       | 1,440 
|                                                                                                   |  |                         |       
|                                                                                                   |  |                         |       
|Income
  taxes                                                                                     |  | $                       | 471   
|                                                                                                   |  |                         |       
|                                                                                                   |  |                         |       
|Non-cash transactions:                                                                             |  |                         |       
|Revaluation of Syspart acquisition
  against liability                                             |  | $                       | 471   
|                                                                                                   |  |                         |       

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

F - 9

---

---

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

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

F - 10

---

---

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

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

F - 11

---

---

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

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

F - 12

---

---

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

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

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

| | h. | Impairment
  of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The
  Companys long-lived assets and certain identifiable intangibles are reviewed
  for impairment in accordance with Statement of Financial Accounting Standard
  No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
  No. 144), whenever events or changes in circumstances indicate that the carrying
  amount of an asset may not be recoverable. Recoverability of assets to be
  held and used is measured by a comparison of the carrying amount of an asset
  to the future undiscounted cash flows expected to be generated by the assets.
  If such assets are considered to be impaired, the impairment to be recognized
  is measured by the amount by which the carrying amount of the assets exceeds
  the fair value of the assets. As of December 31, 2003, no impairment losses
  have been identified.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Before the
  adoption of SFAS No. 144 the Company evaluated the recoverability of
  long-lived assets annually and the appropriateness of the amortization period
  based on the estimated future undiscounted cash flows derived from the asset.
  In 2001, such impairments were indicated and the Company recognized
  impairment loss in the amount of $519,000, which was included in the
  marketing, selling, general and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | i. | Capitalized
  software development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Research and
  development costs incurred in the process of developing new products or
  product improvements, are charged to expense as incurred, net of
  participation by the Office of the Chief Scientist in Israelis Ministry of
  Industry and Trade (the OCS).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F - 13

---

---

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

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

F - 14

---

---

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

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

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

| |    | As of
  December 31, 2003, no impairment losses have been identified.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | l. | Revenue
  recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Product revenues include software license
  sales and implementation and customization services (which include the sale
  of software technology and services).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Revenues earned under software licensing
  agreements with end-users are recognized when all criteria outlined in
  Statement of Position No. 97-2 Software Revenue Recognition (SOP No. 97-2)
  (as amended) are met. Revenues from license fees are recognized
  when persuasive evidence of an agreement exists, delivery of the product has
  occurred, no significant obligations with regard to implementation remain,
  the fee is fixed or determinable and collectibility is probable.                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  and its subsidiaries do not grant rights of return.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Where
  software arrangements involve multiple elements, revenues are allocated to
  each element based on vendor specific objective evidence (VSOE) of the
  relative fair values of each element in the arrangement, in accordance with
  the residual method prescribed by Statement of Opinion
  No. 98-9. Modification of SOP 97-2, Software Revenue Recognition With
  Respect to Certain Transactions (SOP No. 98-9). The Companys VSOE used to
  allocate the sales price to consulting, training and maintenance is based on
  the price charged when these elements are sold separately. License revenues
  are recorded based on the residual method.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Under the
  residual method, revenue is recognized for the delivered elements when (1)
  there is VSOE of the fair values of all the undelivered elements other than
  those accounted for using long-term contract accounting, and (2) all revenue
  recognition criteria of SOP 97-2, as amended, are satisfied.                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Under certain
  circumstances license revenue consists of license fees received whereby under
  the terms of these license agreements the Companys software is modified to
  that customers specific requirements. Fees are payable upon completion of
  agreed-upon milestones, such as delivery of specifications and technical
  documentation. Each license is designed to meet the specific requirements of
  the particular customer.                                                                                                                                                                                                                            

F - 15

---

---

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

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

F - 16

---

---

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

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

F - 17

---

---

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

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

F - 18

---

---

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

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

F - 19

---

---

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

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

| |                          |  | 2001    |   | 2002 |         | 2003 | 
| | ------------------------ |  | ------- | - | ---- | ------- | ---- | 
| |                          |  |         |   |      |         |      | 
| |                          |  |         |   |      |         |      | 
| | Dividend
  yield         |  | 0       | % |      | 0       | %    | 
| | Expected
  volatility    |  | 82      | % |      | 97      | %    | 
| | Risk-free
  interest     |  | 2.5     | % |      | 2       | %    | 
| | Expected
  life of up to |  | 6 years |   |      | 6 years |      | 

| |  | Pro forma
  information under SFAS No. 123 is as follows:
| |  | ---------------------------------------------------------

| |                                                                     |  | Year ended December 31, |       
| | ------------------------------------------------------------------- |  | ----------------------- | ------
| |                                                                     |  |                         |       
| |                                                                     |  | 2001                    |       
| |                                                                     |  |                         |       
| |                                                                     |  |                         |       
| | Net loss -
  as reported                                            |  | $                       | 17,970
| | Less -
  stock-based employee
       compensation - intrinsic value |  |                         | (107  
| | Add
  - stock-based employee compensation -
            fair value  |  |                         | 1,735 
| |                                                                     |  |                         |       
| |                                                                     |  |                         |       
| | Pro forma net loss                                                  |  | $                       | 19,598
| |                                                                     |  |                         |       
| | Basic and diluted net loss per share -
       as reported           |  | $                       | 3.91  
| |                                                                     |  |                         |       
| | Pro forma
  basic and diluted net loss per share                    |  | $                       | 4.26  
| |                                                                     |  |                         |       

F - 20

---

---

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

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

F - 21

---

---

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

|NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | w.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|NOTE 3: | MARKETABLE SECURITIES AND SHORT-TERM DEPOSITS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | At December
  31, 2002 and 2003, the Companys marketable securities were classified as
  available-for-sale securities and were carried at fair value. Gross realized
  gains (losses) on sales of these securities included in earnings in 2001,
  2002 and 2003 totaled $124,000, $0 and $(77,000), respectively. As of
  December 31, 2002, the Company had short-term deposits of $1,618,000 and
  marketable securities of $34,000. As of December 31, 2003, the Companys
  investments consist of investment in a deposit of $1.0 million and in
  marketable securities in the amount of $39,000.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | The $1.0
  million deposit was withdrawn in January 2004, subsequent to the balance
  sheet date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | As for
  pledges see Note 12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F - 22

---

---

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

|NOTE 4:- | TRADE RECEIVABLES                                                                                                                                                                                                                                                                                                                           
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                             
|         | The
  Companys trade receivables are composed of accounts receivable in the
  amounts of $9.9 million and $6.4 million as of December 31, 2002 and 2003,
  respectively, and unbilled receivables in the amounts of $500,000 and $2.7
  million as of December 31, 2002 and 2003, respectively.                                            
|         |                                                                                                                                                                                                                                                                                                                                             
|         | During 2003,
  the Company entered into several sales of receivables agreements with a
  financial institution. Accounts receivable sold under these agreements
  amounted to $2.5 million as of December 31, 2003. Expenses related to
  receivables sold are recorded in the consolidated statement of operations as
  financial expenses.
|         |                                                                                                                                                                                                                                                                                                                                             
|         | Bad debt
  expenses totaled $1,931,000, $1,084,000 and $205,000 for the years ended
  December 31, 2001, 2002 and 2003, respectively.                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                                             
|NOTE 5:  | OTHER RECEIVABLES AND PREPAID EXPENSES                                                                                                                                                                                                                                                                                                      

| |                                    |  | December
  31,            |      
| | ---------------------------------- |  | ------------------------- | -----
| |                                    |  |                           |      
| |                                    |  | 2002                      |      
| |                                    |  |                           |      
| |                                    |  | U.S. dollars in thousands |      
| |                                    |  |                           |      
| |                                    |  |                           |      
| | Sales and
  other taxes receivable |  | $                         | 2,290
| | Prepaid
  expenses                 |  |                           | 1,332
| | Deferred
  income taxes            |  |                           | 860  
| | Government
  grants                |  |                           | 742  
| | Other                              |  |                           | 618  
| |                                    |  |                           |      
| |                                    |  |                           |      
| |                                    |  | $                         | 5,842
| |                                    |  |                           |      

|NOTE 6: | PROPERTY AND EQUIPMENT, NET
|------- | ---------------------------

| |                                   |  | Cost                      |        | Accumulated depreciation |  
| | --------------------------------- |  | ------------------------- | ------ | ------------------------ | -
| |                                   |  |                           |        |                          |  
| |                                   |  | December 31,              |       
| |                                   |  |                           |       
| |                                   |  | 2002                      |        | 2003                     |  
| |                                   |  |                           |        |                          |  
| |                                   |  | U.S. dollars in thousands |       
| |                                   |  |                           |       
| |                                   |  |                           |        |                          |  
| | Equipment
  and furniture         |  | $                         | 2,231  |                          | $
| | Computer
  equipment and software |  |                           | 10,447 |                          |  
| | Motor
  vehicles                  |  |                           | 198    |                          |  
| | Leasehold
  improvements          |  |                           | 1,989  |                          |  
| |                                   |  |                           |        |                          |  
| |                                   |  |                           |        |                          |  
| |                                   |  | $                         | 14,865 |                          | $
| |                                   |  |                           |        |                          |  

| | Depreciation
  expense totaled $2,318,000, $1,592,000 and $1,282,000 for the years ended
  December 31, 2001, 2002 and 2003, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                           
| | As for
  pledges see Note 12.                                                                                                             

F - 23

---

---

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

|NOTE 7: | GOODWILL                                                                                                                                                                                                                                                    
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                             
|        | The results
  of operations presented below for the three years ended December 31, 2001,
  2002 and 2003, reflect the impact on results of operations had the Company
  adopted the non-amortization provisions of SFAS No. 142 effective January 1,
  2001:

| |                                         |  | Year ended
  December 31, |       
| | --------------------------------------- |  | ------------------------- | ------
| |                                         |  |                           |       
| |                                         |  | 2001                      |       
| |                                         |  |                           |       
| |                                         |  | U.S. dollars in thousands |       
| |                                         |  |                           |       
| |                                         |  |                           |       
| | Reported net
  loss                     |  | $                         | 17,970
| | Goodwill
  amortization                 |  |                           | 1,345 
| |                                         |  |                           |       
| |                                         |  |                           |       
| | Adjusted net
  loss                     |  | $                         | 16,625
| |                                         |  |                           |       
| |                                         |  |                           |       
| | Basic and
  diluted net loss per share: |  |                           |       
| | Reported
  net loss per share           |  | $                         | 3.91  
| | Goodwill
  amortization                 |  |                           | 0.29  
| |                                         |  |                           |       
| |                                         |  |                           |       
| | Adjusted
  net loss per share           |  | $                         | 3.62  
| |                                         |  |                           |       

|NOTE 8: | OTHER ASSETS, NET
|------- | -----------------
|        |                  
|        | a.               
|        |                  
|        | b.               

| |                                     |  | Cost                      |       | Accumulated amortization |  
| | ----------------------------------- |  | ------------------------- | ----- | ------------------------ | -
| |                                     |  |                           |       |                          |  
| |                                     |  | December 31,              |      
| |                                     |  |                           |      
| |                                     |  | 2002                      |       | 2003                     |  
| |                                     |  |                           |       |                          |  
| |                                     |  | U.S. dollars in thousands |      
| |                                     |  |                           |      
| |                                     |  |                           |       |                          |  
| | Prepaid
  royalties                 |  | $                         | 2,083 |                          | $
| | Technology
  and usage rights       |  |                           | 863   |                          |  
| | Intangible
  assets and other       |  |                           | 335   |                          |  
| | Distribution
  rights               |  |                           | 1,070 |                          |  
| | Long-term
  deferred income taxes   |  |                           | 3,872 |                          |  
| | Deferred
  debt issuance expenses*) |  |                           | -     |                          |  
| |                                     |  |                           |       |                          |  
| |                                     |  |                           |       |                          |  
| |                                     |  | $                         | 8,223 |                          | $
| |                                     |  |                           |       |                          |  

| |  | *)                                                                                                                              | Related to
  the issuance of Debentures, Options (Series A) and Warrants (Series 1) (see
  Note 10b).
| |  | ------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------
| |  |                                                                                                                                 |                                                                                                      
| |  | Amortization
  of other assets charged to expenses was $563,000, $368,000 and $303,000 for
  2001, 2002 and 2003, respectively.

F - 24

---

---

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

|NOTE 8: | OTHER ASSETS, NET (Cont.)
|------- | -------------------------
|        |                          
|        |                          
|        |                          
|        | c.                       

| | December 31, |  | U.S.
  dollars in
  thousands |  
| | ------------ |  | ----------------------------- | -
| |              |  |                               |  
| |              |  |                               |  
| | 2004         |  |                               | $
| | 2005         |  |                               |  
| | 2006         |  |                               |  
| | 2007         |  |                               |  
| | 2008         |  |                               |  
| |              |  |                               |  
| |              |  |                               |  
| |              |  |                               | $
| |              |  |                               |  

|NOTE 9: | OTHER LIABILITIES AND ACCRUED EXPENSES
|------- | --------------------------------------

| |                                           |  | December
  31,            |       
| | ----------------------------------------- |  | ------------------------- | ------
| |                                           |  |                           |       
| |                                           |  | 2002                      |       
| |                                           |  |                           |       
| |                                           |  | U.S. dollars in thousands |       
| |                                           |  |                           |       
| |                                           |  |                           |       
| | Employee and
  related payroll accruals   |  | $                         | 4,035 
| | Sales and
  other taxes payable           |  |                           | 2,915 
| | Accrued
  royalties to the OCS (Note 11a) |  |                           | 2,776 
| | Accrued
  expenses and other liabilities  |  |                           | 4,815 
| |                                           |  |                           |       
| |                                           |  |                           |       
| |                                           |  | $                         | 14,541
| |                                           |  |                           |       

|NOTE 10: | DEBT
|-------- | ----
|         |     
|         | a.  
|         |     
|         |     

F - 25

---

---

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

|NOTE 10: | DEBT (Cont.)
|-------- | ------------
|         |             
|         |             

| |                    |  |                  |  | Weighted average
  interest |  |              |     |                           |  |      |      
| | ------------------ |  | ---------------- |  | --------------------------- |  | ------------ | --- | ------------------------- |  | ---- | -----
| |                    |  |                  |  |                             |  |              |     |                           |  |      |      
| |                    |  |                  |  | December 31,                |  | December 31, |    
| |                    |  |                  |  |                             |  |              |    
| |                    |  |                  |  | 2002                        |  | 2003         |     | 2002                      |  | 2003 |      
| |                    |  |                  |  |                             |  |              |     |                           |  |      |      
| |                    |  | Linkage          |  | %                           |  | %            |     | U.S. dollars in thousands | 
| |                    |  |                  |  |                             |  |              |     |                           | 
| |                    |  |                  |  |                             |  |              |     |                           |  |      |      
| | Credit lines       |  | NIS *)           |  | -                           |  |              | 7.2 |                           |  | $    | -    
| |                    |  | Euro **)         |  | 5                           |  |              | -   |                           |  |      | 1,146
| |                    |  |                  |  |                             |  |              |     |                           |  |      |      
| | Short-term
  loans |  | U.S.
  dollar *) |  | 3.5                         |  |              | 3.2 |                           |  |      | 2,275
| |                    |  | Pound sterling   |  | 5.5                         |  |              | -   |                           |  |      | 1,585
| |                    |  |                  |  |                             |  |              |     |                           |  |      |      
| |                    |  |                  |  |                             |  |              |     |                           |  |      |      
| |                    |  |                  |  |                             |  |              |     |                           |  | $    | 5,006
| |                    |  |                  |  |                             |  |              |     |                           |  |      |      

| |    | *)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Including
  non-material amounts linked to the Euro.                                 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------
| |    | **)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Including
  non-material amounts linked to the U.S. dollar and to the Pound Sterling.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                      
| | b. | Convertible
  debt:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | During
  December 2003, the Company completed an offering of securities in the
  Tel-Aviv Stock Exchange (TASE) in Israel, resulting in gross proceeds of
  NIS 75.2 million (approximately $17.1 million). The price per unit was NIS
  752 (approximately $171.14) with 100,000 units sold. Each of the units
  consists of 800 Debentures (Series A), two Options (Series A) exercisable
  into Debentures (Series A) and six Warrants (Series 1) exercisable into
  Common shares of the Company.                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The
  Debentures (Series A) are linked to the US dollar and bear annual interest at
  the rate of 6.0%, payable on the 5th of June and the 5th of December each
  year commencing on June 5, 2004 and ending on December 5, 2009. Principal is
  payable in four installments on the 5th of December of the years 2006-2009.
  During the period beginning 45 days after the registration of the Debentures
  (Series A) for trading on TASE and ending November 21, 2009, the Debentures
  (Series A) are convertible into Common shares at a conversion rate of one
  Common share per each NIS 27 (approximately $6.14) amount of the Debentures,
  linked to the NIS/dollar exchange rate. The conversion rate is subject to
  certain technical adjustments, which have no accounting implications (stock
  dividend, stock split, reverse split). The Debentures (Series A) are
  unsecured.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Each Option
  (Series A) is exercisable into 100 Debentures (Series A) no later than March
  3, 2004 at an exercise price of NIS 96 (approximately $21.85). See Note 17b,
  Subsequent Events, for options exercised subsequent to the balance sheet
  date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Each Warrant
  (Series 1) is exercisable into one Common share of the Company during the
  period beginning 45 days after the registration of the Debentures (Series A)
  for trading on TASE and ending November 21, 2007 at an exercise price of NIS
  27 (approximately $6.14) linked to the US dollar.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F - 26

---

---

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

|NOTE 10: | DEBT (Cont.)
|-------- | ------------
|         |             
|         |             
|         |             
|         |             
|         |             
|         |             
|         |             
|         |             
|         |             
|         |             
|         |             
|         |             
|         |             
|         |             

F - 27

---

---

|                                          
|------------------------------------------
|SAPIENS
  INTERNATIONAL CORPORATION N.V.  
|AND ITS
  SUBSIDIARIES                    
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|NOTE 10:                                  
|                                          
|                                          

| |                                                                                                      |  |                |  |                    |          |                                    |      | December 31,               
| | ---------------------------------------------------------------------------------------------------- |  | -------------- |  | ------------------ | -------- | ---------------------------------- | ---- | ---------------------------
| |                                                                                                      |  |                |  | Rate of
  interest |          |                                    |      |                            
| |                                                                                                      |  | Linkage        |  |                    | Maturity |                                    | 2002 |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| |                                                                                                      |  |                |  | %                  |          |                                    |      | U.S. dollars
  in thousands
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| | Convertible subordinated
     notes (Old Notes -
     conversion price $160
     per Common share) |  | US
  Dollar    |  | 5                  |          | September
  2003                   |      | $                          
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| | Long-term loans *)                                                                                   |  | US
  Dollar    |  | 2.85-3.6           |          | June
  2004
  through
  March 2005 |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| | Capital lease obligations   (Note 11b)                                                               |  | Euro           |  | 5                  |          | June
  2005                        |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| | Other long-term debts **)                                                                            |  | Japanese
  Yen |  | 2.1-2.8            |          | February 2006                      |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| | Less - current maturities                                                                            |  |                |  |                    |          |                                    |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| | Accrued severance pay                                                                                |  |                |  |                    |          |                                    |      |                            
| | Minority interest                                                                                    |  |                |  |                    |          |                                    |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            
| |                                                                                                      |  |                |  |                    |          |                                    |      | $                          
| |                                                                                                      |  |                |  |                    |          |                                    |      |                            

| | *)                                                                                                                                                                                                                                                                                                                                                                                  | See Note 10a for covenants.                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------
| | **)                                                                                                                                                                                                                                                                                                                                                                                 | Including
  non-material amounts linked to other currencies.
| |                                                                                                                                                                                                                                                                                                                                                                                     |                                                             
| | In 2002 and
  in the first half of 2003, the Company executed an early redemption of some
  of the convertible subordinated notes in the amount of approximately $3.95
  million, which resulted in a gain of $409,000 in 2002 and $61,000 in 2003,
  recorded as other income. In September 2003, the remaining balance of the
  convertible subordinated notes were fully repaid.
| |                                                                                                                                                                                                                                                                                                                                                                                    
| | Long-term
  debt maturities after December 31, 2003, are as follows (U.S. dollars in
  thousands):                                                                                                                                                                                                                                                                                 

| | 2004 |  | $ | 189   |  | 
| | ---- |  | - | ----- |  | 
| | 2005 |  |   | 7,051 |  | 
| |      |  |   |       |  | 
| |      |  |   |       |  | 
| |      |  | $ | 7,240 |  | 
| |      |  |   |       |  | 

| | Interest
  expense was $1.3 million, $1.0 million and $400,000 for 2001, 2002 and 2003,
  respectively.
| | -------------------------------------------------------------------------------------------------------

F - 28

---

---

|                                          
|------------------------------------------
|SAPIENS
  INTERNATIONAL CORPORATION N.V.  
|AND ITS
  SUBSIDIARIES                    
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|                                          
|NOTE 11:                                  
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          

| |                                     |  | Operating
  leases        |        | Capital
  leases |  
| | ----------------------------------- |  | ------------------------- | ------ | ---------------- | -
| |                                     |  |                           |        |                  |  
| |                                     |  | U.S. dollars in thousands |       
| |                                     |  |                           |       
| |                                     |  |                           |        |                  |  
| | 2004                                |  | $                         | 2,530  |                  | $
| | 2005                                |  |                           | 2,258  |                  |  
| | 2006                                |  |                           | 2,018  |                  |  
| | 2007                                |  |                           | 1,789  |                  |  
| | 2008 and thereafter                 |  |                           | 2,808  |                  |  
| |                                     |  |                           |        |                  |  
| |                                     |  |                           |        |                  |  
| | Total future minimum lease payments |  | $                         | 11,403 |                  | $
| |                                     |  |                           |        |                  |  

| |    | Amortization
  of assets recorded under capital leases is included in depreciation expenses.                                                                                                                                                                                                                                                                      
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                   
| |    | Rent expense
  for the years ended December 31, 2001, 2002 and 2003 was $2.6 million, $2.5
  million and $2.5 million, respectively.                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                   
| | c. | The Company
  is party to various legal proceeding and claims that arise in the ordinary
  course of business in the total aggregate amount of approximately $632,000.
  The Company based on the advice of its legal counsel, has provided for the
  expected implication of these proceedings and claims an amount of $100,000,
  in accordance with SFAS No. 5.
| |    |                                                                                                                                                                                                                                                                                                                                                                   
| | d. | As for tax
  assessments, see Note 13c.                                                                                                                                                                                                                                                                                                                           

F - 29

---

---

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

|NOTE 12: | SECURITY INTERESTS AND PLEDGES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | The Company and several of its subsidiaries
  granted floating charges to certain financial institutions and issued cross
  guarantees in support of the credit facilities described in Note 10a above.                                                                                                                                                                                                                                                                                                                                                                                                   
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | All of the
  Companys leased assets are pledged to the finance companies that provided
  the lease financing and the banks providing credit lines. The pledges are for
  various terms depending on the asset leased.                                                                                                                                                                                                                                                                                                                                                                                    
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | The Company
  has provided bank guarantees in the amount of approximately $485,000 as
  security for the rent to be paid for its offices in Israel. The lease is
  valid for approximately six years. If the Company were to breach certain
  terms of its lease, the lessor could demand that the banks providing the
  guarantees pay amounts claimed to be due.                                                                                                                                                                                                                                        
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | The Company
  has provided bank guarantees in the amount of approximately $1,340,000 as
  security for the performance of various contracts with customers. If the
  Company were to breach certain terms of such contracts, the customers could
  demand that the banks providing the guarantees pay amounts claimed to be due.                                                                                                                                                                                                                                                                          
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | The Company
  has provided guarantees to banks in support of the credit facilities extended
  to two subsidiaries. In the case of the Companys U.S. subsidiary, the
  guarantee is for $100,000; in the case of the Companys U.K. subsidiary, the
  guarantee is for £100,000. Each such guarantee is provided for the term of
  the credit facility, such term being generally one year. If a subsidiary
  whose credit line has been guaranteed by the Company were to breach certain
  terms of its credit agreement, the lending bank could demand that the Company
  pay amounts claimed to be due.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|NOTE 13: | TAXES ON INCOME                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F - 30

---

---

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

|NOTE 13: | TAXES ON INCOME (Cont.)
|-------- | -----------------------
|         |                        
|         | b.                     
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        

F - 31

---

---

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

|NOTE 13: | TAXES ON INCOME (Cont.)
|-------- | -----------------------
|         |                        
|         |                        
|         |                        
|         | c.                     
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         | d.                     
|         |                        
|         |                        

| |                            |  | December 31, 2002         |        | December 31, 2003 |  
| | -------------------------- |  | ------------------------- | ------ | ----------------- | -
| |                            |  |                           |        |                   |  
| |                            |  | Current                   |        | Non-
  current    |  
| |                            |  |                           |        |                   |  
| |                            |  | U.S. dollars in thousands |       
| |                            |  |                           |       
| |                            |  |                           |        |                   |  
| | Gross deferred tax assets  |  | $                         | 3,456  |                   | $
| | Less - valuation allowance |  |                           | (2,596 | )                 |  
| |                            |  |                           |        |                   |  
| |                            |  |                           |        |                   |  
| | Net deferred tax asset     |  | $                         | 860    |                   | $
| |                            |  |                           |        |                   |  

F - 32

---

---

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

|NOTE 13: | TAXES ON INCOME (Cont.)
|-------- | -----------------------
|         |                        
|         |                        
|         |                        
|         |                        

| |                    |  | Year ended December 31,   |    
| | ------------------ |  | ------------------------- | ---
| |                    |  |                           |    
| |                    |  | 2001                      |    
| |                    |  |                           |    
| |                    |  | U.S. dollars in thousands |    
| |                    |  |                           |    
| |                    |  |                           |    
| | Current (foreign)  |  | $                         | 676
| | Deferred (foreign) |  |                           | 50 
| |                    |  |                           |    
| |                    |  |                           |    
| |                    |  | $                         | 726
| |                    |  |                           |    

| |    | The
  Companys entire provision for taxes on income relates to operations in
  jurisdictions other than the Netherlands Antilles. The effective income tax
  rate varies from period to period because each jurisdiction in which the
  Company and its subsidiaries operate has its own system of taxation (not only
  with respect to the nominal rate, but also with respect to the allowance of
  deductions, credits and other benefits). In addition, the provision for
  income taxes for the fiscal years ended December 31, 2001, 2002 and 2003,
  does not include the recognition of a majority of the deferred tax assets
  relating to the net operating losses of the Companys subsidiaries worldwide.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The main
  reconciling item from the statutory tax rate of the Company to the effective
  tax rate is the non-recognition of tax benefits from accumulated net
  operating losses carryforward among the various subsidiaries worldwide due to
  the uncertainty of the realization of such tax benefits.                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | e. | Loss
  (income) before taxes on income is comprised as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |          |  | Year ended December 31,   |       
| | -------- |  | ------------------------- | ------
| |          |  |                           |       
| |          |  | 2001                      |       
| |          |  |                           |       
| |          |  | U.S. dollars in thousands |       
| |          |  |                           |       
| |          |  |                           |       
| | Domestic |  | $                         | 6,218 
| | Foreign  |  |                           | 10,995
| |          |  |                           |       
| |          |  |                           |       
| |          |  | $                         | 17,213
| |          |  |                           |       

| | f. | Israeli tax reform:                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                           
| |    | On January
  1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the
  reform, Israel resident companies are subject to Israeli tax on income
  accrued or derived in Israel or abroad.

F - 33

---

---

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

|NOTE 13: | TAXES ON INCOME (Cont.)
|-------- | -----------------------
|         |                        
|         |                        
|         |                        
|NOTE 14: | SHAREHOLDERS EQUITY   
|         |                        
|         | a.                     
|         |                        
|         | b.                     
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        

F - 34

---

---

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

|NOTE 14: | SHAREHOLDERS EQUITY (Cont.)
|-------- | ----------------------------
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             

F - 35

---

---

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

|NOTE 14: | SHAREHOLDERS EQUITY (Cont.)
|-------- | ----------------------------
|         |                             
|         | c.                          
|         |                             
|         |                             
|         |                             
|         | d.                          
|         |                             
|         | e.                          
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             

F - 36

---

---

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

|NOTE 14: | SHAREHOLDERS EQUITY (Cont.)
|-------- | ----------------------------
|         |                             
|         |                             
|         |                             
|         |                             

| |                                         |  | Year ended December 31, |          
| | --------------------------------------- |  | ----------------------- | ---------
| |                                         |  |                         |          
| |                                         |  | 2001                    |          
| |                                         |  |                         |          
| |                                         |  | Shares                  |          
| |                                         |  |                         |          
| | Outstanding at January 1                |  | *)                      | 1,790,614
| |                                         |  |                         |          
| | Granted                                 |  |                         | 61,700   
| | Exercised                               |  |                         | (560     
| | Cancelled and forfeited                 |  |                         | (482,056 
| |                                         |  |                         |          
| | Outstanding at
     December 31         |  | *)                      | 1,569,698
| |                                         |  |                         |          
| |                                         |  |                         |          
| | Exercisable options at
     December 31 |  |                         | 745,647  
| |                                         |  |                         |          

| |  | *)                                                                                                                | Including
  154,000, 102,100 and 102,100 options repriced to zero, as of December 31,
  2001, 2002 and 2003, respectively.
| |  | ----------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                   |                                                                                                                           
| |  | The options
  outstanding as of December 31, 2003, have been classified by range of
  exercise price, as follows:

| | Exercise price      |  | Options
  outstanding
  as of
  December 31,
  2003 |           | Weighted
  average
  remaining
  contractual
  life (years) |      | Weighted
  average
  exercise
  price |  | Options
  exercisable
  as of
  December 31,
  2003 |       | Weighted
  average
  exercise
  Price | 
| | ------------------- |  | --------------------------------------------------- | --------- | ----------------------------------------------------------- | ---- | ------------------------------------- |  | --------------------------------------------------- | ----- | ------------------------------------- | 
| |                     |  |                                                     |           |                                                             |      |                                       |  |                                                     |       |                                       | 
| |                     |  |                                                     |           |                                                             |      |                                       |  |                                                     |       |                                       | 
| |                     |  |                                                     |           |                                                             |      |                                       |  |                                                     |       |                                       | 
| | $ -                 |  |                                                     | 102,100   |                                                             | 6.99 |                                       |  | $                                                   | -     |                                       | 
| | $ 3.25 - $ 3.75     |  |                                                     | 210,700   |                                                             | 8.39 |                                       |  | $                                                   | 3.58  |                                       | 
| | $ 4.06 - $ 5.70     |  |                                                     | 844,562   |                                                             | 7.62 |                                       |  | $                                                   | 4.46  |                                       | 
| | $ 11.25 - $ 16.875  |  |                                                     | 175,080   |                                                             | 2.26 |                                       |  | $                                                   | 11.87 |                                       | 
| | $ 19.375 - $ 29.375 |  |                                                     | 54,675    |                                                             | 6.54 |                                       |  | $                                                   | 28.90 |                                       | 
| | $ 32.5 - $ 47.5     |  |                                                     | 129,328   |                                                             | 5.14 |                                       |  | $                                                   | 38.31 |                                       | 
| | $ 61.25 - $ 69.375  |  |                                                     | 42,050    |                                                             | 6.07 |                                       |  | $                                                   | 67.40 |                                       | 
| |                     |  |                                                     |           |                                                             |      |                                       |  |                                                     |       |                                       | 
| |                     |  |                                                     |           |                                                             |      |                                       |  |                                                     |       |                                       | 
| |                     |  |                                                     | 1,558,495 |                                                             |      |                                       |  | $                                                   | 10.25 |                                       | 
| |                     |  |                                                     |           |                                                             |      |                                       |  |                                                     |       |                                       | 

| |  | All options
  were granted at exercise price equal to the share price at the date of grant.
  The weighted average fair value of options granted during the year ended
  December 31, 2003 was $2.3.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---

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

|NOTE 14: | SHAREHOLDERS EQUITY (Cont.)
|-------- | ----------------------------
|         |                             
|         | f.                          
|         |                             
|         | g.                          
|         |                             
|         |                             

| | Issuance date |  | Warrants to
  Common
  shares |         | Weighted
  average
  exercise price
  per share |  | Warrants
  exercisable |   | Exercisable 
  through | 
| | ------------- |  | ----------------------------- | ------- | ----------------------------------------------- |  | ---------------------- | - | ---------------------- | 
| |               |  |                               |         |                                                 |  |                        |   |                        | 
| |               |  |                               |         |                                                 |  |                        |   |                        | 
| | 1999          |  |                               | 20,939  |                                                 |  |                        | $ | 24.78                  | 
| | 2000          |  |                               | 114,305 |                                                 |  |                        | $ | 33.20                  | 
| |               |  |                               |         |                                                 |  |                        |   |                        | 
| |               |  |                               |         |                                                 |  |                        |   |                        | 
| |               |  |                               | 135,244 |                                                 |  |                        |   |                        | 
| |               |  |                               |         |                                                 |  |                        |   |                        | 

| | h. | In 2001, the
  Company granted Bank Leumi Le Israel B.M., Bank Hapoalim Ltd., Mizrahi Bank Ltd.
  and Bank Discount Ltd. (collectively the Banks) 81,000 warrants as part of
  a credit-line extension agreement (see Note 10a) at an exercise price ranging
  from $4.4 to $6.9 per share. These warrants were measured at fair value
  (according to the Black-Scholes option pricing model) with the following
  weighted-average assumptions for 2001: risk free interest rate of 5%,
  dividend yields of 0%, volatility factors of the expected market price of the
  Companys Common shares of 0.901, and contractual life of the option of 2
  years. Total compensation expense amounted to $203,000, of which $150,000 and
  $53,000 were recognized as financial expense in 2001 and 2002, respectively,
  over the credit-line period.                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | i. | The Company
  does not intend to pay cash dividends in the foreseeable future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | j. | Payments in
  respect of acquisition adjustment of Syspart:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | In May 1999,
  the Company acquired all of the outstanding shares of Syspart (Deutschland)
  GmbH, a German corporation (hereafter - Syspart). The total consideration
  was approximately $6 million (including $354,000 of costs related to the
  acquisition) of which 64% was paid in cash and 36% in Sapiens Common shares.
  The acquisition was treated on the basis of the purchase method of
  accounting. The operations of Syspart are included in the consolidated
  statements from the acquisition date. In 2000, 2001, 2002 and 2003, the
  Company paid additional consideration in the amounts of $164,000, $471,000,
  $486,000 and $496,000, respectively, which were paid due to a share price
  floor clause in the purchase agreement. In accordance with APB 16, Business
  Combinations, and EITF 97-8, Accounting for Contingent Consideration Issued
  in a Purchase Business Combination, the additional amounts were recorded as
  reductions to the additional paid-in capital.

F - 38

---

---

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

|NOTE 15: | GEOGRAPHIC INFORMATION
|-------- | ----------------------
|         |                       
|         | a.                    
|         |                       
|         | b.                    
|         |                       
|         |                       

| |    |               | Year ended
  December 31,   |       
| | -- | ------------- | --------------------------- | ------
| |    |               |                             |       
| |    |               | 2001                        |       
| |    |               |                             |       
| |    |               | U.S.
  dollars in thousands |       
| |    |               |                             |       
| | 1. | Revenues:     |                             |       
| |    | U.K.          |                             | $     
| |    | North America |                             |       
| |    | France        |                             |       
| |    | Germany       |                             |       
| |    | Israel        |                             |       
| |    | Other         |                             |       
| |    |               |                             |       
| |    |               |                             |       
| |    |               | $                           | 63,435
| |    |               |                             |       

| |    |                    | December
  31,              |       
| | -- | ------------------ | --------------------------- | ------
| |    |                    |                             |       
| |    |                    | 2001                        |       
| |    |                    |                             |       
| |    |                    | U.S.
  dollars in thousands |       
| |    |                    |                             |       
| |    |                    |                             |       
| | 2. | Long-lived assets: |                             |       
| |    | France             |                             | $     
| |    | Dutch Antilles     |                             |       
| |    | Israel             |                             |       
| |    | Germany            |                             |       
| |    | Other              |                             |       
| |    |                    |                             |       
| |    |                    |                             |       
| |    |                    | $                           | 22,695
| |    |                    |                             |       

F - 39

---

---

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

|NOTE 16: | SELECTED STATEMENTS OF OPERATIONS DATA
|-------- | --------------------------------------
|         |                                       
|         | a.                                    

| |                                        |                                                    | Year ended
  December 31,   |       
| | -------------------------------------- | -------------------------------------------------- | --------------------------- | ------
| |                                        |                                                    |                             |       
| |                                        |                                                    | 2001                        |       
| |                                        |                                                    |                             |       
| |                                        |                                                    | U.S.
  dollars in thousands |       
| |                                        |                                                    |                             |       
| |                                        |                                                    |                             |       
| | Total costs                            |                                                    | $                           | 11,006
| |                                        |                                                    |                             |       
| |                                        | Less - capitalized software development
     costs |                             |       
| |                                        | Less - royalty-bearing grants                      |                             |       
| |                                        |                                                    |                             |       
| |                                        |                                                    |                             |       
| | Research and development expenses, net |                                                    | $                           | 5,458 
| |                                        |                                                    |                             |       

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

| | Financial income:       |                                          |   |       |       |   |       |       |   |        |       
| | ----------------------- | ---------------------------------------- | - | ----- | ----- | - | ----- | ----- | - | ------ | ------
| |                         | Interest                                 |   | $     | 518   |   | $     | 778   |   | $      | 612   
| |                         | Foreign currency translation differences |   |       | 3,728 |   |       | 6,511 |   |        | 26,178
| |                         | Gain on sale of marketable securities    |   |       | 124   |   |       | -     |   |        | -     
| |                         |                                          |   |       |       |   |       |       |   |        |       
| |                         |                                          |   |       |       |   |       |       |   |        |       
| |                         |                                          |   | 4,370 |       |   | 7,289 |       |   | 26,790 |       
| |                         |                                          |   |       |       |   |       |       |   |        |       
| | Financial expenses:     |                                          |   |       |       |   |       |       |   |        |       
| |                         | Interest                                 |   |       | 1,818 |   |       | 1,747 |   |        | 1,246 
| |                         | Foreign currency translation differences |   |       | 5,277 |   |       | 6,351 |   |        | 26,292
| |                         | Bank charges and others                  |   |       | 462   |   |       | 162   |   |        | 133   
| |                         | Loss on sale of bonds                    |   |       | -     |   |       | -     |   |        | 77    
| |                         |                                          |   |       |       |   |       |       |   |        |       
| |                         |                                          |   |       |       |   |       |       |   |        |       
| |                         |                                          |   | 7,557 |       |   | 8,260 |       |   | 27,748 |       
| |                         |                                          |   |       |       |   |       |       |   |        |       
| |                         |                                          |   |       |       |   |       |       |   |        |       
| | Financial expenses, net |                                          | $ | 3,187 |       | $ | 971   |       | $ | 958    |       
| |                         |                                          |   |       |       |   |       |       |   |        |       

F - 40

---

---

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

|NOTE 17: | SUBSEQUENT EVENTS (UNAUDITED)
|-------- | -----------------------------
|         |                              
|         | a.                           
|         |                              
|         |                              
|         |                              
|         |                              
|         |                              
|         |                              
|         |                              
|         |                              
|         |                              
|         | b.                           

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

F - 41

---

---



CONSENT OF INDEPENDENT ACCOUNTANTS





We hereby consent to the use in the consolidated financial statements of Formula Systems (1985) ("Formula") constituting part of the Annual Report of Formula on Form 20-F for the fiscal year ended December 31, 2003, of our report dated January 28, 2004, relating to the financial statements of Magic Software Japan for the year ended December 31, 2003 which are included by consolidation in the consolidated financial statements of magic Software Enterprises Ltd. for the year then ended.





/s/

ASG Audit Corporation





Tokyo, Japan

June 28, 2004







MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES





ASG Audit Corporation

Certified Public Accountants



Grant Thornton



INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholder of

Magic Software Japan K.K.





We have audited the accompanying balance sheets of Magic Software Japan K. K. ("the Company") as of December 31, 2001, and the related statements of operations and accumulated deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements, based on our audit.



We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Magic Software Japan K. K. as of December 31, 2001 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles in the United States of America.



ASG Audit Corporation



Tokyo, Japan

January 24, 2002





MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES





ASG Audit Corporation

Certified Public Accountants



Grant Thornton



INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholder of

Magic Software Japan K.K.





We have audited the accompanying balance sheets of Magic Software Japan K. K. ("the Company") as of December 31, 2002, and the related statements of operations and accumulated deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements, based on our audit.



We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Magic Software Japan K. K. as of December 31, 2002 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles in the United States of America.



ASG Audit Corporation



Tokyo, Japan

January 24, 2003







MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES





ASG Audit Corporation

Certified Public Accountants



Grant Thornton



INDEPENDENT AUDITORS' REPORT



To the Board of Directors and Shareholder of

Magic Software Japan K.K.





We have audited the accompanying balance sheets of Magic Software Japan K. K. ("the Company") as of December 31, 2003, and the related statements of operations and accumulated deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements, based on our audit.



We conducted our audits in accordance with the standards of thee Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Magic Software Japan K. K. as of December 31, 2003 and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles in the United States of America.



ASG Audit Corporation



Tokyo, Japan

January 28, 2004





Blick Rothenberg

Chartered Accountants



CONSENT OF INDEPENDENT ACCOUNTANTS





We hereby consent to the use in the consolidated financial statements of Formula Systems (1985) ("Formula") constituting part of the Annual Report of Formula on Form 20-F for the fiscal year ended December 31, 2003, of our report dated January 29, 2002, relating to the consolidated financial statements of Magic Software Enterprises (UK) Limited for the year ended December 31, 2001 which are included by consolidation in the consolidated financial statements of magic Software Enterprises Ltd. for the years then ended.





London, United Kingdom

June 28, 2004



/s/

Blick Rothenberg

Registered Auditors



MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES



BLICK ROTHENBERG

Chartered Accountants



REPORT OF INDEPENDENT AUDITORS

To the shareholders of

MAGIC SOFTWARE ENTERPRISES (UK) LIMITED



We have audited the accompanying balance sheets of Magic Software Enterprises (UK) Limited ("the Company") as of December 31, 2000 and 2001, and the related statements of operations and changes in shareholders' equity for each of the three years in the period ended December 31, 2001.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements, based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in al material respects, the financial position of the Company as of December 31, 2000 and 2001 and the results of their operations for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.



/s/

BLICK ROTHENBERG

Chartered Accountants

Registered Auditors



12 York Gate, Regent's Park, London NW1 4QS

29 January 2002



CONSENT OF INDEPENDENT ACCOUNTANTS





We hereby consent to the use in the consolidated financial statements of Formula Systems (1985) Ltd. ("Formula") constituting part of the Annual Report of Formula on form 20-F for the fiscal year ended December 31, 2003, of our report dated February 2, 2004, relating to the consolidated financial statements of Magic Software Enterprises Ltd. for the year ended December 31, 2003, 2002 and 2001 which are included by consolidation in such financial statements.





Tel Aviv, Israel



June 28, 2004



/s/

Kost Forer Gabbay and Kasierer

A Member of Ernst & Young Global



MAGIC SOFTWARE ENTERPRISES LTD.

AND ITS SUBSIDIARIES



Ernst & Young



REPORT OF INDEPENDENT AUDITORS



To the Shareholders of



MAGIC SOFTWARE ENTERPRISES LTD.



We have audited the accompanying consolidated
balance sheets of magic Software Enterprises Ltd. ("the Company") and its subsidiaries as of December 31, 2002 and 2003 and the
related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31,
2003.  These financial statements are the responsibility of Company's management. Our responsibility is to express an opinion on these financial statements
based on our audits.  We did not audit the financial statements of certain subsidiaries, which statements reflect total assets of 14% and 19% as of December 31,
2002 and 2001 respectively and total revenues of 30%, 34% and 39% for each of the three years in the period ended December 31, 2003.  Those statements were audited
by other auditors whose reports have been furnished to us and our opinion, insofar as it relates to the
 amounts included for these subsidiaries, is based solely on the reports of the other auditors.



We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurances about whether the financial
statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.



In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries
as of December 31, 2002 and 2003, and the related consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2003,
inconformity with accounting principles generally accepted in the united States.



As discussed in Note 2 to the consolidated financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002.



KOST FORER GABBAY & KASIERER

A Member of Ernst & Young Global



Tel Aviv, Israel

February 2, 20040628



Levy Cohen & Co.

Registered Auditors

37 Broadhurst Gardens, London NW6 3QT





CONSENT OF INDEPENDENT AUDITORS





We consent to the use in the consolidated financial statements of Formula Systems (1985) Ltd. ("Formula") constituting part of the Annual reports of Formula on form 20-F for the fiscal year ended December 31, 2003, of our report dated 26 January 2004 relating to the balance sheets of the Magic Software Enterprises (UK) Limited for the years ended December 31, 2002 and 2003 which are included by consolidation in the consolidated financial statements of Magic Software Enterprises Ltd. for the years then ended.





Yours sincerely,





/s/

Levy Cohen & Co.

Registered Auditors







28, June, 2004



Levy Cohen & Co.

Registered Auditors



REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

MAGIC SOFTWARE ENTERPRISES (UK) LIMITED





We have audited the accompanying balance sheets of Magic Software Enterprises (UK) Limited
("the Company") as of December 31, 2002 and 2003, and the related statements of operations and changes in shareholders' equity for each of the two years in the period
ended December 31, 2003.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements,
 based on our audits of the two years in the period ended 31, December 2003.



We conducted our audits in accordance with the standards of Public Company Accounting Oversight Board
(United States) auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
 position of the Company as of December 31, 2002 and 2003 and the results of their operations and each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in
the United States.



/s/

LEVY COHEN & CO.

Registered Auditors



26 January 2004



MOCK & PARTNERS INTERNATIONAL

Registeraccountants





CONSENT OF INDEPENDENT ACCOUNTANTS





We hereby consent to the use in the consolidated financial statements of
 Formula Systems (1985) ("Formula") constituting part of the Annual Report of Formula on Form 20-F for the fiscal year ended December 31, 2003, of our
report dated January 28, 2004, relating to the financial statements of Magic Benelux BV for the years ended December 31, 2001 and 2003 which are included by consolidation
in the consolidated financial statements of magic Software Enterprises Ltd. for the years then ended.







Amsterdam, The Netherlands

June 28, 2004



/s/

Mock & Partners International

Registered Accounts

Drs. HJS Mock RA



MOCK & PARTNERS INTERNATIONAL

Registeraccountants



REPORT OF INDEPENDENT AUDITORS

To the Shareholders of



MAGIC BENELUX BV





We have audited the accompanying balance sheets of Magic Benelux BV ("the Company") and its subsidiaries as of December 31, 2001 and 2003, and the related consolidated statements of operations, changes in shareholders equity and cash flows for each of the two years ended December 31, 2001 and 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements, based on our audits.



We conducted our audits in accordance with the standards of the Public company Accounting Oversight Board (United States) as the standards generally accepted in the United States of America.



Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.



In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2001 and 2003, and the related consolidated results of their operations and cash flows for each of the years ended December 31 2001 and December 31, 2003, in conformity with accounting principles generally accepted in the United States.



Amsterdam, Januar 28th 2004



Mock & Partners International Registeraccountants

Drs. H.J.A. Mock RA

/s/









---

---

SIGNATURES

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

FORMULA SYSTEMS (1985) LTD.

|By: | /s/Dan Goldstein                                                   | June
  30, 2004
|--- | ------------------------------------------------------------------ | ---------------
|    |                                                                    |                
|    | Dan
  GoldsteinChairman of the Board and
  Chief Executive Officer |                
|    |                                                                    |                

98

---

---

Exhibit Index

|Exhibit No. |  |                                                                                                                                                                     
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                     
|            |  |                                                                                                                                                                     
|1.1         |  | Memorandum
  of Association*                                                                                                                                        
|            |  |                                                                                                                                                                     
|1.2         |  | Articles
  of Association as amended on January 7, 2001**                                                                                                           
|            |  |                                                                                                                                                                     
|2           |  | The description of terms of debentures issued by
  the Registrant in May 2002, contained in Section 2.3 of the prospectus of the
  Registrant dated May 23, 2002 ***
|            |  |                                                                                                                                                                     
|4.1         |  | Agreement
  dated October 1, 1999 between the Registrant and Shamrock Holdings of
  California Inc.****                                                             
|            |  |                                                                                                                                                                     
|4.2         |  | Agreement
  dated January 24, 2001 among the Registrant, Sapiens International
  Corporation N.V. and Yarnfield International Limited**                             
|            |  |                                                                                                                                                                     
|4.3         |  | Amendment
  to the agreement among the Registrant, Sapiens International Corporation N.V.
  and Yarnfield International Limited, dated October 20, 2002             
|            |  |                                                                                                                                                                     
|4.4         |  | Agreement
  dated December 30, 2001 between the Registrant and Formula Vision
  Technologies (F.V.T.) Ltd. (English summary accompanied by Hebrew original)*****    
|            |  |                                                                                                                                                                     
|4.5         |  | Agreement
  dated December 15, 2003 between the Registrant and Formula Vision
  Technologies (F.V.T.) Ltd.                                                          
|            |  |                                                                                                                                                                     
|4.6         |  | Form
  of the 1997 Share Option Plan (English translation from Hebrew original)*                                                                                    
|            |  |                                                                                                                                                                     
|4.7         |  | Form
  of the 2000 Share Option Plan (English translation from Hebrew original)**                                                                                   
|            |  |                                                                                                                                                                     
|4.8         |  | Letter
  of Indemnification, dated February 14, 2002*****                                                                                                           
|            |  |                                                                                                                                                                     
|8           |  | List
  of Subsidiaries                                                                                                                                              
|            |  |                                                                                                                                                                     
|12.1        |  | Certification
  of the Chief Executive Officer pursuant to §302 of
  the Sarbanes-Oxley Act                                                                         
|            |  |                                                                                                                                                                     
|12.2        |  | Certification
  of the Principal Financial Officer pursuant to §302 of
  the Sarbanes-Oxley Act                                                                     
|            |  |                                                                                                                                                                     
|13.1        |  | Certification of the Chief Executive Officer
  pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the
  Sarbanes-Oxley Act                         
|            |  |                                                                                                                                                                     
|13.2        |  | Certification of the Principal Financial Officer
  pursuant to 18 U.S.C. sec. 1350, as adopted pursuant to sec. 906 of the
  Sarbanes-Oxley Act                     

---

99

---

---





October 20, 2002



Itzick Sharir

President & CEO

Sapiens International Corporation N.V.



Re:

Offer to Convert Preferred Shares and Exercise Option



Dear Itzick,



Pursuant to the Share Purchase Agreement, dated as of January 24, 2001 (the Agreement), between Formula System (1985) Ltd., together with Yarnfield International Limited (collectively the Investors), and Sapiens International Corporation N.V. (the Company), the Investors invested $15 million  into the Company in return for 10,000 shares of Series F Convertible Preferred Shares (the Series F Preferred).  In accordance with the terms of the Agreement, the Company granted to the Investors an option to invest up to an additional $15 million on the same terms of the original investment, as adjusted, at any time on or before December 25, 2003.



Pursuant to the terms of the Agreement, the conversion price of the Series F Preferred into common shares has been adjusted to $1.14 per common share.  This adjusted conversion price applies both to the original investment and to any future exercise of the option to make an additional investment.



According to the redemption rights of the Series F Preferred, if the Investors do not choose to convert their Series F Preferred shares to common shares prior to March 5, 2004, the Company must then redeem the Series F Preferred at a redemption price of $1,500 per share of Series F Preferred (currently a total of $15,000,000) in either cash or the number of common shares of the Company equal to $15 million divided by the average closing price of the common shares during the thirty days preceding the redemption date.  If the redemption were to be implemented today, the average closing price of the Companys common shares would be $0.78 per share.



In furtherance of discussions that we have held with you and other representatives of the Company regarding your request that the Investors convert their Series F Preferred shares into common shares and exercise their option to invest additional capital, we are pleased to make the following offer:



1.

The Investors will convert all of their outstanding Series F Preferred shares into common shares at a reduced conversion price of $0.83 per common share (the Reduced Conversion Price).



2.

Formula shall exercise two-thirds of the option granted to the Investors (i.e. an additional investment of $10 million) promptly following shareholder approval of the transactions contemplated by this offer. The number of common shares that the Company shall issue to Formula pursuant to this exercise of the Investors option shall be calculated according to the Reduced Conversion Price.



3.

The remaining one-third of the Investors option ($5 million) shall be assigned by Yarnfield to Formula and shall be governed by the original terms of the Agreement, except for the Reduced Conversion Price, which shall apply to the remaining portion of the  option as well.



4.

The practical result of these revisions to the original investment and exercise of two-thirds of the option shall be as follows:



Formula:Formula shall convert its 6,666 shares of Series F Preferred into common shares at the Reduced Conversion Price. Formula shall invest an additional $10 million in return for the number of common shares equal to $10 million divided by the Reduced Conversion Price. Formula shall have an option to invest an additional $5 million in return for common shares at the Reduced Conversion Price, under the original terms of the Agreement



Yarnfield: Yarnfield shall convert its 3,334 shares of Series F Preferred into common shares at the Reduced Conversion Price.



Under the present circumstances in which the Company needs additional investment capital and Formula is willing to exercise immediately its option to invest an additional $10 million into the Company more than one year in advance of the expiration of the Investors option, the reduction of the conversion price to the Reduced Conversion Price of $0.83 is justifiable, particularly in light of the fact that the current market price of the Companys common shares is approximately [$0.74].



Please favor us with an early reply to our offer. Our timing is such that we need to complete the steps necessary to consummate the transaction contemplated by this offer, (meaning the shareholders approval), by December 31, 2002. Our offer as set forth herein shall remain valid and irrevocable through December 31, 2002.





Respectfully yours,





By:____________________

Formula Systems (1985) Ltd. (directly or through a subsidiary)



By:______________________

Yarnfield International Limited







Yossi Avraham & Co Advocates





December 10, 2002



|Formula Systems (1985) Ltd.            |  | Yarnfield International Ltd.
|-------------------------------------- |  | ----------------------------
|(directly or through its subsidiaries) |  |                             
|Att: Bruria Gross-Prushansky           |  | Att: Ron Zukerman           





Re: Offer to Convert Preferred Shares and

Exercise Option Dated October 20, 2002





Reference is hereby made to your offer to Sapiens International Corporation N.V. (the "Company"), dated October 20, 2002, to convert preferred shares of the Company and exercise a certain option (the "Offer").



As you already know, the Company has resolved to accept the Offer. This is merely a formal acceptance notice on behalf of the Company that is being given to you for the sake of good order only.







Sincerely,



/s/

Beni Maidenberg, Adv.



Yossi Avraham & Co., Advocates



# SHARE SUBSCRIPTION
AGREEMENT

This
Agreement is made as of December 15 , 2003

by and between

Formula Vision
Technologies (F.V.T.) Ltd.
of 3 Hagalim Boulevard,
Herzlia, Israel (the
Company)

and

Formula Systems (1985)
Ltd.
of 3 Hagalim Boulevard,
Herzlia, Israel 
(Formula).

# W I T N E S S E T H

WHEREAS,the Company is a
public company traded on the Tel-Aviv Stock Exchange (the "TASE"); and

WHEREAS, Formula desires to
subscribe for and the Company wishes to issue to Formula 38,000,000 shares of the issued
and outstanding share capital of the Company, all under the terms and subject to the
conditions set forth below;

NOW, THEREFORE, in
consideration of the mutual promises and conditions herein contained, the parties hereto
hereby agree as follows:

|1. | Subscription
for Shares
|-- | -----------------------

| | 1.1 | On the basis of the representations, warranties and covenants of the Company, and subject
to the satisfaction or waiver of the conditions set forth herein, at the Closing (as
hereinafter defined) the Company shall issue and sell to Formula 38,000,000 ordinary
shares of the Company, each having a nominal value of NIS 1 (the
Shares), constituting immediately after their issuance to Formula
approximately 59.44% of the entire issued and outstanding share capital of the Company
(58.26% on a fully diluted basis), free and clear from all liens, claims, charges,
security interests, options or other legal or equitable encumbrances of whatever kind or
nature, (the Allocated Shares).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

---

| | 1.2 | As consideration for the Allocated Shares the Company shall repay Formula a portion of the
debt owed by the Company to Formula in the amount of 156,180 Thousand NIS (the
Consideration and the Consideration Amount), an
amount originating from series of debentures issued by the Company to Formula totaling
352,000 Thousand NIS (the Original Debt).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1.3 | The remainder of the Original Debt owed by the Company to Formula, deducting payments made
by the Company to Formula up to the date hereof, is in the sum of 352,715 Thousand NIS,
plus accrued interest (as specified below) as of the last payment of interest made by the
Company. After deduction of the Consideration Amount following and subject to the
execution of the allocation of the Allocated Shares, the remainder of the outstanding
debentures shall be in the aggregate principal amount of approximately 196,535 Thousand
NIS (the Remainder).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
repayment terms for the Remainder will remain as specified in the debentures issued by the
Company to Formula in the framework of a transaction between the Company and Formula which
took place on December 2001, concerning purchase of certain companies from Formula, and
which generated the Original Debt (the Original Transaction); that is,
the payments on account of the Remainder plus linkage differences, subject to adjustments
based on the income of the Company during each of a relevant year, will be in each
calendar year, no less than 30% but no more than 70% of the income arising to the Company
from the companies purchased within the frame of the Original Transaction, and in any case
shall not be less than 20% of the annual profit as recorded in the financial statements of
the Company. The Remainder , linked to the CPI and bearing interest at an annual rate of
5%, paid quarterly, is to be repaid in annual installments until year 2006 (the
Payment Period). Any amounts which remain outstanding will be payable at the
end the Payment Period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1.4 | The Company shall register Formula and/or Hevra LeRishumim Shel Bank Leumi LeIsrael Ltd.
(the Hevra LeRishumim) for securities account of Formula, as
provided by Formula in writing upon the Closing (as hereinafter defined), in the
Companys Register of Members.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Closing
|-- | -------

| | The
Closing of the transaction contemplated under Section 1 above (the
Closing) shall take place and be held at the offices of the Company, 3
Hagalim Blvd, Herzeliya, Israel, on the first business day following the fulfillment of
the Conditions Precedent set forth in Section 5 hereof.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event the Conditions Precedent set forth in Section 5 hereof have not been fulfilled
and the Closing did not take place within 90 days of the signing of this Agreement,
Formula shall have the right, effective immediately upon a written notice to the Company,
to cancel the Agreement, and no party shall have any claim and/or demand to the other
party with regard to said termination.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2

---

---

| | 2.1 | Closing
Deliveries
| | --- | ------------------

| | At
the Closing the Company shall deliver the following to Formula:
| | ------------------------------------------------------------------

| | 2.1.1 | The
share certificates representing all of the Allocated Shares issued to Formula or to the
Hevra Lerishumim, as provided by Formula in writing 3 days prior to the Closing, pursuant
to Section 1 hereof; and
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.1.2 | Copies
of resolutions taken by the Audit Committee, the Board of Directors and the General
Meeting of the Company authorizing the transactions contemplated hereby and approving the
issuance of the Allocated Shares to Formula under this Agreement Closing and the increase
of the Companys authorized share capital; and
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.1.3 | An
approval by TASE to register the Allocated Shares;
| | ----- | -----------------------------------------------------

| | 2.1.4 | An
approval by the Restrictive Trade Practices Commissioner,  to the merger contemplated
                          hereby;
| | ----- | --------------------------------------------------------------------------------------------------------------------------

| | 2.2 | The
Company shall cancel debentures issued by it to Formula totaling the Consideration Amount
pursuant to Section 1 hereof, and deliver to Formula document evidencing that
cancellation in the wording specified in Schedule 2.2 hereto.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Representations,
Warranties and Undertakings
|-- | --------------------------------------------

| | The
Company hereby represents, warrant and undertakes to Formula as follows:
| | ----------------------------------------------------------------------------

| | 3.1 | Incorporation
and Authorization
| | --- | -------------------------------

| | The
Company is a public company, duly incorporated and validly existing under the laws of the
State of Israel, whose shares are duly registered and traded on the TASE.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | Effect
of Transactions
| | --- | ----------------------

| | 3.2.1 | The
Audit Committee and Board of Directors of the Company have duly authorized the execution
and delivery of this Agreement and the consummation of the transactions contemplated
hereby at meetings duly called and held, and no other corporate action is necessary to
authorize such execution, delivery and consummation, other than the approval the General
Meeting of the shareholders of the Company, which approval is a condition precedent to
the Closing of this Agreement.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

---

---

| | 3.2.2 | Upon
the approval of the General Meeting, this Agreement will contain valid and binding
obligations of the Company enforceable in accordance with their terms.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.3 | Approvals,
Permits and Consents
| | --- | -------------------------------

| | The
execution and performance of this Agreement and the consummation of the transactions
contemplated hereunder and related thereto will not result in a breach of, nor do they
constitute, or will constitute after passage of time or giving of notice or both, a
default or a violation under any applicable law.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4 | Capitalization
| | --- | --------------

| | 3.4.1 | The
Companys entire authorized share capital is NIS 30,500,000, divided into 30,500,000
Shares. The Company shall increase its authorized share capital to NIS 100,000,000
divided into 100,000,000 Shares until the execution of the Closing, in order to enable
the execution of this Agreement and the allocation of the Allocated Shares.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4.2 | The
Companys entire issued share capital is and immediately prior to the Closing will
be NIS 25,925,853 consisting of 25,925,853 Shares, all of such shares being validly
issued, fully paid and owned by their respective holders, free and clear of all liens,
claims, charges, security interests, options or other legal or equitable encumbrances.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4.3 | A
list of all Interested Parties in the Company (as such term is defined in the Securities
Act, 1968) including their respective holdings on a fully diluted basis as of the date of
this Agreement and as of the Closing are detailed in Schedule 3.4.3 hereto.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4.4 | There
are no authorized or outstanding subscriptions, options, warrants, convertible
securities, or other arrangements under which the Company is or may become obligated to
issue any of its securities, except as specified in Schedule 3.4.4 hereto.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.4.5 | The
Allocated Shares will be upon Closing validly issued by the Company, fully paid, duly
registered on the Companys Register of Members, and free and clear from any liens,
claims, encumbrances or pre-emptive rights upon their issuance.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | 3.5 | TASE
Regulations
| | --- | ----------------

| | The
Company does not comply with the applicable TASE capital reservation regulations required
from publicly traded companies on the TASE according to the forth part of the TASE
Articles (due to the fact that according to the Companys last four Financial
Statements its equity is lower than NIS 2,000,000).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.6 | Filings
| | --- | -------

| | 3.6.1 | The
Company have duly complied with all applicable regulatory requirements, including without
limitation, all filing requirements stipulated in the Securities Act, 1968 and the
regulations promulgated thereunder (the Filings).
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.6.2 | The
Filings contain all statements required to be included therein. The Filings (i) were
prepared in accordance with applicable law and regulations, (ii) do not include any
untrue statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and (iii) do
not include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.6 | Full
and Correct Disclosure
| | --- | ---------------------------

| | Each
exhibit, schedule and any other document furnished, or to be furnished, by the Company in
connection herewith is, and at the Closing shall be, true, correct and complete. No
representation or warranty by the Company in this Agreement, or in any exhibit, schedule
or other document furnished, or to be furnished, to Formula in connection herewith
contains or will contain, any untrue statements of a material fact or omits.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.7 | Continuing
Representations and Warranties
| | --- | -----------------------------------------

| | The
representations and warranties of the Company shall be true and correct, and shall be
deemed to have been made again, on and as of the date of the Closing.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.8 | Brokers
and Finders
| | --- | -------------------

| | The
Company have not employed, or is subject to any claim of any broker, finder, consultant
or other intermediary in connection with the transactions contemplated by this Agreement
who might be entitled to a fee or commission upon the consummation of the transactions
contemplated hereby.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | 3.9 | Survival
of Representations
| | --- | ---------------------------

| | All
representations and warranties of the Company contained in this Agreement shall survive
for the period of 12 months following the Closing Date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Representations
, Warranties and Undertakings of Formula
|-- | --------------------------------------------------------

| | Formula
represents and warrants as follows:
| | -------------------------------------------

| | 4.1 | Incorporation
and Authorization
| | --- | -------------------------------

| | Formula
is a public company, duly incorporated and validly existing under the laws of the State
of Israel, whose shares are duly registered and traded on the TASE and on NASDAQ, with
full power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.2 | Experience
| | --- | ----------

| | Formula
is an experienced investor, has such knowledge and experience in financial and business
matters as to be capable, in its opinion, of evaluating the merits and risks of a
prospective investment in the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.3 | Effect
of Transaction
| | --- | ---------------------

| | 4.3.1 | The
Audit Committee and Board of Directors of Formula have authorized the execution and
delivery of this Agreement and the consummation of the transactions contemplated hereby,
and no other corporate action is necessary to authorize such execution, delivery and
consummation.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.3.2 | No
provisions of Formulas corporate documents or any agreement to which Formula is a
party have been or will be violated by the execution and delivery of this Agreement or
the performance or satisfaction of any agreement or condition herein contemplated upon
its part to be performed or satisfied.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.4 | Brokers
and Finders
| | --- | -------------------

| | Formula
has not employed, nor is subject to any claim of, any broker, finder, consultant or other
intermediary in connection with the transactions contemplated by this Agreement who might
be entitled to a fee or commission upon the consummation of the transactions contemplated
hereby.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | 4.5 | TASE
Limitations
| | --- | ----------------

| | Formula
is aware to the limitations imposed by TASE with respect to sale of the Allocated Shares
as specified in Schedule 4.5 hereto and undertakes to comply with
said limitations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | Conditions
Precedent
|-- | --------------------

| | The
obligations of Formula to consummate the transactions contemplated hereby shall be subject
to the satisfaction on or prior to the Closing of all of the following conditions, any of
which may be waived by Formula prior to the Closing:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.1 | Representations,
Warranties and Covenants
| | --- | -----------------------------------------

| | The
representations and warranties of the Company contained in this Agreement shall be true
and correct at and as of the date hereof and the Closing; each and all of the covenants,
agreements and conditions to be performed or satisfied by the Company on or prior to the
Closing shall have been duly performed or satisfied.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.2 | Approval
of Proceedings and Documents
| | --- | -------------------------------------

| | All
corporate and legal proceedings to be taken in connection with the transactions
contemplated hereunder, including delivery to Formula of the documents pursuant to
Section 2.1.2 hereof.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.3 | Consents,
Approvals and Waivers
| | --- | -------------------------------

| | On
or prior to the Closing, the Company shall have obtained the consents, approvals and
waivers for the transactions contemplated hereunder from all governmental authorities
from which such consents, approvals or waivers are required, including, the Israeli
Securities Authority, the TASE, and the Restrictive Trade Practices Commissioner.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | General
Provisions and Miscellaneous
|-- | ------------------------------------

| | 6.1 | Further
Assurance
| | --- | -----------------

| | The
parties hereto shall do and perform or cause to be done and performed all such further
acts and things and shall execute and deliver all such other agreements, certificates,
instruments and documents as any other party hereto may reasonably request in order to
carry out the intents and accomplish the purposes of this Agreement and the consummation
of the transactions contemplated hereby.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | 6.2 | Binding
Agreement
| | --- | -----------------

| | This
Agreement, including all exhibits and other documents relating hereto, constitutes the
entire agreement between the parties hereto with respect to the subject matter hereof and
embodies all the terms binding upon the parties in respect thereof. No party to this
Agreement shall be liable or bound in any manner by prior or contemporaneous express or
implied representation, warranty, statement, promise, covenant or agreement pertaining to
said transactions made by it or on its behalf unless same is expressly set forth or
referred to herein.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.3 | Counterparts
| | --- | ------------

| | This
Agreement may be executed in one or more counterparts, all of which shall be considered
one and the same agreement, and shall become effective when one or more counterparts have
been signed by each of the parties and delivered to the other parties.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.4 | Amendments,
Waivers, Discharges and Consents
| | --- | --------------------------------------------

| | 6.4.1 | No
amendment, change or modification of this Agreement or any of the provisions, terms or
conditions hereof, no waiver of a right, remedy, privilege or power, or discharge of an
obligation or liability, conferred upon, vested in or imposed on either party under or
pursuant to this Agreement, and no consent to any act or omission pertaining hereto shall
come into operation and be effective unless duly embodied in a written instrument signed
by or on behalf of the party against whom such amendment, change, modification, waiver,
discharge or consent is asserted or sought.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.4.2 | No
failure to exercise and no delay in exercising any right, remedy, privilege or power
under or pursuant to this Agreement shall operate as a waiver thereof; nor shall any
single or partial exercise of any such right, remedy, privilege or power preclude any
other or further exercise thereof or the exercise of any other right, remedy, privilege
or power.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.5 | Partial
Invalidity or Unenforceability
| | --- | --------------------------------------

| | If
any provision of this Agreement is held to be invalid or unenforceable, such invalidity
or unenforceability shall not invalidate this Agreement as a whole, but this Agreement
shall be construed as though it did not contain the particular provision held to be
invalid or unenforceable and the rights and obligations of the parties shall be construed
and enforced only to such extent as shall be permitted by law.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | 6.6 | Assignability
| | --- | -------------

| | Neither
this Agreement as a whole nor any right or obligation hereunder shall be assignable by
any party without the prior written consent of the other parties.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.7 | Section
and Other Headings
| | --- | --------------------------

| | The
section and other headings contained in this Agreement are for convenience only and do
not constitute matters to be considered in interpreting this Agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.8 | Notices
| | --- | -------

| | All
notices and other communications required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given and received either (i)
after twenty four (24) hours from the time they have been transmitted, if sent by
facsimile; or (ii) if mailed by registered mail (postage prepaid, return receipt
requested), upon delivery, or (iii) upon delivery, if delivered personally against
receipt, to the addresses stated in the prologue of this Agreement, or to such other
address or addresses as hereafter shall be furnished as provided in this Section 7.8 by
any of the parties hereto to the other parties hereto. Each such notice shall be deemed
to have been given as of the date received. Failure to provide notice to any of the above
shall not invalidate the effect of notices received by any other party hereto.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.9 | Governing
Law
| | --- | -------------

| | This
Agreement and the rights and obligations of the parties hereunder or pursuant hereto
shall be governed by and construed in accordance with the laws of the State of Israel.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
competent courts in Tel-Aviv shall have an exclusive jurisdiction in all matters relating
to this Agreement.
| | ----------------------------------------------------------------------------------------------------------------

| | 6.10 | Expenses
of the Parties
| | ---- | -----------------------

| | The
Company and Formula shall each pay their respective expenses, including the expenses of
its accountants and attorneys, in connection with the negotiation, execution and
performance of this Agreement.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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IN
WITNESS WHEREOF the parties hereto have caused this SHARE SUBSCRIPTION
AGREEMENT to be duly executed and delivered as of the date first written above.

|Formula Vision Technologies (F.V.T.) Ltd.BY:  ___________________________
_______________________________ |  | Formula Systems (1985) Ltd.BY:  ___________________________
_______________________________
|--------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------

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