---

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F O R M 20  F 
SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, 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, 2004
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|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: 005-52583
|--------------------------------------------------------------------------------------

BLUEPHOENIX SOLUTIONS
LTD. (Exact Name of
Registrant as Specified in Its Charter)

Israel 
(Jurisdiction of
Incorporation or Organization)

8 Maskit Street,
Herzlia 46120, 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:
Ordinary shares, NIS 0.01 par value
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Ordinary shares, NIS 0.01 par value
(Title of Class)

Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of December 31,
2004:

13,549,539
Ordinary shares, NIS 0.01 per share

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

Yes x No o

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

Item 17 o Item 18 x



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# TABLE OF CONTENTS

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Page                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------
|PART I 
                Item 1. IDENTITY OF DIRECTRS, SENIOR MANAGEMENT AND ADVISERS
                Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE
                Item 3. KEY INFORMATION
                        A. Selected Financial Data 
                        B. Capitalization and Indebtedness 
                        C. Reasons For the Offer and Use of Proceeds 
                        D. Risk Factors 
                Item 4. INFORMATION ON THE COMPANY
                        A. History and Development of the Company 
                        B. Business Overview 
                        C. Organizational Structure 
                        D. Property, Plants and Equipment 
                Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
                        A. Operating Results 
                        B. Liquidity and Capital Resources 
                        C. Research and Development, Patents and Licenses 
                        D. Trend Information 
                        E. Off-Balance Sheet Arrangements 
                        F. Tabular Disclosure of Contractual Obligations 
                Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
                        A. Directors and Senior Management 
                        B. Compensation 
                        C. Board Practices 
                        D. Employees 
                        E. Share Ownership 
                Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
                        A. Major Shareholders 
                        B. Related party Transactions 
                        C. Interests of Expert and Counsel 
                Item 8. FINANCIAL INFORMATION
                        A. Consolidated Statements and Other Financial Information
                        B. Significant Changes 
                Item 9. THE OFFER AND LISTING
                        A. Offer and Listing Detail 
                        B. Plan of Distribution 
                        C. Markets 
                        D. Selling Shareholders 
                        E. Dilution 
                        F. Expenses of the Issue 
                Item 10. ADDITIONAL INFORMATION
                        A. Share Capital 
                        B. Memorandum and Articles of Association | 6
6
6
6
7
7
8
20
20
21
40
41
41
49
54
60
60
60
61
61
61
63
64
70
70
74
74
75
79
79
79
80
80
80
81
82
82
82
82
82
82
82

3

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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                               
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------
|C. Material Contracts 
                        D. Exchange Controls 
                        E. Taxation 
                        F. Dividend and Paying Agents 
                        G. Statement by Agents 
                        H. Documents on Display 
                        I. Subsidiary Information 
                Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
                Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIESPART II
                Item 13. DEFUALTS, DIVIDEND ARREARAGES AND DELIQUENCIES
                Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
                Item 15. CONTROLS AND PROCEDURES
                Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT
                Item 16B. CODE OF ETHICS
                Item 16C. PRINCIPAL ACCOUNT FEES AND SERVICES
                Item 16D. EXEMPTINS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
                Item 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERSPART III
                Item 17. FINANCIAL STATEMENTS
                Item 18. FINANCIAL STATEMENTS
                Item 19. EXHIBITS | 86
87
87
95
95
95
95
96
96
97
97
97
97
97
98
99
99
100
100
100

4

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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.

As
used in this annual report, references to we, our,
ours and us refer to BluePhoenix Solutions Ltd. and its
subsidiaries, unless otherwise indicated. References to BluePhoenix refer to
BluePhoenix Solutions Ltd.

The
name BluePhoenix and the names BluePhoenix IT Discovery, BluePhoenix
LogicMiner, BluePhoenix PowerText, BluePhoenix WS4Legac, BluePhoenix
DBMSMigrator, BluePhoenix PlatformMigrator, BluePhoenix LanguageMigrator,
BluePhoenix DataMigrator, BluePhoenix Remediator, BluePhoenix
GTIN/UPCEnabler, BluePhoenix EuroEnabler, BluePhoenix LiraEnabler and
BluePhoenix AppBuilder appearing in this annual report are trademarks of our
company. Other trademarks in this annual report are owned by their respective holders.

5

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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 derived the statement of operations data
for each of the years ended December 31, 2002, 2003 and 2004 and the balance sheet
data as of December 31, 2003 and 2004 from our consolidated financial statements included
in Item 18 of this annual report, which have been prepared in accordance with generally
accepted accounting principles as applied in the United States, or U.S. GAAP. Our
consolidated financial statements have been audited byZiv Haft certified public
accountants (Isr.) BDO member firm. The selected consolidated financial data as of
December 31, 2000, 2001 and 2002 and for the years ended December 31, 2000 and 2001
is derived from our audited financial statements not included in this annual report, which
have been prepared in accordance with U.S. GAAP. You should read the selected consolidated
financial data set forth below together with our consolidated financial statements
included elsewhere in this annual report. See Item 5. Operating and Financial Review
and Prospects.

6

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|                                                                | Year Ended December 31,
|--------------------------------------------------------------- | -----------------------
|
|
|
|
|
|Revenues                                                        |                        
|Cost of revenues                                                |                        
|                                                                |                        
|Gross profit                                                    |                        
|Software development costs                                      |                        
|Selling, general, and administrative expenses                   |                        
|                                                                |                        
|                                                                |                        
|Goodwill impairment, restructuring costs, and                   |                        
|non-recurring expenses                                          |                        
|                                                                |                        
|Operating income (loss)                                         |                        
|Financial income (expenses), net                                |                        
|Gain on realization of shareholdings                            |                        
|Other income (expenses), net                                    |                        
|                                                                |                        
|Income (loss) before taxes on income                            |                        
|Income tax expense                                              |                        
|                                                                |                        
|                                                                |                        
|Equity in losses of affiliated companies, net                   |                        
|Minority interest                                               |                        
|                                                                |                        
|Net income (loss)                                               |                        
|                                                                |                        
|                                                                |                        
|Basic earning (loss) per share                                  |                        
|Diluted earnings (loss) per share                               |                        
|                                                                |                        
|Weighted average number of shares outstanding                   |                        
|Weighted average number of shares outstanding assuming dilution |                        
|                                                                |                        
|                                                                |                        
|                                                                |                        
|
|
|
|
|
|
|Working capital                                                 |                        
|Total assets                                                    |                        
|Total liabilities                                               |                        
|Shareholders' equity                                            |                        

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

Not applicable.

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

Not applicable.

7

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

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

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 overall business slow-down in North
America and Europe, as well as in Israel. Uncertainties in the North American and European
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 directly affect our
operating results. Our revenues decreased from $49.2 million in 2000 to $38.4 million in
2001 and to $36.7 million in 2002. In 2003 and 2004, as a result of a slight recovery of
the market, and the impact of a strategic acquisition we completed, this trend changed,
and our revenues increased to $54.3 million and $57.2 million, respectively. However, due
to the overall business slow-down and in particular, 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 2004. We cannot know whether the global market will recover in the
future, and how the economic conditions will continue to affect our business.

If we fail to successfully
leverage the merger with Liraz and penetrate new markets, our operating results may be
adversely affected.

In
March 2003, we completed the acquisition of the entire outstanding share capital of Liraz
Systems Ltd., an Israeli company then publicly-traded on the Tel Aviv Stock Exchange, or
the TASE. During 2004, we completed the integration of Lirazs business within our
business. We expect that as a result of the integration of our business with that of
Liraz, the combined companies will be able to realize greater operating efficiencies and
will benefit from a broader product line with a larger and more diversified marketing and
support network. In addition, we anticipate that the combination of our respective
technical personnel will enhance our product development capabilities. We cannot assure
you that the benefits we anticipate will occur as a result of assimilating Lirazs
business will contribute to our business to the extent anticipated. This in turn may
materially adversely affect our business, financial condition and our quarterly and annual
results of operations.

8

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

As
part of our growth strategy, we have been investing in and acquiring control of various
companies to expand our solution portfolio. We intend to continue seeking investment
opportunities. In addition, as part of our expansion strategy, we increased our
controlling interest in some of our subsidiaries and fully integrated them within our
business. 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, invest in, or increase our control interest in another company, we
could have difficulty assimilating that companys personnel, operations, technology,
or products and service offerings into our own. In addition, the key personnel of the
acquired company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees, increase our expenses, and
adversely affect our results of operations. Acquisitions of new companies also involve the
risk of penetrating markets in which we have no or limited experience. 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 have a limited operating
history in our current principal markets, which will make it difficult or impossible for
you to predict our future results of operations.

We
have experienced major fluctuations in our net results. In 2004 and 2003, we had net
income of $2.8 million and $1.9 million, respectively, while in 2002 and 2001 we had a net
loss of $3.6 million and $15.0 million, respectively. The net loss in 2002 and 2001 was a
reversal from prior years in which we had net income. The fluctuations in our net results
are mainly attributable to the changes in the suite of modernization tools we have been
offering to our customers, the limited experience we have had in the markets for these
tools, and the difficulties we have encountered in introducing our tools to their
respective markets. Most of the solutions we offer to our customers are based on tools
that share a common generic technology and methodology. However, the introduction of new
tools to new markets involves increased selling and marketing expenses, which in turn
increases our operating expenses and directly affects our results of operations. Because
of our limited experience in our principal markets and with our new products, we cannot
assure you that our strategy for operating in these markets or selling these products will
be successful. You should not rely on our historical results of operations as indications
of future performance.

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

The
IT modernization business is characterized by rapidly evolving technology and
methodologies. This makes it difficult to predict demand and market acceptance for our
modernization tools and services. In order to succeed, we need to adapt the tools and
services we offer to keep up with technological developments and changes in customer
needs. We cannot guarantee that we will succeed in enhancing our tools and services or
developing or acquiring new modernization tools and services that adequately address
changing technologies and customer requirements. We also cannot assure you that the tools
and services we offer will be accepted by customers. If our tools 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 solutions obsolete and unmarketable, or require us to enhance our current
tools or develop new tools. This may require us to expend significant amounts of money,
time, and other resources to meet the demand. This could strain our personnel and
financial resources.

9

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We may experience significant
fluctuations in our annual and quarterly results, which makes it difficult for our
shareholders to make reliable period-to-period comparisons and may contribute to
volatility in the market price for our ordinary 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. These fluctuations are the result of risks related to the introduction of new
products as described above and any of the following events:

| |  | adverse
economic conditions in various geographic areas where our customers
                        and potential customers operate;
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| |  | acquisitions
and dispositions of companies;
| | - | -------------------------------------------

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

| |  | timing
of product releases;
| | - | ---------------------------

| |  | timing
of contracts;
| | - | --------------------

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

| |  | currency
fluctuations.
| | - | ----------------------

In
addition, unexpected events that do not occur on a regular basis and that are difficult to
predict may cause fluctuations in our operating results. 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.

A delay in collection of our fees
could result in cash flow shortages, which in turn may significantly impact our financial
results.

Typical
modernization projects, which deploy our solutions, are long-term projects, and therefore,
payment for these projects or a substantial portion of our fees may be delayed until the
successful completion of specified milestones. In addition, the payment of our fees is
dependent upon customer acceptance of the completed work, and our ability to collect the
fees. Further, although the timing of receipt of our fees varies, we incur the majority of
our expenses on a current basis. As a result, a delay in the collection of our fees could
result in cash flow shortages. To date, we have not experienced any significant payment
delays that resulted in cash flow shortages. Any significant variation in estimated and
actual revenues obtained may significantly impact our financial results in any given
period.

10

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The ability of our subsidiary,
Mainsoft, to continue to market the cross-platform products for the Unix environment
(Visual MainWin for Unix) is dependent upon Mainsoft obtaining from Microsoft access to
updated and additional source code.

In
August 1998, our subsidiary, Mainsoft Corporation, entered into a Windows source-code
licensing agreement. Pursuant to this agreement and the amendments thereto, 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. Mainsofts ability to continue to market the Visual MainWin for Unix
depends upon Microsoft providing access to updated and additional source code. We
anticipate that in the future, we will pursue a source code license from Microsoft for any
subsequent code we may benefit from. However, we cannot assure you that we will be able to
negotiate successfully any additional license rights on a timely basis or at all, or that
these license rights would be on terms acceptable to us. If we are unable to develop
future products under a source code license agreement with Microsoft, we may encounter
difficulties in selling updated versions of our cross-platform products and as a result,
our business, results of operations, and financial condition could be adversely
affected.

The
rights that Microsoft granted to Mainsoft are non-exclusive. We cannot assure you that
Microsoft has not granted, or will not grant, similar or more extensive rights to use its
technology on similar or more favorable terms to our existing or new competitors, which
could have an adverse effect on our ability to market our cross-platform products.
Furthermore, we cannot assure you that Microsoft will not internally develop or otherwise
acquire its own cross-platform development solution, thereby becoming a direct competitor
of ours. The emergence of Microsoft as a direct or indirect competitor of ours would
intensify competition in the environment in which we operate.

Under
the license agreement between Mainsoft and Microsoft, Mainsoft may request that Microsoft
waive certain Microsoft royalties for particular customers. In the past, Microsoft
generally has granted these customers specific royalty waivers. However, we cannot assure
you that Microsoft will continue to grant such waivers. An increase in royalties would
require us to raise the prices of specific products or reduce our gross margins, either of
which could harm our business.

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 Mainsoft servers and personnel. Mainsofts management team
immediately adopted an open door policy of full cooperation with local authorities, the
FBI, and Microsoft in their respective investigations. All parties conducting
investigations have found no trace of a security breach after that date. The FBI notified
us that as of December 31, 2004, the investigation has not yet been completed.

While
Mainsoft believes its relationship with Microsoft will continue on terms acceptable to us,
a change in the relationship could adversely affect our business, results of operations,
and financial condition.

11

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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.

In
the past few years, we have undergone significant changes in our product offerings. These
changes include developing and marketing new modernization tools and expanding the sales
of our products further into the North American market. This has placed and will continue
to place substantial demands upon our management, systems, and resources, including our
sales, project management, consulting personnel, and software development operations. 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.

If we are unable to manage the
effects of the variations in our offering portfolio, our results will be adversely
affected.

We specialize in the development and
implementation of sophisticated software modernization tools and products. We leverage our
know-how, experience and generic technologies, to develop and introduce new software tools
that enable the modernization of legacy systems. The need for our modernization solutions
changes over time, and recent regulations or newly introduced technologies may create new
needs for modernization solutions. As part of our growth strategy, as a new need evolves,
we typically conduct a market analysis to qualify and quantify the market opportunity. If
the results justify the investment required for the development of new products or tools,
then we begin the development process of the new product. In order to maintain our
position in the market, and our ability to address the constantly changing needs of the
marketplace, we continually invest in the development of new products. The net annual
expense related to research and development has varied between $7 million and $8 million
in the last three years.

In
order to properly introduce a new product to the marketplace or to introduce our current
products into new markets, we continuously update our marketing materials, educate our
sales force and make changes to our operations. If these activities are not completed in a
timely manner, our new product introduction may be delayed.

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 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.

12

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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 past years, we have successfully used our software modernization tools in numerous
software projects. In the course of providing our modernization solutions, the project
team conducts 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 in modernization projects to date,
and the cost of correcting them, have not been significant. However, if our modernization
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 and if this occurs, customers may have
the ability to 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 disputes or others may lead to material damages.

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

Some
of the products, tools, and services we provide involve key aspects of our customers
information systems. These systems are frequently critical to our customers
operations. As a result, our customers have a greater sensitivity to failures in these
systems than do customers of other software products generally. We have never been the
subject of a material damages claim related to our modernization solutions or
modernization services. However, if a customers system fails during or following the
provision of modernization solutions or services by us, or if we fail to provide customers
with proper support for our modernization solutions, we are exposed to the risk of a claim
for substantial damages against us, regardless of our responsibility for the failure. When
possible, we limit our liability under our product and service contracts. However, we
cannot guarantee that these limitations of liability, if any, would be sufficient to
protect us against legal claims. We maintain professional errors and omissions and general
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, it may have a material adverse effect on our
business, operating results, and financial condition. In addition, the filing of legal
claims against us in connection with contract liability may cause us negative publicity
and damage to our reputation.

13

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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. Software
products may be increasingly subject to third-party infringement claims as the
functionality of products in different industry segments overlaps. 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. In addition, our
employees and contractors have access to software licensed by us from third parties. A
breach of the non-disclosure undertakings by any of our employees or contractors may lead
to a claim of infringement against us. Any claim, 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. Most of our intellectual property consists of proprietary or confidential
information that is not subject to patent or similar protection. Our employees and
contractors have direct access to our technology. 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 also provided our software
directly to customers. This may increase the likelihood of misappropriation or other
misuse of our software.

14

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We are exposed to litigation that
could result in considerable financial liabilities.

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 us, as a class action. The claim
relates to the acquisition of Liraz shares, which we completed in March 2003. The
shareholder alleges that the share price we 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.
Under Israeli law, the courts approval is required for the plaintiff to represent
all of the shareholders of Liraz who sold their shareholdings to us pursuant to the tender
offer and the mandatory acquisition. The plaintiff has applied for such approval in the
lawsuit. No preliminary hearing has been scheduled. Based on our analysis of the statement
of claim, our management believes that the claim is without merit. However, if we are not
successful in defending this claim, we could be exposed to considerable financial
liabilities and as a result, our financial condition could be materially adversely harmed.

Our largest shareholder, Formula,
controls a majority of our ordinary shares and influences the outcome of matters that
require shareholder approval.

Formula
Systems (1985) Ltd. owns, as of March 16, 2005, 58.6% of our outstanding ordinary shares.
Therefore, Formula has the power to control the outcome of most matters requiring
shareholder approval, including the election of directors and approval of significant
corporate transactions. In addition, Dan Goldstein, a member of our board of directors and
chairman of the board of Formula, and Gad Goldstein, the chairman of our board and a
director, president, and chief executive officer of Formula, own, in the aggregate,
755,138 ordinary shares, representing 5.6% of our outstanding ordinary shares. These
individuals have entered into agreements that require them to vote their shares as
instructed by Formula. Accordingly, Formula is deemed to beneficially own approximately
64.2% of our outstanding ordinary shares.

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, including certain of those between us and Formula, we cannot assure you that
these procedures will eliminate the possible detrimental effects of conflicts of interest.
Our two independent directors constitute a majority of the members of our audit committee.
The audit committee reviews potential conflict of interest situations where appropriate.
If certain transactions are not approved in accordance with required procedures under
applicable Israeli law, these transactions may be void or voidable.

15

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The market price of our ordinary
shares may be volatile and our investors may not be able to resell their shares at or
above the price they paid, or at all.

The
stock market in general has experienced during the past few 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. During 2003,
for example, the market price of our ordinary shares traded on the NASDAQ fluctuated
between $7.04 and $2.10, and during 2004, the market price of our ordinary shares
fluctuated between $7.49 and $3.92. The market price of our ordinary shares may continue
to fluctuate substantially due to a variety of factors, including:

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

| |  | shortfalls
in our operating results from levels forecast by securities analysts;
| | - | --------------------------------------------------------------------------------

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

| |  | the
introduction or market acceptance of new products or service offerings by us or by 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.

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

As
of March 16, 2005, we had 13,556,205 ordinary shares outstanding (excluding 1,870,565 held
by two of our wholly owned subsidiaries). In addition, we have reserved 2,625,021 ordinary
shares for issuance under our option plans. We also have certain commitments described
below to issue BluePhoenix ordinary shares and register them for resale.

We
have made a commitment to purchase from First Israel Mezzanine Investors Ltd., known as
FIMI, promissory notes issued by Intercomp Ltd., one of our subsidiaries, in an aggregate
principal amount of $3.5 million plus interest accrued since January 2001 at an annual
rate of 5%. Of the principal amount of such promissory notes, $2.33 million plus the
interest accrued may be paid, subject to FIMIs approval, in BluePhoenixs
ordinary shares. We also undertook to issue FIMI warrants to purchase up to 336,000
BluePhoenixs ordinary shares. We also agreed to register the shares underlying
FIMIs option for resale. Under certain circumstances, we are obliged to register for
resale the shares underlying FIMIs warrants.

For
more information about the option and warrants granted to FIMI, see Item 5.B.
Liquidity and Capital Resources  Contractual Commitments and Guarantees.

16

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In
addition, as part of a $5 million private placement we completed on March 30, 2004, we
issued to each of the participating four institutional investors, convertible debentures
and warrants exercisable into BluePhoenixs ordinary shares. If all such debentures,
including interest, are converted into BluePhoenixs ordinary shares and the warrants
are fully exercised, we would be required to issue to the investors up to 1,238,095
ordinary shares, subject to adjustments. Under certain circumstances, the investors are
entitled to purchase additional convertible debentures and warrants, which if converted
and exercised in full, would increase the number of issued shares by an additional 866,666
ordinary shares. In connection with the private placement, we filed a registration
statement for the resale of the ordinary shares underlying the convertible debentures and
warrants.

For
more information about the $5 million private placement, see Item 6.E. Share
Ownership  Arrangements Involving the Issue of Blue Phoenixs Shares or Grant of
Options to Purchase Shares  Convertible Debentures and Warrants Purchased by
Institutional Investors.

In
addition, certain of our shareholders, holding in the aggregate 10,317,271 ordinary
shares, have registration rights with respect to the shares they hold, including piggyback
rights.

If
a large number of our ordinary shares are sold in a short period, the price of our
ordinary shares would likely decrease.

We will be required to record a
compensation expense in connection with stock option grants and, as a result, our
profitability may be reduced significantly.

The
financial Accounting Standards Board (FASB) has recently issued an accounting
standard that will require that the fair value of all equity-based awards granted to
employees be recognized in the statement of operations as a compensation expense,
beginning in the third quarter of 2005. The various methods for determining the fair value
of stock options are based on, among other things, the volatility of the underlying stock.
The impact of the adoption of this standard cannot be predicted at this time because it
will depend also on levels of share based compensation granted in the future. Had we
adopted this standard in prior periods, however, the impact would have had an adverse
effect on our profitability. The adoption of this standard could materially adversely
affect our profitability in the future. Such adoption could also limit our ability to
continue to use stock options as an incentive and retention tool, which could, in turn,
hurt our ability to recruit employees and retain existing employees.

Risks relating to
International Operations

Marketing our tools and solutions
in international markets may cause increased expenses and greater exposure to risks that
we may not be able to successfully address.

We
intend to continue to expand our international operations, which will require significant
management attention and financial resources. In order to continue to expand worldwide
sales, we need to establish additional marketing and sales operations, hire additional
personnel and recruit additional resellers internationally. To the extent that we are
unable to do so effectively, our growth is likely to be limited and our business,
operating results and financial condition will be materially adversely affected.

17

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We
have generated approximately 45% of our international revenues in 2004 from sales to
European customers. Additional risks inherent in our European and other worldwide business
activities generally include unexpected changes in regulatory requirements, tariffs and
other trade barriers, costs of localizing products for foreign countries, lack of
acceptance of localized products in European and other foreign countries, longer accounts
receivable payment cycles, difficulties in operations of management, potentially adverse
tax consequences, including restrictions on the repatriation of earnings, and the burdens
of complying with a wide variety of European and other foreign laws. We cannot assure you
that these factors will not have a material adverse effect on our future European and
other international sales and, consequently, on our business, operating results and
financial condition.

We
may be adversely affected if the rate of inflation in Israel exceeds the rate of
devaluation of the new Israeli shekel against the dollar or the euro.

Our
reporting currency is the United States dollar, which is our functional currency. Most of
our revenues are in dollars and euros, 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 any of the following risks:

| |  | that
the inflation rate in Israel will exceed the NIS devaluation rate against the dollar or
the euro;
| | - | ------------------------------------------------------------------------------------------------------

| |  | that
the devaluation process will lag behind the NIS inflation timing; or
| | - | -------------------------------------------------------------------------

| |  | that
the euro will devaluate against the dollar.
| | - | ------------------------------------------------

If
any of these occur, the dollar or euro cost of our operations, as well as our financial
expenses, would increase. We cannot predict any future trends of the rate of inflation in
Israel or the rate of devaluation of the NIS or the euro against the dollar. An increase
in our dollar or euro operational cost will adversely affect our dollar-measured results
of operations. In addition, our operations could be adversely affected if we are unable to
hedge against currency fluctuations in the future. To date, we have not engaged in
significant hedging transactions. In the future, we may enter into currency hedging
transactions to decrease the risk of financial exposure from fluctuations in the exchange
rate of the dollar against the NIS or the euro. However, we cannot assure you that these
measures will adequately protect us from material adverse effects arising from the impact
of inflation in Israel. For additional information relating to the exchange rates between
different relevant currencies, see Item 5. Operating and Financial Review and
Prospects  Overview  Our Reporting Currency.

Fluctuations in foreign currency
values affect the prices of our products, which in turn may affect our business and
results of operations.

Most
of our worldwide sales are currently denominated in dollars. A decrease in the value of
the dollar relative to foreign currencies, in particular the euro, Danish kroner (DKK) and
the new Israeli shekel (NIS) would make our products more expensive and increase our
operating costs and, therefore, could adversely affect our results and harm our
competitive position in the markets in which we compete.

18

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We are subject to multiple taxing
jurisdictions. If we fail to estimate accurately the amount of income tax due in any of
these jurisdictions, our net income might be affected.

We
operate within multiple taxing jurisdictions and are subject to taxation by these
jurisdictions at rates higher than those to which we are subject in Israel. In addition,
we may be subject to audits in these jurisdictions. These audits can involve complex
issues, which may require an extended period of time to resolve. In our managements
opinion, we have made adequate provisions for income taxes for all past years. Although
our management believes that its estimates are reasonable, we cannot assure you that the
final tax outcome of these issues will not be different than those, which are reflected in
our income tax provisions. Such differences could have a material effect on our income tax
provision and net income in the period in which such outcome occurs.

Risks Relating to
Operations in Israel

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

We
are incorporated under the laws of the State of Israel, and certain of our key management
personnel as well as certain of our research and development facilities are located in
Israel. Although we generate most of our revenues from international markets, we
nonetheless are influenced by the political, economic and military conditions affecting
Israel. The execution of Israels plan of unilateral disengagement from the Gaza
Strip and some parts of the West Bank may affect Israels foreign relations and the
stability of the region. 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, nonexempt male
adult citizens of Israel, including some of our officers and employees, are obligated to
perform military reserve duty until the age of 40 or 45 depending on their function in the
army, and are subject to being called for active duty under emergency circumstances. While
we have operated effectively under these requirements since our incorporation, we cannot
predict the full impact of such conditions on us in the future, particularly if emergency
circumstances occur. If many of our employees are called for active duty, our operations
in Israel and our business may be adversely affected.

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

We
receive tax benefits under Israeli government programs, particularly as a result of the
Approved Enterprise status of certain of our operations in Israel.
Approved Enterprise status is granted by the Israeli Investment Center of the
Ministry of Industry and Trade and entitles the company to a variety of tax incentives.
The incentives awarded to certain of our subsidiaries include reduced tax rates and a tax
holiday. We were granted a two year tax exemption, followed by a five year reduced tax
rate of 25% instead of 35% on income derived from our Approved Enterprise
investment programs. In order to qualify for these incentives, the Approved
Enterprise is required to provide minimum paid-in-capital (30% of the investment),
to show an increase in its export activities, and to meet other general investing
criteria. As of March 16, 2005, we have met those criteria and received tax benefits from
our Approved Enterprise programs, as presented in Note 14I to our financial
statements. To maintain our eligibility for these programs and benefits, we must meet the
conditions mentioned above. We cannot assure you that these programs and tax benefits will
continue at the same level in the future. If these tax benefits and programs are
terminated or reduced, we could pay increased taxes in the future, which could decrease
our profits.

19

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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. Most 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:

| |  | effect
service of process within the United States on us or any of our executive officers or
         directors who are nonresidents of the United States;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

# ITEM 4. INFORMATION ON
THE COMPANY

|A. | History
and Development of the Company
|-- | --------------------------------------

We
were incorporated in Israel in 1987 under the name A. Crystal Solutions Ltd. In 1996, we
changed our name to Crystal Systems Solutions Ltd. In 2003, following the acquisition of
Liraz Systems Ltd., we changed our name to BluePhoenix Solutions Ltd. Our registered
office is located at 8 Maskit Street, Herzlia, 46120 Israel and our telephone number is
972-9-9526110. Our agent in the United States isBlue Phoenix Solutions USA Inc.,
8000 Regency Parkway, Cary, NC 27511 United States and its telephone number is (919)
380-5100.

Prior
to the acquisition of Liraz, we conducted our international operations through our wholly
owned subsidiaries, Crystal America Inc., in the United States, and Crystal Europe (1999)
B.V., in Europe.

In
2002, we acquired control of Liraz Systems Ltd. In 2003, we completed the acquisition of
the remaining outstanding share capital of Liraz. Since 2002, we have run our worldwide
operations through several additional wholly owned subsidiaries, named below:

|Name of Subsidiary               | Country of Incorporation
|-------------------------------- | ------------------------
|
|
|
|
|
|BluePhoenix Solutions USA Inc.   | United States           
|IntraComp Group Inc.             | Unites States           
|BluePhoenix Solutions Nordic ApS | Denmark                 
|BluePhoenix Solutions U.K. Ltd.  | United Kingdom          

20

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|Name of Subsidiary             | Country of Incorporation
|------------------------------ | ------------------------
|
|
|
|
|
|BluePhoenix Solutions SRL      | Italy                   
|BluePhoenix Solutions GmbH     | Germany                 
|BluePhoenix Solutions B.V      | The Netherlands         
|BluePhoenix Solutions Ltd.     | Cyprus                  
|Alphatech (2000) Srl           | Romania                 
|BluePhoenix Solutions Pty Ltd. | Australia               

For
a discussion of our capital expenditures and divestitures, see Item 4.B. Business
Overview  Investments and Acquisitions and Item 5.B. Liquidity and Capital
Resources.

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

Our Business

We
develop and market unique enterprise IT modernization, or EIM, 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. The
combination of our comprehensive set of products and tools with our expert services
methodology provides an efficient and cost-effective process for extending the return on
investment of existing enterprise IT assets. Our 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.

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

Our
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.
| | - | --------------------------------------------------------------------------

Our
comprehensive enterprise technologies span mainframe, midrange, and client/server
computing platforms. We have enhanced our expertise through the successful completion of
projects for many large organizations over the past 18 years, establishing our credibility
and achieving international recognition and presence. Based on our technology and that of
our affiliates, we develop and market software products, tools, and related methodologies.
We deliver our 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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In
1997, we introduced our C-MILL millennium conversion tool, which was developed based on
our generic modernization technology, and we were awarded significant contracts from
leading international system integrators. In 1997 and 1998, we derived substantially all
of our revenues from millennium conversion projects. Since 2000, we have derived all of
our revenues from providing legacy modernization and porting solutions.

As
part of our growth strategy, we sought opportunities to increase our revenue base through
the acquisition of complementary products and services. This culminated in the acquisition
of a controlling interest in Liraz in November 2002, and the purchase of the remaining
outstanding interest in Liraz in March 2003. Lirazs business included the operations
of BluePhoenix Solutions B.V. and its international subsidiaries. Through our
subsidiaries, we develop and market the AppBuilder, formerly developed and marketed by
Liraz, a software product used for the development of sophisticated and robust
applications needed by large enterprises. Following the acquisition, we have benefited
from Lirazs large install base that includes leading international banks and
financial institutions, whose information systems operate in various legacy environments.

We
believe that following the Liraz acquisition, utilizing our combined broad technology
offering and our worldwide marketing capabilities, we became a leading global player in
the enterprise IT modernization market. With 12 offices in 10 countries, five full service
delivery centers, and representatives, we provide our products and services worldwide.

Market Background

Companies
initiate IT modernization projects for a wide range of reasons, such as:

| |  | maintaining
a competitive edge in the market;
| | - | ---------------------------------------------

| |  | addressing
changing business needs;
| | - | -----------------------------------

| |  | complying
with new regulations;
| | - | -------------------------------

| |  | reducing
maintenance, human resources, and technology costs; or
| | - | ---------------------------------------------------------------

| |  | gaining
access to cutting edge technology and new business channels.
| | - | --------------------------------------------------------------------

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. We provide 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:

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Enterprise
IT Understanding  Solutions that enable companies to make informed strategic
decisions regarding the future of their IT systems by automatically capturing multiple
levels of operational and development information into a consolidated metadata warehouse.
These tools facilitate global assessments and impact analyses of application assets, thus
helping reduce costs, streamline working processes, and increase efficiency.

Enterprise
IT Presentment  Noninvasive solutions that enable companies to intelligently mine
text and convert documents from any legacy system into Web-enabled formats and to turn
mainframe applications into Web services. These tools help medium to large-sized
organizations offer their customers and employees immediate Web-based viewing and delivery
of all their documents, including invoices, statements, bills, reports, and policies. The
Web services solution allows customers to extend their development environment by
providing access to mainframe systems through Web services protocols, making the legacy
systems appear as modern systems.

Enterprise
IT Migration  Solutions that enable companies to consolidate and eliminate a wide
range of legacy hardware and software through automated migrations of applications,
databases, platforms, programming languages, and data. These tools help reduce costs and
resources, and minimize reliance on proprietary technology, sunset products, and dwindling
skill sets.

Enterprise
IT Remediation  Solutions that enable companies to extend the life of their
existing IT systems by quickly adapting to new regulatory changes and business
requirements. These automated tools can be easily customized to fit any IT environment and
corporate need, including data field adjustment, IT standardization, and system
consolidation.

Enterprise
IT Redevelopment  Solutions that enable companies to mine existing applications by
extracting business rules, data flows, and data models, and then reusing the proven code
base to create more flexible Java/Web-based applications. These tools help reduce
maintenance costs and resources and application development time-to-market.

Enterprise IT
Understanding

In
the current lean budgetary environment, companies that want to extend the return on
investment of their existing systems need to modernize their legacy systems. Since
modernization projects are intricate and complex, the essential first step is a thorough
review of existing IT assets.

Our
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.

23

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Modernization
initiatives that need to be based on an in-depth examination of actual system elements
include:

| |  | building
and rewriting enterprise-scale application components;
| | - | ---------------------------------------------------------------

| |  | implementing
new technologies such as Web-enablement;
| | - | -----------------------------------------------------

| |  | integrating
purchased and newly written applications;
| | - | -----------------------------------------------------

| |  | consolidating
servers and applications;
| | - | ---------------------------------------

| |  | migrating
to more modern platforms, databases and languages;
| | - | ------------------------------------------------------------

| |  | transforming
current applications to adapt to changing business standards; and
| | - | ------------------------------------------------------------------------------

| |  | protecting
against the loss of critical personnel and corporate knowledge base.
| | - | -------------------------------------------------------------------------------

|Our
integrated set of enterprise IT understanding solutions are designed to assist
companies in achieving these goals by accurately mapping raw IT operational and
development data, down to the program code level, into a consolidated enterprise-wide
warehouse. The gathered information enables companies to keep track of system inventories,
resources, and interrelationships and to intelligently mine systems and application
metadata.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This
enterprise-wide view can then be used for a variety of strategic purposes, including:

| |  | performing
impact, cost, and trend analyses as well as ongoing tracking of IT resources,
inventories, components, their usage and their interrelationships;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | running
business-logic analyses for business process identification, evaluation, extraction,
                  transition, and enhancement;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | achieving significant cost reductions through the elimination of unused products,
unnecessary software upgrades, inefficient storage allocations, and wasteful CPU usage;
and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | providing
more efficient application development by reusing systems and leveraging existing
business rules.
| | - | -----------------------------------------------------------------------------------------------------------

|BluePhoenix
IT Discovery  This solution 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.
IT Discovery provides the ability to analyze on a refreshable basis numerous
technology environments, and from them extract and report on the interrelationships among
the components that make up these environments. In this manner, it provides an
organization the ability to discover information about its current systems, thereby
insuring that ongoing decisions are made based on an accurate audit of the current
environment.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Enterprise
IT Presentment

|Ourenterprise IT presentment solutions enable companies to more effectively use the large
amount of information produced by batch reports generated from legacy systems and to turn
mainframe applications into Web services directly from the existing development
environment. 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.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

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BluePhoenix
PowerText This product provides 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. This process enables data such as invoice numbers to
be extracted from a character-based batch report and redisplayed as data on an actual
invoice form. Original reports are fed though the listener-based PowerText that uses the
created definitions to extract the XML views. Once extracted, they are stored in the view
database requiring much less storage capacity than either scanned reports or the original
character reports. Using PowerTexts browser-based view selector, the XML views in
the database can be displayed graphically using the associated XSL. They can also be
downloaded directly as XML into any tool that supports XML input, such as Microsoft Excel.

BluePhoenix WS4Legacy A comprehensive end-to-end solution that
enables companies to adapt their existing development environment by providing access to
mainframe systems through Web services protocols, a standard in todays market.
WS4Legacy makes legacy systems appear as modern systems, and enables them to communicate
with other applications in the same language. WS4Legacy provides two way Web services
support; not only publishing legacy transactions as Web services, but also allowing legacy
programs to consume Web services. WS4Legacys strict adherence to open standards and
protocols allows the seamless integration of new tools and technologies, such as Java or
..NET.

Enterprise
IT Migration

Our
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, our 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.

Our
migration solutions provide numerous advantages, including:

| |  | significantly
decreasing project costs, risk of errors, and time;
| | - | -----------------------------------------------------------------

| |  | preserving
corporate business knowledge;
| | - | ----------------------------------------

| |  | substantially
reducing dependency on scarce skill sets;
| | - | -------------------------------------------------------

| |  | solving
problematic maintenance issues;
| | - | ---------------------------------------

| |  | enabling
end-to-end project control and management;
| | - | ---------------------------------------------------

| |  | directly
supplying a full audit trail and documentation of all changes;
| | - | -----------------------------------------------------------------------

| |  | minimizing
system freeze time with a unique refresh feature; and
| | - | ------------------------------------------------------------------

| |  | comprehensively
working with most mainframe and non-mainframe platforms.
| | - | ------------------------------------------------------------------------

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The
enterprise IT migration suite includes the following solutions:

BluePhoenix DBMSMigrator
An automated migration tool that converts applications from nonrelational
databases, such as IDMS, ADABAS, and VSAM, to relational databases, such as DB2, Oracle
and SQL Server. The tool performs automated conversions that provide companies with fully
functional compliance for source and target applications and minimal application,
functional, and logical program flow changes. DBMSMigrator leaves no residuals, emulation
software, or translation procedures and allows system support to continue uninterrupted
during the migration project. As a result of the conversion process, the migrated
application operates more efficiently, is easier to maintain, and contains complete
documentation of the customers knowledge base and guidelines.

BluePhoenix PlatformMigrator
 An automated migration tool that convertsa range of platforms, including
VSE, MVS, and Bull GCOS, and can becustomized to fit the unique IT configuration
and business rules of each customer site. The tool converts platforms to a pure, native
installation so that programs are not required to run under emulation or through
translation techniques. PlatformMigrator solutions assist companies with maintaining
service levels, setting and upgrading standards, implementing the new IT environment,
training IT users, implementing new facilities like a security system or a batch
scheduler, and testing for functional equivalence.

BluePhoenix LanguageMigrator An
automated migration tool for converting COBOL and 4GLs (fourth generation languages) such
as ADSO, Natural Mantis and COOL:Gen. This reliable, time-efficient, and comprehensive
solution enables site-wide installation, simultaneous testing, and implementation of
batch programs. In addition, LanguageMigrator identifies the compatibility of the code,
converts it to the new standards required by customers, and analyzes converted programs
to identify potential problems. For more information about future developments of this
tool, see Research and Development.

BluePhoenix 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. DataMigrator enables full control of source
and target data definitions resulting in consistent, accurate, highest quality target
data with no data loss, and efficient utilization of available resources. In addition, it
provides support for partial or incremental migration and for multiple run-time
environments.

Enterprise
IT Remediation

Our
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. Our remediation solutions address a variety of
corporate needs and include:

BluePhoenix FieldEnabler  New
business decisions or regulatory requirements often require companies to make changes
that impact a wide range of system components. These include field adjustments that
involve changes in the type, length, and structure of a database or program field, such
as expanding a dealer code. FieldEnabler is a rule-based tool that enables a
step-by-step, comprehensive process for making these kinds of modifications across an
enterprise in a reliable and time-efficient manner.

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BluePhoenix
StandardsEnabler A highly automated solution for reliably facilitating system
consolidation into a single set of naming standards. Since all resources being converted
must be changed in parallel, the large task of manually standardizing the naming of system
components is not practical. Our solution provides automated solution to this problem.

BluePhoenix
COBOL/LE-Enabler A highly automated solution that facilitates the migration of
COBOL code from non-LE compliant environments to LE compliant environments.

BluePhoenix EuroEnabler A highly automated solution that enables the transformation of
applications to be euro compliant. EuroEnabler fully preserves system and data integrity
and helps to maintain existing levels of system application development and maintenance
throughout the process.

BluePhoenix LiraEnabler A highly automated solution that enables applications to be compliant
with the Turkish currency requirements for entry into the European Community.

BluePhoenix GTIN/UPCEnabler A highly automated solution that enables companies to quickly
and easily comply with the 2005 Sunrise and GTIN/GLN initiatives.

Enterprise IT
Redevelopment

Enterprise
IT environments are complex, and can prevent companies from quickly and easily adapting to
new business needs and requirements. The more companies can organize and understand their
applications, the faster they can adapt to inevitable changes. While organizations are
mostly satisfied with the existing business functionality of their applications, they
usually want to improve their business processes and leverage technologies such as
Web-enabled and service-oriented architectures. Additionally, they are eager to find a way
to lower their maintenance costs, which consume 70%80% of total IT spending.

Our
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 AppBuilder  Our
primary redevelopment legacy environment has been used for managing, maintaining, and
reusing the complicated applications needed by large businesses. It provides the
infrastructure for enterprises worldwide, across several industries, with applications
running millions of transactions daily on legacy systems. Enterprises using AppBuilder
can build, deploy, and maintain large-scale custom-built business applications for years
without being dependent on any particular technology until they cease using their legacy
infrastructure. AppBuilder acts like a virtual application warehouse, keeping the
underlying structure of the system in an organized framework such that developers can
easily understand it. This allows companies to reuse critical business components,
realizing a long-term return on investment for both new and existing applications.

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Visual
MainWin® for the Unix and Linux platforms (formerly MainWin)  Visual MainWin® for
the Unix and Linux platforms is 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.

Customers
continue to choose Unix due to its reliability and scalability in production
environments, despite the wide popularity of Windows-based systems for application
development and smaller departmental production applications. As a result, enterprises
confront not only the complexity inherent in these heterogeneous computing environments,
but also the higher costs of developing, maintaining, and updating applications for
multiple systems. Using our Visual MainWin® products, independent software vendors
and enterprise IT professionals can develop software applications using the powerful
Windows development tools and then quickly and efficiently deploy those Windows
applications natively on Unix systems.

The
uniqueness of the Mainsoft solution is its ability to recompile Windows application source
code on Unix, creating natively executable code, which consequently achieves native Unix
performance levels. In addition, our remote development technology enables Windows
developers to build native Unix applications from within the comfort of the familiar
Microsoft Visual Studio interface. This enables development teams to focus on a single
development environment while leveraging the resulting code onto multiple platforms,
saving valuable time and money. Developers, therefore, focus on adding revenue-generating
functionality rather than on software porting.

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  In February 2004, Mainsoft launched its new
generation product: Visual MainWin® for the J2EE platform (formerly named
Grasshopper). The Visual MainWin® for J2EE Platform 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. With Visual MainWin® for the J2EE platform, .NET and Java developers can
accelerate J2EE development by co-developing Web applications and Web services. Visual
MainWin® also eliminates .NET/J2EE server integration costs by enabling ASP.NET
applications to be deployed on industry-leading J2EE application servers, such as BEA
Weblogic, IBM WebSphere or Tomcat.

Investments and
Acquisitions

In
order to enhance our solutions and services portfolio, we have been pursuing a strategy of
adding new technologies to our suite of automated modernization tools. We implement this
strategy via internal development of new software tools and through acquisitions and
investments. Accordingly, we devote significant resources to the development and marketing
of new software modernization tools, and invest in businesses that develop software tools
that are complementary to our existing portfolio. The broad portfolio that we established,
among others, through these acquisitions, contributes to our ability to penetrate new
markets and to offer a complete set of solutions addressing the broad array of changing
demands of our customers. We integrate the acquired businesses into our business and
assimilate many of their functions, including, marketing, sales, finance and
administration into our existing infrastructure.

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Following
is a description of our investments and acquisitions, which form a part of our business as
described above:

Liraz.In
November 2002, we purchased through a share exchange           transaction, approximately
86% of the outstanding share capital of Liraz, an           international software and
services company, developing and marketing the           AppBuilder, then publicly traded
on the TASE. As part of the share exchange           transaction, we issued to Lirazs
selling shareholders, including Formula,           3,478,624 of our ordinary shares,
constituting an aggregate of 26% of our           outstanding share capital. In two
public tender offers that we published in           December 2002 and March 2003, we
purchased additional shares of Liraz           representing 9% of the outstanding share
capital of Liraz. In March 2003,           pursuant to the provisions of the Israeli
Companies Law, we purchased the           remaining outstanding share capital of Liraz.
The total aggregate amount of           those cash purchases was $2.7 million. Following
these transactions, we           currently hold the entire outstanding share capital of
Liraz. During 2003 and           2004, we assimilated and integrated Lirazs
infrastructure, management,           personnel and sales and marketing activities within
our business by combining           our delivery centers, teaching the respective sales
forces about the products of           the other company, combining operations and
eliminating duplicative roles in           administration. The acquisition of Liraz has
enhanced our ability to market our           solutions in international markets through
Lirazs international sales           force, and its experience in the mainframe
environment. As a result, we have           been able to expand the services we provide
to our customers. For more           information about the AppBuilder, see Enterprise
IT           Redevelopment  BluePhoenix AppBuilder.

Mainsoft.           Since
1999, we purchased, in a series of transactions, 57.5% of the outstanding           share
capital of Mainsoft, for aggregate consideration of approximately $17.2
          million. These holdings include the exercise of a warrant in May 2003, pursuant
          to which we purchased 630,000 shares of Mainsoft for an aggregate of $378,000.
          We believe that our controlling interest in Mainsoft, the developer and
marketer           of the Visual MainWin® products, including Visual MainWin® for
J2EE,           enables us to address customer needs across a wide range of computing
platforms,           from mainframe through midrange and workstations. We also believe
that holding a           controlling interest in Mainsoft positions us as a specialized
cross-platform           software solutions provider. For more information about Mainsofts
          products, see Enterprise IT Redevelopment  Visual MainWin® for
the           Unix and Linux platforms; Visual MainWin® for J2EE Platform.

Alexandria.During 1999, we purchased 19% of the outstanding share capital of
          Alexandria Migration Technologies Ltd., which develops DBMSMigrator. In
          September 2002, we entered into an agreement with the other shareholder of
          Alexandria to purchase his entire shareholdings in Alexandria, constituting 81%
          of Alexandrias outstanding share capital, for an aggregate amount of
          $585,000. As a result, we currently wholly own Alexandria and its entire
          activity is integrated within our business. For more information about the
          DBMSMigrator, see Enterprise IT Migration  BluePhoenix
          DBMSMigrator.

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Alphatech.           In
December 2002, we purchased from Intercomp, our affiliate, a 65% controlling
          interest in Alphatech (2000) Srl. for aggregate consideration of $100,000. In
          February 2005, we entered into an agreement with the other shareholder of
          Alphatech to purchase its entire holdings in Alphatech. Pursuant to the
          agreement, we purchased from the selling shareholder, in February 2005, 25% of
          Alphatechs outstanding share capital for consideration of $150,000. Under
          the agreement, we undertook to purchase the remaining 10% outstanding share
          capital of Alphatech in January 2006 for an additional consideration of
          $100,000. Alphatech, a company incorporated in Romania, serves as our off-shore
          delivery center in Romania.

CePost.In January 2004, we purchased the entire outstanding share
          capital of CePost Ltd., an Israeli company that develops and markets software
          solutions for electronic document mining, management and presentment. Pursuant
          to the purchase agreement, we paid to the shareholders of CePost $172,500 and
          issued to them 31,496 BluePhoenixs ordinary shares. In addition, we
          undertook to pay to the sellers royalties from CePosts revenues in an
          amount of up to $1.5 million. At our option, we may pay the royalties in
          BluePhoenixs ordinary shares. In accordance with the purchase agreement,
          we paid to the sellers in March 2005 an advance of $30,000 in cash on account
of           the royalties. For more information about CePosts software solutions,
see           Enterprise IT Presentment  BluePhoenix PowerText.

Intercomp.           In
1998, we invested in Intercomp Ltd., which has developed a set of automated
          analysis and reengineering tools for legacy COBOL applications. During 2002 and
          2003, Intercomp focused its efforts on the development of software tools that
          comprise a part of BluePhoenix LogicMiner. For more information about
          LogicMiner, see Research and Development  Enterprise IT
          Understanding  BluePhoenix LogicMiner.

In
the fourth quarter of 2003, we exercised an option to purchase from Intercomp its tool
known as AnalyzeIT for an aggregate of $1.9 million. In addition, we undertook to pay to
Intercomp royalties of 25% of the revenues generated from the purchased technology.
AnalyzeIT provides an analysis of a legacy application and creates a repository and
inventory of the applications components and the relationships between them. The
results of the analysis are presented graphically and in reports. They include a study of
the applications control flow and data flow which enable the user to examine the
code and structure of the application down to the level of a single variable. In
connection with the purchase of Intercomps technology, we assumed the rights and
obligations of Intercomp under the distribution agreement described below. The
consideration for the acquired technology was offset against the outstanding loan balance
owed to us by Intercomp, as described in the next paragraph.

During
the years 1998-2003, we lent to Intercomp an aggregate of $3.7 million. As of December 31,
2004, after offsetting the $1.9 million described above for the purchase of technology, an
aggregate of approximately $1.8 million was outstanding. These loans are required to be
repaid by Intercomp at the end of a 5-year period commencing on February 19, 2002 or
earlier (i) in the event of liquidation or acquisition of Intercomp by a third party or
(ii) if the current ratio of Intercomp is equal or greater than 1.25. The loans bear
interest at a rate of LIBOR +1% per annum. The principal of the loans plus interest
accrued are convertible into preferred shares of Intercomp at a conversion price of
$162.70 per share.

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Effective
as of January 2004, we entered into an option agreement, pursuant to which we were granted
an option to purchase all of Eran Tirers interest in Intercomp, constituting 18.5%
of the outstanding share capital of Intercomp. In the event we exercise our option to
purchase Eran Tirers shares in Intercomp, we are obligated to issue to him as
consideration for his shares, warrants to purchase 5,000 BluePhoenixs ordinary
shares at an exercise price of $20 per share. The warrants are exercisable until October
25, 2005. Concurrently, the remaining shareholders of Intercomp comprised of several funds
acting through their general partner, Israel Infinity Venture Capital Partners Ltd.,
referred to as Infinity, and we, approved the signing of a non-exclusive distribution
agreement between Intercomp and a distributor partially owned by Mr. Tirer, pursuant to
which Intercomp granted non-exclusive rights to the distributor to further develop and
distribute Intercomps products. In March 2004, we exercised our option to purchase
Mr. Tirers holdings in Intercomp. As part of this transaction, certain shareholders
of Intercomp, holding 2.1% of Intercomps outstanding share capital, transferred to
the company their holding in Intercomp. In addition, Infinity converted certain
outstanding loans owed to it by Intercomp into 7,236 shares of Intercomp at a price per
share of $162.70. Following these transactions, our holdings in Intercomp increased from
49% to approximately 62%. Since the end of the first quarter of 2004, we consolidated the
results of operations of Intercomp.

In
April 2004, Infinity granted us a call option to purchase its entire holdings in
Intercomp, exercisable until April 1, 2006. If we do not exercise such option, Infinity
will have a put option to cause us to purchase Infinitys entire holdings in
Intercomp, exercisable during a period of six months commencing in April 2006. If either
of the options is exercised, we shall be obliged to issue to Infinity, as consideration
for Intercomps shares, 100,000 BluePhoenixs ordinary shares and an additional
amount of shares to be calculated based on revenues generated from the sale of licenses to
use Intercomps products during a 3-year period commencing on April 1, 2003, as
follows:

| |  | For
the first $3 million of revenues, the number of additional shares shall be equal to
10,000 shares for each $1 million of revenues.
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| |  | If
revenues exceed $3,000,000 but are less than or equal to $15,000,000, then the number of
additional shares shall be equal to 30,000 plus 20,000 shares for each $1 million of
revenues exceeding $3 million.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If
revenues exceed $15,000,000, then the number of additional shares shall be equal to
270,000 plus 10,000 shares for each $1 million of revenues exceeding $15 million.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
shares will be subject to a lock-up period until April 1, 2006. We undertook, upon
Infinitys request, to use our best efforts to effect registration of the shares,
within 8 months of the end of the lock-up period or within 90 days of such date, if we
filed our annual report on Form 20-F during such 90-day period, whichever is earlier. We
may, at our option, pay to Infinity the cash equivalent of such shares which will be
calculated according to the average closing price of BluePhoenixs shares during the
20 trading days prior to the exercise of any of the options.

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We
have granted to FIMI, a creditor of Intercomp, a put option to sell to us convertible
promissory notes issued to FIMI by Intercomp in an aggregate principal amount of $3.5
million. For more information about this transaction, see Item 5.B. Liquidity and
Capital Resources  Contractual Commitments and Guarantees.

IntraComp. IntraComp
Group Inc. provides migration and conversion services           for large-scale systems
and back-end integration services. In 2000, we acquired           a 53% controlling
interest in IntraComp for aggregate consideration of           approximately $3.4
million. During the second quarter of 2003, we purchased from           the other
shareholders of IntraComp the remaining outstanding share capital of           IntraComp
for consideration to be calculated based on IntraComps           cumulative
earnings before interest and taxes, referred to as EBIT, during the           three-year
period commencing on January 1, 2003, as follows:

| |  | If
the EBIT is less than or equal to $3,000,000, then the consideration shall be equal to
30% of the EBIT;
| | - | ----------------------------------------------------------------------------------------------------------

| |  | If
the EBIT exceeds $3,000,000 but is less than or equal to $4,000,000, then the
consideration shall be equal to the sum of $900,000 plus 40% of the difference between
the EBIT and $3,000,000;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If
the EBIT exceeds $4,000,000 but is less than or equal to $5,000,000, then the
consideration shall be equal to the sum of $1,300,000 plus 50% of the difference between
the EBIT and $4,000,000;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If
the EBIT exceeds $5,000,000 but is less than or equal to $6,000,000, then the
consideration shall be equal to the sum of $2,500,000 plus 60% of the difference between
the EBIT and $5,000,000; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | If
the EBIT exceeds $6,000,000, then the consideration shall be equal to the sum of
$3,600,000 plus 60% of the difference between the EBIT and $6,000,000.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

We
undertook to pay to the selling shareholders, on August 30, 2004, an advance on account of
the contingent consideration, based on the interim EBIT. Based on the recorded EBIT, we
did not pay the advance. The consideration is due in February 2006, based on a final
report of IntraComps earnings. Following the purchase of the entire interest in
IntraComp, we integrated IntraComps business completely into ours.For more
information about IntraComps solutions, see Enterprise IT
Migration  BluePhoenix PlatformMigrator.

MultiConn. In
1999, we acquired 51% of the outstanding share capital of           M.S.I. MultiConn
Solutions International (1995) Ltd., referred to as M.S.I.           MultiConn, and in
2000, we increased our shareholdings in M.S.I. MultiConn to           60%. Effective as
of January 2004, the other shareholders of M.S.I. MultiConn           transferred their
entire holdings in M.S.I. MultiConn to us. Following this           transaction, we
assumed control over the daily management of M.S.I. MultiConn.           We currently
wholly own M.S.I. MultiConn and finance its activities.

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In
2000, we established together with the other shareholders of M.S.I. MultiConn, a company
named MultiConn Technologies Ltd., and initially owned 19% of its share capital. MultiConn
Technologies develops and markets BluePhoenix WS4Legacy (formerly known as
eXperanto). Under our agreement with MultiConn Technologies entered into in 2000, we lent
to MultiConn Technologies $2.1 million, of which $1 million was convertible into ordinary
shares of MultiConn Technologies. In December 2002, we converted the $1 million loan into
shares of MultiConn Technologies and as a result our holdings increased to 60%. Following
a transaction entered into between us and the other shareholders of MultiConn Technologies
in 2004, the other shareholders of MultiConn Technologies increased their holdings in
MultiConn Technologies to 58.2% in the aggregate, through the issuance of shares by
MultiConn Technologies. As a result, we currently hold approximately 40% of the
outstanding share capital of MultiConn Technologies. We have an option to increase our
holdings in MultiConn Technologies to 60% of its outstanding share capital for an exercise
price of $50,000. In May 2004, we provided on behalf of MultiConn Technologies a guarantee
in the amount of $300,000, which expires in May 2005. In 2004, we included in our equity
in affiliated companies 100% of the losses of MultiConn Technologies up to the guaranteed
amount. As of December 31, 2004, we consolidate MultiConn Technologies balance sheet
with ours. In 2002 and 2003, we wrote down $1.8 million and $350,000, respectively, of the
balance of our investments and loans to MultiConn Technologies, due to the impairment of
the investment and since it was probable that we would be unable to collect all amounts
due. For more information about BluePhoenix WS4Legacy, see Enterprise IT
Presentment  BluePhoenix WS4Legacy.

Outlook. Effective
as of January 2004, we acquired from an Israeli           company, Outlook Systems Ltd.,
through our new wholly owned subsidiary, Outlook           & BluePhoenix Ltd.,
Outlook Systems entire business activities in           Israel in the field of
software development services. Pursuant to the purchase           agreement, we hired 31
employees previously employed by Outlook Systems and           assumed all the
obligations in respect of the purchased activity. These           obligations include the
extension of a guarantee to banks with respect to loans           in an aggregate amount
of $720,000 plus interest accrued, to be repaid by us by           February 15, 2007. In
addition, under the purchase agreement, we undertook to           pay to the shareholders
of Outlook Systems in the first quarter of 2007, an           amount equal to between 5
and 7 times the average operating profit of Outlook           & BluePhoenix Ltd. in
the years 2004, 2005 and 2006, less an amount of           $720,000.

Tesnet.          Effective
as of January 1999, we acquired 32% of the outstanding share capital           of Tesnet  Software
Testing Ltd., a provider of testing and software quality           assurance services,
for an aggregate amount of $2.0 million which we paid during           1999 and 2002. In
February 2000, Tesnet consummated a public offering of its           shares on the Tel
Aviv Stock Exchange. Net proceeds from the offering were $9.5           million. As a
result, we recorded a capital gain of approximately $1.0 million.           During 2000,
we sold a portion of our holdings constituting 3% of the           outstanding share
capital of Tesnet, and in the first quarter of 2004, we sold           our entire
remaining holdings in Tesnet. As a result, we currently do not hold           any
interest in Tesnet.

Zulu.In February 2005, we entered into an agreement to purchase up to
               20% of the outstanding share capital of Zulu Software, Inc., or Zulu, on a
fully                diluted basis. In accordance with the agreement, the purchase was
divided into                four installments. The closing of the first installment was
held in February                2005. At that closing, Zulu issued to us 8.0% of its
outstanding shares, in                consideration for $350,000. The remaining 12% of
Zulus outstanding shares                shall be sold to us in three portions of
3.5%, 5.0% and 3.5%, in consideration                for $150,000, $200,000 and $300,000,
respectively, each installment payable at                each respective closing. These
three pending closings shall be held on specific                dates prior to March 31,
2006, subject to the fulfillment of certain milestones                set forth in the
purchase agreement. In addition, pursuant to the agreement,                Zulu granted
us warrants to purchase a number of additional shares in Zulu, such                number
representing a percentage of Zulus outstanding shares, on a fully
               diluted basis, equal to half of such percentage actually purchased by us
under                the purchase agreement. The exercise price of the warrants is 33%
higher than                the price per share that we paid for Zulus shares under
the purchase                agreement. In addition, we entered into an alliance agreement
with Zulu for                cooperation in marketing and selling Zulus and our
software and services.

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Zulu
is a developer and marketer of software solutions for migration from Adabas/Natural to
Java. For more information about Zulus software solutions, see Enterprise IT
Migration  BluePhoenix LanguageMigrator.

Purchase
of SDCs Activity. In October 2002, Liraz, through a wholly owned subsidiary,
acquired from SDC FinansSystems A/S, referred to as SDC, a company incorporated in
Denmark, its IT development services activities relating to customers in the banking
sector in Denmark. Pursuant to the purchase agreement, we assumed all the obligations in
respect of the purchased activity and hired 100 employees, of which 30 employees were
dismissed during the first quarter of 2003. The seller agreed to reimburse us for any
costs associated with such dismissals. The aggregate consideration paid for the purchased
activity and goodwill was $800,000. In addition, we entered into an agreement with two of
the sellers shareholders, pursuant to which the shareholders have purchased from us
IT development services.

Level
8. As of March 16, 2005, we hold several capital instruments, including
warrants and rights to receive warrants, exercisable into shares of Level 8 Systems Inc.
If we exercise these capital instruments in full, we will hold approximately 7 million
ordinary shares of Level 8.

In
2003, we purchased 444,444 ordinary shares of Level 8 for $200,000. During 2003 and in
the first quarter of 2004, we sold substantially all of the shares of Level 8 then held
by us for $624,000.

From
2000 through 2004, we provided to a bank guarantee to secure Level 8s loan from a
bank. As of March 16, 2004, this guarantee amounted to approximately $2 million. In
November 2003, we agreed to extend the term of our guarantee until November 2004. As
consideration for the extension of such guarantee, we were issued an aggregate of 300,000
Level 8s ordinary shares. In November 2004, we agreed to extend again the term of
our guarantee until November 2005. As consideration for such extension of the guarantee,
we are entitled to receive 3,942,000 ordinary shares of Level 8. In the event that the
guarantee is exercised, the bank is obligated to grant us a three year loan in an amount
of up to the amount of the guarantee.

In
September 2004, we extended a loan to Level 8 of approximately $97,000 under a secured
promissory note. The note bears interest at an annual rate of 10%. In consideration, we
are entitled to receive warrants to purchase 1,986,468 ordinary shares of Level 8 at an
exercise price of $0.10 per share.

Steps
Ventures.As of March 16, 2005, we hold 375,000 shares of Steps Ventures
Ltd. comprising 3.75% of the outstanding share capital of Steps Ventures. Steps Ventures
is an Israeli venture capital investment group focused on Israeli startup companies in the
fields of software, telecommunications and semiconductors.

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Customers

We
provide our modernization solutions directly or through our strategic partners, such as
IBM, Capgemini, EDS, Cook Systems, Temenos, Millennium and TACT. Additionally, from time
to time, other IT services companies license our technologies for use in modernization
projects in various markets. Our partners are usually system integrators who assist us in
increasing our penetration and exposure in the market. We provide solutions to our
partners customers in collaboration with the system integrators team. In most
cases, the partners provide related services to the customers. Our arrangements with our
partners vary. We may enter into distribution agreements with the partners under which we
grant license rights to the partners and/or the partners customers, provide related
services or a combination of both. Alternatively, we may enter into subcontractor
relationships with our strategic partners.

Approximately
10% of our agreements are based on fixed price contracts. Although we have significant
experience in pricing fixed price projects, these projects may bear some risks and
uncertainties as we price these contracts based on estimates of future costs, duration of
the project and the impact potential changes in the scope of the work. We also enter into
other types of contracts, including annual maintenance contracts, license agreements and
arrangements on a time and material basis. To date, shifts in revenues generated from
different types of agreements have not materially affected our results of operations.

Our
customers include, among others:

|Financial Services                                                                                                                                                                                                                                               | Insurance                                                                                                                                                                                                                                                   | Other Industries                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   Banca Carige S.p.A.   CitiBank                   Credit Suisse              Fidelity International     Resource Management   Rabobank Netherland BV     Rural Servicios         
     Informaticos (Spain)   SDC Udvikling  (Denmark)   Temenos Group |    AXA Sunlife Services,   
     PCL(UK)   Barmenia                
     Krankenversicherung A.G   Friends Provident       
     Management Services Ltd.   LBS (Germany)              Legal and general       
     Resources)   Mutual of America . |    Altera Corporation   Cadence Design Systems, Inc.   Cognos   Commonwealth of Australia   Computer Associates Islandia   CSC Denmark A/S   Crystal Decisions   Electronic Data Systems Corp   Fudicia Informationszentra AG   Global Exchange Services Inc.   IBM Japan Ltd.   IBM (Rational Software)   Intensa Sistemi E Servizi   Mentor Graphics Corporation   Microsoft Corporation   Ministry of Defence (Israel)   Scottish Equitable Plc.   Synopsys MT VIEW

35

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Each
of the customers mentioned above contributed at least $600,000 to our annual revenues for
a project performed within the previous two fiscal years.

SDC
Udvikling A/S, referred to as SDC Udvikling, an affiliated company of SDC, accounted for
15% and 14% of our revenues in 2004 and 2003, respectively.

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

|                            | Year ended December 31,
|--------------------------- | -----------------------
|
|
|
|
|United States               |                        
|Europe (other then Denmark) |                        
|Denmark                     |                        
|Israel                      |                        
|Other                       |                        
|                            |                        
|Total                       |                        

Research and Development

In
order to maintain our position as a market leader in the IT modernization market, we are
focusing our development efforts on further enhancements to current solutions, as well as
addressing newly emerging aspects of the modernization market. We are planning additional
software development activities to extend our modernization solutions by leveraging our
technological skills to create added value for our customers and to generate additional
business opportunities.

The
next generation of our solutions will be extended to address the entire modernization
process from legacy systems to modern platforms. We have started to develop our next
generation of products and tools, which will allow the fluent transformation of legacy
code to state-of-the-art platforms, such as J2EE and .NET. The new generation of solutions
is composed of products and tools in several EIM categories.

Enterprise IT
Understanding

BluePhoenix IT Discovery  By further refining our existing understanding technology and
combining it with the additional technology licensed from Merrill Lynch, IT Discovery
will provide the basis for legacy understanding needed by the rest of our modernization
solutions.

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Enterprise IT Automated
Migration

Fourth
Generation Language Migration  In the area of automated migration, we continue to
build on our 4GL migration solutions. Our assets in the migration area cover COOL, Mantis,
ADSO/IDMS, Natural, CSP, and PowerBuilder transformations. We continue to extend the
support target platform of these transformations to include J2EE and .NET platforms.

BluePhoenix  LogicMiner
A comprehensive solution for recovery that mines COBOL and extracts business
rules from the legacy code, thus providing IT departments with the ability to begin a
modernization process based on techniques that preserve the functionality of a legacy
code. This tool retains past investments in software assets by producing reusable code
objects or descriptive data that can later be used for improving the quality of the
legacy code, rewriting the legacy application, or building a full modernization plan.
LogicMiner increases a systems manageability, while eliminating rules that no
longer apply to current business procedures. We intend to incorporate technology owned by
MultiConn Technologies that performs automatic generation of Web and service oriented
architecture, or SOA, service interfaces for existing applications into LogicMiner to
allow for easy Web services enablement of legacy through either existing or new
LogicMiner created interfaces.

BluePhoenix  ReFactoring
Repository  A repository that supports the storage and management of the
abstract models and code of applications that make use of multiple development
architectures such as legacy information engineering and more modern object oriented and
service oriented architectures. In order to address re-factoring which involves changing
from one application model to another, we are adding the necessary tools to assist in the
process of taking the information from legacy applications architectures via
LogicMiner to more modern architectures such as object and SOA.

Re-Builder 
(code name)  Once legacy models and code are re-factored, Re-Builder will
provide the ability to generate from the abstract platform independent model stored in
the ReFactoring Repository to platform specific models such as J2EE and .net. To address
this, we are extending robust generation technologies to generate platform specifics for
object orientation and SOA. This model driven modernization environment can be used to
gradually migrate applications rather than requiring an all at once approach.

Visual
MainWin® for J2EE Platform  Mainsofts Visual MainWin® for the J2EE
platform, 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.

With
Visual MainWin® for the J2EE platform, .NET and Java, developers can accelerate J2EE
development by co-developing Web applications and Web services. Visual MainWin® also
eliminates .NET/J2EE server integration costs by enabling ASP.NET applications to be
deployed on industry-leading J2EE application servers, such as BEA Weblogic, IBM WebSphere
or Tomcat.

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In
2004, Mainsoft released early versions of Visual MainWin® for the J2EE platform 1.5
with certain porting functionalities and third party support. These functionalities were
tested in the market with several beta customers to enhance our understanding of
customers needs. As a result, an additional development was identified as still
needed to achieve the products general release and the completion of the feature
set. The release of this development is scheduled for the second quarter of 2005 in the
form of version 1.6. The planned development includes:

| | support
for globalization;
|- | --------------------------

| | Mail
and XML serialization;
|- | ---------------------------

| | support
for users with disabilities and compliance with section 508 of the Rehabilitation Act  as
required       by U.S. Federal law and regulation; and
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | extensible
run-time enabling developers to extend our run-time and recompile our libraries.
|- | -------------------------------------------------------------------------------------------

We believe that this development will
significantly improve our market positions and support sales growth.

Costs and Grants

We
employ 160 employees in our software development departments. Our development expenditures
were $8.1 million in 2004, $8.1 million in 2003 and $7.4 million in 2002. Certain of our
new product development projects have been awarded research grants that are repayable as
royalties.

Chief
Scientist Grants

Visual
MainWin® for J2EE Platformt  Through December 31, 2004, our subsidiary,
Mainsoft, accrued an aggregate of approximately $1.0 million in grants from the Office of
the Chief Scientist, or the OCS, for the development of Visual MainWin® for J2EE.
Royalties of 3% are payable to the OCS on sales of Visual MainWin® for J2EE, up to
100% of the dollar-linked grant received in respect of the funded product. To date,
Mainsoft has paid the royalties to the OCS as required. Mainsoft has submitted to the OCS
an application for obtaining research and development grants for 2005, which is pending
approval.

PowerText  As
of January 1, 2004, we received through our wholly owned subsidiary, an aggregate of
approximately $220,000 in grants from the OCS for the development of PowerText.Royalties
of 3% are payable to the OCS on all sales of PowerText up to 100% of the
dollar-linked grant received. To date, CePost has paid to the OCS the royalties as
required.

BluePhoenix  WS4Legacy  Through
December 31, 2004 our subsidiary, MultiConn Technologies, accrued an aggregate of
approximately $580,000 in grants from the OCS, for the development of BluePhoenix WS4Legacy.
Royalties of 3% are payable to the OCS on sales of BluePhoenix WS4Legacy up to 100%
of the dollarlinked grant received in respect of the funded product.

The balance
of the contingent liability relating to the royalties payable by our subsidiaries to the
OCS, at December 31, 2004, amounted to approximately $1.8 million.

38

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Other
Grants

In
the first quarter of 2004, the Singapore-Israel Industrial Research and Development
Foundation agreed to provide one of our wholly owned subsidiaries together with a company
incorporated in Singapore, financing for the development of a JAVA report generator based
on legacy text file input. Accordingly, the foundation agreed to award our subsidiary up
to $100,000 payable according to an agreed upon schedule. As of March 16, 2005, we
received $30,000 of the grant. The grant is required to be repaid in installments based on
sales of the funded product up to the amount of the grant.

Intellectual Property

We
rely on a combination of trade secret, copyright, and trademark laws and non-disclosure
agreements, to protect our proprietary know-how. Our proprietary technology incorporates
processes, methods, algorithms, and software that we believe are not easily copied.
Despite these precautions, it may be possible for unauthorized third parties to copy
aspects of our products or to obtain and use information that we regard as proprietary.
MultiConn Technologies has a patent application pending under the Patent Cooperation
Treaty (1970) covering its solution for implementing XML processing. However, we believe
that with regard to most of our solutions, 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.

Competition

The
modernization market in which we operate is highly competitive. The principal competitive
factors affecting the market for our modernization solutions include:

| |  | product
functionality, performance, and reliability;
| | - | ----------------------------------------------------

| |  | technical
range of the offered solutions;
| | - | -----------------------------------------

| |  | integration
between the offered solutions;
| | - | ------------------------------------------

| |  | availability
of experienced personnel;
| | - | --------------------------------------

| |  | prices;
| | - | -------

| |  | ability
to respond in a timely manner to changing customer needs;
| | - | -----------------------------------------------------------------

| |  | ease
of use; and
| | - | ----------------

| |  | quality
of support.
| | - | -------------------

Competition
in the enterprise IT modernization field is, to a large extent, based upon the
functionality of the tools. Vendors in this market address the evolutionary modernization
of legacy systems in different ways, and therefore do not always compete directly with
others in the market. Many small vendors address only a small part of the market, whereas
only a few offer a comprehensive and integrated solution set which can provide answers for
most of the modernization challenges that companies currently face.

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Our
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. IBM has
established legacy modernization as a strategic pillar of its long-term application
development strategy. IBM has a specific, dominant advantage in the underlying application
development infrastructure associated with many legacy environments (predominantly IBM
mainframes) and it has a large service capability. We cooperate with some of these system
integrators in providing specific solutions. Although all of them provide solutions for
the modernization of enterprise systems, each player focuses on different niches. In
addition, we face competition from niche companies operating in each of the five principal
areas of the enterprise IT modernization market:

| |  | Enterprise
IT Understanding;
| | - | ----------------------------

| |  | Enterprise
IT Presentment;
| | - | --------------------------

| |  | Enterprise
IT Migration;
| | - | ------------------------

| |  | Enterprise
IT Remediation; and
| | - | ------------------------------

| |  | Enterprise
IT Redevelopment.
| | - | ----------------------------

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.

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

We
are part of the Formula group, a global IT solutions and services group headquartered in
Israel. The Formula group is principally engaged in providing software consulting
services, developing proprietary software products, and providing computer-based business
solutions. The Formula group delivers its solutions in over 50 countries worldwide to
clients with complex IT services needs, including a number of Fortune 1000
companies. We are a subsidiary of Formula Systems (1985) Ltd., or Formula, which holds
directly 58.6% of our ordinary shares and, through voting agreements with Dan Goldstein, a
director of our company and Formulas chief executive officer and chairman of the
board of directors, and Gad Goldstein, the chairman of our board and Formulas
president, beneficially own 64.2% of our ordinary shares.

Following
is a list of our significant subsidiaries, their country of incorporation, and proportion
of our ownership interest in them, as of March 16, 2005:

|Name of Subsidiary        | Country of
Incorporation | Proportion of
Ownership Interest
|------------------------- | ------------------------ | --------------------------------
|
|
|
|
|BluePhoenix Solutions B.V |                          |                                 
|Liraz Systems Ltd.        |                          |                                 
|Mainsoft Corporation      |                          |                                 

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

We,
together with our subsidiaries and affiliates, currently occupy approximately 8,000 square
meters of office space. The aggregate annual rent we paid for these facilities in 2004 was
$1.8 million. The following table presents certain information about our facilities and
the terms of lease of these facilities.

|Country and State   | City                        | Sq.
Meters | Expiration        | Annual anticipated
rental fees in 2005
in thousands US$
|------------------- | --------------------------- | ---------- | ----------------- | -------------------------------------------------------
|Israel              | Herzlia                     | 1,720      | December 2006     | 360                                                    
|Israel              | Holon                       | 250        | February 2007     | 30                                                     
|Israel              | Lod                         | 165        | June 2006         | 170                                                    
|USA, North Carolina | Cary                        | 1,300      | May 2006          | 260                                                    
|USA, California     | San Jose                    | 350        | November 2007     | 80                                                     
|USA, Indiana        | South-Bend                  | 700        | December 2005     | 120                                                    
|Denmark             | Ballerup                    | 1,500      | Six months notice | 285                                                    
|Germany             | Frankfurt                   | 270        | November 2006     | 70                                                     
|Netherlands         | Amsterdam                   | 130        | June 2005         | 10                                                     
|Romania             | Bucharest                   | 950        | November 2007     | 140                                                    
|United Kingdom      | Uxbridge                    | 35         | August 2005       | 70                                                     
|Cyprus              | Nicosia                     | 800        | June 2009         | 135                                                    
|Italy               | San Felice Segrate  Milano | 150        | November 2005     | 30                                                     
|Total               |                             | 8,320      |                   | 1,760                                                  

If,
in the future, we determine that we need 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. We do not own any real property.

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ITEM 5. OPERATING AND FINANCIAL
REVIEW AND PROSPECTS

# Background

We
develop and market unique enterprise IT modernization, or EIM, 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. The
combination of our comprehensive set of products and tools with our expert services
methodology provides an efficient and cost-effective process for extending the return on
investment of existing enterprise IT assets. Our 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.

Our
quarterly and annual revenues, gross profit, and results of operations have fluctuated
significantly in the past and we expect them to continue to fluctuate significantly in the
future, as a result of numerous factors, including the changes in the suite of
modernization tools we have been offering to our customers, the limited experience we have
had in the markets for these newly introduced tools, and the difficulties we have
encountered in introducing our tools to their respective markets. Therefore, we believe
that period-to-period comparisons of our financial results are not necessarily meaningful
and you should not rely on them as an indication for future performance.

The
following discussion of our critical accounting policies and our financial condition and
operating results should be read in conjunction with our consolidated financial statements
and related notes, prepared in accordance with U.S. GAAP for the years ended December 31,
2004, 2003 and 2002, and with any other selected financial data included elsewhere in this
report.

# Overview

# General

In
recent years, we have been affected by the global economic changes, in particular the
sharp decline in capital spending in the IT sector and the overall business slowdown in
North America and Europe, as well as in Israel. Uncertainties in the North American and
European 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 $49.2 million in 2000
to $38.4 million in 2001 and to $36.7 million in 2002. In 2003 and 2004, as a result of a
slight recovery of the market, and the impact of a strategic acquisition we completed,
this trend changed, and our revenues increased to $54.3 million and $57.2 million,
respectively. As part of this change, our average backlog has increased from approximately
$12 million in late 2002 to approximately $22 million and $25 million at the end of 2003
and 2004, respectively. This increase improves managements ability to engage in
near-term planning. We typically fill current backlog within one year.

In
providing our solutions, we work closely with our customers or system integrators, and can
therefore be impacted by holiday seasons of the customers and system integrators. As a
result, we may sometimes experience a decline in our third quarter revenues due to the
summer holiday season in Europe and Israel.

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In
order to enhance our solutions and services portfolio, we have been pursuing a strategy of
adding new technologies to our suite of automated modernization tools. We implement this
strategy via internal development of new software tools and through acquisitions and
investments. Accordingly, we devote significant resources to the development and marketing
of new software modernization tools. In addition, we invest in businesses that develop
software tools that are complementary to our existing portfolio and have a skilled and
specialized workforce.

# Liraz Acquisition

In
November 2002, we completed the acquisition of a majority of the outstanding share capital
of Liraz, an Israeli company then publicly traded on the TASE. In March 2003, we completed
the acquisition of all the remaining outstanding share capital of Liraz. Lirazs
development environment, the AppBuilder, acts as a virtual application warehouse for large
legacy mainframe installations. Most of BluePhoenixs tools are based on generic
technologies that were initially developed to be used in the mainframe environment. By
combining with Liraz, we anticipate to increase sales of our solutions by leveraging
Lirazs well-developed marketing infrastructure and expertise in the mainframe
environment. We have completed the integration of Lirazs management, personnel and
sales, marketing and development activities within our business. We believe that as a
result of the integration of our business with that of Liraz, the combined company will be
able to realize greater operating efficiencies and will benefit from a larger and more
diversified marketing and support network. In addition, we anticipate that the combination
of our respective technical personnel will enhance our product development capabilities.
We currently offer a broad suite of enhanced enterprise IT modernization solutions, from
legacy reuse to platform rehosting, which we believe will assist us in achieving our goal
of being a market leader in the IT modernization market.

# Restructuring

In
October 2002, when our board of directors approved the acquisition of Liraz, and we
entered into the agreement with the selling shareholders, we began implementing our
restructuring plan. This plan was aimed at aligning our cost structure with our
then-current revenue stream, as well as building our combined positioning and recognition
as a leader in enterprise IT modernization.

Prior
to the merger, each of the companies maintained a complete range of infrastructure that
enabled it to operate as a public company in the global IT market. In late 2002,
immediately following the acquisition of a majority of the outstanding share capital of
Liraz, we began our restructuring plan, which affected employees in all departments of
both companies. During the first stage of this plan, all duplicative functions were
eliminated in sales, finance and administration. The annual savings generated from the
implementation of the initial stage of our restructuring plan was approximately $1.2
million, resulting from the dismissal of approximately 25 employees.

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During
the second stage, which took place in 2003, we established our off-shore delivery centers
in Romania and Cyprus. These off-shore centers allow us to reduce the prices paid by our
customers for our solutions while at the same time improving our operating profit.

After
the off-shore remote delivery centers were ready to operate and our management learned to
function under the revised structure, we dismissed an additional 20 employees, increasing
our annual cost saving by an additional $1 million. In the United States, we converted the
South-Bend, Indiana office into a low cost on-shore delivery center.

In
addition to the dismissals mentioned above, we consolidated office space, resulting in
annual savings of approximately $370,000 of direct lease payments.

Following
a temporary increase in late 2003 of certain costs due to some remaining overlapping
functions, we streamlined our operations through the complete integration of the assets,
workforce and infrastructure of some of our other subsidiaries and affiliates. In
addition, we disposed of less efficient product lines. Our restructuring activities have
directly contributed to our operating profit, which grew from $344,000, or 0.9% of
revenues, in 2002 to $1.9 million, or 3.6% of revenues, in 2003 and to $3.5 million, or
6.1% of revenues in 2004. Since the beginning of the integration process, the management
analyzes the combined business as one business unit.

# Visual MainWin

Our
revenues relating to the Visual MainWin product depend on the availability of
Windows source code, which is provided by Microsoft under its agreement with
Mainsoft. In order to diversify Mainsofts product offering, we have begun the
development of a new innovative product that converts applications developed on .NET to
J2EE platform, without the need to rely on Microsofts source code. We believe that
the source code leak in February 2004 has not interfered with our customer relationships.
For a more detailed description of the source code leak and the licensing relationship
with Microsoft, see Item 3.D. Risk Factors  The ability of our subsidiary,
Mainsoft, to continue to market the cross-platform products for the Unix environment
(Visual Mainsoft for Unix) is dependent upon Mainsoft obtaining from Microsoft access to
updated and additional source code.

# Challenges and
Opportunities

Our
principal opportunity is to enhance our revenues by leveraging the marketing resources and
skilled specialized workforce to market the suite of tools and solutions that we offer. We
also anticipate expanding our customer base by entering new markets, such as Australia,
which we view as an introduction of our products into the greater Far East market. Another
opportunity for us is to market newly developed products. The next generation of tools and
solutions we are developing include software to bridge the .NET and J2EE platforms. We
believe that we can realize this potential growth while improving our profitability.

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The
principal challenge we face is to accomplish our growth objectives while also enhancing
profitability. In order to expand our revenue base, we will continue to invest in our
sales and marketing operations. In addition, we will continue to devote substantial
resources to research and development both internally and through acquisitions. There is
no assurance that these investments will lead to revenue growth. If they do not lead to
such growth, our profitability will be adversely affected. For example, we expended
significant resources to develop, and in 2004, we introduced, a new porting tool, Visual
MainWin for J2EE, through our subsidiary, Mainsoft. We consider this tools cross
platform bridging capabilities a technological breakthrough. However, we cannot assure you
that this new tool will gain market acceptance to the extent anticipated, and generate the
expected growth of revenues.

Consolidation of the
Results of Operations of Our Subsidiaries

Following
is information regarding the consolidation of the results of operations of certain of our
subsidiaries, for the periods indicated. We began to consolidate the results of operations
of each of these subsidiaries when we acquired control in them.

|Name of Subsidiary                     | Beginning Consolidation
|-------------------------------------- | -----------------------
|
|
|
|
|SCH - Software Conversion House Ltd,   | Second quarter of 1998 
|                                       |                        
|Mainsoft Corporation                   | Fourth quarter of 1999 
|                                       |                        
|M.S.I. MultiConn Solutions             | Third quarter of 1999  
|International (1995) Ltd. (1)         
|                                       |                        
|IntraComp Group Inc.                   | Second quarter of 2000 
|                                       |                        
|Liraz Systems Ltd.                     | Fourth quarter of 2002 
|                                       |                        
|Advanced Systems Europe B.V            | Fourth quarter of 2002 
|                                       |                        
|BluePhoenix Solutions B.V              | Fourth quarter of 2002 
|                                       |                        
|Alexandria Migration Technologies Ltd. | First quarter of 2003  
|                                       |                        
|CePost Ltd.                            | First quarter of 2004  
|                                       |                        
|Outlook & BluePhoenix Ltd.             | First quarter of 2004  
|                                       |                        
|Intercomp Ltd.                         | Second quarter of 2004 
|                                       |                        
|MultiConn Technologies Ltd.            | First quarter of 2005  

---

(1)    
          We did not consolidate the results of operations of M.S.I. MultiConn in 2003,
          since the other shareholders undertook the daily management and control.
          Following the acquisition of the remaining shareholdings of M.S.I. MultiConn
          Solutions from the other shareholders, effective as of the first quarter of
          2004, M.S.I. MultiConns results are consolidated with ours.

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Critical Accounting
Policies

We
prepare the consolidated financial statements of BluePhoenix in conformity with accounting
principles generally accepted in the United States, referred to as U.S. GAAP. Accordingly,
we are required to make certain estimates, judgments and assumptions that we believe are
reasonable based upon the information available. These estimates and assumptions affect
the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented. The
significant accounting policies which we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the following:

| | Revenue
recognition.Our revenue recognition policy is significant because our revenue is a
key component of our results of operations. In addition, 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 management to determine that these
guidelines are not met for certain future transactions, revenue recognized for any
reporting period could be adversely affected. (See note 1K to our financial statements).
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
recognize revenues from direct software license agreements 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 production, modification or customization of software, and
with respect to fixed fee contracts, revenue is generally recognized according to the
percentage of completion method in accordance with the provisions of SOP 81-1 Accounting
for performance of Construction-Type Contracts. Under this method, estimated
revenue is generally accrued based on costs incurred to date as a percentage of total
updated estimated costs. If we do not accurately estimate the resources required or the
scope of work to be performed, or do not manage our projects properly within the planned
periods of time or satisfy our 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. We recognize contract losses, if any, in the period in
which they first become evident.

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Under
some of our agreements, the customer may have the right to receive unspecified upgrades
on a when-and-if available basis. These upgrades are considered post-contract customer
support, referred to as PCS, and the fair value allocated to this right, is recognized
ratably over the term of the PCS.

There
are no rights of return, price protection or similar contingencies in our contracts.
Accordingly, we do not establish a provision due to the lack of warranties claims in the
past. Some of our contracts include client acceptance clauses. In determining whether
revenue can be recognized, when an acceptance clause exists, we consider our history with
similar arrangements, the customers involvement in the progress, the existence of
other service providers and the payments terms.

Our
revenue recognition policy does not permit any revenue recognition when the payment term
exceeds 12 months or when there is an uncertainty related to the relationship with the
customer.

Deferred
revenue includes unearned amounts received under maintenance contracts and amounts
received from customers but not yet recognized as revenues. Payments for maintenance fees
are generally made in advance and are non-refundable.

| | Capitalized
software research and development costs.Development costs of software that is
intended for sale that were incurred after the establishment of technological feasibility
of the relevant product, are capitalized. Technological feasibility is determined when
detailed program design is completed and verified in accordance with the provisions of
the FASB statement of Financial Accounting Standards No. 86 (SFAS 86).
Software development costs incurred before technological feasibility is established are
charged to the statement of operations as incurred net of participation of the office of
the Chief Scientist, (the OCS). Our policy on capitalized software costs
determines the timing of our recognition of certain development costs. In addition, this
policy determines whether the cost is classified as development expense or capitalized
costs. Management is required to use professional judgment in determining whether
development costs meet the criteria for immediate expense or capitalization. Our failure
to accurately predict the life of capitalized software could cause a one-time
amortization, which could adversely affect our operating results.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impairment
of goodwill and intangible assets. Our business acquisitions resulted in goodwill and
other intangible assets. We periodically evaluate our goodwill, intangible assets, and
investments in affiliates 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 and investments.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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In
accordance with SFAS 142 Goodwill and Other intangible Assets (SFAS 142),
effective January 1, 2002, indefinite life intangible assets and goodwill are not
amortized but rather subject to annual impairment testing.

The
annual impairment testing required by SFAS 142 also requires us to use our judgment as to
the value of these intangible assets. If we are incorrect in these judgments, we may be
required to write down the carrying value of our goodwill and other intangible assets in
future periods. These write downs, if any, may have an adverse affect on our operating
results. Future events could cause us to conclude that impairment indicators exist and
that additional intangible assets associated with our acquired businesses are impaired.
Any resulting impairment loss could have a material adverse impact on our financial
condition and result of operations.

| | Income
taxes. Our income tax policy records the estimated future tax effects of temporary
differences between the tax bases of assets and liabilities and amounts reported in the
accompanying consolidated balance sheets, as well as operating loss and tax credit carry
forwards. We follow very specific and detailed guidelines regarding the recoverability of
any tax assets recorded on the balance sheet and provide any necessary allowances as
required in accordance with the provisions of SFAS 109 Accounting for Income Taxes. If
we fail to accurately predict our estimated tax and if we are required to pay higher
taxes than we anticipated, our results of operations could be seriously harmed.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Principles
of Consolidation. The consolidated financial statements include the accounts of
BluePhoenix Solutions Ltd. and its subsidiaries in which it has a controlling interest.
Effective December 31, 2004 we adopted FASB Interpretation No. 46(R) (FIN 46R), Consolidation
of Variable Interest Entities. As a result of the adoption of FIN46R, we identified
our investment in MultiConn Technologies as a variable interest entity with BluePhoenix
Solutions Ltd. as the primary beneficiary. We consolidated MultiConn Technologies in our
consolidated financial statements as of December 31, 2004.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounts
receivable. We maintain a conservative method to assure the collection of our
accounts receivable. Under this methodology, we periodically estimate the outstanding
amounts and deduct an allowance for receivables with a low collection certainty. When
there is a major deterioration of a customers credit worthiness, we make allowances
for doubtful accounts upon specific review of all outstanding invoices of such customer.
If we fail to estimate accurately the recoverability of amounts due to us, our results of
operations could be adversely affected.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Reporting Currency

Most
of our revenues and a substantial portion of our costs are denominated in United States
dollars, or dollars. The dollar is the primary currency of the economic environment in
which BluePhoenix operates. Thus the dollar is our functional and reporting currency.
Accordingly, monetary accounts maintained in currencies other than the dollar are
remeasured into dollars under the principles described in FASB No. 52. Assets and
liabilities have been translated at period-end exchange rates. For non-dollar transactions
reflected in the statements of operations, the exchange rates at transaction dates are
used. For consolidated companies whose functional currency is other than the dollar,
results of operations have been translated at average exchange rates. The exchange gains
and losses arising from these translations are included in the statement of income (loss).

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

|For the year ended
December 31, | Inflation rate in Israel | Devaluation of NIS
against the US$ | Devaluation of euro
against the US$
|------------------------------- | ------------------------ | ---------------------------------- | -----------------------------------
|
|
|
|
|2002                            |                          |                                    |                                    
|2003                            |                          |                                    |                                    
|2004                            |                          |                                    |                                    

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

The
following table presents the percentage relationships of certain items from our
consolidated statement of operations, as a percentage of total revenues for the periods
indicated:

|                                              | 2004 | 2003 | 2002
|--------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Statement of Operations Data                  |      |      |     
|as a Percentage of Revenues:                  |      |     
|Revenues                                      |      |      |     
|Cost of revenues                              |      |      |     
|                                              |      |      |     
|Gross profit                                  |      |      |     
|Software development costs                    |      |      |     
|Selling, general, and administrative expenses |      |      |     
|                                              |      |      |     
|                                              |      |      |     
|Goodwill impairment, restructuring costs, and |      |     
|non-recurring expenses                        |      |      |     
|                                              |      |      |     
|Operating income (loss)                       |      |      |     
|Financial income (expenses), net              |      |      |     
|Gain on realization of shareholdings          |      |      |     
|Other income (expenses), net                  |      |      |     
|                                              |      |      |     
|Income (loss) before taxes on income          |      |      |     
|Income tax expense                            |      |      |     
|                                              |      |      |     
|                                              |      |      |     
|Minority interest                             |      |      |     
|Equity in losses of affiliated companies, net |      |      |     
|                                              |      |      |     
|Net income (loss)                             |      |      |     
|                                              |      |      |     

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Years Ended December 31,
2004 and 2003

Revenues.
          Revenues increased 5.2% from $54.3 million in 2003 to $57.2 million in 2004.
          This increase reflects the initial results of our marketing efforts. In
          addition, preliminary recovery symptoms in the markets in which we operate, led
          to increased IT spending, which in turn increased the volume of our
          services and products sales. The prices of our products and services
          have not changed significantly during the recent three years, and price
          fluctuations had no material impact on our revenues.

The
table below presents the breakdown of our revenues based on the location of our customers
for the periods indicated:

|                            | 2004 | 2003 | 2002
|--------------------------- | ---- | ---- | ----
|
|
|
|
|
|United States               | 36   | 34   | 57  
|Europe (other than Denmark) | 28   | 36   | 21  
|Denmark                     | 18   | 17   | 7   
|Israel                      | 15   | 7    | 13  
|Other                       | 3    | 6    | 2   
|                            |      |      |     
|Total                       | 100  | 100  | 100 

The
relatively low increase in our sales in the United States and the decrease in our sales in
Europe (other than Denmark) is mainly attributable to the world-wide slow recovery of the
IT industry. Therefore, in 2005, we have increased our marketing efforts.

Cost
of revenues. Cost of revenues consists of salaries, travel costs relating to products
and services rendered, amortization of capitalized software costs and consulting fees paid
to independent contractors. Despite the overall growth in the volume of our activities,
cost of revenues increased only 0.6% from $24.1 million in 2003 to $24.3 million in 2004.
Cost of revenues as a percentage of revenues decreased to 42.4% in 2004 compared to 44.4%
in 2003. The increase in our gross margins is mainly attributable to the increased usage
of our low cost development and delivery centers in Romania, Cyprus and South-Bend,
Indiana. Due to the lower average employers costs in these sites, we have reduced
the overall cost of programmers which resulted in the decrease of our cost of revenues and
the respective increase in our gross margins.

Software
development costs. Software development costs, gross, consist of salaries and
consulting fees that we pay to professionals engaged in the development of new software
tools and related methodologies. Software development costs, net, consist of software
development costs, gross, less development grants and capitalized software costs. During
2004, our subsidiaries received an aggregate of approximately $470,000 in grants from the
OCS and the Singapore-Israel Industrial Research and Development Foundation for the
development of the funded products.

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Software
development costs, gross, increased 28% from $11.9 million in 2003 to $15.6 million in
2004. As a percentage of revenues, software development costs, gross increased to 27.3% in
2004 compared to 21.8% in 2003. This increase was primary due to the implementation of our
strategy to expedite the development of our solutions in an effort to maintain our
leadership position in our market.

During
2004, our development costs were attributed to the development of our unique modernization
suite of tools. Software development costs are charged to operations as incurred, unless
capitalized according to FASB No. 86. In 2004, we capitalized software development costs
in an aggregate amount of $7.1 million compared to $3.2 million in 2003. Software
development costs, net, decreased to 14.1% in 2004 compared to 15.0% in 2003. Net software
development costs related to development of tools through our affiliates are included in
our consolidated financial statements under Equity in Losses of Affiliated
Companies, Net..For a description of our research and development
activities, see Item 4.B. Business Overview-Research and Development.

Selling,
general and administrative expenses. Selling, general and administrative expenses
consist primarily of wages and related expenses, travel expenses, third party commissions,
selling expenses, marketing and advertising expenses, rent, insurance, utilities,
professional fees, and depreciation. Selling, general and administrative expenses
increased 6.2% from $20.1 million in 2003 to $21.4 million in 2004. As a percentage of
revenues, selling, general and administrative expenses increased to 37.4% in 2004 compared
to 37.0% in 2003.

Financial
income (expenses), net. Financial expense in 2004 was $882,000 compared to financial
income of $165,000 in 2003. In 2004, financial expense included the impact of the issuance
of the $5 million convertible debentures and other long term convertible debt resulting in
a net expense of $688,000.

Gain
on realization of shareholdings. Gain on realization of shareholdings in 2004 was
$112,000 compared to a gain of $376,000 in 2003. In 2004, we sold substantially all of the
ordinary shares of Level 8 then held by us. The gain realized from the sale of these
shares was $171,000. This gain was partially offset by a loss of $59,000 resulted from the
sale of our shareholdings in Tesnet. The sale of Tesnets shares was for cash
consideration of $2.8 million, and the $59,000 loss is mainly attributable to transaction
related costs. Gain on realization of shareholdings in 2003 is attributable to the
conversion of preferred shares of Level 8 into common shares of Level 8 and their
subsequent sale. The gain realized from the sale of these shares was $376,000.

Other
income, net.Other income, net in 2004 was $975,000 compared to $567,000 in 2003.
Other income in 2004 consists primarily of a $703,000 dividend received from Steps
Ventures.

Income
tax expense. In 2004, we had an income tax expense of $260,000 compared to an income
tax expense of $152,000 in 2003. This net aggregate expense is composed of local taxes
paid worldwide by our international subsidiaries.

Equity
in losses of affiliated companies, net. In 2004, equity in losses of affiliated
companies, net, was $516,000. Equity in losses of affiliated companies in 2004 is mainly
attributable to $69,000 representing our share in the losses of Intercomp, and $455,000
representing our share in the losses of MultiConn Technologies.

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Minority
interest. In 2004, minority interest was $73,000. Minority interest in 2004 includes
$51,000 representing the minority share in the losses of Liacom, and $22,000 representing
the minority share in the losses of Mainsoft.

Years Ended December 31,
2003 and 2002

Revenues.
          Revenues increased 48% from $36.7 million in 2002 to $54.3 million in 2003. This
          increase was attributable to the inclusion of $30.0 million representing the
          integration of Lirazs and SDCs businesses. In addition, our revenues
          increased as a result of the initial recovery in the markets in which we
          operate, leading to increased IT spending, which in turn increased the volume of
          our services and products sales. The prices of our products and services
          have not changed significantly during the recent three years, and price
          fluctuations had no material impact on our revenues. During the second half of
          2003, we had several cross-sales of our modernization solutions to veteran
          AppBuilder customers of Liraz.

Sales
by Lirazs European sales force contributed a material portion to our overall
revenues. Sales in Denmark, as a percentage of revenues, increased from 7% in 2002 to 17%
in 2003. This increase was attributable to the impact of the SDC acquisition in the fourth
quarter of 2002. Sales in the United States, as a percentage of revenues, decreased from
57% in 2002 to 34% in 2003. This decline is mainly attributable to the slow recovery of
the IT industry in North America, as well as the relatively low resources we initially
allocated to this region in 2003.

Cost
of revenues. Due to the overall growth in the volume of our activities, cost of
revenues increased 58% from $15.2 million in 2002 to $24.1 million in 2003. Cost of
revenues as a percentage of revenues increased to 44% in 2003 compared to 42% in 2002. The
increase in cost of revenues was attributable to the integration of Lirazs and
SDCs businesses, which contributed $12.9 million to our cost of revenues in 2003 and
to the temporary overlapping functions caused by to the consolidation of Lirazs
business. During 2003, we further implemented our restructuring plan that was aimed at
aligning our cost structure with our revenue stream, while realizing the benefits of the
local and offshore delivery centers. This restructuring plan partially offset the overall
increase in cost of sales.

Software
development costs. During 2003, our subsidiary, Mainsoft, accrued an aggregate of
$570,000 in grants from the Office of the Chief Scientist for the development of Visual
MainWin® for J2EE.

Software
development costs, gross, increased 21% from $9.8 million in 2002 to $11.9 million in
2003. As a percentage of revenues, software development costs, gross decreased to 22% in
2003 compared to 27% in 2002. This decrease was part of our cost alignment plan according
to which some of our development activities have been re-allocated to our own offshore
subsidiaries, which perform these activities at lower costs. In addition, some of our
development activities were consolidated into competence centers, where the expertise in
certain areas is concentrated.

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During
2003, our development costs were attributed to the development of our unique modernization
suite of tools. Software development costs are charged to operations as incurred, unless
capitalized according to FASB No. 86. In 2003, we capitalized software development costs
in an aggregate amount of $3.2 million. Software development costs, net, increased 10%
from $7.4 million in 2002 to $8.1 million in 2003. As a percentage of revenues, software
development costs, net decreased from 20% in 2002 to 15% in 2003. Net software development
costs related to development of tools through our affiliates are included in our
consolidated financial statements under Equity in Losses of Affiliated Companies,
Net.

Selling,
general and administrative expenses. Selling, general and administrative expenses
increased 52% from $13.2 million in 2002 to $20.1 million in 2003. As a percentage of
revenues, selling, general and administrative expenses increased to 37% in 2003 compared
to 36% in 2002. This increase in selling, general and administrative expenses was
primarily attributable to the temporary overlapping functions caused due to the
consolidation of Lirazs business as well as to the enlarged infrastructure required
to support the consolidated company.

In
2002 and 2003, amortization of goodwill was not included in general and administrative
expenses, pursuant to SFAS 141. Under SFAS 141, all investments were evaluated and their
utilization was determined according to their anticipated contribution to the business,
and under SFAS 141, no additional write-downs were required to be made.

Financial
income (expenses), net. Financial income increased in 2003 to $165,000 compared to
financial expenses of $195,000 in 2002. In 2003, financial income consisted of currency
rate differentials with respect to short-term deposits as a result of the devaluation of
the dollar against the NIS and the devaluation of the dollar against the euro. Income
derived from foreign currency translation adjustments in 2003 was $614,000. In addition,
the reduction in the interest rate on short-term loans and the lower cash balance
decreased our interest income to $109,000. The financial income in 2003 was partially
offset by interest paid to banks on short-term loans in an aggregate amount of $663,000.
In 2002, financial expenses consisted of currency rate differentials with respect to
short-term deposits as a result of the devaluation of the NIS against the dollar. Expense
derived from foreign currency translation adjustments in 2002 was $64,000. Our interest
expenses net for 2002 were $155,000.

Gain
on realization of shareholdings.In 2003, we converted preferred shares of Level 8
into 900,035 common shares of Level 8 and sold them. The gain realized from the sale of
these shares was $376,000. In 2002, we had no gain on realization of shareholdings.

Other
income (expenses), net.Other income, net in 2003 was $567,000 compared to other
expenses, net of $1.6 million in 2002. Other income in 2003 consists primarily of the
decrease in the bank guarantee that secured an overdraft of Level 8. This income was
partially offset by the write-down of $350,000 related to loans that were previously made
to an investee due to limited visibility of the repayment. Other expenses in 2002 consist
primarily of a write-down of an investment.

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Income
tax expense. In 2003, we had income tax expense of $152,000 compared to income tax
expense of $160,000 in 2002. This net aggregate expense is composed of local taxes paid
worldwide by our international subsidiaries.

Equity
in losses of affiliated companies, net. In 2003, equity in losses of affiliated
companies, net, was $898,000. Equity in losses of affiliated companies in 2003 includes an
aggregate amount of $898,000 representing our share in the losses of our affiliate
Intercomp, and an amount of $200,000 representing our share in the losses of our
affiliates M.S.I. MultiConn and MultiConn Technologies, partially offset by $200,000
representing our share in the gains of Tesnet.

Minority
interest. The net charge assigned to the minority shareholders of our subsidiaries in
2003, was $154,000 compared to $702,000 in 2002. The reduction in minority interest was
attributable to the acquisition of minority interest in some of our subsidiaries that was
completed in 2003.

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

How We Have Financed Our
Business

In
1997, we consummated two public offerings, and received net proceeds of $33.9 million
after deducting underwriting discounts and commissions and offering expenses.

On
March 30, 2004, we completed a $5
million private placement to institutional investors. The terms of this transaction were
amended on February 18, 2005. Under the terms of this transaction as amended we issued to
the institutional investors convertible debentures, bearing interest at a rate of LIBOR
calculated on a semi-annual basis. In addition, the institutional investors were granted
warrants to purchase up to 285,714 of BluePhoenixs ordinary shares at an exercise
price of $6.50 per share, subject to (i) adjustment for stock dividends, stock splits,
recapitalization and other similar events and (ii) anti-dilution adjustment. The warrants
are exercisable during a period of five years commencing on September 2004. Under certain
circumstances, the institutional investors may increase their investment by an additional
$3 million of debentures convertible into BluePhoenixs ordinary shares at a price of
$4.50 per share, and receive warrants on the same terms as the initial warrants,
exercisable into such number of BluePhoenixs ordinary shares equal to 30% of the
ordinary shares into which the debentures are convertible. For more information regarding
the private placement, see Item 6.E. Share Ownership: Arrangements Involving the
Issuance of BluePhoenixs Shares or Grant of Options to Purchase
Shares  Convertible Debentures and Warrants Purchased by Institutional
Investors.

We
have entered into credit facilities with Bank Discount LeIsrael Ltd., Bank
Hapoalim Ltd. and Bank Leumi LeIsrael Ltd., of up to $15.3 million. The
aggregate amount outstanding under these credit facilities as of December 31, 2004 is
$11.3 million, and as of March 16, 2005, $11.8 million. We may use these credit facilities
from time to time for interim financing, in accordance with our cash requirements. These
credit facilities provide for loans, are in various currencies and bear various interest
rates. In connection with these credit facilities extended to us by these banks, we are
committed to certain covenants related to our operations, such as:

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| | maintaining
a minimum level of shareholders' equity of no less than 40% of our total assets and no
    less than $40 million;
|- | -----------------------------------------------------------------------------------------------------------------------------

| | maintaining
a level of quarterly operating income before depreciation and amortization of no less
    than $500,000; and
|- | ------------------------------------------------------------------------------------------------------------------------

| | maintaining
a ratio of our bank liabilities to current assets, excluding other current assets, of no
more than 55%.
|- | -------------------------------------------------------------------------------------------------------------------

To
date, we have met all such covenants.

As of
March 16, 2005, our subsidiary, Intercomp has outstanding indebtedness to FIMI of $4.2
million including accrued interest (see Contractual Commitments and
guarantees).

On
December 31, 2004, we had cash and cash equivalents (including marketable securities) of
$9.5 million and working capital of $6.4 million. On December 31, 2003, we had cash and
cash equivalents (including marketable securities) of $11.5 million and working capital of
$246,000.

Net
cash provided by operating activities was $1.1 million in 2004 compared to $2.5 million in
2003. Cash provided by operating activities in 2004 was primarily the result of add-backs
from depreciation and amortization. This was partially offset by a decrease in other
payables and an increase in trade receivables. Cash provided by operating activities in
2003 was primarily the result of our $1.9 million net income and add-backs due to
depreciation and amortization. This was partially offset by an increase in trade
receivables and a decrease in other accounts payable.

Liraz
has a fixed charge in favor of a bank on certain of its assets, as well as a floating
charge on its entire assets, securing our long-term credit facility of $8 million. This
credit facility also covers a guarantee of $2 million in the aggregate that we extended to
banks relating to the credit line of Level 8.

In
connection with the purchase of Outlook Systems Ltd.s software development services
activity, in 2004, we extended a guarantee to a bank with respect to loans in an aggregate
amount of $720,000 plus interest accrued, to be repaid by us by February 15, 2007.

Typical
modernization projects, which deploy our solutions, are long-term projects, and therefore,
payment for these projects or a substantial portion of our fees may be delayed until the
successful completion of specified milestones and customer acceptance for the completed
work. During 2004, we mutually agreed with a customer, to terminate a contract. The
contract was accounted for under the percentage of completion method. As a result, we
recorded a loss of $400,000 in the first quarter of 2004. The payment of our fees is
generally dependent upon customer acceptance of the completed work, and our ability to
collect the fees. Further, although the timing of receipt of our fees varies, we incur the
majority of our expenses on a current basis. As a result, a delay in the collection of our
fees could result in cash flow shortages.

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Capital Expenditures

Our
capital expenditures were $1.1 million in 2004 and $867,000 in 2003. Our capital
expenditures in these years related primarily to purchases of computers and related
equipment required to support our software development activities. In 2004, we invested
$97,000 in other companies. In 2003 and 2002, we lent $1.1 million and $2.2 million,
respectively, to affiliated companies.

In
2002, we purchased a 90% controlling interest in Liraz through a share exchange
transaction that was followed by a cash tender offer. We paid for the tendered shares
aggregate consideration of $1.1 million. During 2003, we completed an additional tender
offer and purchased the remaining outstanding share capital of Liraz for an aggregate of
$1.5 million.

During
2004 and 2003, we did not repurchase any shares under our buy-back programs. As of
December 31, 2004, we repurchased 1,870,565 of our ordinary shares under our buy-back
programs, for an aggregate of approximately $14.7 million. Under these programs, we may
purchase our shares from time to time, subject to market conditions and other relevant
factors affecting us. Under the Companies Law, the repurchased shares are considered
dormant shares. We may not resell these shares unless (i) they are registered for resale
under an effective registration statement pursuant to the Securities Act of 1933, as
amended, referred to as the Securities Act; or (ii) pursuant to an exemption from
registration under the Securities Act. The first buy-back program adopted in May 1998,
enables us to purchase our shares, through a subsidiary, utilizing up to $5.0 million.
Under the second buy-back program adopted in September 1998, and amended in May 1999, we
may purchase, through a subsidiary as a trustee, up to an additional 1,400,000 ordinary
shares. Under the two plans we may acquire an additional 1,185,914 shares at the current
stock price. The closing price of our ordinary shares as quoted on the NASDAQ National
Market on March 16, 2005 was $4.50. Under the agreement we entered into in connection with
the private placement in March 2004, we are restricted to use only up to $200,000 for the
repurchase of our shares, as long as 20% or more of the debentures are outstanding.

We
believe that cash generated from operations together with existing sources of liquidity
and cash flow, will be sufficient to meet our anticipated cash needs for at least the next
18 months.

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# Contractual Commitments
and Guarantees

In
December 2003, Mainsoft entered into an Independent Contractor Agreement with Microsoft.
As a result of this agreement, Microsoft agrees to apply the value of Mainsofts
services performed under the Independent Contractor Agreement to accrued royalties up to
$1,605,000. During the year ended December 31, 2004, Mainsoft accrued royalties due
Microsoft of $325,000, and recognized credits of $125,000 related to waivers (reduction of
cost of revenues) and credits of $635,000, related to services performed (increase in
revenues). During the year ended December 31, 2003, Mainsoft accrued royalties due to
Microsoft of $2,753,000, and recognized credits of $2,411,000 related to waivers
(reduction of cost of revenues) and credits of $999,000 related to services performed
(increase in revenues). The excess credits over the royalties amount is related to
previous years royalties.

Under
funding agreements three of our subsidiaries have entered into with the Office of the
Chief Scientist (OCS), these subsidiaries are obliged to pay royalties to the OCS at a
rate of 3% on sales of the funded products, up to 100% of the dollar-linked grant received
in respect of these products from the OCS. As of December 31, 2004, the aggregate amount
of grants received by our subsidiaries from the OCS was $1.8 million.

In
the first quarter of 2004, the Singapore-Israel Industrial Research and Development
Foundation agreed to provide one of our wholly owned subsidiaries together with a company
incorporated in Singapore, financing for the development of a JAVA report generator
software tool. Accordingly, the foundation agreed to award our subsidiary up to $100,000
payable according to an agreed upon schedule. As of March 16, 2005, we received $30,000 of
the grant. The grant is required to be repaid in installments based on sales of the funded
software up to the amount of the grant.

We
are obligated to pay to Formula management fees in an annual amount equal to 3% of our
revenues, but no more than the NIS equivalent of $180,000. For more information see
Item 7. Major Shareholders and Related Party Transactions  Related Party
Transactions  Management Agreement with Formula.

Under
agreements between us and certain of our customers, we undertook to provide such customers
bank guarantees for the assurance of performance of our obligations under our agreements
with such customers. As of March 16, 2005, there are outstanding bank guarantees on our
behalf for our customers in the aggregate amount of $163,000.

We
are committed under operating leases for rental of office facilities, vehicles and other
equipment for the years 2005 until 2009. Annual rental fees under current leases are
approximately $3.1 million, and are expected to remain at this level for each of the next
three years. In connection with the office leases, we issued bank guarantees of $113,000
in the aggregate.

During
2000, Liraz provided a bank guarantee to secure a loan to Level 8. Liraz recorded a
provision of the maximum potential amount of future payment because the realization of the
guarantee was reasonably foreseeable. The guarantee is outstanding until November 2005. In
the event that the guarantee is exercised, the bank is obligated to grant us a three years
loan in an amount of up to the amount of the guarantee. As of December 31, 2004, this
guarantee amounted to approximately $2.0 million. For more information, see Item
4.B. Business Overview  Investments and Acquisitions  Level-8.

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In
connection with the purchase of Outlook Systems Ltd.s software development services
activity, in 2004, we extended a guarantee to banks with respect to loans in an aggregate
amount of $720,000 plus interest accrued, to be repaid by us by February 15, 2007. For
more information, see Item 4.B. Business Overview  Investments and
Acquisitions  Outlook.

In
January 2001, we granted FIMI, a creditor of Intercomp, a put option to sell to us
promissory notes issued by Intercomp in an aggregate principal amount of $3.5 million plus
interest accrued since January 2001 at an annual rate of 5%, which could be paid, subject
to FIMIs approval, in BluePhoenixs ordinary shares. The total outstanding
amount of principal and interest accrued as of December 31, 2004, and as of March 16, 2005
was $4.22 million and $4.23 million, respectively. The number of ordinary shares subject
to the option will be calculated based on the average market price of the shares during
the 14 trading days prior to the exercise of the option. In August 2003, the terms of
FIMIs option were amended, allowing FIMI to exercise its option in three
installments during June 2004, June 2005 and June 2006. At our option, we may pay FIMI the
consideration in BluePhoenixs ordinary shares. However, within 7 business days
following our notice to FIMI of our election to pay the consideration
in BluePhoenixs ordinary shares, FIMI may notify us that it refuses to
receive the shares and seeks instead a payment in cash. In such an event, we shall have to
pay FIMI the corresponding cash amount, but shall be entitled to defer such payment until
September 30, 2006. FIMI submitted a notice to exercise the June 2004 installment for
cash, thus postponing the payment of the respective portion of the consideration to
September 30, 2006. After accounting for this payment, there remains $2.33 million of the
principal amount of the promissory notes plus interest accrued that may be paid, subject
to FIMIs approval as described above, in BluePhoenixs ordinary shares. In
addition, as part of the consideration, we are obliged to issue to FIMI warrants to
purchase up to 336,000 of our ordinary shares exercisable until June 30, 2007, at an
exercise price of $4.00 per share.

In
April 2004, a shareholder of Intercomp comprised of several funds acting through their
general partner, Israel Infinity Venture Capital Partners Ltd., referred to as Infinity,
granted us a call option to purchase its entire holdings in Intercomp, exercisable until
April 1, 2006. If we do not exercise such option, Infinity will have a put option to cause
us to purchase Infinitys entire holdings in Intercomp, exercisable during a period
of six months commencing in April 2006. If either of the options is exercised, we shall be
obliged to issue to Infinity, as consideration for Intercomps shares, 100,000
BluePhoenixs ordinary shares and an additional amount of shares to be calculated
based on revenues generated from the sale of licenses to use Intercomps products
during a 3-year period commencing on April 1, 2003. The shares will be subject to a
lock-up period until April 1, 2006. We may, at our option, pay to Infinity the cash
equivalent of such shares which will be calculated according to the average closing price
of BluePhoenixs shares during the 20 trading days prior to the exercise of any of
the options.

In
February 2003, the Israeli Income Tax Authorities issued to BluePhoenix an income tax
assessment for the tax year ended December 31, 1997 in the amount of approximately $1.5
million. Following an appeal we filed on this assessment, we received a revised tax
assessment for the tax years ended December 31, 1997 through 2001 of approximately $1.2
million. As agreed with the tax authorities, although the revised assessment is not yet
final, we are required to pay a down payment of approximately $800,000 in 24 monthly
installments until December 2005. Based on consultation with our tax counsel, we believe
that while the outcome of any controversy cannot be predicted with complete certainty, the
payment of $800,000 mentioned above constitutes the final settlement of this dispute with
the Israeli income tax authorities. This tax expense is fully offset against previously
existing tax reserves and will not have a material adverse effect on our financial
statements as a whole.

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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.

# Effective Corporate Tax
Rates

In
1996, 1997 and 1998, certain of our operations were granted approved
enterprise status under the Law for the Encouragement of Capital Investments 1969,
known as the Investments Law. If we comply with all requirements, we shall be eligible for
certain tax benefits with respect to these operations, for the first seven years in which
they generate taxable income. Income derived from our approved enterprise programs will be
tax exempt for a period of two years after we have taxable income, and will be subject to
a 25% company tax rate for the following five years. We completed the tax exemption period
of some of our qualified approved enterprise operations and, therefore, these
operations are subject to a 25% income tax commencing 1999. If the percentage of our share
capital held by foreign shareholders exceeds 25%, future approved enterprises would
qualify for reduced tax rates for an additional three years, after the seven years
mentioned above. However, we cannot assure you that we will obtain additional
approved enterprise status for our operations, or that the provisions of the
Investments Law will not change, or that the above-mentioned shareholding portion will be
reached or maintained for each subsequent year.

On
January 1, 2003, Israels tax laws underwent a significant tax reform (Amendment 132
to the Income Tax Ordinance (New Version)  1961). The legislation broadened the
categories of taxable income, and reduced the tax rates imposed on employment income.
Among the key provisions of this legislation were (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.

Our
international operations are taxed at the local effective corporate tax rate in the
countries of our subsidiaries residence. We believe that in the future we will
derive an increasing percentage of our income from operations outside of Israel and that,
accordingly, our effective tax rate may increase. However, we expect that this increase
will be offset by carried forward accumulated losses of consolidated companies. As a
result, we anticipate that our net effective tax rate in the foreseeable future shall be
lower than 25%.

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|C. | Research
and Development, Patents and Licenses
|-- | ----------------------------------------------

For
a description of our research and development activities, see Item 4.B. Business
Overview-Research and Development.

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

|D. | Trend
Information
|-- | -----------------

We
have been affected by global economic changes, in particular the sharp decline in 2001 and
2002, in capital spending in the information technology, or IT, sector and the overall
business slow-down in North America and Europe, as well as in Israel. Uncertainties in the
North American and European 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 directly affect our operating results. Our revenues decreased from $49.2 million
in 2000 to $38.4 million in 2001 and to $36.7 million in 2002. In the last two years, as a
result of a slight recovery of the market, and the impact of a strategic acquisition we
completed, this trend changed, and our revenues increased to $54.3 million in 2003 and
$57.2 million in 2004. We cannot know whether the global market will recover in the
future, and how the economic conditions will continue to affect our business. As we
continue to market new products and penetrate international markets, we expect our
selling, general and administrative expenses to continue to be relatively high.

In
March 2003, we completed the acquisition of the entire outstanding share capital of Liraz.
In 2004, we concluded the integration of all managerial and field functions of Liraz
within ours. We expect that as a result of the integration of our business with that of
Liraz, the combined companies will be able to realize greater operating efficiencies and
will benefit from a broader product line with a larger and more diversified marketing and
support network. In addition, we anticipate that the combination of our respective
technical personnel will enhance our product development capabilities. We cannot assure
you that the benefits we anticipate will occur as a result of assimilating Lirazs
business will contribute to our business to the extent anticipated. This in turn may
materially adversely affect our business, financial condition and our quarterly and annual
results of operations.

|E. | Off-Balance
Sheet Arrangements
|-- | ------------------------------

The
Company has no off-balance sheet arrangements.

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|F. | Tabular
Disclosure of Contractual Obligations
|-- | ---------------------------------------------

The
following table summarizes our contractual obligations and commitments as of December 31,
2004:

|                                    | Payment due by period
|----------------------------------- | ---------------------
|
|
|
|
|
|Long term debt obligations          | 13,422               
|Capital (finance) lease obligations | 136                  
|Operating lease obligations         | 5,179                
|                                    |                      
|Total                               | 18,737               

The
above table does not include royalties that we may be required to pay to the OCS and which
may reach, in the aggregate, as of December 31, 2004, $1.8 million (see Item 4.B.
Business Overview  Research and Development.). We are unable to reasonably
estimate the time and the amounts that we will eventually be required to pay to the OCS,
if at all, since these amounts depend on our ability to sell products based on the
OCS-funded technologies and the timing of such sales, if any.

# ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES

|A. | Directors
and Senior Management
|-- | -------------------------------

The
following table describes information about our executive officers and directors as of
March 16, 2005.

|Name                    | Age | Position                         
|----------------------- | --- | ---------------------------------
|
|
|
|
|
|Gad Goldstein           | 46  | Chairman of the Board            
|Aaron Crystal           | 61  | Director                         
|Arie Kilman             | 52  | Chief Executive Officer, Director
|Iris Yahal              | 44  | Chief Financial Officer, Director
|Dan Goldstein           | 51  | Director                         
|Shai Beilis             | 56  | Director                         
|Naamit Salomon          | 40  | Director                         
|Michael Chill (1)       | 38  | Director                         
|Amira Berkovitz-Amir(1) | 38  | Director                         

---

(1) An outside director

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Gad
Goldstein has served as a chairman of our board of directors since April 1998 and as a
director of Formula since January 1985. Mr. Goldstein was the vice president of Formula
from 1985 through 1995 and was appointed president of Formula in 1995. He is also a
director of other companies within the Formula Group, including Matrix IT Ltd., or Matrix,
Magic Software Enterprise Ltd., or Magic, Formula Vision Technologies (F.V.T.) Ltd. and
Sapiens International Corporation N.V., or Sapiens, all of which are publicly traded
companies. Mr. Goldstein holds a BA in economics and an MA in business administration,
both from Tel Aviv University. Gad Goldstein is the brother of Dan Goldstein, one of our
directors.

Aaron
Crystal founded Crystal System Solutions Ltd. In 1987, and served as its Chief
Executive Officer through 1996 and President through 2004. Mr. Crystal has served as one
of our directors since our formation. Between November 1999 and December 2004, he also
served as vice chairman of the board of directors. From 1983 to 1987 Mr. Crystal was vice
president  technical support of Mehish Computer Services.

Arie
Kilmanhas served as our chief executive officer since May 2003. Mr. Kilman has also
served as president and chief executive officer of BluePhoenix Solutions B.V. since its
inception in October 2001. Mr. Kilman previously served as the president of Liraz, which
he founded in 1984, and managed since then. From 1998 to 2000, Mr. Kilman served as chief
executive officer of Level 8. Mr. Kilman holds a BA degree in economics and computer
science from New York University.

Iris
Yahal has served as one of our directors since January 1, 1999 and as our chief
financial officer since October 1995. In addition, Ms. Yahal served as the controller of
several other Formula subsidiaries until December 1996. From 1991 until 1996, Ms. Yahal
served as the controller of Transtech Control Ltd., a subsidiary of Formula. Prior to
1991, Ms. Yahal worked as an auditor with Wallenstein and Co., a public accounting firm.
Ms. Yahal holds a BA in accounting and an MA in business administration, both from Tel
Aviv University and is a certified public accountant in Israel.

Dan
Goldstein has served as one of our directors since March 1993. Mr. Goldstein has
served as chairman of the board of directors and chief executive officer of Formula since
1985. Mr. Goldstein is also chairman of the board of Formula Vision and Matrix and is a
director of Magic and Sapiens. Mr. Goldstein holds a BA in mathematics and computer
sciences and an MA in business administration, both from Tel Aviv University. Dan
Goldstein is the brother of Gad Goldstein.

Shai
Beilis served as chairman of our board of directors from December 1995 until April
1998 and as vice chairman of our board of directors from April 1998 until November 1999.
Mr. Beilis continues to serve as one of our directors and as a member of our audit
committee. Mr. Beilis currently serves as chairman and chief executive officer of Formula
Ventures, a venture capital fund, member of the Formula group. Mr. Beilis also served as a
director of Formula from December 1997 to February 2005. 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.

Naamit
Salomonjoined our board of directors in December 2004. Ms. Salomon has served as vice
president, finance of Formula 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
privately held companies in the Formula Group. Ms. Salomon holds a BA degree in economics
and business administration from Ben Gurion University and an LLM degree from Bar-Ilan
University.

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Michael
Chillhas served as one of our independent directors and a member of our audit
committee since July 2003. From July 2003, Mr. Chill has served as an investment analyst
at the hedge fund Vertical Ventures LLP. Prior to that, Mr. Chill was an independent
advisor to various high technology companies and venture capital firms both in Israel and
the United States. During 2000 and the first half of 2001, Mr. Chill served as the
president and head of investment banking department at Jerusalem Global Ltd., a venture
capital and investment banking firm. Prior to that, from 1999, Mr. Chill served as a
managing director in the technology investment banking group at Gruntal and Co. Mr. Chill
holds a B.S. in accounting from the Sy Syms School of Business at Yeshiva University and
an MBA from the Columbia Business School.

Amira
Berkovitz-Amir joined our board of directors as one of our independent directors in
December 2004. Ms. Berkovitz-Amir serves as vice president, finance of Of-Tov Products
(2001) Ltd. a manufacturer in the food industry and a member of Osem Industries Group.
Previously, Ms. Berkovitz-Amir served as vice president, finance and controller of
Pri-Hagalil Industries, a manufacturer in the food industry. Ms. Berkovitz-Amir holds a BA
degree in economics and accounting and an MA in business administration, both from the
Hebrew University. Ms. Berkovitz-Amir is a certified public accountant in Israel.

|B. | Compensation
|-- | ------------

During
the year ended December 31, 2004, we paid to our outside directors and executive officers
aggregate remuneration of approximately $582,000. Under Israeli law, we are not required
to disclose, and have not otherwise disclosed, the compensation of our senior management
and directors on an individual basis. This amount includes amounts set aside or accrued to
provide pension, social security or similar benefits but does not include amounts expended
by us for automobiles made available to our officers and expenses (including business
travel, professional and business association dues and expenses) reimbursed to officers.

The
aggregate remuneration set forth in the foregoing paragraph does not include amounts we
paid to Formula under the terms of a management agreement, as consideration for management
services rendered to us by certain directors designated by Formula. These directors
currently include Gad Goldstein, Dan Goldstein and Naamit Salomon. See Item 7.B.
Related Party Transactions.

We
maintain written employment agreements with Arie Kilman, Iris Yahal and Aaron Crystal. The
employment agreements are not for a specific term and we may terminate any of them upon
prior notice of between three and six months. If we terminate any of these employment
agreements, we will have to pay the usual severance pay required under Israeli law for all
employees. The directors are not entitled to any other benefits upon termination. These
agreements provide for annual base salaries and other benefits like vacation, sick leave,
provision of automobiles, insurance contributions and non-compete and confidentiality
agreements. The agreements also entitle Mr. Kilman and Ms. Yahal to bonuses based on
achieving targets set by our board of directors.

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Mr.
          Kilman, in his former position as Lirazs chairman of the board of
          directors was granted by Liraz in May 2002 a loan in an amount equal to
          approximately $300,000, linked to the Israeli consumer price index, and bearing
          annual interest at a rate of 4%. Under the terms of the loan, the loan should be
          repaid to Liraz in four equal annual installments until 2006, but no later than
          termination of Mr. Kilmans employment. Mr. Kilman pledged in favor of
          Liraz 200,000 Lirazs shares he owned as a security for repayment of the
          loan. Following the share exchange transaction between us and Lirazs
          shareholders, effective as of November 14, 2002, Mr. Kilman replaced the pledged
          shares with 119,760 BluePhoenix shares. The amount of BluePhoenix shares pledged
          by Mr. Kilman was based on the exchange ratio determined in the share exchange
          agreement, pursuant to which every 1.67 shares of Liraz were exchanged for one
          BluePhoenix ordinary share. Except for the replacement of the pledged shares,
          the terms of the loan were not amended in any way. As of March 16, 2005, Mr.
          Kilman repaid $150,000 of the principal amount of the loan plus linkage
          differentials and accrued interest. Accordingly, one half of the pledged shares
          were released from the pledge. To date, Mr. Kilman has complied with all loan
          payment obligations under the loan agreement. An amount of $170,000 (including
          linkage differentials and accrued interest) is still outstanding.

|C. | Board
Practices
|-- | ---------------

Pursuant
to our articles of association, directors are elected at a general meeting of our
shareholders by a vote of the holders of a majority of the voting power represented at the
meeting. Additional directors may be elected between general meetings by a majority of our
directors. Our board is comprised of 9 persons, of which 2 have been determined to be
independent within the meaning of the applicable NASDAQ requirements. These independent
directors also serve as outside directors mandated under Israeli law and subject to
additional criteria to help ensure their independence. See Outside Directors,
below. 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. We
compensate our outside directors in an annual amount of $12,000 each. We do not compensate
our other directors for their services as directors (other than compensation we pay to
Formula pursuant to our management agreement with it). For information regarding the
employment agreements of our officers, see Item 6.B. Compensation. For
additional information, see Item 7.B. Related Party Transactions.

Our
board of directors has appointed a compensation committee, comprised of Messrs. Gad
Goldstein, Shai Beilis and Arie Kilman. The compensation committee is responsible for
making recommendations to the Board with respect to the granting of options to employees
and setting the compensation of our executive officers.

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Companies
trading on The NASDAQ Stock Market are generally required to have a majority of their
board members be independent. We are exempt from this requirement under the
controlled company exemption because more than 50% of our voting power is held
by Formula.

# 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. The Companies 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 elected by a majority vote
at a shareholders meeting, provided that either:

(1)       
          the majority of shares voted at the meeting, including at least one-third of the
          shares of non-controlling shareholders or their representatives voted at the
          meeting, vote in favor of election; or

(2)       
          the total number of shares of non-controlling shareholders voted against the
          election of the outside 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. At present, Mr. Michael Chill and Ms. Amira Berkovitz-Amir serve as our
outside directors, Mr. Chill to hold office until July 2006 and Ms. Berkovitz-Amir until
December 2007.

Each
committee exercising the powers of the board of directors is required to include at least
one outside director. However, the audit committee should include all the outside
directors.

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

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# 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 applicable NASDAQ rules, we are currently required to have at least two
independent directors and to maintain an audit committee, at least a majority of whose
members are independent of management. Our outside directors qualify as independent
directors under the applicable NASDAQ rules and those of the Securities and Exchange
Commission. We have established an audit committee, consisting of our two outside
directors, Mr. Michael Chill and Ms. Amira Berkovitz-Amir, as well as Mr. Shai Beilis. The
board has determined that both Michael Chill and Amira Berkovitz-Amir are audit
committee financial experts 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 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.

# Internal Auditor

Under
the Companies Law, the board of directors appoints 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.

# 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.

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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.

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 its articles of association, the approval of the audit committee and the
approval of the board of directors, as well as shareholder approval. An office holder who
has a personal interest in a matter that is considered at a meeting of the board of
directors or the audit committee may not be present at 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 such 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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Under
the Companies Law, a shareholder has a duty to act in good faith towards the company and
other shareholders and to refrain from abusing his power in the company including, among
other things, voting in a general meeting of shareholders on the following matters:

| |  | any
amendment to the articles of association;
| | - | ---------------------------------------------

| |  | an
increase of the company's authorized share capital;
| | - | ------------------------------------------------------

| |  | a
merger; or
| | - | ------------

| |  | approval
of interested party transactions that require shareholder approval.
| | - | ----------------------------------------------------------------------------

In
addition, any controlling shareholder, any shareholder who knowingly possesses power to
determine the outcome of a shareholder vote and any shareholder who, pursuant to the
provisions of a companys articles of association, has the power to appoint or
prevent the appointment of an office holder in the company, is under a duty to act with
fairness towards the company. The Companies Law does not describe the substance of this
duty.

For
information concerning personal interests of certain of our office holders and our
principal shareholders in certain transactions with us, see Item 7.B. Related Party
Transactions.

# 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 Holder
Insurance

|Our
articles of association provide that, subject to the provisions of the Companies Law, we
may enter into a contract for insurance of all or a part 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, in respect of each of the following:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 such act would not prejudice our interests; or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
financial obligation imposed on him or her in favor of another person.
| | - | ------------------------------------------------------------------------

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Indemnification of Office
Holders

|Our
articles of association provide that, subject to the provisions of the Companies Law, we
may indemnify our office holders in respect of an obligation or expense specified below
imposed on an office holder in respect of an act performed in his or her capacity as an
office holder, as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by an office holder or
charged to the office holder by a court, in a proceeding instituted against the office
holder by us or on our 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We
may undertake to indemnify an office holder as aforesaid, (a) prospectively, provided that
the undertaking is limited to categories of events which in the opinion of our board of
directors can be foreseen when the undertaking to indemnify is given, and to an amount set
by our board of directors as reasonable under the circumstances and (b) retroactively.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have entered into an undertaking to indemnify our office holders in specified limited
categories of events and in specified amounts, subject to the limitations set by the
Companies Law and our articles of association, as described above. For more information,
see Item 7.B. Related Party Transactions  Indemnification of Office
Holders.

Limitations on
Insurance and Indemnification

The
Companies Law provides that a company may not indemnify an office holder nor enter into an
insurance contract that 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.

69

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We
have procured directors and officers liability insurance and obtained all
necessary approvals.

|D. | Employees
|-- | ---------

The
table below presents certain information regarding the number of our employees, the sector
in which they are employed and their geographical area of employment, in the periods
indicated.

|                                  | 2004 | 2003 | 2002
|--------------------------------- | ---- | ---- | ----
|
|
|
|
|
|Technical Experts                 | 290  | 250  | 280 
|Research and Development          | 160  | 120  | 140 
|Sales, General and Administrative | 110  | 115  | 120 
|Total                             | 560  | 485  | 540 
|                                  |      |      |     
|                                 
|In Israel                         | 223  | 175  | 230 
|Outside Israel                    | 337  | 310  | 310 

These
employees include expert consultants who we train for the implementation of our
modernization tools and methodologies.

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 compatible with the United States Social Security Administration. Other
provisions of Israeli law and regulations govern matters such as the length of the
workday, minimum wages, other terms of employment and restrictions on discrimination. We
are also subject to the labor laws and regulations of other jurisdictions in the world
where we have employees.

|E. | Share
Ownership
|-- | ---------------

The
following table presents information regarding the ownership of our ordinary shares by the
persons listed in the table under Directors and Senior Management, as of March
16, 2005. The percentage of outstanding ordinary shares is based on 13,556,205 ordinary
shares outstanding as of March 16, 2005, (excluding 1,870,565 shares held by two of our
wholly owned subsidiaries).

70

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|Name                                                  | Shares beneficially
owned (1) |  | Options to purchaseordinary shares
|----------------------------------------------------- | ----------------------------- |  | ----------------------------------
|
|
|
|
|
|Arie Kilman (2)                                       |                               |  |                                   
|Dan Goldstein                                         |                               |  |                                   
|Gad Goldstein                                         |                               |  |                                   
|Aaron Crystal                                         |                               |  |                                   
|Shai Beilis (1)                                       |                               |  |                                   
|Iris Yahal (1)                                        |                               |  |                                   
|Naamit Salomon (1)                                    |                               |  |                                   
|Michael Chill (1)                                     |                               |  |                                   
|Amira Berkovitz-Amir (1)                              |                               |  |                                   
|All directors and officers as a group (9 persons) (4) |                               |  |                                   

---

|(1) | Each
of the directors and executive officers whose holdings are not separately
                    specified in the above table beneficially owns less than one percent
of our                     outstanding ordinary shares (including options held by each of
these persons).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mr.
Kilman was granted options to purchase ordinary shares under the following
                    terms: (i) Options to purchase 375,000 ordinary shares exercisable at
$2.25 per                     share and (ii) Options to purchase 200,000 ordinary shares
exercisable at $4.00                     per share. Of these grants, options to purchase
264,236 and 112,593 ordinary                     shares, respectively, are currently
exercisable.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes
294 shares that Anat Crystal, Mr. Crystals spouse, beneficially
                    owns.
|--- | ---------------------------------------------------------------------------------------------------

|(4) | Includes
options to purchase 467,829 ordinary shares currently exercisable at a
                    price and during the terms indicated in the table below:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|Number of Ordinary Shares
Underlying the Options | Exercise
Price | Expiration
|------------------------------------------------ | -------------- | ----------
|
|
|
|
|
|280,236                                          |                |           
|30,000                                           |                |           
|10,000                                           |                |           
|112,593                                          |                |           
|10,000                                           |                |           
|10,000                                           |                |           
|15,000                                           |                |           

71

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# Arrangements Involving
the Issuance of BluePhoenixs Shares or Grant of Options to Purchase Shares

The 1996 Share
Option Plan

In
1996, we adopted two option plans. One of these option plans has been terminated after all
options granted under it had been exercised.Pursuant to our other 1996 option
plan, as amended, we reserved 3,700,000 ordinary shares for issuance to our and our
subsidiaries directors, officers, consultants and employees. As of March 16, 2005,
options to purchase 2,132,587 ordinary shares were outstanding under the plan. The
exercise price of the options granted under the extant 1996 option plan ranges from $2.25
to $10.50.

Our
board of directors administers our 1996 option plan. Under the 1996 option plan, as
amended, options to purchase our ordinary shares may be granted to our and our
subsidiaries directors, officers, consultants and employees. Our board of directors
is empowered, among other things, to designate the grantees, dates of grant, the exercise
price of the options and the terms of exercise of the options. Unless determined otherwise
by the board, the options generally vest over a three-year period. Unvested options are
forfeited upon termination of employment, unless otherwise agreed. Under the 1996 option
plan, the grantee is responsible for all personal tax consequences of the grant and the
exercise of the options. Each option granted under the 1996 option plan is exercisable
during a term of ten years from the date of grant of the option. The 1996 option plan will
expire on August 6, 2013, except as to options outstanding on that date.

Options Granted to
Employees of One of Our Subsidiaries

In
connection with the purchase of a controlling interest in IntraComp Group Incorporated in
2000, we granted to certain employees of IntraComp options to purchase an aggregate of
70,000 of our ordinary shares. The options are exercisable at an exercise price of $9.625
per share and shall expire in August 2010.

Options Granted to
FIMI

In
January 2001, we granted FIMI, a creditor of our affiliate, Intercomp, a put option to
sell to us promissory notes issued by Intercomp in an aggregate principal amount of $3.5
million plus interest accrued since January 2001 at an annual rate of 5%, which could be
paid, subject to FIMIs approval, in BluePhoenixs ordinary shares. For
additional information regarding the terms of this put option, see Item 5.B.
Liquidity and Capital Resources  Contractual Commitments and Guarantees.

72

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Issuance
of Shares in connection with Call and Put Options in respect of Infinitys Holdings
in Intercomp

In
April 2004, a shareholder of Intercomp represented by Infinity, granted to us a call
option to purchase its entire holdings in Intercomp, exercisable until April 1, 2006. If
we do not exercise our option, Infinity will have a put option to cause us to purchase
Infinitys entire holdings in Intercomp, exercisable from April 2006 until September
2006. If either of the options is exercised by us or by Infinity, we shall be obliged to
issue to Infinity, as consideration for Intercomps shares, 100,000
BluePhoenixs ordinary shares and an additional amount of shares to be calculated
based on revenues generated from the sale of licenses to use Intercomps products.
The shares will be subject to a lock-up period until April 1, 2006. We may, at our option,
pay to Infinity the cash equivalent of such shares.

Convertible
Debentures and Warrants Purchased by Institutional Investors

On
March 30, 2004, we completed a $5 million private placement of our convertible debentures
and warrants to purchase BluePhoenixs ordinary shares to four institutional
investors. On February 18, 2005, in connection with discussions regarding the delayed
effectiveness of the registration statement required to be filed as part of the
transaction, the institutional investors and we amended certain terms of the transaction.
The debentures are convertible into our ordinary shares for a conversion price of $5.25
per ordinary share, subject to (i) adjustment for stock dividends, stock splits,
recapitalization and other similar events and (ii) anti-dilution adjustment. The
debentures are due on November 30, 2007. Interest accrues on the debentures at a rate
equal to the six-month LIBOR. Interest on the debentures is paid quarterly in cash or
BluePhoenix ordinary shares, at our discretion. The conversion rate with respect to
payments of interest on the debentures will be equal to 90% of the volume weighted average
price of our ordinary shares on the NASDAQ during the 20 trading days preceding the date
of payment of interest. In the event the volume weighted average price per ordinary share
(as calculated in the preceding sentence) for any 20 consecutive trading days exceeds
$6.56, then we may force the holders of the debentures to convert any or all of the
principal amount of the debentures held by them as of such date, subject to, among other
things, our having an effective resale registration statement at such time for the resale
of the ordinary shares underlying the debentures.

In addition to the debentures, the
institutional investors were issued warrants to purchase up to 285,714 of our ordinary
shares at an exercise price of $6.50 per share, subject to (i) adjustment for stock
dividends, stock splits, recapitalization and other similar events and (ii) anti-dilution
adjustment. The warrants are exercisable during a 5 years period commencing on September
2004.

Notwithstanding
the above, if as a result of any conversion of debentures or exercise of warrants, any of
the institutional investors will beneficially own more than 4.99% of our outstanding
ordinary shares (or 9.99%, in the case of a forced conversion of debentures), then that
investor will not have the right to convert its debenture or exercise its warrant, as the
case may be, in an amount in excess of such threshold. Furthermore, we will not issue
ordinary shares upon conversion of the debentures or exercise of the warrants in an
aggregate amount in excess of 19.99% of the total number of ordinary shares outstanding as
of March 30, 2004, without obtaining the approval of our shareholders prior to such
issuance.

73

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If
the debentures issued to the institutional investors are fully converted and the warrants
are fully exercised, we would be required to issue to the investors up to 1,238,095
ordinary shares, subject to adjustments.

If,
during a period of 360 days after the date on which the registration statement registering
the ordinary shares underlying the convertible debentures and the warrants is declared
effective, the volume weighted average price per ordinary share equals or exceeds the
market price of our shares on March 30, 2004, the institutional investors may purchase
from us additional debentures convertible into BluePhoenixs ordinary shares for a
conversion price of $4.50 per ordinary share at an aggregate purchase price of up to
$3,000,000 and receive additional warrants on the same terms as the initial warrants,
exercisable into such number of BluePhoenixs ordinary shares equal to 30% of the
ordinary shares into which the additional debentures are convertible.

If,
during the period mentioned above, the volume weighted average price per ordinary share
during any 10 consecutive trading days exceeds $12.825, we may require the institutional
investors to purchase, for an aggregate purchase price of up to $3,000,000, additional
debentures for an aggregate principal amount of $3,000,000, and warrants on the same terms
as the initial warrants, exercisable into such number of BluePhoenixs ordinary
shares equal to 30% of the ordinary shares into which the additional debentures are
convertible.

# ITEM 7. MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

|A. | Major
Shareholders
|-- | ------------------

The
following table presents information regarding the ownership of our ordinary shares at
March 16, 2005 by each person known to us to be the beneficial owner of 5% or more of our
ordinary shares. 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            | Ordinary Shares
Beneficially Owned
|--------------------------- | ----------------------------------
|
|
|
|
|
|Formula Systems (1985) Ltd. |                                   
|3 Hagalim Boulevard         |                                   
|Herzlia 46725, Israel       |                                   
|                            |                                   
|Aaron Crystal               |                                   
|                            |                                   
|Arie Kilman                 |                                   

---

|(1) | Unless
otherwise indicated, percentages in the above table are based on
               13,556,205 ordinary shares outstanding as of March 16, 2005, and do not
include                1,870,565 ordinary shares that two of our subsidiaries hold.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

74

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|(2) | Formula
owns of record 7,946,170 ordinary shares. Messrs. Dan Goldstein and Gad
               Goldstein have entered into agreements, which require them to vote their
               ordinary shares (an aggregate of 755,138 shares) as instructed by Formula.
As a                result of these voting agreements, Formula beneficially owns
approximately 64.2%                of our outstanding shares. Dan Goldstein is chairman
of the board and chief                executive officer of Formula. Dan Goldstein holds,
through a wholly owned                company, 50% interest in FIMGold LP which owns 33%
of the outstanding shares of                Formula. Gad Goldstein is a director and
president of Formula and owns 2.5% of                the outstanding shares of Formula.
Messrs. Dan and Gad Goldstein are brothers.                Based on the foregoing, Dan
Goldstein and Gad Goldstein each may be deemed to                share with Formula the
power to vote and dispose of our ordinary shares                beneficially owned by
Formula. Each of Dan Goldstein and Gad Goldstein disclaims                beneficial
ownership of the ordinary shares beneficially owned by Formula.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes
294 shares that Anat Crystal, Mr. Crystals spouse, beneficially
               owns.
|--- | ----------------------------------------------------------------------------------------------

|(4) | Includes
currently exercisable options to purchase 376,829 ordinary shares.
|--- | ---------------------------------------------------------------------------

|(5) | Percentage
is calculated based on 14,024,034 ordinary shares outstanding, which
               includes currently exercisable options to purchase 467,829 ordinary shares
by                two officers of the company.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All
of our ordinary shares have equal voting rights. Under our two buy-back programs (as
described in Item 5.B. Liquidity and Capital Resources), two of our
subsidiaries purchased 1,870,565 of our ordinary shares, as of March 16, 2005. Under
applicable Israeli law, the shares held by our subsidiaries have no voting rights and,
therefore, are excluded from the number of our outstanding shares. If our subsidiaries
purchase additional shares, the percentage of our outstanding shares controlled by Formula
would increase.

In
November 2002, we purchased through a share exchange transaction 86% of the outstanding
share capital of Liraz. As part of the transaction, we issued to Lirazs selling
shareholders, including Formula, 3,478,624 of our ordinary shares, constituting an
aggregate of 26% of our outstanding share capital. Of these shares, we issued to Formula
2,343,113 ordinary shares.

As
of March 15, 2005, there were 32 record holders of our ordinary shares. Of these record
holders, 17 holders had mailing addresses in the United States owning an aggregate of
approximately 53.8% of our outstanding ordinary shares, excluding the shares that our
subsidiaries hold. As of December 2, 2004, we had 1,407 beneficial shareholders.

|B. | Related
Party Transactions
|-- | --------------------------

Management Agreement
with Formula

|On
January 1, 1996, we signed a letter agreement with Argotec Ltd., at that time our
parent company wholly owned by Formula, pursuant to which Formula provides us with
administrative and management support. Under the agreement, Formula provides three of our
directors, including our chairman of the board, who is active in the direction of our
business. Additionally, Formula arranges to have certain volume discounts extended to us
as part of Formulas control group, and Formula provides us with administrative
services, including services relating to insurance, human resources, global planning, real
property leasing, and the department of motor vehicles.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

75

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Pursuant
to the letter agreement, we pay to Formula in return for its services, a management fee
equal to 3.0% of our revenues, up to a maximum of $180,000 per year. The amount of
management fee was negotiated between us and Argotec in 1996 when we initially entered
into the letter agreement. The amount of the fee was determined based primarily on the
parties good faith estimates of the value of services to be provided by the three
directors seconded to us by Formula and the extent of our expected cost savings to be
generated by Formulas assistance in obtaining volume discounts and the provision of
administrative support. Although we did not engage in actual negotiations with potential
third-party providers of comparable services, the fee was based in part on our market
knowledge of the cost of obtaining such services from third parties and/or developing the
internal resources necessary to carry out these functions ourselves.

We
pay the management fee to Formula in installments at the end of each quarter. For the year
ended December 31, 2004, a management fee of $180,000 was payable to Formula under this
agreement, representing 0.3% of our revenues in 2004. In addition, we reimburse Formula
from time to time for expenses Formula incurred on our behalf.

For
more information regarding the positions that some of our directors hold in Formula and
their holdings in Formulas shares, see Item 6.A. Directors and Senior
Management and Item 7.A. Major  Shareholders.

Cooperation with
Matrix

We
have been cooperating with Matrix Ltd., a subsidiary of Formula, in performance of
modernization projects in Israel and license agreements. In 2004 revenues from sales
through Matrix amounted to $1.9 million.

Matrix
also serves as a subcontractor in several projects we perform. In 2004 the aggregate
expense to Matrix subcontractors was $2.2 million.

Registration Rights
Agreements, Voting Agreements

In
1997, we entered into a registration rights agreement with Formula, Dan Goldstein,
Gad Goldstein, Aaron Crystal and an additional shareholder, referred to collectively as
the holders. Under this registration rights agreement, the holders have certain
registration rights with respect to their ordinary shares. We have agreed that, beginning
January 31, 1998, at the request of the holders of a majority of the shares held by the
persons and entities who signed the agreement, and on no more than two occasions, we will
file a registration statement under the Securities Act for an offering of their shares
with respect to which registration is requested. In addition, if we otherwise propose to
register our ordinary shares under the Securities Act, these holders may request that we
register their shares as well, subject to certain limitations. We 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.

76

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In
October 2002, we granted certain registration rights to Formula, Mr. Arie Kilman and other
shareholder of Liraz in the Share Exchange Agreement with those shareholders. Under this
agreement, we 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, we 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 we otherwise propose to register our ordinary
shares under the Securities Act, these holders may request that we register their shares
as well, subject to certain limitations. We 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
May 2004, our board of directors approved to include 400,000 BluePhoenixs shares
held by certain directors and officers in a registration statement filed by us on June 1,
2004 and declared effective on March 15, 2005.

Messrs.
          Dan Goldstein and Gad Goldstein have entered into voting agreements that require
          them to vote their ordinary shares as instructed by Formula.

Transactions Between
Us and Our Subsidiaries

We
currently hold 40% of the outstanding share capital of MultiConn Technologies, and have an
option to increase our holdings in MultiConn Technologies to 60%. In May 2004, we provided
on behalf of MultiConn Technologies a guarantee in the amount of $300,000. For more
information about M.S.I. MultiConn and MultiConn Technologies, see Item 4.B.
Business Overview  Investments and Acquisitions  MultiConn.

In
the fourth quarter of 2003, we exercised an option to purchase from Intercomp certain
technology for an aggregate of $1.9 million. In addition, we undertook to pay to Intercomp
royalties of 25% of the revenues generated from the purchased technology. In connection
with the purchase of Intercomps technology, we assumed the rights and obligations of
Intercomp under a distribution agreement, pursuant to which Intercomp granted rights to a
distributor to further develop and distribute Intercomps products. As of December
31, 2004, we lent to Intercomp an aggregate of approximately $1.8 million. The principal
of the loans plus interest accrued are convertible into preferred shares of Intercomp,
subject to certain conditions. For more information about Intercomp, see Item 4.B.
Business Overview  Investments and Acquisitions  Intercomp.

Transactions Between
Us and Our Chief Executive Officer

Mr.
          Kilman, in his former position as Lirazs chairman of the board of
          directors, was granted by Liraz in May 2002 a loan in an amount equal to
          approximately $300,000. As of March 16, 2005, Mr. Kilman repaid $150,000 of the
          principal amount of the loan plus linkage differentials and accrued interest.
          For more information relating to the loan granted to Mr. Kilman, see Item
          6.B. Compensation.

77

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Indemnification of
Office Holders

Since
July 2003, we grant to each of our office holders an indemnification letter, pursuant to
which we undertake 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.

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.

78

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Office Holders
Insurance

We
have obtained an insurance policy covering our directors and officers
liability. Our subsidiaries participate in the premium payments of the insurance, on a
proportional basis. The total premium we paid during 2004 was approximately $80,000.

|C. | Interests
of Expert and Counsel
|-- | -------------------------------

Not applicable.

# ITEM 8. FINANCIAL
INFORMATION

|A. | Consolidated
Statements and Other Financial Information
|-- | -------------------------------------------------------

Financial Statements

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

Legal Proceedings

We
are not involved in any 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
July 2003, a former Liraz shareholder filed an application with the Tel Aviv, Jaffa
District Court to approve a claim filed by him against us, as a class action. The claim
relates to the acquisition of Liraz shares, which we completed in March 2003. The
shareholder alleges that the share price we 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.
Under Israeli law, the courts approval is required for the plaintiff to represent
all of the shareholders of Liraz who sold their shareholdings to us pursuant to the tender
offer and the mandatory acquisition. The plaintiff has applied for such approval in the
lawsuit. No hearing has been scheduled for this lawsuit. Based on our analysis of the
statement of claim, including an evaluation of the fair value of the Liraz shares, and the
price paid for Liraz in a previous transaction immediately prior to the tender offer, we
believe that the allegations against us in this proceeding are without merit and we intend
to vigorously defend the claim and contest the allegations made therein.

79

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Sogeti
Nederland B.V., referred to as Sogeti, a Dutch company, has notified us of the termination
of a migration project which was performed jointly by Sogeti and one of our wholly owned
subsidiaries, ASE B.V., for a Dutch customer, NV Interpolis BTL, due to an alleged breach
on our part. The project was performed by Sogeti as prime contractor and by ASE as
subcontractor. BluePhoenix acted as subcontractor of ASE. In March 2004, Sogeti was
granted by the district court in Amsterdam leave to put a lien over a bank account of ASE
pursuant to an ex parte application. In the application, Sogeti claims that it has to
make, or has made, a refund to Interpolis of 2.2 million euro and that it may suffer
losses of a least 150,000 euro. For purposes of the lien application, Sogeti estimates the
aggregate amount of the claim at 3 million euro. Sogeti did not file a claim against us by
the due date as required under the Dutch law, and as a result, the lien was cancelled.

Our
management examined the work done by us and concluded that we had performed our
obligations in connection with this project. Therefore, we believe that the alleged claim
of Sogeti as described in the application for the lien has no grounds and is without
merit. If a claim is filed against us we intend to vigorously defend it.

Dividend policy

We
have never declared or paid dividends to our shareholders and we do not intend to pay
dividends in the future. We anticipate that we will retain all of our future earnings for
use in the expansion and operation of our business.

|B. | Significant
Changes
|-- | -------------------

Except
as otherwise disclosed in this annual report, there has been no material change in our
financial position since December 31, 2004.

# ITEM 9. THE OFFER AND
LISTING

|A. | Offer
and Listing Details
|-- | -------------------------

The
following table shows the high and low closing price for our ordinary shares on the NASDAQ
National Market for the periods indicated.

|Calendar Period | Price Per Share
|--------------- | ---------------
|
|
|
|
|2000            |                
|                |                
|2001            |                
|                |                
|2002            |                
|                |                
|2003            |                
|First Quarter   |                
|Second Quarter  |                

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|Calendar Period          | Price Per Share
|------------------------ | ---------------
|
|
|
|
|Third Quarter            |                
|Fourth Quarter           |                
|                         |                
|2004                     |                
|First Quarter            |                
|Second Quarter           |                
|Third Quarter            |                
|Fourth Quarter           |                
|September                |                
|October                  |                
|November                 |                
|December                 |                
|                         |                
|2005                     |                
|January                  |                
|February                 |                
|March (through March 16) |                

The
following table shows the high and low closing price for our ordinary shares on the TASE
for the periods indicated.

|Calendar Period          | Price Per Share
|------------------------ | ---------------
|
|
|
|2001(from January 21)    |                
|                         |                
|2002                     |                
|                         |                
|2003                     |                
|First Quarter            |                
|Second Quarter           |                
|Third Quarter            |                
|Fourth Quarter           |                
|                         |                
|2004                     |                
|First Quarter            |                
|Second Quarter           |                
|Third Quarter            |                
|October                  |                
|November                 |                
|December                 |                
|2005                     |                
|January                  |                
|February                 |                
|March (through March 16) |                

|B. | Plan
of Distribution
|-- | --------------------

Not applicable.

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|C. | Markets
|-- | -------

Our
ordinary shares have been traded in the United States on the NASDAQ National Market since
our initial public offering on January 30, 1997 and were not publicly traded prior to
this date. The symbol on the NASDAQ National Market for our ordinary shares is BPHX. On
January 21, 2001, we listed our ordinary shares for trading on the Tel Aviv Stock
Exchange.

|D. | Selling
Shareholders
|-- | --------------------

Not applicable.

|E. | Dilution
|-- | --------

Not applicable.

|F. | Expenses
of the Issue
|-- | ---------------------

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

|A. | Share
Capital
|-- | -------------

Not applicable.

| | Pursuant
to Marketplace Rule 4350(a) of NASDAQ, we received a permanent exemption from Marketplace
Rule 4350(b)(1)(A), which requires a company to distribute to its shareholders copies of
its annual report containing its audited financial statements. We follow the common
practice among TASE companies, and do not send our annual financial statements to
shareholders. A copy of our annual report on Form 20-F is posted on our website promptly
after it is filed with the SEC.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|B. | Memorandum
and Articles of Association
|-- | --------------------------------------

We
are registered with the Israeli Companies Register under the number 52-004306-8. 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
| | - | -----------------------------------------------------------------------------------

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| |  | 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 that are in a state of
war with Israel.

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.

Dividend Rights 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 pay the dividend as an allotment of shares or
a distribution of assets. If we do decide to issue dividends by an allotment of shares at
a price lower than the nominal value of those shares, we must convert a portion of our
profits or any other source of equity to share capital in an amount equal to the
difference between the nominal value of the shares and the price paid in the dividend. If
dividends remain unclaimed for seven years from the date we declared the dividend, they
lapse and revert 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.

Redemption provisions

In
accordance with our articles of association, we may issue redeemable shares and
accordingly redeem those shares. Our board may attach to redeemable shares the attributes
of shares, including voting rights and the right to participate in profits.

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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, whenever it
decides it is appropriate, and shall, within 21 days after receiving a written demand from
one director or from one or more shareholders representing at least 10% of the outstanding
share capital and 1% of the voting power, 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 35% 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 to another later time if such time is specified in the
original notice convening the general meeting or if we give notice to the shareholders of
another time at least 72 hours before the date fixed for the adjourned meeting. 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 that 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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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.

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.

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|C. | Material
Contracts
|-- | ------------------

We
consider the agreements related to the $5 million private placement of convertible
debentures and warrants completed in March 2004, the acquisition of Lirazs shares
and our investments in Mainsoft Corporation, IntraComp Group Inc. and Intercomp Ltd. as
material contracts. For a summary of the terms of these investments, see Item 4.B.
Business Overview  Investments and Acquisitions and Item 5.B. Liquidity
and Capital Resources. In addition, the following agreements with Microsoft and
SDCUdvikling are material to our business.

Licensing
Agreement with Microsoft

In
August 1998, we entered into a Windows source code license agreement with Microsoft that
terminated and superseded our prior arrangement with Microsoft. In May 2002, the parties
entered into an amendment to the license agreement that expanded our access to certain
Microsoft development technologies.

Under
the terms of the agreement, as amended, we continue to have access to specified software
code and documentation for specified versions of Windows, Windows NT, and Windows XP,
collectively referred to as the licensed software. The agreement grants us the right to
distribute the licensed software as a component of our Visual MainWin® development kit
and runtime products. The agreement provides for the payment of royalties to Microsoft
that are based upon the licensing of our Visual MainWin® products, which include the
licensed software. The agreement has a perpetual term although it may be terminated
earlier under certain circumstances, including in the event of change of control of either
of the parties.

The
agreement provides that in the event that we cease the active distribution or licensing of
our Visual MainWin® products for more than one year, we will be deemed to have granted
to Microsoft a worldwide, exclusive, perpetual, irrevocable, royalty-free license to our
Visual MainWin® products.

The
agreement provides for a procedure under which we may be granted by Microsoft a waiver of
payment of certain royalties to Microsoft relating to specific customers. Upon recording
revenue from a customer, we accrue the royalties due to Microsoft in product cost of
revenues and often apply for a waiver. We recognize a reduction in product cost of
revenues when a waiver is approved by Microsoft.

In
December 2003, we entered into an independent contractor agreement with Microsoft. In
accordance with this agreement, Microsoft agreed to offset the value of the services we
performed under the independent contractor agreement from accrued royalties of up to
$1,605,000. During the year ended December 31, 2004, we accrued royalties due to Microsoft
of $325,000, and recognized credits (reductions to expense) related to waivers and to
services performed of $125,000 and $635,000, respectively.

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Our
ability to develop, sell and market our Visual MainWin® products that use the licensed
software is dependent upon the continued access to the licensed software and updated
additional source code. While we believe that our relationship with Microsoft will
continue on terms acceptable to us, a change in or termination of the agreement could
prevent us from developing and selling certain products and materially adversely affect
our business, results of operations and financial condition.

Services
Agreement with SDC Udvikling

In
October 2002, we entered into a services agreement with an affiliated company of SDC,
named SDC Udvikling A/S, for the provision of IT development services related to our tool,
the AppBuilder. Under the agreement, this customer purchased from us services to be
rendered beginning on the date of signing of the agreement through the end of 2004, as
will be specified in purchase orders to be issued by the customer from time to time.

|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. 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 securities pursuant to the general permit issued
under the Israeli Currency Control Law, 1978. Neither our memorandum 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.

|E. | Taxation
|-- | --------

Israeli Taxation

The
following is a description of material tax consequences regarding the ownership and
disposition of the Companys ordinary shares under Israeli tax laws to which U.S. and
other non-Israeli shareholders may be subject. The information below does not apply to
specified persons or cover specified situations. Therefore, you are advised to consult
your own tax advisor as to particular tax consequences unique to you related to an
investment in our ordinary shares including the effects of applicable Israeli or foreign
or other tax laws and possible changes in the tax laws.

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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 condition
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 that 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.

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 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 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 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 ordinary shares who is a resident of the United States will be 25% or 12.5% if
certain conditions are met, including, inter alia that the holder is a corporation which
holds, directly or indirectly, shares representing 10% or more of the voting power in our
company during any part of the 12-month period preceding the date of payment of the
dividend. However, under the Law for the Encouragement of Capital Investments, 1959 (the
Investments Law), dividends generated by an approved enterprise are taxed at the rate of
15%.

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United States Federal
Income Tax Considerations

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

| |  | an
individual citizen or resident of the U.S. for U.S. federal income tax purposes;
| | - | -----------------------------------------------------------------------------------

| |  | a
corporation or partnership (or another entity taxable as a corporation or partnership for
U.S.                   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 U.S. federal income tax regardless of its
source; or
| | - | -------------------------------------------------------------------------------------------------

| |  | a
trust (i) if, in general, a U.S. court is able to exercise primary supervision over its
                  administration and one or more U.S. persons have the authority to
control all of                   its substantial decisions or (ii) that has in effect a
valid election under                   applicable U.S. Treasury regulations to be treated
as a U.S. person.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Unless
otherwise specifically indicated, this discussion does not consider the U.S. tax
consequences to a person that is not a U.S. holder and considers only U.S. holders that
will own the ordinary shares 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 U.S. federal income taxation that
may be relevant to any particular U.S. holder based on the U.S. holders individual
circumstances. In particular, this discussion does not address the U.S. federal income tax
consequences to U.S. holders who are broker-dealers or who own, directly, indirectly or
constructively, 10% or more of our outstanding voting shares, U.S. holders holding the
ordinary shares as part of a hedging, straddle or conversion transaction, U.S. holders
whose functional currency is not the U.S. dollar, insurance companies, tax-exempt
organizations, financial institutions, persons who acquired their shares upon the exercise
of employee 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 through, a
partnership or other pass-through entity is not considered, nor is the possible
application of U.S. federal estate or gift taxes or any aspect of state, local or non-U.S.
tax laws.

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

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Taxation
on Distributions on the Ordinary Shares

We
have never paid dividends, and currently do not intend to pay dividends in the future. If
we make distributions in the future, the amount of the distribution with respect to the
ordinary shares 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 Taxation  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 to a U.S. holder will be
treated as dividend income to the extent that the distribution does not exceed our current
and accumulated earnings and profits, as determined for U.S. federal income tax purposes.
Dividends that are received by U.S. holders that are individuals, estates or trusts 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 U.S. holders, are taxed at ordinary income rates. No dividend received by a U.S.
holder will be a qualified dividend (1) if the U.S. holder held the ordinary share
with respect to which the dividend was paid for less than 61 days during the 121-day
period beginning on the date that is 60 days before the ex-dividend date with respect to
such dividend, excluding for this purpose, under the rules of Code section 246(c), any
period during which the U.S. holder has an option to sell, is under a contractual
obligation to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise diminished its
risk of loss by holding other positions with respect to, such ordinary share (or
substantially identical securities); or (2) to the extent that the U.S. holder is
under an obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in property substantially similar or related to the ordinary share
with respect to which the dividend is paid. If we were to be a passive foreign
investment company (as such term is defined in the Code) for any year, dividends
paid on our ordinary shares in such year or in the following year would not be qualified
dividends. In addition, a non-corporate U.S. 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.

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

Dividends
paid by us in NIS will be included in the income of U.S. 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 the distribution is included in income. U.S. holders will
have a tax basis in NIS for U.S. 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 U.S. source ordinary income or loss.

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Subject
to the limitations set forth in the Code and the Treasury regulations thereunder, U.S.
holders may elect to claim as a foreign tax credit against their U.S. federal income tax
liability the Israeli income tax withheld from dividends received in respect of the
ordinary shares. 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 U.S. 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. U.S. 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 U.S. holder will be denied a foreign tax
credit for Israeli income tax withheld from a dividend received on the ordinary shares (i)
if the U.S. holder has not held the ordinary shares 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 U.S. holder is under an obligation to make related
payments with respect to positions in substantially similar or related property. Any days
during which a U.S. holder has substantially diminished its risk of loss on the ordinary
shares are not counted toward meeting the required 16-day holding period.

Taxation
on Disposition of the Ordinary Shares

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, a U.S. holder will recognize capital gain or loss in an amount equal to the
difference between the amount realized on the disposition and the U.S. holders tax
basis in the ordinary shares. The gain or loss recognized on the disposition will be
long-term capital gain or loss if the U.S. holder held the ordinary shares for more than
one year at the time of the disposition. Gain or loss recognized by a U.S. holder on a
sale, exchange or other disposition of ordinary shares will be treated as U.S. source
income or loss for U.S. foreign tax credit purposes.

A
U.S. holder that uses the cash method of accounting calculates the dollar value of the
proceeds received on the sale as of the date that the sale settles. However, a U.S. holder
that uses the accrual method of accounting is required to calculate the value of the
proceeds of the sale as of the trade date and may therefore realize foreign currency gain
or loss. A U.S. holder may avoid realizing foreign currency gain or loss by electing to
use the settlement date to determine the proceeds of sale for purposes of calculating the
foreign currency gain or loss. In addition, a U.S. holder that receives foreign currency
upon disposition of ordinary shares and converts the foreign currency into dollars after
the settlement date or trade date (whichever date the U.S. holder is required to use to
calculate the value of the proceeds of sale) 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 U.S. 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 U.S. holder must determine under which of
three alternative taxing regimes it wishes to be taxed:

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| |  | The
QEF regime applies if the U.S. holder elects to treat us as a qualified
electing fund (QEF) for the first taxable year in which the U.S. holder
owns our ordinary shares 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 U.S. 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 U.S. holder for its taxable year in which our taxable year ends,
whether or not such amounts are actually distributed to the U.S. holder. A U.S. holders
basis in our ordinary shares 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 U.S. holder to treat any gain realized on the disposition of his
ordinary shares as capital gain.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Once
made, the QEF election applies to all subsequent taxable years of the U.S. holder in
which it holds our ordinary shares and for which we are a PFIC, and can be revoked only
with the consent of the Internal Revenue Service. The QEF election is made by attaching a
completed Internal Revenue Service Form 8621, including the PFIC annual information
statement, to a timely filed United States federal income tax return. Even if a QEF
election is not made, a U.S. person who is a shareholder in a PFIC must file a completed
Internal Revenue Service Form 8621 every year.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
a QEF election is made after the first taxable year in which a U.S. holder holds our
ordinary shares 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 are publicly traded. Pursuant to this regime, an electing U.S. holders
ordinary shares are marked-to-market each year and the U.S. 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 and the U.S. holders adjusted
tax basis therein. Losses are allowed only to the extent of net mark-to-market gain
previously included by the U.S. holder under the election for prior taxable years. An
electing U.S. holders adjusted basis in our ordinary shares 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 is treated as
ordinary income, and loss on the sale of our ordinary shares, 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 cease to be marketable or the
Internal Revenue Service consents to the revocation of the election.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

92

---

---



| | If
the mark-to-market election is made after the first taxable year in which a U.S. holder
holds our ordinary shares and we are a PFIC, then special rules would apply.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
U.S. 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 that is greater than 125% of the average distributions
received by the U.S. holder from us over the shorter of either the preceding three years
or such U.S. holders holding period for our ordinary shares, or (2) 100% of the
gain from the disposition of our ordinary shares (including gain deemed recognized if the
ordinary shares are used as security for a loan).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Excess
distributions must be allocated ratably to each day that a U.S. holder has held our
ordinary shares. A U.S. 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 U.S. holder would be taxed at the highest tax rate for
each such other year applicable to ordinary income. The U.S. 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 U.S. 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
U.S. person who inherits shares in a foreign corporation that was a PFIC in the hands of
the decedent (who was not a nonresident 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 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 2004 we were not a PFIC and currently we expect that we will not be a
PFIC in 2005. 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, 2005 or in a future year. We will
notify U.S. holders in the event we conclude that we will be treated as a PFIC for any
taxable year to enable U.S. holders to consider whether or not to elect to treat us as a
QEF for U.S. federal income tax purposes or to mark to market the ordinary
shares or to become subject to the excess distribution regime.

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

93

---

---



Information
Reporting and Backup Withholding

A
U.S. 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. Backup withholding will not apply
with respect to payments made to exempt recipients, including corporations and tax-exempt
organizations, or if a U.S. holder provides 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 U.S.
federal income tax liability of a U.S. holder, or alternatively, the U.S. 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-U.S.
holders of Ordinary Shares

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

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

Non-U.S.
          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 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-U.S. 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 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-U.S. holders foreign
status           or the non-U.S. 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 U.S. federal income tax liability of
          a non-U.S. holder, or alternatively, the non-U.S. 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.

94

---

---



|F. | Dividend
and Paying Agents
|-- | --------------------------

Not applicable.

|G. | Statement
by Agents
|-- | -------------------

Not applicable.

|H. | Documents
on Display
|-- | --------------------

BluePhoenix
files annual and 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.

The
SEC maintains an Internet Web site at http://www.sec.gov that contains reports and
other material that are filed through the SECs Electronic Data Gathering, Analysis
and Retrieval (EDGAR) system. BluePhoenix began filing through the EDGAR
system beginning on November 14, 2002.

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

Information
about us is also available on our Web site at http://www.bphx.com. Such information
on our Web site is not part of this annual report.

BluePhoenix,
as a foreign private issuer, is exempt from the rules under the Exchange Act prescribing
the furnishing and content of proxy statements, and BluePhoenix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,
BluePhoenix 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. A copy of
each report submitted in accordance with applicable United States law is available for
public review at our principal executive offices.

|I. | Subsidiary
Information
|-- | ----------------------

Not applicable.

95

---

---



# ITEM 11. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In
light of the nature of our activities, we invest our cash and cash equivalents, in
short-term time deposits. As of December 31, 2004, we invested substantially all of the
cash we held in dollars, euro and DKK currency accounts. In addition, we had outstanding
loans in dollars, euro and NIS. Fluctuations in foreign currency exchange rates, such as
euro or NIS versus the dollar may have a negative impact on our operating results and
financial condition. 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 versus any other applicable foreign currencies.

We
do not engage in currency speculation. We do not hold nor have we issued any derivatives
or other financial instruments for trading purposes. In case we use financial instruments,
we include the gains and losses on these transactions in the statement of operations in
the period in which the changes in the exchange rates occur.

# ITEM 12. DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

96

---

---



|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.We have carried out an evaluation, as
          of the end of our fiscal year, under the supervision and with the participation
          of our management, including our chief executive officer and chief financial
          officer, of our internal control over financial reporting and the effectiveness
          of the design and operation of our disclosure controls and procedures. Based
          upon that evaluation, the chief executive officer and chief financial officer
          concluded that our disclosure controls and procedures are effective in assuring
          that all material information relating to our company is made known to them.

(b)
Internal Controls.Since the date of the evaluation described above,
          there have been no significant changes in our internal controls over financial
          reporting or in other factors that have materially affected, or are reasonably
          likely to materially affect, our internal control over financial reporting.

# ITEM 16A. AUDIT
COMMITTEE FINANCIAL EXPERT

Our
board of directors has determined that Mr. Michael Chill and Ms. Amira Berkovitz-Amir,
both members of our audit committee, are audit committee financial experts, as defined by
applicable SEC regulations.

# ITEM 16B. CODE OF ETHICS

BluePhoenix
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 all
BluePhoenixs employees, investors and others upon request to the following address:
BluePhoenix Solutions Ltd. 8 Maskit st. Herzliya 46120, Israel, Attn: Legal Advisor. Any
waiver of this code for executive officers or directors will be disclosed through the
filing of a Form 6-K.

97

---

---



# ITEM 16C. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Policy of 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.

Principal Accountant Fees
and Services

BluePhoenix
paid the following fees for professional services rendered by Ziv Haft certified public
accountants (Isr.) and other BDO member firm, for the years ended December 31, 2003 and
2004:

|                   | 2004 | 2003
|------------------ | ---- | ----
|
|
|
|
|Audit Fees         |      |     
|Audit-Related Fees |      |     
|Tax Fees           |      |     
|All Other Fees     |      |     
|                   |      |     
|Total              |      |     

The
audit fees for the years ended December 31, 2004 and 2003 were for professional services
rendered for the audits of our annual consolidated financial statements, review of our
consolidated quarterly financial statements, statutory audits of BluePhoenix and its
subsidiaries, issuance of comfort letters, consents and assistance with review of
documents filed with the SEC.

The
audit-related fees for the years ended December 31, 2004 and 2003 were for assurance and
related services related to accounting consultations and audits in connection with
acquisitions, issuance of convertible debentures and related warrants and review of our
registration statement by the SEC.

Tax
fees for the years ended December 31, 2004 and 2003 were for services related to tax
compliance, including the preparation of tax returns and claims for refund, and tax
planning and tax advice, including assistance with tax audits and appeals, tax services
for employee benefit plans and assistance with respect to requests for rulings from tax
authorities.

98

---

---



# 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.

99

---

---



|P A R T  III
|------------
|            

# ITEM 17. FINANCIAL
STATEMENTS

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

# ITEM 18. FINANCIAL
STATEMENTS

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

# ITEM 19. EXHIBITS

Exhibit No.

|1.1 |  | English
translation of the Memorandum of Association as amended on July 23, 2003(1)
|--- |  | -----------------------------------------------------------------------------------

|1.2 |  | Articles
of Association as amended on January 15, 2001(2)
|--- |  | ---------------------------------------------------------

|4.1 |  | Cooperation
agreement dated August 10, 1999, between ForSoft Ltd. and the Registrant (English
                       summary accompanied by Hebrew original) (3)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Agreement
dated June 12, 2003, among the Registrant, the owners of all of the issued and
                       outstanding common stock of IntraComp Group Incorporated (4)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Agreement
dated January 11, 2001 among the Registrant, the Israel Mezzanine Fund L.P., The
                        Israel Mezzanine Fund, The Jordan (Bermuda) Investment Company
Ltd.(2)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Amendment
dated August 7, 2003 to agreement among the Registrant, the Israel Mezzanine Fund
                        L.P., The Israel Mezzanine Fund and The Jordan (Bermuda)
Investment Company Ltd. dated January                         11, 2001 (6)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Share
Purchase Agreement dated March 30, 2004, among the Registrant and four institutional
                        investors in connection with a $5 million private placement(5)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Amendment
dated February 18, 2005 to Share Purchase Agreement among the Registrant and four
                        institutional investors in connection with a $5 million private
placement(5)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | Registration
Rights Agreement dated March 30, 2004, among the Registrant and four institutional
                       investors in connection with a $5 million private placement(5)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

100

---

---



Exhibit No.

|4.8 |  | Share
Exchange Agreement dated October 13, 2002 among the Registrant, Formula Systems (1985)
and                         certain shareholders of Liraz Systems Ltd.(4)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | The
1996 Share Option Plan--Part One, as amended on January 28, 1997, December 5, 1999,
December                        18, 2000, December 26, 2000 and August 6, 2003(6)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Agreement
dated January 1, 1996 among the Registrant and Argotec Ltd.(7)
|---- |  | ------------------------------------------------------------------------

|4.11 |  | Form
of voting agreement dated September 30, 1996 between Argotec Ltd. and each of Dan
Goldstein                        and Gad Goldstein (7)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | English
translation of Loan Agreement between Liraz Systems Ltd. and Arie Kilman dated April 2000
                       as amended by the Addendum dated April 2002(6)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 |  | Form
of Indemnification Letter dated July 24, 2003 between the Registrant and certain office
                       holders(6)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------

|4.14 |  | Summary
of credit line Letter Agreement between the Registrant and Bank Leumi Le'Israel Ltd.(6)
|---- |  | -----------------------------------------------------------------------------------------------

|8 |  | List
of Subsidiaries
|- |  | --------------------

|10.1 |  | Consent
of Ziv Haft certified public accountants (Isr.) BDO member firm
|---- |  | -----------------------------------------------------------------------

|12.1 |  | Certification
of the Chief Executive Officer pursuant toss.302 of the Sarbanes-Oxley Act
|---- |  | ----------------------------------------------------------------------------------------

|12.2 |  | Certification
of the Chief Financial Officer pursuant toss.302 of the Sarbanes-Oxley Act
|---- |  | ----------------------------------------------------------------------------------------

|13.1 |  | Certification
of the Chief Executive Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant to
                     ss.906 of the Sarbanes-Oxley Act
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|13.2 |  | Certification
of the Chief Financial Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant to
                     ss.906 of the Sarbanes-Oxley Act
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

---

(1)    Incorporated
by reference to the Registration Statement on Form F-1 filed with the Securities and
 Exchange Commission on December 24, 1996.(2)    Incorporated
by reference to the Registrant annual report on Form 20-F filed with the Securities and
 Exchange Commission on June 29, 2001.(3)    Incorporated
by reference to the Registrant annual report on Form 20-F filed with the Securities and
 Exchange Commission on June 28, 2002.

101

---

---



(4)     Incorporated
by reference to the Registrant annual report on Form 20-F filed with the Securities and
 Exchange Commission on June 19, 2003.(5)     Incorporated
by reference to the Registration Statement on Form F-3 filed with the Securities and
 Exchange Commission on June 1, 2004, as amended on November 9, 2004 and on February 18,
2005.(6)     Incorporated
by reference to the Registrant annual report on Form 20-F filed with the Securities and
 Exchange Commission on June 1, 2004, as amended on November 9, 2004.(7)     Incorporated
by reference to Amendment No. 1 to the Registration Statement on Form F-1 filed with the
 Securities and Exchange Commission on January 28, 1997.     Previously
submitted.

102

---

---



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.

| |  | BLUEPHOENIX SOLUTIONS LTD.(Registrant)BY: /S/ Iris Yahal
Iris YahalChief Financial Officer
| |  | --------------------------------------------------------------------------------------------------------

Date: March 30, 2005



---

---



# EXHIBIT INDEX

Exhibit No.

|1.1 |  | English
translation of the Memorandum of Association as amended on July 23, 2003(1)
|--- |  | -----------------------------------------------------------------------------------

|1.2 |  | Articles
of Association as amended on January 15, 2001(2)
|--- |  | ---------------------------------------------------------

|4.1 |  | Cooperation
agreement dated August 10, 1999, between ForSoft Ltd. and the Registrant (English
                       summary accompanied by Hebrew original) (3)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Agreement
dated June 12, 2003, among the Registrant, the owners of all of the issued and
                       outstanding common stock of IntraComp Group Incorporated (4)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 |  | Agreement
dated January 11, 2001 among the Registrant, the Israel Mezzanine Fund L.P., The
                        Israel Mezzanine Fund, The Jordan (Bermuda) Investment Company
Ltd. (2)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 |  | Amendment
dated August 7, 2003 to agreement among the Registrant, the Israel Mezzanine Fund
                        L.P., The Israel Mezzanine Fund and The Jordan (Bermuda)
Investment Company Ltd. dated January                         11, 2001 (6)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.5 |  | Share
Purchase Agreement dated March 30, 2004, among the Registrant and four institutional
                        investors in connection with a $5 million private placement(5)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Amendment
dated February 18, 2005 to Share Purchase Agreement among the Registrant and four
                        institutional investors in connection with a $5 million private
placement(5)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7 |  | Registration
Rights Agreement dated March 30, 2004, among the Registrant and four institutional
                        investors in connection with a $5 million private placement (5)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | Share
Exchange Agreement dated October 13, 2002 among the Registrant, Formula Systems (1985)
and                         certain shareholders of Liraz Systems Ltd. (4)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | The
1996 Share Option Plan--Part One, as amended on January 28, 1997, December 5, 1999,
December                        18, 2000, December 26, 2000 and August 6, 2003(6)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Agreement
dated January 1, 1996 among the Registrant and Argotec Ltd. (7)
|---- |  | -------------------------------------------------------------------------

|4.11 |  | Form
of voting agreement dated September 30, 1996 between Argotec Ltd. and each of Dan
Goldstein                        and Gad Goldstein(7)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|4.12 |  | English
translation of Loan Agreement between Liraz Systems Ltd. and Arie Kilman dated April 2000
                       as amended by the Addendum dated April 2002(6)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

---



Exhibit No.

|4.13 |  | Form
of Indemnification Letter dated July 24, 2003 between the Registrant and certain office
                       holders(6)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------

|4.14 |  | Summary
of credit line Letter Agreement between the Registrant and Bank Leumi Le'Israel Ltd. (6)
|---- |  | ------------------------------------------------------------------------------------------------

|8 |  | List
of Subsidiaries
|- |  | --------------------

|10.1 |  | Consent
of Ziv Haft certified public accountants (Isr.) BDO member firm
|---- |  | -----------------------------------------------------------------------

|12.1 |  | Certification
of the Chief Executive Officer pursuant toss.302 of the Sarbanes-Oxley Act
|---- |  | ----------------------------------------------------------------------------------------

|12.2 |  | Certification
of the Chief Financial Officer pursuant toss.302 of the Sarbanes-Oxley Act
|---- |  | ----------------------------------------------------------------------------------------

|13.1 |  | Certification
of the Chief Executive Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant to
                     ss.906 of the Sarbanes-Oxley Act
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|13.2 |  | Certification
of the Chief Financial Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant to
                     ss.906 of the Sarbanes-Oxley Act
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

---

(1)     Incorporated
by reference to the Registration Statement on Form F-1 filed with the Securities and
 Exchange Commission on December 24, 1996.(2)    Incorporated
by reference to the Registrant annual report on Form 20-F filed with the Securities and
 Exchange Commission on June 29, 2001.(3)     Incorporated
by reference to the Registrant annual report on Form 20-F filed with the Securities and
 Exchange Commission on June 28, 2002.(4)     Incorporated
by reference to the Registrant annual report on Form 20-F filed with the Securities and
 Exchange Commission on June 19, 2003.(5)     Incorporated
by reference to the Registration Statement on Form F-3 filed with the Securities and
 Exchange Commission on June 1, 2004, as amended on November 9, 2004 and on February 18,
2005.(6)     Incorporated
by reference to the Registrant annual report on Form 20-F filed with the Securities and
 Exchange Commission on June 1, 2004, as amended on November 9, 2004.(7)     Incorporated
by reference to Amendment No. 1 to the Registration Statement on Form F-1 filed with the
 Securities and Exchange Commission on January 28, 1997.        Previously
submitted.



---

---



BLUEPHOENIX SOLUTIONS LTD. 
(An Israeli Corporation) 
2004 Annual Report

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

2004 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

|                                                           |  | Page
|---------------------------------------------------------- |  | ----
|                                                           |  |     
|                                                           |  |     
|Report of
  Independent Registered Public Accounting Firm: |  | F-1 
|                                                           |  |     
|Consolidated Financial Statements:                         |  |     
|                                                           |  |     
|Balance
  Sheets                                           |  | F-2 
|                                                           |  |     
|Statements
  of Operations                                 |  | F-3 
|                                                           |  |     
|Statements
  of Changes in Shareholders Equity            |  | F-4 
|                                                           |  |     
|Statements
  of Cash Flows                                 |  | F-5 
|                                                           |  |     
|Notes to
  Financial Statements                            |  | F-7 

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

---

---

---

---

---

Report of Independent Registered Public Accounting Firm 
To the Shareholders and Board of Directors of BLUEPHOENIX SOLUTIONS LTD.

We
have audited the accompanying consolidated balance sheets of BluePhoenix
Solutions Ltd. (the Company) and its subsidiaries as of December 31, 2004 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, 2004. 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. The company is not
required to have, nor  were we engaged
to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, 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, 2004 and 2003, and the related
consolidated results of its operations and cash flows for each of the three
years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States.

As
discussed more fully in Note 11A1, 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s business, result of operations, and financial condition.

Tel
Aviv, Israel 
March 30, 2005

| |                                                                   
| | ------------------------------------------------------------------
| |                                                                   
| |                                                                   
| | Ziv
  Haft
  Certified Public Accountants (Isr.)
  BDO Member Firm

F-1

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                  |                                                                     | December
  31,   |       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------- | ------
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  |                                                                     | 2004             |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  |                                                                     | (in
  thousands) |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|ASSETS                                                                                                                                                                                                            |                                                                     |                  |       
|CURRENT ASSETS (Note 13):                                                                                                                                                                                         |                                                                     |                  |       
|                                                                                                                                                                                                                  | Cash and cash equivalents                                           |                  | $     
|                                                                                                                                                                                                                  | Marketable securities                                               |                  |       
|                                                                                                                                                                                                                  | Trade accounts receivable
  (Note 15A1)                             |                  |       
|                                                                                                                                                                                                                  | Other current assets (Note
  15A2)                                  |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  | Total current assets                                                |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|INVESTMENTS IN AFFILIATES AND OTHER COMPANIES (Note 3)                                                                                                                                                            |                                                                     |                  | -     
|                                                                                                                                                                                                                  |                                                                     |                  |       
|FIXED ASSETS (Note 4, 15D2):                                                                                                                                                                                      |                                                                     |                  |       
|                                                                                                                                                                                                                  | Cost                                                                |                  |       
|                                                                                                                                                                                                                  | Less - accumulated
  depreciation                                   |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  | 2,693 
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|GOODWILL (Note 5)                                                                                                                                                                                                 |                                                                     |                  | 37,090
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND OTHER (Note 6)                                                                                                                                                         |                                                                     |                  | 23,178
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|Total assets                                                                                                                                                                                                      |                                                                     | $                | 90,882
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                              |                                                                     |                  |       
|CURRENT LIABILITIES (Note 13):                                                                                                                                                                                    |                                                                     |                  |       
|                                                                                                                                                                                                                  | Short-term bank credit
  (Note 7)                                   |                  | $     
|                                                                                                                                                                                                                  | Accounts payable and
  accruals:                                    |                  |       
|                                                                                                                                                                                                                  | Trade                                                               |                  |       
|                                                                                                                                                                                                                  | Deferred revenue                                                    |                  |       
|                                                                                                                                                                                                                  | Other (Note 15A3)                                                   |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  | Total current liabilities                                           |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|LONG-TERM LIABILITIES:                                                                                                                                                                                            |                                                                     |                  |       
|                                                                                                                                                                                                                  | Convertible debentures
  (Note 12B4)                                |                  |       
|                                                                                                                                                                                                                  | Accrued severance pay, net
  (Note 8)                               |                  |       
|                                                                                                                                                                                                                  | Provision for losses in
  formerly-consolidated subsidiary (Note 9) |                  |       
|                                                                                                                                                                                                                  | Loans from banks and others
  (Note 10)                             |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  | Total long-term liabilities                                         |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|MINORITY INTEREST                                                                                                                                                                                                 |                                                                     |                  | 4,870 
|                                                                                                                                                                                                                  |                                                                     |                  |       
|COMMITMENTS AND CONTINGENCIES (Note 11)                                                                                                                                                                           |                                                                     |                  |       
|SHAREHOLDERS EQUITY (Note 12):                                                                                                                                                                                   |                                                                     |                  |       
|Share capital - ordinary shares of NIS 0.01 par value (authorized - December 31, 2004 and 2003
     - 30,000,000 shares; issued: December 31, 2004 15,420,104 shares; December 31, 2003 -
     15,354,841 shares) |                                                                     |                  | 31    
|                                                                                                                                                                                                                  | Capital surplus                                                     |                  |       
|                                                                                                                                                                                                                  | Accumulated other
  comprehensive income (loss)                     |                  |       
|                                                                                                                                                                                                                  | Retained earnings                                                   |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  | 63,339
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  | Cost of 1,870,565 Company
  shares held by subsidiaries             |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  | Total shareholders equity                                          |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       
|Total liabilities and shareholders equity                                                                                                                                                                        |                                                                     | $                | 90,882
|                                                                                                                                                                                                                  |                                                                     |                  |       
|                                                                                                                                                                                                                  |                                                                     |                  |       

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

---

* reclassified

F-2

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                   |                                        | Year ended
  December 31,                 |       
|------------------------------------------------------------------ | -------------------------------------- | ----------------------------------------- | ------
|                                                                   |                                        |                                           |       
|                                                                   |                                        | 2004                                      |       
|                                                                   |                                        |                                           |       
|                                                                   |                                        | (in
  thousands, except per shareamounts) |       
|                                                                   |                                        |                                           |       
|                                                                   |                                        |                                           |       
|Revenues (Note 15D1)                                               |                                        | $                                         | 57,186
|Cost of revenues                                                   |                                        |                                           | 24,253
|                                                                   |                                        |                                           |       
|                                                                   | Gross profit                           |                                           |       
|Software development
  costs, net                                  |                                        |                                           | 8,055 
|Selling, general and
  administrative expenses                     |                                        |                                           | 21,388
|Restructuring costs and
  non-recurring 
     expenses (Note 15B1) |                                        |                                           | -     
|                                                                   |                                        |                                           |       
|                                                                   | Operating income (loss)                |                                           |       
|Financial income
  (expenses), net (Note 15B3)                     |                                        |                                           | (882  
|Gain on realization of
  shareholdings (Note 15B4)                 |                                        |                                           | 112   
|Other income (expenses),
  net (Note 15B5)                         |                                        |                                           | 975   
|                                                                   |                                        |                                           |       
|                                                                   | Income (loss) before taxes
  on income |                                           |       
|Income tax expense (Note
  14)                                     |                                        |                                           | 260   
|                                                                   |                                        |                                           |       
|                                                                   |                                        |                                           | 3,435 
|Equity in losses of
  affiliated companies, net                    |                                        |                                           | (516  
|Minority interest                                                  |                                        |                                           | (73   
|                                                                   |                                        |                                           |       
|                                                                   | Net income (loss)                      |                                           | $     
|                                                                   |                                        |                                           |       
|                                                                   |                                        |                                           |       
|Earnings
  (loss) per share (Note 15C):                            |                                        |                                           |       
|                                                                   | Basic                                  |                                           | $     
|                                                                   |                                        |                                           |       
|                                                                   |                                        |                                           |       
|                                                                   | Diluted                                |                                           | $     
|                                                                   |                                        |                                           |       
|                                                                   |                                        |                                           |       
|Weighted
  average number of shares outstanding (Note 15C):        |                                        |                                           |       
|                                                                   |                                        |                                           |       
|                                                                   | Basic                                  |                                           |       
|                                                                   |                                        |                                           |       
|                                                                   |                                        |                                           |       
|                                                                   | Diluted                                |                                           |       
|                                                                   |                                        |                                           |       
|                                                                   |                                        |                                           |       

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

F-3

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY

|                               |                                                          | Share Capital                 |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|------------------------------ | -------------------------------------------------------- | ----------------------------- | ---------- | --------- | - | ----------------- | -- | -------------------------------------------- |  | ------------------- | ------ | --------------------------------------- |  | ---------------------------------------------- | ------ | ------ | - | - | ----- | ------
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               |                                                          | Number of
  Shares            |            | Amount    |   | Capital
  Surplus |    | Accumulated
  Other
  Comprehensive
  Income |  | Retained
  Earnings |        | Loans
  Against
  Exercise of
  Options |  | Cost ofCompany
  Shares Held by
  Subsidiaries |        | Total  |  
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |  
|                               |                                                          | (in thousands, except shares) |           
|                               |                                                          |                               |           
|Balance at
  January 1, 2002   |                                                          |                               | 9,984,850  |           |   |                   | 23 |                                              |  |                     | 41,131 |                                         |  |                                                | -      |        |   |   | 8,919 |       
|Changes
  during 2002:         |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Components of comprehensive
  income:                    |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Net loss                                                 |                               |            | -         |   |                   |    | -                                            |  |                     |        | -                                       |  |                                                |        | -      |   |   |       | (3,630
|                               | Currency translation
  adjustments                       |                               |            | -         |   |                   |    | -                                            |  |                     |        | -                                       |  |                                                |        | 1,781  |   |   |       | -     
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Total comprehensive loss                                 |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Repayment of loans granted
  against exercise of options |                               |            | -         |   |                   |    | -                                            |  |                     |        | -                                       |  |                                                |        | -      |   |   |       | -     
|                               | Exercise of employee share
  options                     |                               |            | 90,000    |   |                   |    | -                                            |  |                     |        | 321                                     |  |                                                |        | -      |   |   |       | -     
|                               | Purchase of treasury stock                               |                               |            | (104,465  | ) |                   |    | -                                            |  |                     |        | -                                       |  |                                                |        | -      |   |   |       | -     
|                               | Issuance of shares (Note 2D)                             |                               |            | 3,478,624 |   |                   |    | 7                                            |  |                     |        | 12,877                                  |  |                                                |        | -      |   |   |       | -     
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|Balance at
  December 31, 2002 |                                                          |                               | 13,449,009 |           |   |                   | 30 |                                              |  |                     | 54,329 |                                         |  |                                                | 1,781  |        |   |   | 5,289 |       
|Changes
  during 2003:         |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Components of comprehensive
  income:                    |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Net income                                               |                               |            | -         |   |                   |    | -                                            |  |                     |        | -                                       |  |                                                |        | -      |   |   |       | 1,851 
|                               | Currency translation
  adjustments                       |                               |            | -         |   |                   |    | -                                            |  |                     |        | -                                       |  |                                                |        | (3,257 | ) |   |       | -     
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Total comprehensive loss                                 |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Exercise of employee share options                       |                               |            | 35,267    |   |                   |    | -                                            |  |                     |        | 83                                      |  |                                                |        | -      |   |   |       | -     
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|Balance at
  December 31, 2003 |                                                          |                               | 13,484,276 |           |   | $                 | 30 |                                              |  | $                   | 54,412 |                                         |  | $                                              | (1,476 | )      |   | $ | 7,140 |       
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|Changes
  during 2004:         |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Components of comprehensive
  income:                    |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Net income                                               |                               |            | -         |   |                   |    | -                                            |  |                     |        | -                                       |  |                                                |        | -      |   |   |       | 2,846 
|                               | Currency translation
  adjustments                       |                               |            | -         |   |                   |    | -                                            |  |                     |        | -                                       |  |                                                |        | (155   | ) |   |       | -     
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Total comprehensive income                               |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Issuance of shares (note 2G)                             |                               |            | 31,496    |   |                   |    | 1                                            |  |                     |        | 199                                     |  |                                                |        | -      |   |   |       | -     
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Issuance of options                                      |                               |            | -         |   |                   |    | -                                            |  |                     |        | 48                                      |  |                                                |        | -      |   |   |       | -     
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Beneficial conversion
  features                         |                               |            | -         |   |                   |    | -                                            |  |                     |        | 173                                     |  |                                                |        | -      |   |   |       | -     
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               | Exercise of employee share
  options                     |                               |            | 33,767    |   |                   |    | -                                            |  |                     |        | 121                                     |  |                                                |        | -      |   |   |       | -     
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|Balance at
  December 31, 2004 |                                                          |                               | 13,549,539 |           |   | $                 | 31 |                                              |  | $                   | 54,953 |                                         |  | $                                              | (1,631 | )      |   | $ | 9,986 |       
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       
|                               |                                                          |                               |            |           |   |                   |    |                                              |  |                     |        |                                         |  |                                                |        |        |   |   |       |       

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

F-4

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                                  | Year ended
  December 31, |       
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------- | ------
|                                                     |                                                                                                  |                           |       
|                                                     |                                                                                                  | 2004                      |       
|                                                     |                                                                                                  |                           |       
|                                                     |                                                                                                  | (in
  thousands)          |       
|                                                     |                                                                                                  |                           |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                                  |                           |       
|                                                     | Net income (loss)                                                                                |                           | $     
|                                                     | Adjustments to reconcile
  net income (loss) to net cash provided by 
     operating activities: |                           |       
|                                                     | Minority interest in
  earnings of consolidated subsidiaries                                     |                           |       
|                                                     | Equity in losses of
  affiliated companies, net                                                  |                           |       
|                                                     | Depreciation and
  amortization                                                                  |                           |       
|                                                     | Increase (decrease) in
  accrued severance pay, net                                              |                           |       
|                                                     | Loss from sale of fixed
  assets                                                                 |                           |       
|                                                     | Gain on realization of
  shareholdings and expiration of options                                 |                           |       
|                                                     | Write-down of loans to an
  investee                                                             |                           |       
|                                                     | Write-down of
  shareholdings in an investee                                                     |                           |       
|                                                     | Change in value of long
  term-loans and liabilities                                             |                           |       
|                                                     | Decrease of provision for
  losses in formerly consolidated subsidiary                           |                           |       
|                                                     | Deferred taxes                                                                                   |                           |       
|                                                     | Changes in operating
  assets and liabilities:                                                   |                           |       
|                                                     | Decrease in marketable
  securities                                                              |                           |       
|                                                     | Decrease (increase) in
  trade receivables                                                       |                           |       
|                                                     | Decrease (increase) in
  other current assets                                                    |                           |       
|                                                     | Increase (decrease) in
  trade payables                                                          |                           |       
|                                                     | Decrease in other accounts
  payable                                                             |                           |       
|                                                     |                                                                                                  |                           |       
|                                                     | Net cash provided by
  operating activities                                                      |                           |       
|                                                     |                                                                                                  |                           |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                                  |                           |       
|                                                     | Purchase of fixed assets                                                                         |                           |       
|                                                     | Proceeds from sale of
  fixed assets                                                             |                           |       
|                                                     | Investment in and loans to
  affiliated and other companies                                      |                           |       
|                                                     | Repayment of loan                                                                                |                           |       
|                                                     | Proceeds from sale of
  investments                                                              |                           |       
|                                                     | Capitalization of software
  development and other costs                                         |                           |       
|                                                     | Purchase of minority
  interest in subsidiaries                                                  |                           |       
|                                                     | Investment in newly-consolidated
  subsidiaries (Appendix A)                                     |                           |       
|                                                     | Realization of investment
  in previously-consolidated subsidiaries   (Appendix B)               |                           |       
|                                                     |                                                                                                  |                           |       
|                                                     | Net cash used in investing
  activities                                                          |                           |       
|                                                     |                                                                                                  |                           |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                                  |                           |       
|                                                     | Short-term bank credit,
  net                                                                    |                           |       
|                                                     | Repayment of long-term
  loans                                                                   |                           |       
|                                                     | Receipt of long-term loans                                                                       |                           |       
|                                                     | Issuance in a subsidiary
  to minority shareholders                                              |                           |       
|                                                     | Purchase of Company shares
  by subsidiaries                                                     |                           |       
|                                                     | Repayment of loans granted
  against exercise of options                                         |                           |       
|                                                     | Issuance of convertible
  debentures and warrants                                                |                           |       
|                                                     | Debentures issuance
  expense                                                                    |                           |       
|                                                     | Exercise of employee share
  options                                                             |                           |       
|                                                     |                                                                                                  |                           |       
|                                                     | Net cash provided by (used
  in) financing activities                                            |                           |       
|                                                     |                                                                                                  |                           |       
|                                                     |                                                                                                  |                           |       
|EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH      |                                                                                                  |                           | -     
|                                                     |                                                                                                  |                           |       
|                                                     |                                                                                                  |                           |       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                                  |                           | (1,742
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR       |                                                                                                  |                           | 11,105
|                                                     |                                                                                                  |                           |       
|                                                     |                                                                                                  |                           |       
|CASH AND CASH EQUIVALENTS AT END OF YEAR             |                                                                                                  | $                         | 9,363 
|                                                     |                                                                                                  |                           |       
|                                                     |                                                                                                  |                           |       

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

F-5

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                          |                                  | Year ended
  December 31, |  
|--------------------------------------------------------- | -------------------------------- | ------------------------- | -
|                                                          |                                  |                           |  
|                                                          |                                  | 2004                      |  
|                                                          |                                  |                           |  
|                                                          |                                  | (in
  thousands)          |  
|                                                          |                                  |                           |  
|                                                          |                                  |                           |  
|SUPPLEMENTAL
  DISCLOSURE OF CASH FLOW 
     INFORMATION: |                                  |                           |  
|                                                          | Cash paid during the year
  for: |                           |  
|                                                          | Income taxes                     |                           | $
|                                                          | Interest                         |                           | $
|                                                          |                                  |                           |  

APPENDIX A - INVESTMENT IN NEWLY-CONSOLIDATED
SUBSIDIARIES:

|                                                |                                              | Year ended
  December 31, |       
|----------------------------------------------- | -------------------------------------------- | ------------------------- | ------
|                                                |                                              |                           |       
|                                                |                                              | 2004                      |       
|                                                |                                              |                           |       
|                                                |                                              | (in
  thousands)          |       
|                                                |                                              |                           |       
|Working capital, other
  than cash              |                                              | $                         | 2,631 
|Investment in and loans to
  affiliated Company |                                              |                           | 27    
|Fixed assets                                    |                                              |                           | (373  
|Minority interest                               |                                              |                           | 98    
|Customer related
  intangible assets            |                                              |                           | (425  
|Goodwill                                        |                                              |                           | (283  
|Capitalized software
  development costs        |                                              |                           | (6,056
|Non-current liabilities                         |                                              |                           | 4,086 
|The Company shares issued
  upon acquisition    |                                              |                           | 200   
|                                                |                                              |                           |       
|                                                | Net cash provided by (used
  in) acquisition |                           | $     
|                                                |                                              |                           |       
|                                                |                                              |                           |       

APPENDIX B - REALIZATION OF
PREVIOUSLY-CONSOLIDATED SUBSIDIARIES:

|                                                |       | Year ended
  December 31, |  
|----------------------------------------------- | ----- | ------------------------- | -
|                                                |       |                           |  
|                                                |       | 2004                      |  
|                                                |       |                           |  
|                                                |       | (in
  thousands)          |  
|                                                |       |                           |  
|                                                |       |                           |  
|Working capital, other
  than cash              |       |                           | -
|Investment in and loans to
  affiliated Company |       |                           | -
|Fixed assets other                              |       |                           | -
|Other assets                                    |       |                           | -
|Minority interest                               |       |                           | -
|Goodwill                                        |       |                           | -
|Severance pay                                   |       |                           | -
|                                                |       |                           |  
|                                                | Total |                           |  
|                                                |       |                           |  
|                                                |       |                           |  

APPENDIX C - NON CASH ACTIVITIES:

|                                                                                                                     |  | Year ended
  December 31, |  
|-------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | -
|                                                                                                                     |  |                           |  
|                                                                                                                     |  | 2004                      |  
|                                                                                                                     |  |                           |  
|                                                                                                                     |  | (in
  thousands)          |  
|                                                                                                                     |  |                           |  
|Purchase of technology
  from an affiliate offset against the 
     outstanding loan that was given to the affiliate |  |                           | -
|                                                                                                                     |  |                           |  

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

F-6

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 1 - Summary of Significant Accounting
Policies:

| | A. | General:                                                                               
| | -- | ---------------------------------------------------------------------------------------
| |    |                                                                                        
| |    | The
  significant accounting policies, applied on a consistent basis, are as
  follows:
| |    |                                                                                        
| |    | 1.                                                                                     
| |    |                                                                                        

|                                                       |  | Shareholding percentage |      | State ofincorporation | 
|------------------------------------------------------ |  | ----------------------- | ---- | --------------------- | 
|                                                       |  |                         |      |                       | 
|Name                                                   |  |                         | 2004 |                       | 
|                                                       |  |                         |      |                       | 
|                                                       |  |                         | %    |                       | 
|                                                       |  |                         |      |                       | 
|Subsidiaries:                                          |  |                         |      |                       | 
|BluePhoenix Solutions B.V.
  *                         |  |                         | 100  |                       | 
|BluePhoenix Solutions
  Nordic Aps *                   |  |                         | 100  |                       | 
|Advanced Systems Europe
  B.V. *                       |  |                         | 100  |                       | 
|Liraz Systems Ltd.
  (Liraz)                         |  |                         | 100  |                       | 
|Mainsoft Corporation
  (Mainsoft)                    |  |                         | 58   |                       | 
|IntraComp Group, Inc.
  (IntraComp)                  |  |                         | 100  |                       | 
|MSI MultiConn Solutions
  International (1995) Ltd. ** |  |                         | 100  |                       | 
|MultiConn Technologies
  Ltd.**                        |  |                         | 40   |                       | 
|Intercomp Ltd.
  (Intercomp)                         |  |                         | 62   |                       | 
|                                                       |  |                         |      |                       | 
|Affiliates:                                            |  |                         |      |                       | 
|MSI MultiConn Solutions
  International (1995)         |  |                         |      |                       | 
|Ltd. **                                                |  |                         | __   |                       | 
|MultiConn Technologies
  Ltd.**                        |  |                         | __   |                       | 
|Tesnet Software Testing
  Ltd. (Tesnet)              |  |                         | __   |                       | 

| |  |  |   
| |  |  | --
| |  |  | * 
| |  |  | **

F-7

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

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

| | A. | General (cont.):
| | -- | ----------------
| |    |                 
| |    | 1.              
| |    |                 
| |    |                 
| |    | 2.              
| |    |                 
| |    |                 
| |    | 3.              
| |    |                 
| |    |                 
| |    | 4.              
| |    |                 
| |    |                 
| |    |                 
| |    |                 
| |    |                 

F-8

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

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

| | A. | General (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | B. | Principles of Consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The consolidated financial statements include the
  accounts of BluePhoenix Solutions Ltd. and its subsidiaries in which it has a
  controlling interest, and a certain variable interest entity that the Company
  is required to consolidate pursuant to Financial Accounting Standards Board
  Interpretation No. 46, Consolidation of Variable Interest Entities as
  revised in December 2003 (FIN 46) Acquisition of subsidiaries is accounted
  for under the purchase method. All intercompany balances and transactions
  have been eliminated upon 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 not restricted.                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | D. | Provision for doubtful accounts:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | The provision for doubtful accounts was computed on
  the basis of specific receivables the collection of which, in the opinion of
  Companys management, is in doubt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | E. | Investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Investments in affiliates over which the Company
  exercises significant influence are accounted for under the equity method.
  Investments in other companies are accounted for under the cost method.
  Investments in marketable securities are classified as trading, and unrealized
  gains or losses therefrom are reported in the statement of operations in
  accordance with the principles set forth in SFAS No. 115 of the FASB.
  Investments are periodically reviewed to determine whether an
  other-than-temporary impairment in value has occurred, in which case the
  investment is written down to its fair value.

F-9

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

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

| | F. | Fixed Assets:                                                                                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                             
| |    | Fixed assets are stated at cost, net of accumulated
  depreciation. Depreciation is calculated by the straight-line method over
  their estimated useful lives. Annual rates of depreciation are as follows:

| |                                    |  | %                                                                             
| | ---------------------------------- |  | ------------------------------------------------------------------------------
| |                                    |  |                                                                               
| |                                    |  |                                                                               
| | Computers and peripheral equipment |  | 20 - 33 (mainly 33)                                                           
| | Office furniture and equipment     |  | 6 - 15 (mainly 7)                                                             
| | Leasehold improvements             |  | Over the term of the
  lease or the life of the
  assets, whichever is shorter
| | Motor vehicles                     |  | 15                                                                            

| | G. | Impairment of Long-Lived Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Companys long-lived assets are reviewed for
  impairment in accordance with SFAS No. 144 Accounting for the Impairment or
  Disposal of Long-Lived Assets whenever events or changes in circumstances
  indicate that the carrying amount of an asset may not be recoverable.
  Recoverability of assets to be held and used is measured by a comparison of
  the carrying amount of an asset to the future undiscounted cash flows
  expected to be generated by the assets. If such assets are considered to be
  impaired, the impairment to be recognized is measured by the amount by which
  the carrying amount of the assets exceeds their fair value.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | H. | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Goodwill that arose from acquisitions prior to July
  1, 2001 was amortized until December 31, 2001 on a straight-line basis over
  10 years. Prior to 2002, goodwill was assessed for impairment by comparing
  undiscounted cash flows to the carrying amount of the goodwill. If the
  carrying amount was not recoverable, goodwill was written down to its fair
  value.                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In July 2001 the FASB issued SFAS No. 142, Goodwill
  and Other Intangible Assets (SFAS No. 142). SFAS No. 142 requires goodwill
  to be tested for impairment on an annual basis and between annual tests in
  certain circumstances, and written down when impaired, rather than being
  amortized as previous accounting standards required. Furthermore, SFAS No.
  142 requires purchased intangible assets other than goodwill to be amortized
  over their useful lives unless these lives are determined to be indefinite.                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | SFAS No. 142 is effective for fiscal years beginning
  after December 15, 2001. The Company adopted SFAS No. 142 effective January
  1, 2002. In accordance with SFAS No. 142, the Company ceased amortizing
  goodwill totaling $15.1 million as of the beginning of 2002. Based on the
  impairment tests performed, there was no impairment of goodwill in 2004, 2003
  and 2002. There can be no assurance that future goodwill impairment tests
  will not result in a charge to earnings.                                                                                                                                                                      

F-10

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

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

| | I. | Software Development Costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Development costs of software that is intended for
  sale, and which were incurred after the establishment of technological
  feasibility of the relevant product, are capitalized. Technological feasibility
  is determined when detailed program design is completed and verified in
  accordance with the provisions of SFAS No. 86 of the FASB. Software
  development costs incurred before technological feasibility is established
  are charged to the statement of operations as incurred, net of participation
  of the Office of the Chief Scientist of the Israeli Ministry of Industry and
  Trade (the OCS).                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Amortization of capitalized software development
  costs begins when the product is available for general release to customers.
  Annual amortization is computed by the straight-line method, over the
  remaining useful life of the product, or based on the ratio of current gross
  revenues to current and anticipated future gross revenues, whichever is
  higher. Currently, amortization is computed by the straight-line method over
  a period of 5 years. During the year ended December 31, 2004, the company
  capitalized software development costs aggregating $7.1 million (2003 - $3.2
  million, 2002 - $2.4 million) and amortized capitalized software development
  costs aggregating $2.6 million (2003 - $2.7 million, 2002 - $1.5million)
  included in cost of revenues.           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | In the Company managements estimate, total
  capitalized costs do not exceed the net realizable value of the software
  product. In the event that unamortized software development costs exceed the
  net realizable value of the product, they are written down to net realizable
  value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | J. | Employee share Options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | At December 31, 2004, the Company has one stock-based
  employee compensation plan, which is described more fully in Note 12B. The
  Company accounts for this plan under the recognition and measurement
  principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,
  and related Interpretations. No stock-based employee compensation cost is
  charged to income, as all options granted under this plan had an exercise
  price equal to the market value of the underlying common stock on the date of
  grant. The following table illustrates the effect on net income and earnings
  per share if the Company had applied the fair value recognition provisions of
  SFAS No. 123 of the FASB, Accounting for Stock-Based Compensation, to
  stock-based employee compensation.

F-11

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

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

| | J. | Employee share Options (cont):
| | -- | ------------------------------

| |                                                                                                                                                 |                             | Year
  ended December 31,                    |      
| | ----------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | -------------------------------------------- | -----
| |                                                                                                                                                 |                             |                                              |      
| |                                                                                                                                                 |                             | 2004                                         |      
| |                                                                                                                                                 |                             |                                              |      
| |                                                                                                                                                 |                             | (in
  thousands, except per share
  amounts) |      
| |                                                                                                                                                 |                             |                                              |      
| |                                                                                                                                                 |                             |                                              |      
| | Net income (loss) as reported                                                                                                                   |                             | $                                            | 2,846
| |                                                                                                                                                 |                             |                                              |      
| | Deduct: Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of related tax effects |                             |                                              | (624 
| |                                                                                                                                                 |                             |                                              |      
| |                                                                                                                                                 | Pro forma net income (loss) |                                              | $    
| |                                                                                                                                                 |                             |                                              |      
| |                                                                                                                                                 |                             |                                              |      
| | Earnings per share:                                                                                                                             |                             |                                              |      
| |                                                                                                                                                 |                             |                                              |      
| |                                                                                                                                                 | Basic - as reported         |                                              | $    
| |                                                                                                                                                 |                             |                                              |      
| |                                                                                                                                                 | Basic - pro forma           |                                              | $    
| |                                                                                                                                                 |                             |                                              |      
| |                                                                                                                                                 |                             |                                              |      
| |                                                                                                                                                 | Diluted - as reported       |                                              | $    
| |                                                                                                                                                 |                             |                                              |      
| |                                                                                                                                                 | Diluted - pro forma         |                                              | $    
| |                                                                                                                                                 |                             |                                              |      

| | K. | Revenue Recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Revenues derived from direct software license
  agreements are recognized in accordance with Statement of Position (SOP) 97-2
  Software Revenue Recognition (as amended by SOP 98-4 and SOP 98-9), upon
  delivery of the software, when collection is probable, the license fee is
  otherwise fixed or determinable and persuasive evidence of an arrangement
  exists.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The arrangements, which include multiple elements,
  are usually arrangements where the Company sells software products and Post
  Contract Support (PCS). In addition there are certain arrangements where the
  Company sells software and consulting services. Consulting service fees are
  based on time invested. For these multiple elements, SOP 97-2 requires that
  the fair value of each component in a multiple element arrangement will be
  determined based on the vendors specific objective evidence (VSOE) for that
  element, and revenue is allocated to each component based on its fair value.
  SOP 98-9 requires that revenue be recognized under the residual method when
  VSOE does not exist for all the delivered elements, VSOE of fair value exists
  for all undelivered elements, and all other SOP 97-2 criteria are met. Under
  the residual method, any discount in the arrangement is allocated to the
  delivered elements. The specific objective evidence for the PCS is
  established by the price charged on separate PCS renewal contracts. The VSOE
  for the consulting services is established by the price charged on other time
  based consulting service contracts where no sale of other elements is
  involved, considering the territory where the service is performed, the size
  of the customer, the quantity of the purchased services, the professional
  expertise of the consultants, etc. The revenue associated with the delivered
  elements is recognized using the residual method discussed above.

F-12

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

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

| | K. | Revenue Recognition (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company recognizes revenues from consulting fees
  with respect to projects billed on a time and material basis, based on the
  number of hours performed. In some of the agreements with the Companys
  customers, the customers have the right to receive unspecified upgrades on an
  if-and-when available basis (the Company does not provide specific upgrades).
  These upgrades are considered post-contract support (PCS). Revenue allocated
  to the PCS is recognized ratably over the term of the PCS.                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | When a project involves significant production,
  modification or customization, of software, and for other fixed fee contracts,
  revenue is generally recognized according to the percentage of completion
  method, in accordance with the provisions of SOP 81-1 Accounting for
  Performance of Construction-Type Contracts. Under this method, estimated
  revenue is generally accrued based on costs incurred to date, as a percentage
  of total updated estimated costs.                                                    
| |    | The Company recognizes contract losses, if any, in
  the period in which they first become evident.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Some of the Companys contracts include client
  acceptance clauses. In these contracts, the Company follows the guidance of
  TPA 5100.67 and SAB 104. In determining whether revenue can be recognized,
  when an acceptance clause exists, the Company considers its history with
  similar arrangements, the customers involvement in the progress, and the
  existence of other service providers and the payments terms. There are no
  rights of return, price protection or similar contingencies in the Companys
  contracts.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | Deferred revenue includes unearned amounts received
  under maintenance contracts and amounts received from customers but not yet
  recognized as revenues. Payments for maintenance fees are generally made in
  advance and are non-refundable. On December 31, 2004 approximately $5.1
  million (December 31, 2003 - $2.8 million) of the accounts receivable balance
  was unbilled due to the customers payment terms. The Company believes the
  amount will be collected in one year in accordance with the contract terms.     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | 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.                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | L. | Advertising Costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company expenses advertising costs as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-13

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

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

| | M. | Gain on Realization of
  Shareholdings:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Gain on realization of shareholdings includes the
  results of realization of the Companys shareholdings in investees arising
  either from the sale of such shareholdings or from issuance of stock by the
  investees to third parties, which is recognized in accordance with the
  provisions of Staff Accounting Bulletin (SAB) No. 51 of the Securities and Exchange
  Commission. The Company charges such results to the statement of operations,
  provided that the conditions stipulated in SAB 51 for such recognition have
  been met.                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | N. | Deferred Income Taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | The Company applies the provisions of SFAS No.109
  Accounting for Income Taxes of the FASB, see also Note 14E.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | O. | Earnings (Loss) Per Share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Earnings (loss) per share (EPS) were computed in
  accordance with the provisions of SFAS No. 128 of the FASB (SFAS No. 128).
  SFASNo. 128 requires the presentation of both basic and diluted EPS. Basic
  net earnings (loss) per share are computed based on the weighted average
  number of common shares outstanding during each year. Diluted earnings (loss)
  per share is computed based on the weighted average number of common shares
  outstanding during each year, plus dilutive potential common shares
  considered outstanding during the year.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | P. | Financial Instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-14

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

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

| | P. | Financial Instruments (cont):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Q. | Comprehensive Income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Comprehensive income presented in shareholders
  equity includes, in addition to net income (loss), translation gains and
  losses of non-dollar currency financial statements of subsidiaries (see also
  Note 1A4, with respect to the change in the functional currency).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | R. | Financial Instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The application of SFAS No. 133 - Accounting for
  Derivatives and Hedging Activities and related pronouncements and interpretations
  did not have any material impact on the Companys consolidated financial
  statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | S. | Recently issued accounting
  pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | In December 2004, the FASB issued No. 123(R), Share
  Based Payment. SFAS No. 123(R) requires that compensation costs related to
  share based payment transactions to be recognized in the financial
  statements. In most cases the amount of compensation cost will be measured
  based on the grant date fair value of the equity or liability issued. SFAS
  No. 123(R) requires all share-based payments to employees, including grants
  of employee stock options, to be recognized in the financial statements based
  on their fair values. Awards classified, as liabilities will be remeasured to
  fair value each reporting period. The compensation cost will be recognized
  over the period that the employee provides service in exchange for the award.
  SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based
  Compensation and supersedes APB 25, Accounting for Stock Issued to Employees.
  SFAS No. 123(R) is effective for public entities as of the beginning of the
  first interim or annual reporting period that begins after June 15, 2005.
| |    | The Company must determine the appropriate fair
  value model to be used for valuing share-based payments, the amortization
  method for compensation cost and the transition method to be used at date of
  adoption. The transition methods include prospective and retroactive adoption
  options. Under the retroactive option, prior periods may be restated either
  as of the beginning of the year of adoption or for all periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-15

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

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

| | S. | Recently issued accounting
  pronouncements (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The prospective method requires that compensation
  expense be recorded for all unvested stock options and restricted stock at
  the beginning of the first period of adoption of SFAS No. 123(R), hile the
  retroactive methods would record compensation expense for all unvested stock
  options and restricted stock beginning with the first period restated. The
  company is currently evaluating the two methods of adoption allowed by SFAS
  123(R), and has yet to determine what effect the adoption of this statement will
  have on its financial statements.                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | In December 2004, the FASB issued SFAS No. 153,
  Exchange of Nonmonetary Assets  An Amendment of APB Opinion No. 29,
  Accounting for Nonmonetary Transactions. (SFAS No. 153). SFAS No. 153
  eliminates the exception from fair value measurement for nonmonetary exchange
  of similar productive assets in paragraph 21(b) of APB Opinion No.29,
  Accounting for Nonmonetary Transactions, and replaces it with an exception
  for exchanges that do not have commercial substance. SFAS No. 153 specifies
  that a nonmonetary exchange has commercial substance if the future cash flows
  of the entity are expected to change significantly as a result of the
  exchange. SFAS No. 153 is effective for the fiscal periods beginning after
  June 15, 2005. The adoption of SFAS No. 153 is not expected to have a
  material impact on the Company financial position or result of operation.                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | In March 2004, the FASB approved the consensus
  reached on the Emerging Issue Task Force (EITF) Issue No. 03-1. The meaning
  of Other-Than-Temporary Impairment and Its Application to Certain
  Investments. The issues objective is to provide guidance for identifying
  other-than-temporarily impaired investments. EITF 03-1 also provides new
  disclosure requirements for investments that are deemed to be temporarily
  impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF
  03-1-1 that delays the effective date of the measurement and recognition
  guidance in EITF 03-1 until further notice. The disclosure requirements of
  EITF 03-1 are effective with this annual report for fiscal 2004. Once the
  FASB reaches a final decision on the measurement and recognition provisions,
  the Company will evaluate the impact of the adoption of the accounting
  provisions of EITF 03-1.

F-16

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 2 -
Certain Transactions:

| | A. | Mainsoft:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Mainsoft is a developer of software products that
  extend the productivity of the Visual Studio development environment to the
  J2EE, Unix, and Linux platforms. Since 1999 the Company has acquired 57.5% of
  the outstanding share capital of Mainsoft in a series of transactions, for
  aggregate consideration of approximately $17.2 million. This holding includes
  the exercise of warrants in May 2003 pursuant to which the Company purchased
  630,000 shares of Mainsoft for an aggregate of $378 thousand. Following the
  exercise, all remaining warrants expired in May 2003 (see also Note 11A1).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | B. | IntraComp:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | IntraComp Group Inc. (IntraComp) provides
  migration and conversion services for large scale systems and back-end
  integration services. In 2000, the Company acquired a 53% controlling
  interest in IntraComp for an aggregate consideration of approximately $3.4
  million. IntraComps results of operations were consolidated in the Companys
  financial statements beginning with the second quarter of 2000.                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | During the second quarter of 2003, the Company
  purchased the remaining outstanding share capital of IntraComp from the other
  shareholders of IntraComp. As a result, the Company currently wholly owns
  IntraComp. Under the agreement with IntraComps selling shareholders, the
  consideration shall be calculated based on IntraComps cumulative earnings
  before interest and taxes, referred to as EBIT, during the three-year period
  commencing on January 1, 2003, as follows:                                                                                                                       
| |    | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Goodwill arising upon acquisition was $191 thousand.
  The Company undertook to pay the selling shareholders on August 30, 2004, an
  advance on account of the contingent consideration, based on the interim
  EBIT. Based on the recorded EBIT the Company did not pay the advance.                                                                                                                                                                                                                                                                                                                                
| |    | The consideration is due in February 2006, based on
  a final report of IntraComps earnings.The purchase of the remaining shares
  of IntraComp Group was accounted for under SFAS No. 141. The contingent
  consideration will be accounted as an additional cost of the acquired entity.
  Following the purchase of the entire interest in IntraComp, the Company
  integrated IntraComps business completely into its business.                                                                                                                                                                                 

F-17

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 2 -
Certain Transactions (cont.):

| | C. | Alexandria:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | During 1999, the Company purchased 19% of the
  outstanding share capital of Alexandria Migration Technologies Ltd., which
  develops DBMSMigrator. In September 2002, the Company entered into an
  agreement to purchase from the other shareholder of Alexandria his entire
  shareholdings in Alexandria, constituting 81% of Alexandrias outstanding
  share capital, for an aggregate amount of $585 thousands. As a result, the
  Company currently wholly owns Alexandria and its entire activity was
  integrated within the Companys business.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | D. | Liraz:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | In November 2002, the Company purchased, through a
  share exchange transaction, approximately 86% of the outstanding share
  capital of Liraz Systems Ltd., or Liraz, an international software and
  services Company then publicly traded on the Tel Aviv Stock Exchange
  (TASE). Liraz, through a wholly-owned subsidiary, develops and markets the
  AppBuilder, a software product used for the development of sophisticated and
  robust applications needed by large enterprises.                                                              
| |    | As part of the share exchange transaction, the
  Company issued to Lirazs selling shareholders, including Formula, 3,478,624
  ordinary shares, constituting an aggregate of 26% of the Companys
  outstanding share capital.                                                                                                                                                                                                                                                                                                                           
| |    | The acquisition of Liraz was recorded in the
  Companys accounts as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | -                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The market value of the total consideration paid in
  this acquisition was $8.8 million. The purchase agreement with the Liraz
  shareholders provided for a fixed exchange ratio between Liraz shares and the
  Company shares. The exchange ratio was based on the average ratio of the
  Companys share price to Lirazs share price in the three months, prior to
  the signing of the agreement between the parties, in October 2002.                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Based upon a valuation of tangible and intangible
  assets acquired, the Company has allocated the total cost of the acquisition
  to Lirazs assets and liabilities as follows:                                                                                                                                                                                                                                                                                                                                                                          

F-18

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 2 -
Certain Transactions (cont.):

| | D. | Liraz (cont.):
| | -- | --------------

| |                                                               | September
  30, 2002                          | 
| | ------------------------------------------------------------- | --------------------------------------------- | 
| |                                                               |                                               | 
| |                                                               | (in
  thousands)                              | 
| |                                                               |                                               | 
| | Cash and cash equivalents                                     |                                               | 
| | Marketable securities                                         |                                               | 
| | Trade receivables                                             |                                               | 
| | Other accounts receivable                                     |                                               | 
| | Other long-term tangible assets                               |                                               | 
| | Fixed assets                                                  |                                               | 
| |                                                               |                                               | 
| |                                                               | Total tangible assets acquired                | 
| | Goodwill                                                      |                                               | 
| |                                                               |                                               | 
| |                                                               | Total tangible and intangible assets acquired | 
| |                                                               |                                               | 
| |                                                               |                                               | 
| | Accounts payable                                              |                                               | 
| | Other accounts payable                                        |                                               | 
| | Accrued severance pay                                         |                                               | 
| | Long-term bank loan                                           |                                               | 
| | Provision for losses in formerly-consolidated
  subsidiary    |                                               | 
| | Minority interest                                             |                                               | 
| |                                                               |                                               | 
| |                                                               | Total liabilities                             | 
| |                                                               |                                               | 
| |                                                               |                                               | 
| |                                                               |                                               | 
| | Contribution of capital due to a common control
  transaction |                                               | 
| |                                                               |                                               | 
| |                                                               |                                               | 
| |                                                               |                                               | 
| |                                                               | Net assets acquired                           | 
| |                                                               |                                               | 

| |  | Lirazs results of operations have been consolidated
  in the Companys financial statements since October 1, 2002. Goodwill arising
  upon acquisition amounted to $22.3 million.                                                                                                                                                                                                                                              
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | The following unaudited pro forma summary presents
  information as if the acquisition of Liraz had occurred as of January 1,
  2002. The pro forma information, which is provided for informational purposes
  only, is based on historical information and does not necessarily reflect the
  results that would have occurred, nor is it necessarily indicative of future
  results of operations of the consolidated entity.

F-19

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 2 -
Certain Transactions (cont.):

| | D. | Liraz (cont.):
| | -- | --------------

| |                             |  | Year
  ended
  December 31, 2002          |  
| | --------------------------- |  | ----------------------------------------- | -
| |                             |  |                                           |  
| |                             |  | (In
  thousands,
  except per share data) |  
| |                             |  |                                           |  
| |                             |  | (Unaudited)                               |  
| |                             |  |                                           |  
| |                             |  |                                           |  
| | Revenues                    |  |                                           | $
| | Net income                  |  |                                           | $
| | Earning per share - basic   |  |                                           |  
| | Earning per share - diluted |  |                                           |  

| |    | In two public tender offers published by the Company
  in December 2002 and March 2003, the Company purchased additional shares of
  Liraz representing 9.0% of the outstanding share capital of Liraz.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | In March 2003, pursuant to the provisions of the
  Israeli Companies Law, the Company purchased the remaining outstanding share
  capital of Liraz. The total aggregate amount of those purchases was $2.7
  million. Following these transactions, the Company currently holds the entire
  outstanding share capital of Liraz. The total carrying amount of the
  investment in Liraz following these transactions was $15.6 million. During
  2003 and 2004, the Company assimilated and integrated Lirazs infrastructure,
  management personnel and sales and marketing activities within the Companys
  business.                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | E. | AlphaTech:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | In December 2002, the Company purchased a 65%
  controlling interest in AlphaTech (2000) Srl. (AlphaTech) from Intercomp
  for aggregate consideration of $100 thousand. In February 2005, the Company
  entered into agreement with the other shareholder of AlphaTech to purchase
  its entire holdings in AlphaTech. Pursuant to the agreement, the Company
  purchased from the selling shareholders, in February 2005, 25% of AlphaTechs
  outstanding share capital for the consideration of $150 thousand. Under the
  agreement, the Company undertook to purchase the remaining 10% outstanding
  share capital of AlphaTech in January 2006 for an additional consideration of
  $100 thousand. AlphaTech, a Company incorporated in Romania serves as an
  off-shore delivery center in Romania.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | F. | Purchase of SDCs activity:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | In October 2002, Liraz, through a wholly owned
  subsidiary, acquired from SDC FinansSystems A/S referred to as SDC, a
  Company incorporated in Denmark, its IT development services activities
  relating to customers in the banking sector in Denmark.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-20

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 2 -
Certain Transactions (cont.):

| | F. | Purchase of SDCs activity (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | In October 2002, Liraz, through a wholly owned
  subsidiary, acquired from SDC FinansSystems A/S referred to as SDC, a
  Company incorporated in Denmark, its IT development services activities
  relating to customers in the banking sector in Denmark.                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Pursuant to the purchase agreement, the Company
  hired 100 employees of SDC, of which 30 employees were dismissed during the
  first quarter of 2003. The seller agreed to reimburse the Company for any
  costs associated with such dismissal. Pursuant to the purchase agreement, the
  Company assumed all the obligations related to the purchased activity and
  paid an aggregate amount of $800 thousand for the purchased goodwill and
  activities. The purchase price was determined in October 2002, based on the
  estimated fair value of the assets received. The purchase was recorded as a
  business combination.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The Company acquired SDC for the purpose of
  complementing its array of services. Following are the amounts assigned to
  major components of SDCs balance sheet as of the date of purchase (in
  thousands):                                                                                                                                                                                                                                                                                                                                                                                                                     

| | Current Assets      |  | $ | 1,097  |  
| | ------------------- |  | - | ------ | -
| | Other Assets        |  | $ | 131    |  
| | Current Liabilities |  | $ | (1,228 | )

| |    | Goodwill arising upon acquisition was $800 thousand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | In addition, the Company entered into an agreement
  with two of the sellers shareholders, pursuant to which the shareholders are
  purchasing IT development services from the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | G. | CePost:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | In January 2004, the Company purchased the entire
  outstanding share capital of CePost Ltd., an Israeli Company that develops
  and markets software solutions for electronic document mining, management and
  presentment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Pursuant to the purchase agreement, the Company paid
  $172,500 to the shareholders of CePost and issued to them 31,496 of the
  Companys ordinary shares, valued at the fair value of $200 thousands. In
  addition, the Company undertook to pay to the sellers royalties from CePosts
  revenues in an amount up to $1.5 million. At its option, the Company may pay
  the royalties in the form of the Companys ordinary shares. In accordance
  with the purchase agreement with the sellers, in March 2005, the Company paid
  the sellers an advance of $30 thousand in cash on account of the royalties.
  The Company accounted for the contingent purchase consideration at the
  minimum level of $120 thousand, in accordance with SFAS No. 141 and will be
  accounted as an additional cost of the acquired entity.

F-21

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 2 -
Certain Transactions (cont.):

| | G. | CePost (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The fair value assigned to CePost technologies was
  $553 thousand and is being amortized currently over 5 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Annual amortization is computed by the straight-line
  method, over the remaining useful life of the product, or based on the ratio
  of current gross revenues to current and anticipated future gross revenues,
  whichever is higher.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | H. | Outlook:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Effective as of January 2004, the Company, through a
  new wholly-owned subsidiary, Outlook & BluePhoenix Ltd., acquired from an
  Israeli Company, Outlook Systems Ltd., Outlook Systems entire business
  activities in the field of software development services. Pursuant to the
  purchase agreement, the Company hired 31 employees previously employed by
  Outlook Systems and assumed all the obligations related to the purchased
  activity. These obligations include the extension of a guarantee to banks
  with respect to loans in an aggregate amount of $720 thousand plus interest
  accrued, to be repaid by the Company by February 15, 2007. In addition, under
  the purchase agreement, the Company undertook to pay to the shareholders of
  Outlook Systems, in the first quarter of 2007, an amount equal to between 5
  and 7 times the average operating profit of Outlook & BluePhoenix Ltd. in
  the years 2004, 2005 and 2006, less the amount of $720 thousand.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Company accounted for the contingent purchase
  consideration at the minimum level of $720 thousand, in accordance with SFAS
  No. 141, and will account for any additional cost of the acquired entity as
  an additional cost of the acquired entity. The value assigned to the customer
  related intangible asset amounted to $425 thousand, and is being amortized
  over its estimated useful life-currently 6 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | I. | Intercomp                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | In 1998, the Company invested in Intercomp Ltd.,
  which has developed a set of automated analysis and reengineering tools for
  legacy COBOL applications. During 2002 and 2003 Intercomp focused its efforts
  on the development of software tools that comprise a part of the Companys
  LogicMiner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | In the fourth quarter of 2003, the Company exercised
  an option to purchase from Intercomp its tool, known as AnalyzeIT, for an
  aggregate of $1.9 million. In addition, the Company undertook to pay
  royalties to Intercomp in amount equal to 25% of the revenues generated from
  the purchased technology. AnalyzeIT provides an analysis of a legacy
  application and creates a repository and inventory of the applications
  components and the relationship between them.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The results of the analysis are presented
  graphically and in reports. They include a study of the applications control
  flow and data flow, which enable the user to examine the code and structure
  of the application down to the level of a single variable. The technology
  will be amortized over a 5 year period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-22

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 2 -
Certain Transactions (cont.):

| | I. | Intercomp (cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In connection with the purchase of Intercomps
  technology, the Company assumed the rights and obligations of Intercomp under
  the distribution agreement described below. Effective as of January 2004, the
  Company entered into an option agreement, pursuant to which the Company was
  granted an option to purchase from a former shareholder of Intercomp all of
  his interest in Intercomp consisting of 18.5% of the outstanding share
  capital of Intercomp. In the event the Company exercises its option to
  purchase from the former shareholder of Intercomp, the Company undertook to
  issue to him as consideration for his shares warrants to purchase 5,000 of
  the Companys ordinary shares, at an exercise price of $20 per share. The
  warrants are exercisable until October 25, 2005. Concurrently, the remaining
  shareholder of Intercomp, comprised of several funds acting through their
  general partner Israel Infinity Venture Capital Partners Ltd. referred to as
  Infinity, and the Company approved the signing of a non-exclusive
  distribution agreement between Intercomp and a distributor partially-owned by
  the former shareholder of Intercomp, pursuant to which Intercomp granted
  rights to the distributor rights to further develop and distribute
  Intercomps products.
| |    | In March 2004, the Company exercised the option to
  purchase from a former shareholder its holdings in Intercomp. As part of this
  transaction, certain shareholders of Intercomp, holding 2.1% of Intercomps
  outstanding share capital, transferred to the Company their holding in
  Intercomp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | In addition, the other shareholder of Intercomp,
  Infinity, converted certain outstanding loans owed to it by Intercomp into
  7,236 shares of Intercomp at the share price of $162.7. Following these
  transactions, the Companys shareholding in Intercomp increased from 49% to
  61.6%. Since the end of the first quarter of 2004, the Company has
  consolidated Intercomp.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In April 2004, the other shareholder of Intercomp,
  Infinity, granted the Company a call option to purchase its entire holding in
  Intercomp, exercisable until April 1, 2006. If the Company does not exercise
  such option, Infinity will have a put option to cause the Company to purchase
  Infinitys entire holdings in Intercomp, exercisable during a six months
  period of commencing in April 2006 (see Note 12B3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The Company granted a creditor of Intercomp - First
  Israel Mezzanine Investors Ltd., known as FIMI, a put option to sell to the
  Company promissory notes issued by Intercomp in an aggregate amount of $3.5
  million plus interest accrued at an annual rate of 5% (see Note 12B2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | J. | M.S.I. MultiConn Solutions and MultiConn
  Technologies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In 1999, the Company acquired 51% of the outstanding
  share capital of M.S.I. MultiConn Solutions International (1995) Ltd.
  referred to as M.S.I. MultiConn. M.S.I. MultiConns results of operations
  were consolidated in the Companys financial statements beginning with the
  third quarter of 1999. In 2000, the Company increased its holding in M.S.I.
  MultiConn to 60%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | Since the first quarter of 2003, the Company
  recorded the investment under the equity method and did not consolidate the
  result of operation of M.S.I. MultiConn, due to lack of control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-23

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 2 -
Certain Transactions (cont.):

| | J. | M.S.I. MultiConn Solutions and
  MultiConn Technologies (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Effective as of January 2004, the other shareholders
  of M.S.I. MultiConn transferred their entire holdings in M.S.I MultiConn to
  the Company. Following this transaction, the Company assumed control over the
  daily management of M.S.I. MultiConn. The Company currently wholly owns M.S.I
  MultiConn and finances its activities. Effective as of the first quarter of
  2004, M.S.I. MultiConns results are consolidated with the Company results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | In 2000, the Company, together with the other
  shareholders of M.S.I. MultiConn established a new Company, named MultiConn
  Technologies Ltd., and initially owned 19% of its share capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | MultiConn Technologies develops and markets
  WS4Legacy (formerly known as eXperanto).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Under the Company agreement with MultiConn
  Technologies entered into in 2000, the Company lent $2.1 million to MultiConn
  Technologies, of which $1 million was convertible into ordinary shares of
  MultiConn Technologies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    | In 2002, prior to the consolidation, the Company
  wrote down $1.8 million of the balance of its investment in MultiConn
  Technologies, due to impairment of the investment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | In December 2002, the Company converted the $1
  million loan into shares of MultiConn Technologies and, as a result, the
  Companys holdings increased to 60%. In 2003, the Company wrote down $350
  thousand out of $1.1 million related to loans granted to MultiConn
  Technologies since it was probable that the Company will be unable to collect
  all amounts due.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Since the first quarter of 2003, the Company has
  recorded the investment under the equity method and did not consolidate the
  result of operation of MultiConn Technologies, due to lack of control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Following a transaction entered into between the
  Company and the other shareholders of MultiConn Technologies in 2004, the
  other shareholders of MultiConn Technologies increased their holdings in
  MultiConn Technologies to 58.2% in the aggregate, through the issuance of
  shares by MultiConn Technologies. As a result, the Company currently holds
  approximately 40% of the outstanding share capital of MultiConn Technologies.
  The Company has an option to increase its holdings in MultiConn Technologies
  to 60% of its outstanding share capital for an exercise price of $50
  thousand.                                                                                                                                                                                                                                                                                                                                                                                
| |    | In May 2004, the Company provided a guarantee on
  behalf of MultiConn Technologies in the amount of $300 thousand, which
  expires in May 2005. In accordance with FIN 45 Guarantors Accounting and
  Disclosure Requirements for Guarantees, Including Indirect Guarantees of
  Others, the Company recorded a liability for the aforementioned guarantee in
  the amount of approximately $60 thousand, which was determined to be the fair
  value of the guarantee at its inception. In 2004, the Company included in its
  equity in affiliated companies 100% of the losses of MultiConn Technologies
  up to the guaranteed amount. In 2004 the Company did not recognize any gain
  in the above-mentioned transaction. The Company is deemed the primary
  beneficiary of MultiConn Technologies and accordingly has consolidated
  MultiConn Technologies into its financial statement as of December 31, 2004.
  The adoption of FIN 46R has no impact on the Companys net income.

F-24

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 2 -
Certain Transactions (cont.):

| | K. | Following are the amounts assigned to major
  components of 2004 acquisitions balance sheets in the aggregate as of the
  date of purchase (in thousands):
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 |  | (in
  thousands) |  
| | ----------------------------------------------- |  | ---------------- | -
| |                                                 |  |                  |  
| |                                                 |  |                  |  
| | Current assets                                  |  |                  | $
| | Other long term tangible assets                 |  |                  |  
| | Fixed assets                                    |  |                  |  
| |                                                 |  |                  |  
| | Total tangible assets acquired                  |  |                  |  
| | Goodwill                                        |  |                  |  
| | Customer related intangible asset (1)           |  |                  |  
| | Technology (2)                                  |  |                  |  
| |                                                 |  |                  |  
| | Total tangible and intangible assets
  acquired |  |                  |  
| | Current liabilities                             |  |                  |  
| | Other long term liabilities                     |  |                  |  
| |                                                 |  |                  |  
| | Total liabilities                               |  |                  |  
| | Minority interest                               |  |                  |  
| |                                                 |  |                  |  
| | Net assets acquired                             |  |                  | $
| |                                                 |  |                  |  

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------
| |  | (1)                                                                                                                                                                                                                                                                                                                                                                                                                      | The value assigned to customer related intangibles
  is being amortized currently over 6 years
| |  | (2)                                                                                                                                                                                                                                                                                                                                                                                                                      | The value assigned to technology is being amortized
  currently over 5 years                  
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                               
| |  | The following unaudited pro forma summary presents
  information as if the acquisitions had occurred as of January 1, 2003. The
  pro forma information, which is provided for informational purposes only, is
  based on historical information and does not necessarily reflect the results
  that would have occurred, not is it necessarily indicative of future results
  of operations of the consolidated entity.
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                               

| |                                    |  | Year
  Ended
  December 31, 2004       |   | Year
  ended
  December 31, 2003 | 
| | ---------------------------------- |  | -------------------------------------- | - | -------------------------------- | 
| |                                    |  |                                        |   |                                  | 
| |                                    |  | (In
  thousands,except per share data) |  
| |                                    |  | (Unaudited)                            |  
| |                                    |  |                                        |  
| |                                    |  |                                        |   |                                  | 
| | Revenues                           |  |                                        | $ | 57,186                           | 
| | Net income (loss)                  |  |                                        | $ | 2,774                            | 
| | Earning (loss) per share - basic   |  |                                        |   | 0.21                             | 
| | Earning (loss) per share - diluted |  |                                        |   | 0.21                             | 

F-25

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 3 -
Investments in Affiliates and Other Companies:

| | A. | Composition
| | -- | -----------
| |    |            
| |    | 1.         

| |                                               |  | December
  31,   | 
| | --------------------------------------------- |  | ---------------- | 
| |                                               |  |                  | 
| |                                               |  | 2004             | 
| |                                               |  |                  | 
| |                                               |  | (in
  thousands) | 
| |                                               |  |                  | 
| | Cost of shares *                              |  | -                | 
| | Less - accumulated amortization of goodwill   |  | -                | 
| | Equity in post-acquisition accumulated losses |  | -                | 
| |                                               |  |                  | 
| |                                               |  | -                | 
| | Loans granted to affiliates (2)               |  | -                | 
| | Investments in other companies                |  | -                | 
| |                                               |  |                  | 
| |                                               |  | -                | 
| |                                               |  |                  | 
| | * Including goodwill - original amount        |  | -                | 
| |                                               |  |                  | 

| |  | 2. | Loans granted to affiliates:
| |  | -- | ----------------------------

| | Interest
  rate
  December 31, 2003 |  | Linkage
  basis |  | December
  2003  |   | Maturity
  dates | 
| | ----------------------------------- |  | --------------- |  | ---------------- | - | ---------------- | 
| |                                     |  |                 |  |                  |   |                  | 
| | %                                   |  |                 |  | (in
  thousands) |   |                  | 
| |                                     |  |                 |  |                  |   |                  | 
| | Libor + 1                           |  | Dollar          |  |                  | $ | 1,767            | 
| | -                                   |  | Dollar          |  |                  |   | 400              | 
| | -                                   |  | Dollar          |  |                  |   | 761              | 
| |                                     |  |                 |  |                  |   |                  | 
| |                                     |  |                 |  |                  | $ | 2,928            | 

| |  |  |                                                                                                                    
| |  |  | -------------------------------------------------------------------------------------------------------------------
| |  |  | The purpose of the loans was for working capital.                                                                  
| |  |  |                                                                                                                    
| |  |  | Following are details relating to the financial
  position and results of operations of investees in the aggregate:

| |                   |  | December
  31,   |  
| | ----------------- |  | ---------------- | -
| |                   |  |                  |  
| |                   |  | 2003             |  
| |                   |  |                  |  
| |                   |  | (in
  thousands) |  
| |                   |  |                  |  
| | Total assets      |  |                  | $
| |                   |  |                  |  
| | Total liabilities |  |                  | $
| |                   |  |                  |  
| | Net loss          |  |                  | $
| |                   |  |                  |  

F-26

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 3 -
Investments in Affiliates and Other Companies (cont.):

| | B. | Tesnet:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Effective as of January 1999, the Company acquired
  32% of the outstanding share capital of Tesnet - Software Testing Ltd.
  (Tesnet), a provider of testing and software quality assurance services.
  Tesnets results of operations were consolidated in the Companys financial
  statements beginning with the first quarter of 1999, owing to the Companys
  control of Tesnets board of directors. During 1999 and 2002, the Company
  paid approximately $2 million for its holding in Tesnet, as Tesnet met an
  agreed upon earnings target within three years following the acquisition.
  Total goodwill arising from this acquisition was $886 thousand.                                                                                           
| |    | In February 2000, Tesnet consummated a public
  offering of its shares and warrants on the Tel Aviv Stock Exchange. Net
  proceeds from the offering were $9.5 million. As a result, the Company
  recorded capital gain of $1 million and its shareholdings in Tesnet decreased
  to 22%. Consequently the Company ceased controlling Tesnets board of
  directors and discontinued consolidating the operating results of Tesnet
  during the first quarter of 2000. Until December 2003, the Companys
  investment in Tesnet was accounted for under the equity method, owing to the
  fact that the Company exercises significant influence over operating and
  financial policies of Tesnet by virtue of its representation on Tesnets
  board of directors.
| |    | During 2002 and 2003, $75 thousand and $112
  thousand, respectively, were recorded as income from an increase in the
  Companys equity investment in Tesnet due to the expiration of the
  above-mentioned warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | In the first quarter of 2004, the Company sold its
  entire remaining holdings in Tesnet for aggregate consideration of
  approximately $3.1 million. As a result, the Company currently does not hold
  any interest in Tesnet. (see Note 15B4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | C. | Level 8:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company holds several capital instruments,
  including warrants and rights to receive warrants exercisable into shares of
  Level 8 Systems Inc. If the Company exercises these capital instruments in
  full, it will hold approximately 7 million ordinary shares of Level 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In 2003, the Company purchased 444,444 ordinary
  shares of Level 8 for $200 thousand. During 2003 and in the first quarter of
  2004, the Company sold substantially all of the shares of Level 8 then held
  by the Company, for $624 thousand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-27

---

---

BLUEPHOENIX
SOLUTIONS LTD.

(An
Israeli Corporation)

Note 3 -
Investments in Affiliates and Other Companies (cont.):

| | C. | Level 8 (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | From 2000 through 2004, the Company provided to a
  bank guarantee to secure Level 8s loan from a bank. As of December 31, 2004
  this guarantee amounted to approximately $2 million (see Note 9). In November
  2003, the Company agreed to extend the term of the guarantee until November
  2004. As consideration for the extension of such guarantee, the Company was
  issued an aggregate of 300,000 Level 8s ordinary shares. In November 2004,
  the Company agreed to extend again the term of the guarantee until November
  2005. As consideration of such extension, the Company is entitled to receive
  3,942,000 ordinary shares of level 8. The income from the issuance of
  additional shares would be recognized over the extension period of the
  guarantee. The amount of the guarantee outstanding was unchanged since the
  amount remained the same and the shares were issued only in connection with
  the extension of the term of the guarantee. In the event that the guarantee
  is exercised, the bank is obligated to grant the company a three year loan in
  an amount of up to the amount of the guarantee.                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | In September 2004, the Company extended a loan to
  Level 8 of approximately $97 thousand under a secured promissory note. The
  note bears an interest at an annual rate of 10%. In consideration, the
  Company is entitled to receive warrants to purchase 1,986,468 ordinary shares
  of Level 8 at an exercise price of $0.10 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | D. | Zulu:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Zulu is a developer and marketer of software
  solutions for migration from Adabas/Natural to Java.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | In February 2005, the Company entered into an
  agreement to purchase up to 20% of the outstanding share capital of Zulu
  Software, Inc., or Zulu, on a fully diluted basis. In accordance with the agreement,
  the purchase was divided into four installments. The closing of the first
  installment was held in February 2005. At that closing Zulu issued 8.0% of
  its outstanding shares, in consideration for $350 thousand. The remaining 12%
  of Zulus outstanding shares shall be sold to the Company in the portions of
  3.5%, 5.0% and 3.5%, in consideration for $150 thousand, $200 thousand and
  $300 thousand, respectively, each installment payable at each respective
  closing. These three pending closings shall be held on specific dates prior
  to March 31, 2006, subject to fulfillment of certain milestones set forth in
  the purchase agreement. In addition, pursuant to the agreement, Zulu granted
  the Company warrants to purchase a number of additional shares in Zulu, such
  number representing a percentage of Zulus outstanding shares, on a fully
  diluted basis equal to half of such percentage actually purchased by the
  Company under the purchase agreement. The exercise price of the warrants is
  33% higher then the price per share the Company paid for Zulus shares under
  the purchase agreement. In addition, the Company entered into an alliance
  agreement for cooperation in marketing and selling Zulus and its software
  and services.

F-28

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 3 - Investments in Affiliates and Other
Companies (cont.):

|                       | E. |                                                                                                                                                                                                                                                                                                                          | Steps Ventures
|---------------------- | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------
|                       |    |                                                                                                                                                                                                                                                                                                                         
|                       |    | As of
  December 31, 2004, we hold 375,000 shares of Steps Ventures Ltd. Comprising
  3.75% of the outstanding share capital of Steps Ventures. Steps Ventures is
  an Israeli venture capital investment group focused on Israeli startup
  companies in the fields of software, telecommunications and semiconductors.
|                       |    |                                                                                                                                                                                                                                                                                                                         
|Note 4 - Fixed Assets:
|                      
|                       |    | Composition
  of assets, grouped by major classifications:                                                                                                                                                                                                                                                              

| |                             | December
  31,                       |  
| | --------------------------- | ------------------------------------ | -
| |                             |                                      |  
| |                             | 2004                                 |  
| |                             |                                      |  
| |                             | (in
  thousands)                     |  
| |                             |                                      |  
| | Cost:                       |                                      |  
| |                             | Computers and peripheral
  equipment |  
| |                             | Office furniture and
  equipment     |  
| |                             | Leasehold improvements               |  
| |                             | Motor vehicles                       |  
| |                             |                                      |  
| |                             |                                      |  
| |                             |                                      |  
| | Accumulated
  Depreciation: |                                      |  
| |                             | Computers and peripheral
  equipment |  
| |                             | Office furniture and
  equipment     |  
| |                             | Leasehold improvements               |  
| |                             | Motor vehicles                       |  
| |                             |                                      |  
| |                             |                                      |  
| |                             |                                      |  
| | Depriciated
  cost          |                                      | $
| |                             |                                      |  

Note 5 - Goodwill:

| |                                                           | December
  31,                   |  
| | --------------------------------------------------------- | -------------------------------- | -
| |                                                           |                                  |  
| |                                                           | 2004                             |  
| |                                                           |                                  |  
| |                                                           | (in
  thousands)                 |  
| |                                                           |                                  |  
| | Carrying
  amounts at beginning of year                   |                                  | $
| | Acquired                                                  |                                  |  
| | Realization
  of previously - consolidated
  subsidiaries |                                  |  
| | Foreign
  currency translation adjustments                |                                  |  
| |                                                           |                                  |  
| |                                                           | Carrying
  amount at end of year |  
| |                                                           |                                  |  
| |                                                           |                                  |  

F-29

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

|Note 6 - Capitalized Software Development Cost and Other:
|---------------------------------------------------------
|                                                         
|                                                         

| |    |                                                                             |  | December
  31,   |       
| | -- | --------------------------------------------------------------------------- |  | ---------------- | ------
| |    |                                                                             |  |                  |       
| |    |                                                                             |  | 2004             |       
| |    |                                                                             |  |                  |       
| |    |                                                                             |  | (in
  thousands) |       
| |    |                                                                             |  |                  |       
| |    |                                                                             |  |                  |       
| |    | Capitalized
  software
  development costs (2)                              |  | $                | 21,729
| |    | Customer
  related intangible asset
  (3)                                   |  |                  | 372   
| |    | Deferred
  issuance expenses, net                                           |  |                  | 516   
| |    | Rent deposit                                                                |  |                  | 176   
| |    | Deferred tax
  asset                                                        |  |                  | 110   
| |    | Loans to
  others (4)                                                       |  |                  | 85    
| |    | Secured
  promissory note to other
  Company (Note 3C)                      |  |                  | 97    
| |    | Others                                                                      |  |                  | 93    
| |    |                                                                             |  |                  |       
| |    |                                                                             |  | $                | 23,178
| |    |                                                                             |  |                  |       
| | 2. | Original
  amount (see Note 2I,
  with respect to purchase of
  technology) |  |                  | 30,143
| |    | Less -
  accumulated amortization                                           |  |                  | 8,414 
| |    |                                                                             |  |                  |       
| |    |                                                                             |  | $                | 21,729
| |    |                                                                             |  |                  |       
| | 3. | Original
  amount                                                           |  |                  | 425   
| |    | Less-accumulated
  amortization                                             |  |                  | 53    
| |    |                                                                             |  |                  |       
| |    |                                                                             |  | $                | 372   
| |    |                                                                             |  |                  |       

| |    | As of
  December 31, 2004, amortization of customer related intangible asset amounted
  to $53 thousands.                                                                         
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                   
| |    | The
  estimated aggregate amortization of customer related intangible asset for the
  following five years is as follows: 2005, 2006, 2007 - $107 thousand, 2008 -
  $53 thousand.
| |    |                                                                                                                                                                                   
| | 4. | The loan is
  linked to the Israeli Consumer price index and bears as annual interest rate
  of 4% (see Note 16F)                                                                 

F-30

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

|Note 7 - Short-Term Bank Credit:
|--------------------------------
|                                
|                                

| |                        | Average 
  Interest rate |         |       |      |                  |     
| | ---------------------- | ------------------------ | ------- | ----- | ---- | ---------------- | ----
| |                        |                          |         |       |      | December
  31,   |     
| |                        | December
  31, 
  2004   |         |       |      |                  |     
| |                        |                          | Linkage |       | 2004 |                  | 2003
| |                        |                          |         |       |      |                  |     
| |                        | %                        |         | Basis |      | (in
  thousands) |     
| |                        |                          |         |       |      |                  |     
| |                        |                          |         |       |      |                  |     
| | Bank
  overdraft       |                          |         | 6.56  |      |                  |     
| | Short-term
  bank loan |                          |         | -     |      |                  |     
| | Short-term
  bank loan |                          |         | 4.17  |      |                  |     
| | Short-term
  bank loan |                          |         | 4.03  |      |                  |     
| |                        |                          |         |       |      |                  |     
| |                        |                          |         |       |      |                  |     
| |                        |                          |         |       |      |                  |     

|Note 8 - Accrued Severance Pay, Net:
|------------------------------------
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    

| |                         |  | December
  31,   |      
| | ----------------------- |  | ---------------- | -----
| |                         |  |                  |      
| |                         |  | 2004             |      
| |                         |  |                  |      
| |                         |  | (in
  thousands) |      
| |                         |  |                  |      
| |                         |  |                  |      
| | Accrued
  severance pay |  | $                | 4,493
| | Less -
  amount funded  |  |                  | 3,333
| |                         |  |                  |      
| |                         |  | $                | 1,160
| |                         |  |                  |      

| | B. | Expenses                                                                                                                                          
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                   
| |    | The expenses
  related to severance pay for the years ended December 31, 2004, 2003 and 2002
  were $919,000, $720,000 and $461,000, respectively.

F-31

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 9 - Provision for losses in
formerly-consolidated subsidiary:

Liraz is liable for losses in a subsidiary it had consolidated until
the second quarter of 2001. The provision for such liability at December 31,
2004 and December 31, 2003, was accounted for under SFAS No. 5 and amounted to
$2 million, representing the maximum potential amount Liraz has guaranteed to
secure a bank loan of the said subsidiary. Under its terms, such guarantee may
be reduced to the extent that the subsidiary raises additional share capital.
The guarantee will be outstanding until November 2005. In the fourth quarter of
2003, $541 thousand was recorded as gain due to a repayment of the loan by the
formerly-consolidated subsidiary, which resulted in a decrease by the bank of
the guaranteed amount (see also Note 3C, with respect to the investment in
Level 8).

|                                       |                                  | December
  31,   |      
|-------------------------------------- | -------------------------------- | ---------------- | -----
|                                       |                                  |                  |      
|                                       |                                  | 2004             |      
|                                       |                                  |                  |      
|                                       |                                  | (in
  thousands) |      
|                                       |                                  |                  |      
|Carrying
  amount of beginning of year |                                  | $                | 1,971
|Realization                            |                                  |                  | -    
|                                       |                                  |                  |      
|                                       | Carrying
  amount at end of year |                  | $    
|                                       |                                  |                  |      
|                                       |                                  |                  |      

|Note 10 - Loans from banks and others:
|--------------------------------------
|                                      

|Average 
  Interest rate |  |                  |                | Long-term 
  liabilities |                | Current 
  maturities |  | Total long-term 
  liabilities net of 
  current maturities |  | Total long-term 
  liabilities net of 
  current maturities |    
|------------------------ |  | ---------------- | -------------- | ------------------------ | -------------- | --------------------- |  | ----------------------------------------------------------- |  | ----------------------------------------------------------- | ---
|                         |  |                  |                |                          |                |                       |  |                                                             |  |                                                             |    
|December 31, 
  2004     |  |                  |                | December 31, 2004        |                | December 31, 2003     | 
|                         |  | Linkage 
  basis |                |                          |                |                       | 
|%                        |  |                  | (in thousands) |                          | (in thousands) |                      
|                         |  |                  |                |                          |                |                       | 
|3.88                     |  |                  | Dollar         |                          |                | 998                   |  |                                                             |  |                                                             | 31 
|5                        |  |                  | Dollar         |                          |                | 4,189                 |  |                                                             |  |                                                             | -  
|6.05                     |  |                  | CPI            |                          |                | 1,416                 |  |                                                             |  |                                                             | -  
|4.32-7.66                |  |                  | CPI            |                          |                | 104                   |  |                                                             |  |                                                             | 73 
|4.875                    |  |                  | Dollar         |                          |                | 934                   |  |                                                             |  |                                                             | -  
|                         |  |                  |                |                          |                |                       |  |                                                             |  |                                                             |    
|                         |  |                  |                |                          | $              | 7,641                 |  |                                                             |  | $                                                           | 104

|B. | Maturity dates:
|-- | ---------------

|                                  |       | December
  31,   |      
|--------------------------------- | ----- | ---------------- | -----
|                                  |       |                  |      
|                                  |       | 2004             |      
|                                  |       |                  |      
|                                  |       | (in
  thousands) |      
|                                  |       |                  |      
|First year
  (current maturities) |       | $                | 104  
|Second year                       |       |                  | 7,482
|Third year                        |       |                  | 30   
|Fourth year                       |       |                  | 25   
|                                  |       |                  |      
|                                  | Total |                  | $    
|                                  |       |                  |      

F-32

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

|Note 11 - Commitments and contingencies:
|----------------------------------------
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        

F-33

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

|Note 11 - Commitments and contingencies (cont.):
|------------------------------------------------
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                

|     |  | Office Facilities |   | Vehicles, 
  Equipment and other | 
|---- |  | ----------------- | - | -------------------------------- | 
|     |  |                   |   |                                  | 
|2005 |  |                   | $ | 1,595                            | 
|2006 |  |                   |   | 998                              | 
|2007 |  |                   |   | 342                              | 
|2008 |  |                   |   | 135                              | 
|2009 |  |                   |   | 135                              | 
|     |  |                   |   |                                  | 
|     |  |                   | $ | 3,205                            | 
|     |  |                   |   |                                  | 

| |  |  |    | Total office
  rent expenses were approximately $1.8, $2.2 and $2.5 million for the years
  ended December 31, 2004, 2003 and 2002, respectively. In connection with
  these leases, the Company issued a bank guarantee of $113 thousand in the
  aggregate.                                                                                                              
| |  |  | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  |    |                                                                                                                                                                                                                                                                                                                                                                            
| |  |  | 4. | Under
  agreements between the Company and certain of its customers, the Company
  undertook to provide such customers a bank guarantee for the assurance of
  performance of its obligations under its agreements with such customers. As
  of December 31, 2004, there are outstanding bank guarantees on behalf of
  customers in the aggregate amount of $163 thousand.

F-34

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

|Note 11 - Commitments and contingencies (cont.):
|------------------------------------------------
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                

F-35

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

|Note 11 - Commitments and contingencies (cont.):
|------------------------------------------------
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                

F-36

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

|Note 11 - Commitments and contingencies (cont.):
|------------------------------------------------
|                                                
|                                                
|                                                
|                                                
|                                                
|Note 12 - Shareholders Equity:                 
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                
|                                                

F-37

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|(An Israeli Corporation)  

|Note 12 - Shareholders Equity (cont.):
|---------------------------------------
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       

| |                              |  | Options
  Outstanding                           |           | Options
  Exercisable                             | 
| | ---------------------------- |  | ----------------------------------------------- | --------- | ------------------------------------------------- | 
| |                              |  |                                                 |           |                                                   | 
| | Range of
  Exercise
  Prices |  | Number
  Outstanding
  on
  December
  31, 2004 |           | Weighted
  Average
  Remaining
  Contractual Life | 
| |                              |  |                                                 |           |                                                   | 
| | $                            |  |                                                 |           | Years                                             | 
| |                              |  |                                                 |           |                                                   | 
| |                              |  |                                                 |           |                                                   | 
| | 2.25                         |  |                                                 | 416,000   |                                                   | 
| | 3.00                         |  |                                                 | 116,000   |                                                   | 
| | 3.00                         |  |                                                 | 183,250   |                                                   | 
| | 3.00                         |  |                                                 | 80,000    |                                                   | 
| | 3.50                         |  |                                                 | 70,000    |                                                   | 
| | 3.50                         |  |                                                 | 20,500    |                                                   | 
| | 4.00                         |  |                                                 | 200,000   |                                                   | 
| | 4.50                         |  |                                                 | 39,483    |                                                   | 
| | 4.50                         |  |                                                 | 10,000    |                                                   | 
| | 5.20                         |  |                                                 | 139,500   |                                                   | 
| | 5.50                         |  |                                                 | 13,000    |                                                   | 
| | 6.00                         |  |                                                 | 28,000    |                                                   | 
| | 6.00                         |  |                                                 | 163,721   |                                                   | 
| | 6.50                         |  |                                                 | 311,900   |                                                   | 
| | 6.50                         |  |                                                 | 2,000     |                                                   | 
| | 8.00                         |  |                                                 | 92,000    |                                                   | 
| | 9.00                         |  |                                                 | 10,000    |                                                   | 
| | 9.63                         |  |                                                 | 70,000    |                                                   | 
| | 10.50                        |  |                                                 | 167,233   |                                                   | 
| |                              |  |                                                 |           |                                                   | 
| |                              |  |                                                 | 2,132,587 |                                                   | 
| |                              |  |                                                 |           |                                                   | 

F-38

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

|Note 12 - Shareholders Equity (cont.):
|---------------------------------------
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       

| |                                                                       |  | 2004                |   | 2003                                  |  | 2002                |          
| | --------------------------------------------------------------------- |  | ------------------- | - | ------------------------------------- |  | ------------------- | ---------
| |                                                                       |  |                     |   |                                       |  |                     |          
| |                                                                       |  | Number
  of options |   | Weighted
  Average
  Exercise
  Price |  | Number
  of options |          
| |                                                                       |  |                     |   |                                       |  |                     |          
| |                                                                       |  |                     |   | $                                     |  |                     |          
| |                                                                       |  |                     |   |                                       |  |                     |          
| | Options
  outstandingat beginning
  of year                           |  | 2,159,993           |   | 4.99                                  |  |                     | 1,347,260
| | Changes
  during the year:                                            |  |                     |   |                                       |  |                     |          
| | Granted                                                               |  | 163,721             |   | 6.00                                  |  |                     | 923,000  
| | Exercised                                                             |  | (33,767             | ) | 3.56                                  |  |                     | (35,267  
| | Forfeited                                                             |  | (157,360            | ) | 6.29                                  |  |                     | (75,000  
| |                                                                       |  |                     |   |                                       |  |                     |          
| | Options
  outstanding
  at end of year                                |  | 2,132,587           |   | 5.00                                  |  |                     | 2,159,993
| |                                                                       |  |                     |   |                                       |  |                     |          
| |                                                                       |  |                     |   |                                       |  |                     |          
| | Options
  exercisable at 
  year-end                                  |  | 877,049             |   | 6.08                                  |  |                     | 1,233,575
| |                                                                       |  |                     |   |                                       |  |                     |          
| | Weighted-average
  fair
  value of options granted
  during the year* |  | 1.71                |   |                                       |  |                     | 0.54     
| |                                                                       |  |                     |   |                                       |  |                     |          

| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | The fair
  value of each option granted is estimated on the date of grant, using the
  Black-Scholes option-pricing model with the following weighted average
  assumptions: dividend yield of 0% for all years; expected volatility: 2004 
  26% 2003 - 28% 2002 - 33%,  risk-free
  interest rate: 2004  2.78% 2003  2.10%, 2002  3.10%, , and expected life:
  2004, 2003 and 2002 - 3 years.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     

F-39

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

|Note 12 - Shareholders Equity (cont.):
|---------------------------------------
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       

F-40

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

|Note 12 - Shareholders Equity (cont.):
|---------------------------------------
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       

F-41

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

|Note 12 - Shareholders Equity (cont.):
|---------------------------------------
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       

F-42

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

|Note 12 - Shareholders Equity (cont.):
|---------------------------------------
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       

F-43

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

|Note 12 - Shareholders Equity (cont.):
|---------------------------------------
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       

| |                                                                         |                                      | 2004                |           | 2003                                  |     
| | ----------------------------------------------------------------------- | ------------------------------------ | ------------------- | --------- | ------------------------------------- | ----
| |                                                                         |                                      |                     |           |                                       |     
| |                                                                         |                                      | Number of
  options |           | Weighted
  Average
  Exercise
  Price |     
| |                                                                         |                                      |                     |           |                                       |     
| |                                                                         |                                      |                     |           | $                                     |     
| |                                                                         |                                      |                     |           |                                       |     
| |                                                                         |                                      |                     |           |                                       |     
| | Options
  outstanding at beginning of year                              |                                      | 3,694,237           |           |                                       | 0.74
| | Changes
  during the year:                                              |                                      |                     |           |                                       |     
| |                                                                         | Granted                              |                     | 1,281,500 |                                       |     
| |                                                                         | Exercised                            |                     | (4,790    | )                                     |     
| |                                                                         | Forfeited
  /cancelled               |                     | (507,460  | )                                     |     
| |                                                                         |                                      |                     |           |                                       |     
| |                                                                         | Options
  outstanding at end of year |                     | 4,463,487 |                                       |     
| |                                                                         |                                      |                     |           |                                       |     
| |                                                                         |                                      |                     |           |                                       |     
| | Options
  exercisable at year-end                                       |                                      | 2,547,776           |           |                                       | 0.85
| |                                                                         |                                      |                     |           |                                       |     
| | Weighted-average
  fair value of options
     granted during the year * |                                      | 0.08                |           |                                       |     
| |                                                                         |                                      |                     |           |                                       |     
| |                                                                         |                                      |                     |           |                                       |     

| |   |                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | The fair
  value of each option granted is estimated on the date of grant, using the
  Black-Scholes option-pricing model with the following weighted average
  assumptions: dividend yield of 0% for all years; expected volatility: 2004 -
  0.1%  2003 - 0.1%, risk-free interest
  rate: 2004 - 3.43%, 2003 -  3.00%, and
  expected life: 2004, 2003 - 4 years.
| |   |                                                                                                                                                                                                                                                                                                                                                                     

F-44

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

|Note 12 - Shareholders Equity (cont.):
|---------------------------------------
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       

| |                              |  | Options
  Outstanding                         |           | Options
  Exercisable                             | 
| | ---------------------------- |  | --------------------------------------------- | --------- | ------------------------------------------------- | 
| |                              |  |                                               |           |                                                   | 
| | Range of
  Exercise
  Prices |  | Number
  Outstanding
  at December
  31, 2004 |           | Weighted
  Average
  Remaining
  Contractual Life | 
| |                              |  |                                               |           |                                                   | 
| | $                            |  |                                               |           | Years                                             | 
| |                              |  |                                               |           |                                                   | 
| |                              |  |                                               |           |                                                   | 
| | 0.25-0.50                    |  |                                               | 796,921   |                                                   | 
| | 0.65                         |  |                                               | 2,516,173 |                                                   | 
| | 0.75-2.5                     |  |                                               | 1,150,393 |                                                   | 
| |                              |  |                                               |           |                                                   | 
| |                              |  |                                               | 4,463,487 |                                                   | 
| |                              |  |                                               |           |                                                   | 

| | C. | Dividends:
| | -- | ----------
| |    |           
| |    | 1.        
| |    |           
| |    | 2.        

F-45

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

Note 13 - Monetary Balances in Non-dollar
Currency:

| |              |                                       | December
  31,   |       
| | ------------ | ------------------------------------- | ---------------- | ------
| |              |                                       |                  |       
| |              |                                       | 2004             |       
| |              |                                       |                  |       
| |              |                                       | (in
  thousands) |       
| |              |                                       |                  |       
| |              |                                       |                  |       
| | ASSETS:      |                                       |                  |       
| |              | Current
  assets                      |                  | $     
| |              | Long-term
  assets                    |                  |       
| |              |                                       |                  |       
| |              |                                       |                  | 15,096
| |              |                                       |                  |       
| | LIABILITIES: |                                       |                  |       
| |              | Current
  liabilities                 |                  |       
| |              | Long-term
  liabilities               |                  |       
| |              |                                       |                  |       
| |              |                                       |                  |       
| |              |                                       |                  | 14,965
| |              |                                       |                  |       
| |              |                                       |                  |       
| |              | Net monetary
  assets
  (liabilities) |                  | $     
| |              |                                       |                  |       
| |              |                                       |                  |       

|Note 14 - Taxes on Income:
|--------------------------
|                          
|                          
|                          
|                          
|                          
|                          
|                          
|                          
|                          
|                          

F-46

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

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

F-47

---

---

|BLUEPHOENIX SOLUTIONS LTD.
|--------------------------
|                          
|(An Israeli Corporation)  

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

| |                                                                  |  | December
  31,   |        
| | ---------------------------------------------------------------- |  | ---------------- | -------
| |                                                                  |  |                  |        
| |                                                                  |  | 2004             |        
| |                                                                  |  |                  |        
| |                                                                  |  | (in
  thousands) |        
| |                                                                  |  |                  |        
| |                                                                  |  |                  |        
| | Net operating losses carry
  forwards                            |  | $                | 15,784 
| | Software development costs                                       |  |                  | 1,065  
| | Provisions for employee
  rights and other temporary differences |  |                  | 412    
| |                                                                  |  |                  |        
| |                                                                  |  |                  | 17,261 
| | Valuation allowance                                              |  |                  | (16,759
| |                                                                  |  |                  |        
| |                                                                  |  | $                | 502    
| |                                                                  |  |                  |        

| |    | For the
  years ended December 31, 2004, 2003 and 2002, the valuation allowance
  increased by $1,611 thousand, 1,755 thousands and 1,081 thousands,
  respectively. The Companys management cannot determine that it is more
  likely than not that the deferred tax asset relating to net operating losses
  will be realized.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                  
| | F. | Non Israeli Subsidiaries:                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                  
| |    | Non-Israeli
  subsidiaries are taxed based upon tax laws in the country of domicile of the
  respective subsidiary.                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                  
| | G. | Income (loss) before taxes on income is composed as follows:                                                                                                                                                                                                                                                                     

| |                                          |  | Year ended
  December 31, |        
| | ---------------------------------------- |  | ------------------------- | -------
| |                                          |  |                           |        
| |                                          |  | 2004                      |        
| |                                          |  |                           |        
| |                                          |  | (in
  thousands)          |        
| |                                          |  |                           |        
| |                                          |  |                           |        
| | The Company
  and subsidiaries in Israel |  | $                         | (12,487
| | Subsidiaries
  outside of Israel         |  |                           | 8,792  
| |                                          |  |                           |        
| |                                          |  | $                         | (3,695 
| |                                          |  |                           |        

F-48

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 14 - Taxes on Income (cont.):

| | H. | Taxes on income included in the statements of income:
| | -- | -----------------------------------------------------

| |                                    |                 | Year ended
  December 31, |     
| | ---------------------------------- | --------------- | ------------------------- | ----
| |                                    |                 |                           |     
| |                                    |                 | 2004                      |     
| |                                    |                 |                           |     
| |                                    |                 | (in
  thousands)          |     
| |                                    |                 |                           |     
| | For the reported
  year - current: |                 |                           |     
| |                                    | In Israel       |                           | $   
| |                                    | Out of
  Israel |                           |     
| |                                    |                 |                           |     
| |                                    |                 |                           | 113 
| | Taxes
  related to prior years     |                 |                           | (133
| | Deferred
  taxes, net              |                 |                           | 280 
| |                                    |                 |                           |     
| |                                    |                 | $                         | 260 
| |                                    |                 |                           |     

| | I. | A reconciliation of the theoretical tax expense (benefit), assuming
  all income is taxed at the regular rates and the actual tax expense is as
  follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                            |                                                         | December
  31,   |      
| | ------------------------------------------------------------------------------------------ | ------------------------------------------------------- | ---------------- | -----
| |                                                                                            |                                                         |                  |      
| |                                                                                            |                                                         | 2004             |      
| |                                                                                            |                                                         |                  |      
| |                                                                                            |                                                         | (in
  thousands) |      
| |                                                                                            |                                                         |                  |      
| | Income
  (loss) before taxes on income, per consolidated
       statements of income       |                                                         | $                | 3,695
| |                                                                                            |                                                         |                  |      
| | Theoretical
  tax expense (income) (36% in 2002 and 2003,
  35% in 2004)                   |                                                         |                  | 1,293
| | Tax benefit
  arising from exempt tax rate as an Approved
       Enterprise              |                                                         |                  | -    
| |                                                                                            |                                                         |                  |      
| |                                                                                            |                                                         |                  | 1,293
| | Increase
  (decrease) in taxes resulting from permanent
       differences:                |                                                         |                  |      
| |                                                                                            | State income
  tax, net of Federal benefit              |                  |      
| |                                                                                            | Tax exempt
  income                                     |                  |      
| |                                                                                            | Non-deductible
  expenses                               |                  |      
| |                                                                                            | Effect of
  different tax rates in foreign subsidiaries |                  |      
| |                                                                                            | Taxes
  related to previous years                       |                  |      
| |                                                                                            | Change in
  tax rate and others                         |                  |      
| |                                                                                            |                                                         |                  |      
| |                                                                                            |                                                         |                  | (432 
| |                                                                                            | Other                                                   |                  |      
| |                                                                                            |                                                         |                  |      
| | Taxes on
  income in the consolidated statements of
        income - for the reported year |                                                         | $                | 260  
| |                                                                                            |                                                         |                  |      
| | Effective
  tax rate                                                                       |                                                         |                  | 7    
| |                                                                                            |                                                         |                  |      

F-49

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 14 - Taxes on Income (cont.):

| | J. | Tax losses:
| | -- | -----------

| | 1. | A U.S.
  subsidiary has net operating losses (NOL) carry forwards for federal tax
  purposes as of December 31, 2003 totaling $23 million, all of which will
  expire through 2022.                                                        
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | That
  subsidiary has net operating losses carry forwards for state tax purposes of
  $4 million, which expire through 2007. In addition, that subsidiary has tax
  credits carry forwards totaling $446 thousand, which expire through 2021.
| |    |                                                                                                                                                                                                                                              
| | 2. | The Company
  and its subsidiaries in Israel have NOL carry forwards for income tax
  purposes as of December 31, 2003 totaling NIS 66.1 million ($15.1 million).                                                                            

| | K. | Tax assessments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The Company
  received a revised tax assessment for the 19972001 tax years at a total
  amount of approximately $1.2 million. As agreed with the tax authorities, the
  Company should pay a down payment of approximately $800 thousand payable in
  24 monthly  installments until
  December 2005. The Company is acting to obtain documentation in order to
  cancel the balance of approximately $400 thousand. This tax expense is fully
  offset against previously existing tax reserves (the tax reserve is included
  in accounts  payable and accrual -
  other).                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | L. | Tax reform:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | On January
  1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the
  reform, resident companies are subject to Israeli tax on income accrued or
  derived in Israel or abroad. In addition, the concept of  controlled foreign corporation was
  introduced, according to which an Israeli Company may become subject to
  Israeli taxes on certain income of a non-Israeli subsidiary if the
  subsidiarys primary source of income is passive income (such as interest,
  dividends, royalties, rental income or capital gains). The tax reform also
  substantially changed the system of taxation of capital gains. The Companys
  management cannot estimate at present whether the reform will have an effect
  on the Companys future results of operations.

F-50

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 15 - Supplementary Financial Statement
Information:

| | A. | Balance Sheets:
| | -- | ---------------
| |    |                
| |    | 1.             

| |                                        |  | December
  31,   |       
| | -------------------------------------- |  | ---------------- | ------
| |                                        |  |                  |       
| |                                        |  | 2004             |       
| |                                        |  |                  |       
| |                                        |  | (in
  thousands) |       
| |                                        |  |                  |       
| |                                        |  |                  |       
| | Trade
  accounts receivable            |  | $                | 16,989
| | Less
  provision for doubtful accounts |  |                  | (1,175
| |                                        |  |                  |       
| |                                        |  | $                | 15,814
| |                                        |  |                  |       

| |  |  |                                                                                                                                                         
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | (*) In
  February 2004, the Company and a customer mutually agreed to terminate a
  contract. As a result, the Company recorded a loss of $400 thousand.

| |  | 2. | Other Current Assets:
| |  | -- | ---------------------

| |                                        | December
  31,   |  
| | -------------------------------------- | ---------------- | -
| |                                        |                  |  
| |                                        | 2004             |  
| |                                        |                  |  
| |                                        | (in
  thousands) |  
| |                                        |                  |  
| |                                        |                  |  
| | Government
  departments and agencies  |                  | $
| | Advances to
  suppliers and others     |                  |  
| | Employees                              |                  |  
| | Prepaid
  expenses                     |                  |  
| | Related
  parties                      |                  |  
| | Deferred
  taxes                       |                  |  
| | Short-term
  deposits                  |                  |  
| | Interest and
  other income receivable |                  |  
| |                                        |                  |  
| |                                        |                  |  
| |                                        |                  | $
| |                                        |                  |  

F-51

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 15 - Supplementary Financial Statement
Information (cont.):

| | A. | Balance Sheets (cont.):
| | -- | -----------------------
| |    |                        
| |    | 3.                     

| |                                                  |  | December
  31,   |      
| | ------------------------------------------------ |  | ---------------- | -----
| |                                                  |  |                  |      
| |                                                  |  | 2004             |      
| |                                                  |  |                  |      
| |                                                  |  | (in
  thousands) |      
| |                                                  |  |                  |      
| |                                                  |  |                  |      
| | Government
  departments and agencies            |  | $                | 866  
| | Employees
  and wage-related liabilities         |  |                  | 4,223
| | Related
  parties                                |  |                  | -    
| | Accrued
  expenses and other current liabilities |  |                  | 2,296
| |                                                  |  |                  |      
| |                                                  |  | $                | 7,385
| |                                                  |  |                  |      

| | B. | Statements of Operations:
| | -- | -------------------------
| |    |                          
| |    | 1.                       
| |    |                          
| |    |                          
| |    |                          
| |    | 2.                       
| |    |                          
| |    |                          
| |    |                          
| |    | 3.                       

| |                                                           |  | Year ended
  December 31, |     
| | --------------------------------------------------------- |  | ------------------------- | ----
| |                                                           |  |                           |     
| |                                                           |  | 2004                      |     
| |                                                           |  |                           |     
| |                                                           |  | (in
  thousands)          |     
| |                                                           |  |                           |     
| |                                                           |  |                           |     
| | Interest income                                           |  | $                         | 205 
| | Foreign currency
  translation adjustments (see Note 1A4) |  |                           | 69  
| | Gain on sale of marketable
  securities                   |  |                           | 164 
| | Interest expense                                          |  |                           | (632
| | Debentures and convertible
  debt related expenses        |  |                           | (688
| |                                                           |  |                           |     
| |                                                           |  | $                         | (882
| |                                                           |  |                           |     

F-52

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 15 - Supplementary Financial Statement
Information (cont.):

| | B. | Statements of Operations (cont.):
| | -- | ---------------------------------
| |    |                                  
| |    | 4.                               

| |         |  | Year ended
  December 31, |    
| | ------- |  | ------------------------- | ---
| |         |  |                           |    
| |         |  | 2004                      |    
| |         |  |                           |    
| |         |  | (in
  thousands)          |    
| |         |  |                           |    
| |         |  |                           |    
| | Level 8 |  | $                         | 171
| | Tesnet  |  |                           | (59
| |         |  |                           |    
| |         |  |                           |    
| |         |  | $                         | 112
| |         |  |                           |    

| |  | 5. | Other Income (Expenses), Net:
| |  | -- | -----------------------------

| |                                                                                       |  | Year ended
  December 31, |    
| | ------------------------------------------------------------------------------------- |  | ------------------------- | ---
| |                                                                                       |  |                           |    
| |                                                                                       |  | 2004                      |    
| |                                                                                       |  |                           |    
| |                                                                                       |  | (in
  thousands)          |    
| |                                                                                       |  |                           |    
| |                                                                                       |  |                           |    
| | Loss from
  disposal of fixed assets                                                  |  |                           | (14
| | Expiration
  of warrants in Tesnet (Note 3B)                                          |  |                           | -  
| | Write-down
  of shareholdings in MultiConn
     Technologies (Note 2J)                |  |                           | -  
| | Write-down
  of shareholdings in Transale                                             |  |                           | -  
| | Write-down
  of loan to MultiConn Technologies
     (Note 2K)                         |  |                           | -  
| | Decrease of
  provision for losses in formerly-
     consolidated subsidiary (Note 9) |  |                           | -  
| | Dividend
  from Steps Ventures (Note 3E)                                              |  |                           | 703
| |                                                                                       |  |                           | -  
| | Other                                                                                 |  |                           | 286
| |                                                                                       |  |                           |    
| |                                                                                       |  |                           |    
| |                                                                                       |  | $                         | 975
| |                                                                                       |  |                           |    

F-53

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 15 - Supplementary Financial Statement
Information (cont.):

| | C. | Earnings (Loss) Per Share:                                                                                                                                                                                                                                                                                                                                               
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                          
| |    | Basic
  earnings per share (EPS) was computed based on the average number of shares
  outstanding during each year, after giving retroactive effect to stock
  dividends and stock splits. In computing diluted EPS, effect was given to
  share options outstanding in each period, using the treasury stock method,
  provided that such effect is not anti-dilutive.
| |    |                                                                                                                                                                                                                                                                                                                                                                          
| |    | The
  following table sets forth the computation of basic and diluted net earnings
  (loss) per share.                                                                                                                                                                                                                                                                   

| |    |                                                                                                                          |  | Year ended
  December 31, |           
| | -- | ------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ----------
| |    |                                                                                                                          |  |                           |           
| |    |                                                                                                                          |  | 2004                      |           
| |    |                                                                                                                          |  |                           |           
| |    |                                                                                                                          |  | (in
  thousands)          |           
| |    |                                                                                                                          |  |                           |           
| | a. | Numerator:                                                                                                               |  |                           |           
| |    | Amount for basic earning
  (loss) per share  income
     (loss) available to shareholder shares                         |  | $                         | 2,846     
| |    |                                                                                                                          |  |                           |           
| |    | Effect of dilutive
  securities                                                                                          |  |                           | 276       
| |    | Amount for diluted
  earnings (loss) per share 
     income (loss) available to shareholders                            |  |                           | 3,122     
| |    |                                                                                                                          |  |                           |           
| | b. | Denominator:                                                                                                             |  |                           |           
| |    | Denominator for basic net
  earnings (loss) per share -
     weighted average of shares                                  |  |                           | 13,522,866
| |    |                                                                                                                          |  |                           |           
| |    | Effect of dilutive
  securities:                                                                                         |  |                           |           
| |    | Employee
  stock options                                                                                                 |  |                           | 477,713   
| |    |                                                                                                                          |  |                           |           
| |    | Dilutive effect of issued
  debentures                                                                                   |  |                           | 678,447   
| |    |                                                                                                                          |  |                           |           
| |    | Dilutive potential
  Ordinary shares                                                                                     |  |                           | 1,156,160 
| |    |                                                                                                                          |  |                           |           
| |    | Denominator for diluted net earnings (loss) per   share -
  weighted average shares and assumed
     exercise of options |  |                           | 14,679,026
| |    |                                                                                                                          |  |                           |           
| |    | Basic net earnings (loss) per share                                                                                      |  | $                         | 0.21      
| |    |                                                                                                                          |  |                           |           
| |    | Diluted net earnings
  (loss) per share                                                                                  |  | $                         | 0.21      
| |    |                                                                                                                          |  |                           |           

| |  
| | -
| | *

| | Options to
  purchase 100,000 shares at $28.35 per share were outstanding during the
  entire years of 2002 and 2001, but were not included in the computation of
  diluted EPS because the options exercise price was greater than the average
  market price of the ordinary shares. Furthermore, options to purchase
  1,067,000, 1,347,260 and 1,101,000 shares at various prices between $5.50 to
  $10.50 per share and $3.00 to $10.50 per share were outstanding during the
  entire years of 2003, 2002 and 2001, respectively, but were not included in
  the computation of diluted EPS because the options exercise price was
  greater than the average market price of the ordinary shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-54

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 15 - Supplementary Financial Statement
Information (cont.):

| | D. | Geographic areas information:
| | -- | -----------------------------
| |    |                              
| |    | 1.                           

| |                               |  | Year ended
  December 31, |       
| | ----------------------------- |  | ------------------------- | ------
| |                               |  |                           |       
| |                               |  | 2004                      |       
| |                               |  |                           |       
| |                               |  | (in
  thousands)          |       
| |                               |  |                           |       
| |                               |  |                           |       
| | USA                           |  | $                         | 20,438
| | Europe
  (other than Denmark) |  |                           | 15,860
| | Denmark                       |  |                           | 10,122
| | Israel                        |  |                           | 8,353 
| | Other                         |  |                           | 2,413 
| |                               |  |                           |       
| |                               |  | $                         | 57,186
| |                               |  |                           |       

| |  |    | Sales by
  geographic areas are determined based on the customers location.
| |  | -- | ----------------------------------------------------------------------------
| |  |    |                                                                             
| |  | 2. | The Companys long-lived assets are as follows:                             

| |                               |  | December
  31,   |       
| | ----------------------------- |  | ---------------- | ------
| |                               |  |                  |       
| |                               |  | 2004             |       
| |                               |  |                  |       
| |                               |  | (in
  thousands) |       
| |                               |  |                  |       
| |                               |  |                  |       
| | Israel                        |  | $                | 18,801
| | U.S.A.                        |  |                  | 4,491 
| | Europe
  (other than Denmark) |  |                  | 579   
| | Denmark                       |  |                  | 551   
| |                               |  |                  |       
| |                               |  | $                | 24,422
| |                               |  |                  |       

| |  |  | Long-lived
  assets information is based on the physical location of the assets at the end
  of each of the fiscal years. The Company does not identify or allocate
  goodwill by geographic areas.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-55

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 16 - Transactions with Related Parties:

| |                                                            |                                                                                             |  | Year ended
  December 31, |      
| | ---------------------------------------------------------- | ------------------------------------------------------------------------------------------- |  | ------------------------- | -----
| |                                                            |                                                                                             |  |                           |      
| |                                                            |                                                                                             |  | 2004                      |      
| |                                                            |                                                                                             |  |                           |      
| |                                                            |                                                                                             |  | (in thousands)            |      
| |                                                            |                                                                                             |  |                           |      
| | Formula, its subsidiaries and other
  associatedcompanies: |                                                                                             |  |                           |      
| |                                                            |                                                                                             |  |                           |      
| | A.                                                         | Selling,
  general and administrative expenses:
  Management fees (Note 11A2)               |  | $                         | 180  
| |                                                            |                                                                                             |  |                           |      
| | B.                                                         | Revenues
  from sale of software conversion tool and
  software services to related parties |  | $                         | 1,973
| |                                                            |                                                                                             |  |                           |      
| | C.                                                         | Cost of
  revenues relating to services from related
  Parties                              |  | $                         | 2,315
| |                                                            |                                                                                             |  |                           |      
| | D.                                                         | Reimbursement
  related to services rendered to
  affiliated and other companies            |  | $                         | 235  

| | E. | Arie Kilman
  was nominated as the Company Chief Executive Office in May 2003. In his
  former position as Lirazs chairman of the board of directors, he was granted
  in May 2002 a loan of approximately $300 thousand, linked to the Israeli
  consumer price index, and  bearing an
  annual interest at a rate of 4%. Under the terms of the loan, the loan should
  be repaid to Liraz in four equal annual installments, but no later than
  termination of Mr. Kilmans employment. Mr. Kilman pledged 200,000 of the
  Lirazs shares he owned in favor of the Company to secure repayment of the
  loan. Following the share exchange transaction between the Company and
  Lirazs shareholders effective as of November 14, 2002, Mr. Kilman replaced
  the pledged shares with 119,760 of the Companys shares. The amount of the
  Companys shares pledged by Mr. Kilman was based on the exchange ratio
  determined in the share exchange agreement, pursuant to which every 1.67
  shares of Liraz were exchanged for one BluePhoenix ordinary share. Except for
  the replacement of the pledged shares, the terms of the loan were not
  amended. As of December 31, 2004 Mr. Kilman repaid $150 thousand of the
  principle amount of the loan plus linkage differentials and accrued interest.
  Accordingly, one half of the pledged shares were released from the pledge. As
  of December 31, 2004, the outstanding balance of this loan was $170 thousand.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | G. | As to the
  Companys acquisition of AlphaTech from Intercomp - see Note 2E.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | H. | As to the
  Companys acquisition of Liraz from Formula - see Note 2D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | I. | In October
  2003, the Company entered into an option agreement with Intercomp to purchase
  Intercomps technology for an aggregate of $1.9 million. In addition, the
  Company undertook to pay royalties to Intercomp of 25% of the revenues
  generated from the purchased technology.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-56

---

---

BLUEPHOENIX SOLUTIONS LTD.

(An Israeli Corporation)

Note 17 - Subsequent Events:

| | A. | As to the
  acquisition of Zulu - see Note 3D.     
| | -- | ---------------------------------------------------
| |    |                                                    
| | B. | As to the
  acquisition of AlphaTech - see Note 2E.
| |    |                                                    
| | C. | As to
  Mainsofts commitments - see Note 11A1.    
| |    |                                                    
| | D. | As to a
  private placement - see Note 12B4.       

F-57

---

---