---

---

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

|o  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
  THE SECURITIES EXCHANGE ACT OF 1934
|-- | ------------------------------------------------------------------------------------------------
|  
|OR
|  
|x  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934          
|  
|   | For the fiscal year ended December 31, 2002                                                     
|  
|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    
|  

CRYSTAL SYSTEMS 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, 2002:

13,449,009 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.

Yesx
No o

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

Item 17 oItem  18x

---

---



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 Crystal
Systems Solutions Ltd. and its subsidiaries, unless otherwise indicated.

This
annual report also contains trademarks, trade names, and service marks of other
companies.

1

---

---

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,
2000, 2001 and 2002 and the balance sheet data as of December 31, 2001 and
2002 from our consolidated financial statements included elsewhere in 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 by BDO Ziv Haft, a member of BDO International, certified public
accountants in Israel. The selected consolidated financial data as of December
31, 1998, 1999 and 2000 and for the years ended December 31, 1998 and 1999
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.

2

---

---

|                                                                              |  | Year Ended December 31,                 |       
|----------------------------------------------------------------------------- |  | --------------------------------------- | ------
|                                                                              |  |                                         |       
|                                                                              |  | 2002                                    |       
|                                                                              |  |                                         |       
|                                                                              |  |                                         |       
|                                                                              |  |                                         |       
|Consolidated Statements of Operations Data:                                   |  | (in thousands, except per share
  data) |       
|Revenues                                                                      |  | $                                       | 36,668
|Cost
  of revenues                                                            |  |                                         | 15,220
|                                                                              |  |                                         |       
|Gross
  profit                                                                |  |                                         | 21,448
|Software
  development costs                                                  |  |                                         | 7,387 
|Selling,
  general, and administrative expenses                               |  |                                         | 13,245
|                                                                              |  |                                         |       
|                                                                              |  |                                         | 816   
|Goodwill
  impairment, restructuring costs, and
       non-recurring expenses |  |                                         | 472   
|                                                                              |  |                                         |       
|Operating
  income (loss)                                                     |  |                                         | 344   
|Financial
  income (expenses), net                                            |  |                                         | (195  
|Gain
  on realization of shareholdings                                        |  |                                         |      
|Other
  income (expenses), net                                                |  |                                         | (1,581
|                                                                              |  |                                         |       
|Income
  (loss) before taxes on income                                        |  |                                         | (1,432
|Income
  tax expense                                                          |  |                                         | 160   
|                                                                              |  |                                         |       
|                                                                              |  |                                         | (1,592
|Equity
  in losses of affiliated companies, net                               |  |                                         | (1,336
|Minority
  interest                                                           |  |                                         | (702  
|                                                                              |  |                                         |       
|Net
  income (loss)                                                           |  | $                                       | (3,630
|                                                                              |  |                                         |       
|Basic
  earning (loss) per share                                              |  | $                                       | (0.35 
|Diluted
  earnings (loss) per share                                           |  | $                                       | (0.35 
|Weighted
  average of Shares outstanding                                      |  |                                         | 10,517
|Weighted
  average of Shares outstanding assuming 
  dilution                 |  |                                         | 10,517
|                                                                              |  |                                         |       
|                                                                              |  | December 31,                            |       
|                                                                              |  |                                         |       
|                                                                              |  | 2002                                    |       
|                                                                              |  |                                         |       
|Consolidated Balance Sheet Data:                                              |  |                                         |       
|Working
  capital                                                             |  | $                                       | 1,310 
|Total
  assets                                                                |  |                                         | 87,481
|Total
  liabilities                                                           |  |                                         | 40,760
|Shareholders
  equity                                                        |  |                                         | 46,721

B.       Capitalization
and Indebtedness

Not
applicable.

C.       Reasons for the
Offer and Use of Proceeds

Not
applicable.

3

---

---

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 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 recent sharp
decline 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. We
cannot know whether the global market will recover in the foreseeable future,
and how the economic conditions will affect our business.

If we fail to successfully
integrate Lirazs business with our own, our operating results may be adversely
affected.

In
November 2002, we acquired 86% of the share capital of Liraz Systems Ltd., an
Israeli company then publicly-traded on the Tel-Aviv Stock Exchange, or the
TASE. Following this transaction, we purchased Lirazs remaining outstanding
share capital in a series of transactions. We are in the process of concluding
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. The achievement of these benefits depends, however, on our
ability to successfully integrate Lirazs business, management, personnel,
operations, technology, and products and service offerings in our business.
Difficulties in assimilating Lirazs business could disrupt our ongoing
business, distract our management and employees, increase our expenses, and
adversely affect our results of operations. We may also encounter difficulties
in penetrating markets in which we have no or limited experience. We cannot
assure you that we will be able to successfully integrate Lirazs business and
operations with our own without encountering difficulties. This in turn may
materially adversely affect our business, financial condition and our quarterly
and annual results of operations.

4

---

---

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

We
have invested in and acquired control of various companies to expand our
solution portfolio. We intend to continue seeking investment opportunities to
realize our expansion strategy. In addition, as part of our expansion strategy,
we intend to increase our controlling interest in some of our subsidiaries and
to fully integrate 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, 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
had a net loss of $3.6 million in 2002 and $15.0 million in 2001 compared to
prior years in which we had net income. Until 1999, we derived substantially
all of our revenues from the provision of year 2000 conversion projects. In
1999, we began focusing on the development and marketing of new automated
software renovation tools. Our future profitability depends on our ability to
continue to successfully develop and market new software modernization tools
and solutions.  We cannot assure you
that the markets for our new modernization solutions will develop or reach the
size we estimate or that our products and services will gain market acceptance.
In addition, we devote significant financial resources to the development of
new products.  Our prospects must be
considered in light of the risks and difficulties frequently encountered by
companies dependent upon operating revenues from new product lines in emerging
and rapidly evolving markets. 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.

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, as a result of 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;                                                                                   

5

---

---

| |  | timing
  of contracts;                                                             
| | - | -----------------------------------------------------------------------------------
| |   |                                                                                    
| |  | price
  and product competition;                                                   
| |   |                                                                                    
| |  | increases
  in selling and marketing expenses, as well as other operating expenses;
| |   |                                                                                    
| |  | technological
  changes;                                                           
| |   |                                                                                    
| |  | currency
  fluctuations; and                                                       
| |   |                                                                                    
| |  | consolidation
  of our customers.                                                  

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 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. Any significant variation in estimated and
actual revenues obtained may significantly impact our financial results in any
given period.

Our growth depends upon the
development of strategic alliances.

In
order to expand penetration in our current markets and penetrate new additional
markets, we need to establish alliances with strategic partners. We believe
that marketing our products through strategic partners would provide us with
international marketing presence, name recognition, and additional resources
necessary to market and deliver our products. In the past, we cooperated
successfully with strategic partners in marketing and implementing Year 2000
conversion projects. However, recently, due to the global business slow-down,
we encounter difficulties in entering into new partnerships. If we fail to
establish suitable effective relationships with strategic partners, our ability
to market and deliver our modernization solutions in international markets
would be significantly limited.  If this
happens, our growth, if any, might be delayed or slowed-down and as a result
our business, financial condition, and results of operations might be seriously
harmed.

6

---

---

Our ability to continue to develop
and market our cross-platform products is dependent upon the continuation of
our licensing relationship with Microsoft.

Effective
as of August 1998, our subsidiary, Mainsoft Corporation, entered into a
licensing agreement, pursuant to which Microsoft granted Mainsoft access to
specified Microsoft source code, including new versions, service packs, or
upgrade releases for Windows.  Microsoft
also granted Mainsoft distribution rights to the Windows object code included
in Mainsofts products. Our ability to continue to develop and market our
cross-platform software solutions depends upon these license and distribution
rights granted by Microsoft to Mainsoft. If our license agreement with
Microsoft is terminated, our business, results of operations, and financial
condition may be seriously harmed.

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,
our ability to sell updated versions of our cross-platform products would be
more difficult and as a result, our business, results of operations and
financial condition could be materially 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 its technology
on similar or more favorable terms to our existing or new competitors, which
could have a material 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.

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 address adequately 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.

7

---

---

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.

We
have recently undergone significant changes in our product offerings. 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. These changes include
developing and marketing new modernization tools and expanding the sales of our
products further into the European market. 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 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.

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

In
2002, we derived 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.

8

---

---

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 renovation 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 and
transformation 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.

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.

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

Substantial
litigation over intellectual property rights exists in the software industry.
We expect that software products may be increasingly subject to third-party
infringement claims as the functionality of products in different industry
segments 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. Any claims, with or without
merit, could:

| |  | be
  expensive and time-consuming to defend;     
| | - | -------------------------------------------------
| |   |                                                  
| |  | divert
  managements attention and resources; or

9

---

---

| |  | 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. 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.

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 June 17, 2003, 58.8% 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, 880,829 ordinary
shares, representing 6.6 % of our outstanding ordinary shares. These
individuals have entered into agreements that require them to vote their shares
as instructed by Formula. These voting agreements have currently no effect,
since Formula owns the majority of our ordinary shares. Accordingly, Formula is
deemed to beneficially own approximately 65.4% 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. See Item 6.C. Board Practices  Outside
Directors; Audit Committee; Internal Auditor; Approval of Certain Transactions
under the Companies Law.

10

---

---

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

The
stock market in general has recently experienced 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 2001, for example, the market price of our ordinary
shares traded on the Nasdaq fluctuated between $8.69 and $2.05, and during
2002, the market price of our ordinary shares fluctuated between $4.15 and
$2.00. The market price of our ordinary shares may fluctuate substantially due
to a variety of factors, including:

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

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

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 June 17, 2003, we had 13,449,009 ordinary shares outstanding. In addition,
we have reserved 1,833,260 ordinary shares for issuance under our option plans.
Of the 13,449,009 shares outstanding, 1,870,565 are held by non affiliates and
are publicly traded. In addition, 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 affiliates, in an aggregate amount of $3.5
million, which may be paid, at our option, in Crystals ordinary shares. We
intend to register for resale these ordinary shares. If a large number of our
ordinary shares are sold in a short period, the price of our ordinary shares
would likely decrease. For more information about the put option of FIMI, see
Item 7.E. Share Ownership - Arrangements Involving the Issue or Grant of
Options to Purchase Shares  Options granted to FIMI.

11

---

---

We do not intend to pay dividends.

Crystal
has never declared or paid cash dividends on its ordinary shares. We currently
intend to retain any future earnings to finance operations and to expand our
business, and therefore do not expect to pay any cash dividends in the
foreseeable future.

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.

Additional
risks inherent in our 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 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 foreign laws. We cannot assure
you that these factors will not have a material adverse effect on our future
international sales and, consequently, our business, operating results and
financial condition.

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 and the new Israeli shekel
(NIS) would make our products more expensive or increase our operating costs
and, therefore, could harm our competitive position in those markets.

12

---

---

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

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. To maintain our eligibility for these programs and benefits, we must
continue to meet specified conditions, including making specified investments
in fixed assets. If we fail to comply with these conditions in the future, the
benefits received could be canceled and we could be required to pay increased
taxes. The government of Israel has reduced the benefits available under these
programs recently and these programs and tax benefits may be discontinued or
reduced 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.

13

---

---

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 enforce a judgment obtained in
the United States against us or any of those persons. It may also be difficult
to enforce civil liabilities under United States federal securities laws in
actions instituted in Israel.

ITEM 4.  INFORMATION ON THE COMPANY

A.       History and
Development of the Company

We
were incorporated in Israel in 1987 under the name A. Crystal Solutions Ltd. In
1996, we changed our name to Crystal Systems 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 is Corporation Service
Company and its address is 2711 Centerville Road, Suite 400, Wilmington, DE
19808. In 1997, we established wholly owned subsidiaries, Crystal America Inc.,
in the United States, and Crystal Sapphire Ltd., in Israel.  In 1999, we established a wholly owned
subsidiary, Crystal Europe (1999) B.V., in the Netherlands. Our wholly owned
subsidiaries manage and conduct our sales and marketing activities and provide
support to our customers in North America and Europe.

In
2002, we acquired control of Liraz Systems Ltd. which operates worldwide
through several wholly owned subsidiaries, including ASE B.V., BluePhoenix
Solutions B.V. and BluePhoenix international subsidiaries.

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

B.       Business
Overview

Our Business

We
provide end-to-end enterprise IT modernization solutions. Our solutions offer
an efficient and cost-effective process for extending the return on investment
of existing enterprise IT assets. Our solutions enable companies to fully
understand and leverage their current systems and applications, and to
effectively update their systems in order to adapt to new business demands and
effectively compete in todays environment.

Our
understanding, migration, transformation and development solution portfolio
includes software products, software tools and support services that are aimed
to address the most pressing challenges organizations and companies face today,
such as supporting the implementation of web services.

14

---

---

Our
solutions enable companies to:

| |  | understand
  and manage their IT systems and resources;                            
| | - | -----------------------------------------------------------------------------------
| |  | integrate
  packaged applications and build customized applications;               
| |  | decrease
  maintenance, human resource, and technology costs;                      
| |  | migrate
  to modern platforms, applications, and languages;                        
| |  | transform
  applications and data bases in order to address regulatory changes; and
| |  | 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, establishing
credibility and achieving international recognition and presence. Based on our
technology and that of our affiliates and investees, 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.

In
1997, we gained international recognition and global presence by introducing
our C-MILL conversion tool, which was developed based on our generic
modernization technology. We delivered C-MILL together with consulting
services, training, and support as a comprehensive conversion solution to solve
the millennium problem. In 1997 and 1998, we derived substantially all of our
revenues from millennium conversion projects. In 1999, we derived less than a
half of our revenues from millennium conversions, and since 2000, we have
derived all of our revenues from providing legacy modernization and porting
solutions.

Since
2001, 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.  As a result
of these changes, we determined in 2001 to withdraw from low-margin and
short-term activities, like consulting services, which were not directly
related to our core technologies. In addition, we instituted a restructuring
plan during 2001 and into 2002 that was aimed at aligning our cost structure
with our revenues.  During 2002, we also sought opportunities to increase
our revenue base through the acquisition of complementary products and
services.  This culminated in the acquisition in November 2002 of Liraz.

In
November 2002, we acquired Lirazs business which includes the operations
of BluePhoenix Solutions B.V. and BluePhoenix international subsidiaries.
BluePhoenix develops and markets the AppBuilder, a software product used for
the development of sophisticated and robust applications needed by large
enterprises. BluePhoenix large and conservative install base, includes leading
international banks and financial institutions, whose information systems are
operating in various legacy environments. In November 2002, Liraz employed 220
full time employees in its local offices in the United States, United Kingdom,
Denmark, Germany, Italy, Netherlands, Israel and Cyprus.

Following
Lirazs acquisition, we and BluePhoenix are combining our global operations,
creating a leading force in the enterprise IT modernization market. In March
2003, Gartner, Inc., a leading technology market analyst, placed us together
with BluePhoenix in the leader quadrant of the legacy modernization market.
With offices in ten countries, five full service delivery centers, and
representatives, we provide our products and services worldwide.

15

---

---

Market Background

Companies
modernize their IT systems and applications in order to address changing
business needs while maintaining a competitive edge in the market.  Among the various alternatives of renewing
legacy systems, buying packaged software or rebuilding entire applications, the
most efficient and viable way for enterprises to protect their existing
investments is to use enterprise IT modernization solutions. We provide a range
of solutions that are designed to address the technological challenges of
retaining the business knowledge while updating the system to reflect new
requirements.

The
enterprise IT modernization market is divided into the following categories:

Enterprise
IT Understanding 
Consolidated warehousing of IT operational and development information,
enabling companies to better understand their IT environment, more efficiently
manage IT systems, integrate new software packages, re-use existing systems and
build new applications.

Enterprise
IT Migration 
Automated migrations of legacy applications, platforms, languages and data,
allowing companies to operate their IT systems independently, without relying
on previous technology support providers.

Enterprise
IT Transformation 
Enterprise-wide application transformations required by regulatory changes and
new business requirements, allowing companies to extend the life of their IT
systems.

Enterprise
IT Development
 A technology independent environment, offering companies a way to
efficiently mine and re-write their existing applications. With our development
solutions, companies can incrementally re-develop and maintain their legacy
systems and extend them to new technologies.

Enterprise IT Understanding

In
the recent budgetary environment, IT departments wish to extend the return on
investment of their existing systems. This goal can be achieved through
purchasing new software, building custom applications, or modernizing companys
existing legacy systems.

In
order to effectively modernize a legacy system, the essential first step is to
thoroughly review the current system. Our suite of understanding solutions
provides the basis for making informed decisions that optimize the use of
existing IT systems and reduce the future ongoing maintenance costs in order
to:

16

---

---

| |  | Ensure the
  proper integration of purchased and newly written applications;                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Build and/or
  rewrite enterprise-scale application components;                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | Extend the
  value of existing systems through technologies such as Web-enablement;                                                                                                                                                                                                                                                                                                                                                                                  
| |  | Migrate to
  more modern platforms, databases, applications, and languages;                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Transform
  current applications to adapt to changing business standards; and                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Protect
  against the loss of critical personnel and corporate knowledge base.                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Our
  enterprise IT understanding suite provides an integrated set of solutions
  designed to assist companies 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 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; 
| |  | Facilitating
  projects such as integrating new systems and applications, consolidating
  servers and applications and decommissioning obsolete systems and
  applications; and
| |  | Providing
  more efficient application development by reusing systems and leveraging
  existing business rules.                                                                

The
enterprise IT understanding suite includes the following solutions:

IT
Discovery . IT
Discovery, previously known as CRYSWARE for Discovery, or CWD, provides an
automated, accurate and immediate impact analysis for centralized and distributed
IT systems. The solution includes detailed reports which map system-wide
operational activity as well as the interaction between all applications and
other software components, allowing companies to make informed decisions about
the future of the IT environment. Whether renewing legacy systems, building
custom applications, or buying packaged software, identification of all
potential IT impacts with our IT Discovery tool is essential in order to reduce
project costs and risks.

OperationsWarehouse.OperationsWarehouse is a powerful system that provides a consolidated
picture of the current enterprise IT operating environment, including both
centralized and distributed systems. This strategic information is stored in a
comprehensive meta-data repository, which helps to create better processes for
understanding, managing, and maintaining complex IT environments. It also
provides all the information required for reengineering and adapting to new
technologies, enabling organizations to efficiently and cost-effectively
address both current and future business needs.

17

---

---

AppMiner. The AppMiner solution, previously known as MineIT, mines IT development
data and extracts business rules from the legacy code, thus providing IT
departments with a better understanding of their IT environments. AppMiner
retains past investments in software assets by producing reusable code objects
or descriptive data. These outputs can later be used for improving the quality
of the legacy code, rewriting the legacy application, or building a full
modernization plan. AppMiner decreases maintenance costs and efforts and
increases the systems manageability, while eliminating rules that no longer
apply to current business procedures.

C-Audit. Telecommunications service providers use
C-Audit to develop and execute automated audits of their invoices use
c-Audit.  It follows a unique approach,
integrated with the revenue assurance of the billing system, through knowledge-based
and traditional software technologies. 
Using a unique expert system, the auditor transfers his or her selection
rules to C-Audit, which then reviews each invoice and reports back on items
requiring further investigation. 
C-Audit learns by accumulating the organizations specific billing
knowledge, and verifies that customers receive accurate bills, eliminating both
over-charge and undercharge errors.

Enterprise IT Migration

Our
enterprise IT migration suite offers a set of comprehensive solutions that
enable companies to standardize and consolidate their IT systems by
automatically converting legacy applications, platforms, languages and
data implemented on outdated computing platforms and redeploying them on
modern environments.

Buying
a packaged application or rebuilding one can often be an expensive and risky
proposition. Therefore, companies look towards migrating their existing
applications. This option is much more cost-effective and efficient as it
leverages the 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 providing
significant savings on maintenance and human resource costs.

Our
migration solutions provide numerous advantages, including:

| |  | significantly
  decreasing project costs, risk of errors and time;  
| | - | --------------------------------------------------------------------
| |  | preserving
  corporate business knowledge;                          
| |  | reducing
  dependency on scarce skill sets;                         
| |  | solving
  problematic maintenance issues;                           
| |  | enabling
  end-to-end project control and management;               
| |  | supplying
  a full audit trail and documentation of all changes;    
| |  | minimizing
  system freeze time with a unique refresh feature; and
| |  | working
  with most mainframe and non-mainframe platforms.          

18

---

---

The
enterprise IT migration suite includes the following solutions:

DBMSMigrator. DBMSMigrator, previously known as C-MIDAS,
offers automated migration of applications from non-relational databases like
IDMS, ADABAS and VSAM to relational database like DB2 and Oracle. DBMSMigrator
performs automated conversions, leaving companies with no residuals, emulation
software or translation procedures. DBMSMigrator provides companies with fully
functional compliance for source and target applications, minimal application,
functional and logical program flow changes and minor transition impact. The
use of our DBMSMigrator also enables continuous system support during the
migration project. Following the process, the migrated database operates more
efficiently, it is easier to maintain and it contains the complete
documentation of the customers knowledge base and guidelines. The operational
improvement of the migrated database is measurable through generally accepted
performance metrics.

PlatformMigrator. PlatformMigrator offers automated migrations customized to fit
the unique IT configuration and business rules of each customer site.
PlatformMigrator solutions enable migration of various platforms including VSE
to OS/390 (MVS) and Bull GCOS to MVS, Unix, or AS/400. PlatformMigrator
converts platforms to a pure, native installation so that programs are not
required to run under emulation or through translation techniques.
PlatformMigrator solutions also 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 equivalence.

DataMigrator.DataMigrator is a Windows-based tool for migrating data between various
data system environments. Coupled with a step-by-step proven methodology,
DataMigrator provides a fully structured but still versatile automated data
migration process. DataMigrator enables full control of source and target data
definitions, the highest quality target data with no data loss, consistent,
accurate, and cost effective results, as well as efficient utilization of
available resources. In addition, DataMigrator provides support for partial or
incremental migration and for multiple run-time environments.

LanguageMigrator. LanguageMigrator incorporates
in-depth knowledge and experience in language upgrades and implementations to
create a reliable, time-efficient, and comprehensive solution. This solution
addresses the various challenges by running a thorough system analysis before
the migration process, enabling 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.

eXperanto. eXperanto is a software product for
enabling mainframe applications to operate via the Web and other technology
channels. eXperanto provides an end-to-end solution by handling the Web
interface while developing attractive applications without the associated
training and management burden of other solutions.

19

---

---

Enterprise IT Transformation

Our
enterprise IT transformation suite includes a set of integrated
solutions for enterprise-wide application transformation projects,
enabling companies to extend the life of their existing IT
systems when faced with ongoing regulatory changes and new business
requirements. Our transformation solutions address a variety of corporate needs
including:

| | EuroEnabler. EuroEnabler,
  previously known as C-Euro, is a highly automated, rules-based tool that
  enables a step-by-step, comprehensive Euro conversion process. EuroEnabler
  fully preserves system and data integrity and helps maintain the usual level
  of system application development and maintenance throughout the process.
  EuroEnabler has so far been used in successful conversions of close to 1
  billion lines of code. Coupled with a well-tested four-step methodology,
  EuroEnabler provides support for all major conversion strategies and for a
  wide range of mainframe, midrange, and AS/400 platforms, covering a wide
  range of database management systems, languages, source and load libraries,
  databases and files.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Data field adjustments.  Due to new business decisions and
  regulatory requirements, data fields may need to be modified. These
  modifications impact a wide range of system components and include field
  adjustments, like changes in UPC codes or telephone numbers, and format
  changes, like numeric to alphanumeric.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | UPCEnabler. UPCEnabler for
  universal product code, or UPC, is based on the unique flexible technology
  developed for complex and large-scale modifications to data field length,
  type and structure. UPCEnabler is available for MVS and Unix systems written
  in most popular programming languages, using various databases and file
  structures. UPCEnabler provides several distinct benefits that assure the
  success of 2005 Sunrise projects. UPCEnabler performs code conversion with an
  automated tool that accelerates the process and provides enhanced control
  over large-scale changes. Additionally, modifications are made simultaneously
  and tested as a whole, thus minimizing maintenance freeze time.                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | OS/390 (MVS)
  standardization. When enterprises need to consolidate or
  rationalize multiple OS/390 systems or logical partitions, they have to
  change and migrate applications, procedures, databases, and data. Different
  OS/390 integrated facilities may also require conversion during this process,
  including security, batch schedulers, tape management, and disk management
  systems.                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Naming conventions. Standardizing
  naming conventions greatly facilitates the process of system consolidation.
  Since all resources being converted must be changed in parallel, changing
  system component naming standards is such a large task that a manual solution
  is not realistic. We offer an automated tool that provides a single
  integrated solution for the challenge of handling the multi-dimensional
  technical aspects of the consolidation of IT systems.                                                                                                                                                                                                                                                                            

20

---

---

| | Consolidating security
  systems. Major changes to IT system and applications, like new third party
  products and upgrades, changes to naming conventions, and consolidation or
  rationalization of programs, have a substantial impact on the security
  system. Since there is a significant difference in the approach and internal
  structure of security systems, like ACF2, TopSecret, and RACF, even
  consolidating logical partitions that use the same product can still be
  complex, and therefore the use of our automated tool, minimizes the freeze
  time thus increasing the reliability of the consolidated security system.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Enterprise IT
Development

Enterprise
IT environments are complex, keeping 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 change.
Our enterprise IT development suite offers companies a technology
independent environment that enables them to efficiently mine and re-write
their existing applications. With our development solutions, companies can
incrementally re-develop and maintain their legacy systems, extend them into
new technologies, save on development and programmer costs, and extend the
return on investment of their IT systems.

AppBuilder.AppBuilder, BluePhoenix principal product, is our premier development
environment. AppBuilder software is used for the management, maintenance and
development of large and complicated applications needed by large
businesses.  It provides the infrastructure
for enterprises worldwide, across several industries, with applications running
millions of transactions daily. Enterprises using AppBuilder can build, deploy
and maintain large-scale custom-built business applications for years without
being dependent on any particular technology. 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. AppBuilder allows
developers to focus on the applications business processes rather than its
deployment by generating the code needed to run any technology, COBOL to HTML,
Java to XML.

MainWin. We develop,
market, and support the MainWin products through our subsidiary, Mainsoft
Corporation. MainWin is an advanced application-porting platform that allows
applications developed on Windows to be rapidly ported to multiple Unix
operating systems without the investment usually associated with such an
undertaking.  Most enterprise computing
environments require many critical applications to run on an installed base of
one or more Unix systems. 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 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.

21

---

---

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, or upgrade releases for Windows.  Microsoft also granted Mainsoft distribution
rights to the Windows object code included in Mainsofts products. As of June
2003, Mainsoft has extended its relationship with Microsoft and now has access
to Microsofts visual C++.NET technology.

Strategy

In
order to enhance our solution 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. In addition, we have recently begun a process of increasing our
shareholdings in certain subsidiaries and affiliates.

Liraz. In November 2002, we 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 TASE. BluePhoenix, Lirazs 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, 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. Upon completion
of the acquisition of Lirazs shares, we have begun a process of assimilating
and integrating Lirazs business and activities into our business.

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 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. See Enterprise IT
DevelopmentMainWin.

22

---

---

IntraComp.IntraComp Group Inc. provides migration and conversion services for
large-scale systems and back-end integration services. In the second quarter of
2000, we acquired a 52% controlling interest in IntraComp for aggregate
consideration of $3.2 million. In the fourth quarter of 2000, we increased our
shareholdings in IntraComp to 53% by investing an additional $240,000. In
addition, we lent to IntraComp $850,000. 
During the second quarter of 2003, we purchased from the other
shareholders of IntraComp the remaining outstanding share capital of IntraComp.
As a result, we currently wholly own IntraComp. Under the agreement with
IntraComps selling shareholders, we shall pay the consideration in two
installments, the first installment in August 2004 and the second in February
2006. The consideration shall be calculated based on IntraComps accumulative
earnings before interest and taxes during the three-year period commencing on
January 1, 2003, subject to certain conditions.

SCH. We wholly own SCH  Software
Conversion House Ltd., a developer and marketer of software conversion tools
and services for midrange environments. 
During 1999, we completed the acquisition of an aggregate of 59% of the
outstanding share capital of SCH. In the second quarter of 2001, we purchased
the entire remaining outstanding share capital of SCH for an aggregate of $2.3
million of which $2.0 million was invested in SCH and $330,000 was paid to
SCHs other shareholders. Since its formation in 1994, SCH has focused on
providing cost-effective technology enhancement tools and solutions for
enterprise IT migrations and conversions. Following the purchase of the entire
interest in SCH, we assimilated SCH business lines into our business,
integrating SCHs entire activity with ours.

MultiConn.Effective as of July 1999, we acquired 51% of the outstanding share
capital of M.S.I. MultiConn Solutions International (1995) Ltd. for aggregate
consideration of $1.1 million. In 2000, we increased our shareholdings in
MultiConn to 60% for additional consideration of $950,000. MultiConn develops,
through an affiliate, and markets eMulticonn and related solutions, referred to
as eXperanto. During 2000 and 2001, we lent to an affiliate of MultiConn $2.1
million. Effective as of December 2002, we exercised an option to convert an
amount of $1 million of the loan into shares of MultiConns affiliated company.
Following this conversion, we currently hold 60% of the outstanding share
capital of MultiConns affiliated company. In the fourth quarter of 2002, we
wrote down $1.8 million of the balance of investment in Multiconn and its
affiliate, due to impairment of the investment. Under the agreement with
MultiConn, the other shareholders of MultiConn have a call option, exercisable
until November 2005, to purchase from us a portion of our shareholdings in
MultiConn and in the affiliated company, for an aggregate consideration of $1.1
million. In the event that the shareholders fully exercise their call option,
our holdings in Multiconn and in the affiliated company would be decreased to
51%.

For
more information about eXperanto, see Enterprise IT MigrationeXperanto.

23

---

---

Intercomp.  In 1998, we invested in Intercomp Ltd.,
which has developed eMaker, a set of three automated software tools for legacy
system Web-enabling, analysis, and reengineering. Our tool, AppMiner, forms
part of the eMaker set. In December 2000, we exercised an option to purchase
additional shares of Intercomp and as a result, we currently hold 49% of the
outstanding share capital of Intercomp. During 2001 and 2002, we lent to
Intercomp an aggregate of approximately $2.6 million, of which approximately
$1.7 are convertible into preferred shares of Intercomp, subject to certain
conditions.  We granted a creditor of
Intercomp a put option to sell to us convertible promissory notes issued by Intercomp
in an aggregate amount of $3.5 million plus interest accrued, which may be
paid, at our option, in Crystals ordinary shares. The creditor may exercise
the put option during a period of two years commencing on January 31, 2004 or,
in certain circumstances, earlier. This option is now being modified for an
extension.

For
more information about AppMiner, see Enterprise IT Understanding  AppMiner.

Alexandria.During 1999, we
purchased 19% of the outstanding share capital of Alexandria Migration
Technologies Ltd., which develops C-MIDAS. In April 2003, we purchased from the
other shareholder of Alexandria his entire shareholdings in Alexandria,
constituting 81% of Alexandrias outstanding share capital, for an aggregate of
$585,000. As a result, we currently wholly own Alexandria. As of June 17, 2003,
we lent to Alexandria approximately $5.9 million in the aggregate, of which we
wrote-off $2.5 million in 2001 due to the uncertainty of repayment of the
entire loan amount.

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 that 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 and our
shareholdings in Tesnet decreased to 22%. During 2000, we sold 3% of our
holdings in Tesnet. We currently hold 19% of the outstanding share capital of
Tesnet.

Alphatech.  In December 2002, we purchased from
Intercomp, our affiliate, a 65% controlling interest in Alphatech (2000) Srl.
for an aggregate consideration of $100,000. Alphatech, a company incorporated
in Romania, provides software development services. Alphatech employs 45
employees, of which 40 are professional software engineers.

SDC. In October 2002,
Liraz, through a wholly owned subsidiary, acquired from SDC FinansSystems A/S,
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 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 dismissal. Pursuant to the purchase
agreement, we assumed all the obligations in respect of the purchased activity.
Under the purchase agreement, we paid an aggregate amount of $800,000 for the
purchased goodwill and activities. In addition, we entered into an agreement
with two of the sellers shareholders, pursuant to which the shareholders will
purchase from us IT development services during a period of nine months
beginning in October 2002, for an aggregate consideration of approximately $15
million.

24

---

---

Level 8. As of
December 31, 2002, we hold several capital instruments, including options,
rights to receive options and preferred stock, convertible into ordinary shares
of Level 8 Systems Inc. If we exercise these capital instruments in full, our
shareholding in Level 8 would reach 9%. 
As of June 17, 2003, we converted preferred stock and currently hold 1%
of the Level 8 ordinary shares.

Customers

We provide
our modernization solutions directly, through our strategic partners and, from
time to time, through other IT services companies that license our technologies
for use in modernization projects in various markets. Our customers include:

| | Microsoft Corp.                                                                    
|- | -----------------------------------------------------------------------------------
| | Synopsys, Inc.                                                                     
| | Computer
  Associates International, Inc.                                          
| | Mentor
  Graphics Corporation                                                      
| | Cadence
  Design Systems, Inc.                                                     
| | Siebel
  Systems, Inc.                                                             
| | Rational
  Software Corporation                                                    
| | Crystal
  Decisions Corporation                                                    
| | Environmental
  Systems Research Institute                                         
| | Altera
  Corporation                                                               
| | Shaw
  Industries, Inc.                                                            
| | Barmenia
  Versicherung - Germany                                                  
| | MCI Worldcom
  Network Services, Inc.                                              
| | Bank Leumi Le-Israel B.M.                                                          
| | Mivtachim
  (Israel)                                                               
| | Argus Health
  Systems                                                             
| | DIMIA
  Department of Immigration & Multicutural & Indegenous Affairs
  (Australia)
| | Merrill
  Lynch                                                                    
| | LBS
  Westdeutsche Landesbausparkasse (Germany)                                    

No
customer accounted for more than 10% of our revenues in 2002.

25

---

---

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

|                |  | Year ended December 31,
|--------------- |  | -----------------------
|                |  |                        
|                |  | 2002                   
|                |  |                        
|                |  | (in thousands)         
|United
  States |  | $                      
|Europe          |  |                        
|Israel          |  |                        
|Other           |  |                        
|                |  |                        
|Total           |  | $                      

Research and Development

We are
focusing our efforts on developing modernization solutions relating to
e-business, legacy systems, and cross-platform re-hosting.  In addition, in order to maintain
technological leadership in the modernization industry, we continue to develop
software tools and methodologies for our software modernization solutions.
These efforts include the following activities:

| |  | introducing
  new supported programming languages and database management systems;       
| | - | -----------------------------------------------------------------------------------------
| |  | improving
  functionality, flexibility, and ease of use of our tools; and                
| |  | enhancing
  the quality of documentation, training material, and technical support tools.

We
intend to conduct additional research and development to further implement our
strategy of developing additional business opportunities in the modernization
industry. Our research and development expenditures were $7.4 million in 2002,
$8.9 million in 2001, and $9.5 million in 2000.

We employ
140 professionals in our software development departments. The software
development departments develop new modernization tools and methodologies based
on our and our subsidiaries core technology. We develop the new tools and
methodologies in accordance with market demands, trends, and forecasts. In
addition, the software development division supports, enhances, and upgrades
our existing modernization tools to meet current and changing customer needs.
To date, we have not sought to obtain any research and development grants from
the government of Israel.

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.  We believe that, because
of the rapid pace of technological change in the industry, patent and copyright
protection are less significant to our competitive position than factors such
as the knowledge, ability, and experience of our personnel, new product
development, and ongoing product maintenance and support.

26

---

---

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;             
| | - | -------------------------------------------------------------------
| |  | 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. Our competitors include
leading software developers,
who enable customers to replace or modernize their legacy systems, such as IBM,
Micro Focus, Software Technologies, and ASG (Allen Systems Group). In addition,
we face competition from companies operating in the four principal areas of the
enterprise IT
modernization market:

| |  | Enterprise
  IT understanding;     
| | - | -----------------------------------
| |  | Enterprise
  IT migration;         
| |  | Enterprise
  IT transformation; and
| |  | Enterprise
  IT development.       

Most
of our principal competitors tend to offer solutions only for selected
segments, while our solutions cover all four areas. Our principal competitors
consist of system integrators and tool vendors.

Competition
for our modernization solutions - System integrators include IBM, Cap Gemini E&Y, and EDS.
IBM has established legacy modernization as a strategic pillar of its long term
application development strategy. IBMs advantage is dominant 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 certain solutions.
Although all of them focus on the modernization of enterprises systems, each
player provides different modernization solutions. For example, Micro Focus
International aims its solutions to the COBOL market, Software Technologies
addresses the Natural/ADABAS arena, and other solution providers focus on
providing sufficient information about application portfolios to enable
improved process. Some other solution providers provide legacy and distributed
repository solutions that are important for a variety of modernization
processes.

27

---

---

Competition for our infrastructure modernization
tools-Our
competitors for these tools include DMR/Amdahl, Oracle Corporation, and Sun
Microsystems Inc. The principal direct competitor for our Windows to Unix
cross-platform products is Bristol Technology, Inc., which is a source code
licensee of an earlier version of Windows-NT. Indirect competitors of these
products include companies marketing solutions that address somewhat similar
but not identical problems addressed by our products, and use a fundamentally
different technological approach.

Examples
are products that allow Unix clients to access Windows applications on Windows
NT servers, products which adapt Unix applications for operation on Windows,
products which provide a proprietary but portable abstraction layer, and
products which emulate the Windows environment on Unix systems rather than
providing native Unix implementations. Citrix Systems Inc. is one of the
principal indirect competitors, and is also a Microsoft source code licensee.
Indirect competitors also include internal product development groups within
current and potential customers.

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
58.8% 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 65.4% 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 June 17, 2003:

|Name of
  Subsidiary           |  | Country of
  Incorporation |  | Proportion of 
  Ownership Interest
|------------------------------ |  | -------------------------- |  | -----------------------------------
|                               |  |                            |  |                                    
|                               |  |                            |  |                                    
|BluePhoenix Solutions B.V.     |  | The
  Netherlands          |  | 100%                               
|                               |  |                            |  |                                    
|Advanced Systems Europe
  B.V. |  | The
  Netherlands          |  | 100%                               
|                               |  |                            |  |                                    
|Liraz Systems Ltd.             |  | Israel                     |  | 100%                               
|                               |  |                            |  |                                    
|Mainsoft Corporation           |  | United
  States            |  | 58%                                
|                               |  |                            |  |                                    
|IntraComp Group Inc.           |  | United
  States            |  | 100%                               

28

---

---

D.     Property,
Plants and Equipment

We,
together with our subsidiaries and affiliates, currently occupy
approximately11,000 square meters. The aggregate annual rental fees we pay for
these facilities are $2.5 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 expected
  costs 2003
  In Thousands US$
|--------------------- |  | --------------------------- |  | ------------ |  | ---------- | ----------------- | -----------------------------------------------
|                      |  |                             |  |              |  |            |                   |                                                
|Israel                |  | Herzelia                    |  | 2,200        |  |            | March 2004        |                                                
|Israel                |  | Azor                        |  | 400          |  |            | August 2004       |                                                
|Israel                |  | Holon                       |  | 250          |  |            | February
  2005   |                                                
|Israel                |  | Lod                         |  | 1,100        |  |            | June 2004         |                                                
|USA, North
  Carolina |  | Cary                        |  | 1,250        |  |            | Monthly
  renewal |                                                
|USA,
  California     |  | San Jose                    |  | 1,400        |  |            | September
  2003  |                                                
|USA, Indiana          |  | South Band                  |  | 700          |  |            | December
  2004   |                                                
|Denmark               |  | Ballerup                    |  | 2,560        |  |            | October 2003      |                                                
|Germany               |  | Frankfurt                   |  | 270          |  |            | November
  2004   |                                                
|Denmark               |  | Allerod                     |  | 120          |  |            | June 2003         |                                                
|Netherlands           |  | Amsterdam                   |  | 130          |  |            | June 2005         |                                                
|Romania               |  | Bucharest                   |  | 400          |  |            | October 2003      |                                                
|United-Kingdom        |  | Uxbridge                    |  | 40           |  |            | April 2003        |                                                
|Cyprus                |  | Nicosia                     |  | 150          |  |            | March 2004        |                                                
|Italy                 |  | San Felice
  Segrate-Milano |  | 150          |  |            | December
  2005   |                                                
|                      |  |                             |  |              |  |            |                   |                                                
|Total                 |  |                             |  | 11,120       |  |            |                   |                                                
|                      |  |                             |  |              |  |            |                   |                                                

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.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND
PROSPECTS

Overview

We develop
and market software tools and provide consulting services for efficient modernization
of legacy systems and cross-platform migration. We provide comprehensive
enterprise technologies spanning mainframe, midrange, and client/server
computing platforms. Our revenues consist primarily of fees we receive for the
use of our software tools and consulting fees for the related services that we
provide. We have been pursuing a strategy
of increasing the range of modernization technologies and services we
offer, and enhancing our ability to serve various enhancement needs of our
customers.  As part of our strategy, we
invested in certain information technology and service companies, which develop
and market various modernization tools and provide related services.

29

---

---

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 in the future, as a result of numerous factors, including the changes
in the types of software tools we offer and market demands for these tools.
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.

Since 2001,
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.  As a result of these
changes, we determined in 2001 to withdraw from low-margin and short-term activities,
like consulting services that were not directly related to our core
technologies. In addition, we instituted a restructuring plan during 2001 and
into 2002 that was aimed at aligning our cost structure with our
revenues.  As a result, our results of operations in 2002 include
restructuring charges of $472,000, and our results of operations in 2001
include restructuring charges of $2.7 million.  The restructuring charges
in 2002 consisted primarily of severance costs for employees and relocation expenses. 
We began to see the benefits of the restructuring in 2002 principally through
the lowering of our cost of revenues and selling, general and administrative
expenses.

During 2002
we also sought opportunities to increase our revenue base through the
acquisition of complementary products and services. In November 2002, we
purchased 86% of the share capital of Liraz through a share exchange
transaction. Following this transaction, we purchased from the public the
remaining share capital of Liraz through two tender offers published in
December 2002 and March 2003. The aggregate amount of Crystal ordinary shares
issued was 3,478,624 and the aggregate amount of cash purchases was $2.7
million. The results of operations of Liraz have been consolidated with
our results of operations commencing with the last quarter of 2002. Upon
completion of the acquisition of Lirazs shares, we have begun a process of
assimilating and integrating Lirazs business and activities into our business.
As of June 2003, this process has been almost completed. We believe that the
purchase of Liraz strengthens our business and provides us with international
presence and sales force. We currently offer a complete range of enhanced
enterprise IT modernization solutions, from legacy reuse to platform rehosting,
which we believe would place us as a market leader in the IT modernization
market.

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 |  | Cessation of Consolidation
  (if applicable)
| | ------------------------------ |  | -------------------------- |  | --------------------------------------------
| |                                |  |                            |  |                                             
| | Liraz
  Systems Ltd.           |  | Fourth
  quarter of 2002   |  |                                             
| |                                |  |                            |  |                                             
| | Advanced
  Systems Europe B.V. |  | Fourth
  quarter of 2002   |  |                                             
| |                                |  |                            |  |                                             
| | BluePhoenix
  Solutions B.V.   |  | Fourth
  quarter of 2002   |  |                                             

30

---

---



| | Name of Subsidiary                                   |  | Beginning 
  Consolidation |  | Cessation of Consolidation
  (if applicable)
| | ---------------------------------------------------- |  | -------------------------- |  | --------------------------------------------
| |                                                      |  |                            |  |                                             
| | Mainsoft Corporation                                 |  | Fourth quarter of 1999     |  |                                             
| |                                                      |  |                            |  |                                             
| | IntraComp
  Group Inc.                               |  | Second
  quarter of 2000   |  |                                             
| |                                                      |  |                            |  |                                             
| | Tesnet 
  Software Testing Ltd.                     |  | First
  quarter of 1999    |  | Second
  quarter of 2000                    
| |                                                      |  |                            |  |                                             
| | M.S.I. MultiConn Solutions International (1995) Ltd. |  | Third
  quarter of 1999    |  | First
  quarter of 2003.                    
| |                                                      |  |                            |  |                                             
| | Multiconn Technologies Ltd.                          |  | Fourth
  quarter of 2002   |  | First
  quarter of 2003.                    

We
recognize a portion of the net losses of our affiliates, Intercomp, Tesnet,
M.S.I. MultiConn Solutions International (1995) Ltd. and Multiconn Technologies
Ltd., in accordance with the equity method of accounting.

Critical Accounting
Policies

We prepare
the consolidated financial statements of Crystal 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.                                                                                                               
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  | 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 modification of software, revenue is generally
  recognized according to the percentage of completion method. Under this method, estimated revenue
  is generally accrued based on costs incurred to date as a percentage of total
  updated estimated costs. If 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.

31

---

---

|  | We
  recognize revenues from fixed price modernization projects over the duration
  of the project based on the utilization of our software tools, as measured by
  consulting fees earned from our customers. We recognize revenues from
  consulting and training fees (i) with respect to projects billed on a time
  and material basis, based on the number of hours performed and (ii) with
  respect to fixed fee contracts, based upon the percentage of completion
  method. We recognize contract losses, if any, in the period in which they
  first become evident.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  | Revenues
  from software maintenance services are recognized ratably over the contract
  period. Unrecognized revenue is recorded as deferred revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Capitalized
  software research and development costs. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Goodwill and Intangible Assets.Our
  business acquisitions typically result in goodwill and other intangible
  assets. The determination of the value of such intangible assets requires
  management to make estimates and assumptions that affect our consolidated
  financial statements. In June 2001, the Financial Accounting Standards Board
  issued Statement of Financial Accounting Standards, referred to as (SFAS) No.
  141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible
  Assets. SFAS No. 141 requires the purchase method of accounting for all
  business combinations and that certain acquired intangible assets in a
  business combination be recognized as assets separate from goodwill. SFAS No.
  142 requires that goodwill and other intangibles determined to have an
  indefinite life are no longer to be amortized but are to be tested for
  impairment at least annually. The annual impairment testing required by SFAS
  No. 142 will also require 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.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 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. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

32

---

---

| | 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 Crystal 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 Financial Accounting Standards Board
Statement No. 52.  Assets and
liabilities have been translated at period-end exchange rates.  Results of operations have been translated
at average exchange rates.  As the
exchange gains and losses arising from these translations are immaterial, they
are included in the statements of income (loss).

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:

|                                                                         |  | 2002 |       | 2001 |  | 2000
|------------------------------------------------------------------------ |  | ---- | ----- | ---- |  | ----
|                                                                         |  |      |       |      |  |     
|Statement of Operations Data 
  as a Percentage of Revenues:             |  |      |       |      |  |     
|Revenues                                                                 |  |      | 100.0 | %    |  |     
|Cost of
  revenues                                                       |  |      | 41.5  |      |  |     
|                                                                         |  |      |       |      |  |     
|Gross profit                                                             |  |      | 58.5  |      |  |     
|Software
  development costs                                             |  |      | 20.1  |      |  |     
|Selling,
  general, and administrative expenses                          |  |      | 36.1  |      |  |     
|                                                                         |  |      |       |      |  |     
|                                                                         |  |      | 2.2   |      |  |     
|Goodwill
  impairment, restructuring costs, and
  non-recurring expenses |  |      | 1.3   |      |  |     
|                                                                         |  |      |       |      |  |     
|Operating
  income (loss)                                                |  |      | 0.9   |      |  |     
|Financial
  income (expenses), net                                       |  |      | (0.5  | )    |  |     
|Gain on
  realization of shareholdings                                   |  |      | 0.0   |      |  |     
|                                                                         |  |      |       |      |  |     
|Other income
  (expenses), net                                           |  |      | (4.3  | )    |  |     
|                                                                         |  |      |       |      |  |     
|Income
  (loss) before taxes on income                                   |  |      | (3.9  | )    |  |     
|Income tax
  expense                                                     |  |      | 0.4   |      |  |     
|                                                                         |  |      |       |      |  |     
|                                                                         |  |      | (4.3  | )    |  |     
|Equity in
  losses of affiliated companies, net                          |  |      | (3.6  | )    |  |     
|Minority
  interest                                                      |  |      | (1.9  | )    |  |     
|                                                                         |  |      |       |      |  |     
|Net income
  (loss)                                                      |  |      | (9.9  | )    |  |     
|                                                                         |  |      |       |      |  |     

33

---

---

Years Ended December 31, 2002 and 2001

Revenues.  Revenues decreased 5% from $38.4 million in
2001 to $36.7 million in 2002. This decrease was primarily attributable to the
slow-down in the global economy that caused customers to delay technology
purchase orders. This decrease was partially offset by the consolidation of
Lirazs results of operations in the fourth quarter of 2002. Lirazs
consolidation was aimed to increase our business volume and improve our
operating results by leveraging Lirazs international sales force and presence.

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

|                |  | 2002 | 2001 | 2000
|--------------- |  | ---- | ---- | ----
|                |  |      |      |     
|                |  |      | %    |     
|United
  States |  |      | 57   |     
|Europe          |  |      | 28   |     
|Israel          |  |      | 13   |     
|Other           |  |      | 2    |     
|                |  |      |      |     
|Total           |  |      | 100  |     

Cost of
revenues. Cost of revenues consists primarily of
salaries, travel costs rel0ting to products and services rendered, and
consulting fees paid to independent contractors. Cost of revenues decreased 14%
from $17.7 million in 2001 to $15.2 million in 2002. Cost of revenues as a
percentage of revenues decreased to 42% in 2002 compared to 46% in 2001. The
decrease in cost of revenues was primarily attributable to the implementation
of our cost reduction plan in the fourth quarter of 2001 that was aimed at
aligning our cost structure with our revenue stream. According to our cost
reduction plan, we reduced our sale and managerial personnel, decreased wages
and tightened our expense structure.

Software
development costs. Software development costs consist
primarily of salaries and consulting fees that are paid to professionals
engaged in the development of new software tools and related methodologies.
Software development costs decreased 17% from $8.9 million in 2001 to $7.4
million in 2002.  This planned decrease
was part of our cost reduction plan. During 2002, our development costs were
attributed to the development of our unique modernization suite of tools. As a
percentage of revenues, software development costs decreased to 20% in 2002 compared
to 23% in 2001. Software development costs are charged to operations as
incurred, unless capitalized according to Financial Accounting Standards Board
Statement No. 86. In 2002, we capitalized software development costs in an
aggregate amount of $3.3 million 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
consist primarily of wages and related expenses, travel expenses, selling
expenses, marketing and advertising expenses, rent, insurance, utilities,
professional fees, and depreciation. Selling, general and administrative
expenses decreased 33% from $19.8 million in 2001 to $13.2 million in 2002. As
a percentage of revenues, selling, general and administrative expenses
decreased to 36% in 2002 compared to 52% in 2001. This decrease is primarily
attributable to the implementation of our cost reduction plan. In addition, in
2001 we charged the amortization of goodwill to general and administrative
expenses. In 2002, no such charges were included pursuant to Financial
Accounting Standards Board Statement No. 141, or 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.

34

---

---

Financial expenses, net.Financial expenses consist primarily of interest paid
to banks on short-term loans, which is offset by interest income we derive on
short-term deposits. Financial expenses also consist of currency rate
differentials we pay to the banks on short-term loans offset by currency rate
differentials we derive with respect to short-term deposits.  Financial expenses increased in 2002 to
$195,000 from $62,000 in 2001. The increase in our cash and cash equivalents
caused a decrease in the financial expenses. This decrease was offset by the
devaluation of the NIS and Euro against the dollar.

Goodwill
impairment, restructuring costs and non-recurring expenses.In 2002, we
continued to implement our restructuring plan, which included the purchase of
90% interest in Liraz, resulting $472,000 restructuring costs in the fourth
quarter of 2002. These costs were attributable primarily to payments related to
dismissal of employees. Our results of operations in 2001 were materially
affected by the implementation of our restructuring plan, resulting in non
recurring expenses that include $2.8 million of restructuring costs, and
goodwill impairment of $1.7 million related to an acquisition.

Other
expenses, net. Other expenses, net in 2002 were $1.6
million compared to other expenses, net of $2.6 million in 2001. Other expenses
in 2002 consist primarily of a write-down of an investment. Other expenses in
2001 consist of a write-down of an investment of $2.5 million and loss from
disposal of fixed assets.

Income
tax expense.In
2002, we had income tax expense of $160,000 compared to income tax expense of
$115,000 in 2001. This increase is primarily attributable to local taxation of
European subsidiaries which had taxable income.

Equity
in losses of affiliated companies, net.In 2002, equity in losses of affiliated
companies, net, was $1.3 million. 
Equity in losses of affiliated companies in 2002 includes aggregate
amount of $1.4 million representing our share in the losses of our affiliate
Intercomp, partially offset by $80,000 representing our share in the gains of
Tesnet.

Years Ended December
31, 2001 and 2000

Revenues.  Revenues decreased 22% from $49.2 million in
2000 to $38.4 million in 2001. This decrease was primarily attributable to the
implementation of our strategy to gradually withdraw from low-margin and
short-term activities, like consulting services that were not directly related
to our core technologies. In addition, the slow down in the global economy
caused customers to delay technology purchase orders.

35

---

---

Cost of revenues.Cost of revenues decreased 12% from $20.1 million in 2000 to
$17.7 million in 2001. Cost of revenues as a percentage of revenues increased
to 46% in 2001 compared to 41% in 2000. The decrease in cost of revenues was
primarily attributable to the restructuring plan we implemented during 2001,
which resulted in a significant reduction in expenses towards the end of 2001.
Cost of revenues as a percentage of revenues increased since the restructuring
plan was implemented later in the year, and the annualized costs represent a
transitional stage in our cost structure.

Software
development costs.Software development costs
decreased 7% from $9.5 million in 2000 to $8.9 million in 2001.  During 2001, our development costs were
attributed to the development of a unique cost saving modernization suite of
tools. As a percentage of revenues, software development costs increased to 23%
in 2001 compared to 19% in 2000. Software development costs are charged to
operations as incurred. 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 13% from $17.5 million in 2000 to
$19.8 million in 2001. This increase is primarily attributable to our efforts
to increase our presence and enlarge our client base. In order to support these
efforts, we maintain a relatively large sales force. As a percentage of
revenues, selling, general and administrative expenses increased to 51% in 2001
compared to 35% in 2000.

Financial
income or expenses, net.In
2001, we had financial expenses of $62,000 compared to financial income of $1.4
million in 2000. The reduction in our cash and cash equivalents was the main
cause of the decrease in our financial income. In addition, the devaluation of
the NIS against the dollar and the euro affected our financial income.

Goodwill
impairment, restructuring costs and non-recurring expenses.Our results of
operations were materially affected by the implementation of our restructuring
plan, resulting in non recurring expenses that include $2.8 million of
restructuring costs, and goodwill impairment of $1.7 million related to an
acquisition.

Other
income or expenses, net. Other expenses in 2001 were
$2.6 million compared to other income of $66,000 in 2000. Other expenses in
2001 consist of a write-down of an investment of $2.5 million and loss from
disposal of fixed assets.

Income
tax expense.In
2001, we had income tax expense of $115,000 compared to income tax expense of
$184,000 in 2000. This decrease is primarily attributable to lower taxable
income and carried forward accumulated losses of consolidated subsidiaries.

Equity
in losses of affiliated companies, net.In 2001, equity in losses of affiliated
companies, net, was $1.3 million compared to $1.1 million in 2000.  Equity in losses of affiliated companies in
2001 includes aggregate amounts of $129,000 and $1.2 million representing our
share in the losses of our affiliates, Polyglot and Intercomp, partially offset
by $70,000 representing our share in the gains of Tesnet.

36

---

---

B.     Liquidity
and Capital Resources

How We Have Financed Our Business

Prior to
our initial public offering, we financed our cash requirements primarily
through borrowings from banks. During 1997, we consummated two public
offerings, in which we sold an aggregate of 3,720,000 ordinary shares (after
giving effect to the exercise of the respective over-allotment options). We
received net proceeds of $33.9 million from the public offerings after
deducting underwriting discounts and commissions and offering expenses.  We have entered into several credit
facilities with banks, which we may use from time to time for interim finance,
in accordance with our cash requirements. These credit facilities provide for
short-term loans are in various currencies and bear various interest rates.

Cash

On December
31, 2002, we had cash and cash equivalents (including marketable securities) of
$15.9 million and working capital of $1.3 million. On December 31, 2001, we had
cash and cash equivalents (including marketable securities) of $9.9 million and
working capital of $9.9 million.

Net cash
provided by operating activities was $2.8 million in 2002 compared to $7.1 million
in 2001.  This change was primarily
attributable to the overall decrease in the revenues due to the global economy
slow down.

As of
December 31, 2002, we had short term bank debt outstanding of $7.5million,
compared to $2.3 million as of December 31, 2001. In connection with credit
lines extended to us by several banks, we are committed to certain covenants
related to our operations, such as maintaining a minimum level of shareholders
equity and reaching certain operating results targets. We believe that we meet
all such covenants.

In
addition, 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 Lirazs
bank credit line of $4.9 million.

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.

Capital Expenditures

Our capital
expenditures were $823,000 in 2002 and $878,000 in 2001. Our capital
expenditures in these years related primarily to purchases of computers and
related equipment required to support our software development activities. In
2002, we invested $800,000 and lent $2.2 million to affiliated companies. In
2001, we lent $4.7 million to affiliated companies.

37

---

---

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

During 2002
and 2001, we repurchased 310,565 of our ordinary shares for an aggregate of
$1.6 million. As of June 1, 2003, 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. Pursuant
to the Companies Ordinance [New Version], which was in effect at the time of
adoption of the plans, we may use the repurchased shares under the programs
only for issuance to our employees under our share option plans. Under the
Companies Law, the repurchased shares are considered as dormant shares. We may
not resell these shares unless (i) they are issued to our employees under our
option plans; and (ii) they are registered for resale under an effective
registration statement pursuant to the Securities Act, 1933. 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 additional 1,400,000 ordinary shares. Under the
two plans we may acquire additional 1,023,486 shares at the current stock
price. The closing price of our ordinary shares as quoted on the Nasdaq
National Market on June 16, 2003 was $3.1.

We have
guaranteed short-term bank loans of an affiliate.  As of June 17, 2003, the aggregate amount of these guarantees was
$530,000.

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.

Related Party Transactions

Management
Agreement With Formula.We
maintain a management agreement with Formula pursuant to which Formula provides
us with administrative and management services. We pay to Formula in return for
its services, a management fee equal to 3% of our revenues, up to a maximum of
$180,000 per year. The amount of management fee was negotiated between us and
Formula in 1996 when we initially entered into the management agreement. We
believe that the management fee we pay to Formula reflects the fair value of
the services Formula provides us with. 
For additional information about our management agreement with Formula,
see Item 7.B. Related Party Transactions.

Purchase of LetMeKnow Shares and Polyglot Shares by
Formula Vision.  In September
2001, we sold to Formula Vision Technologies (F.V.T.) Ltd. our entire
shareholdings in LetMeKnow Ltd. and Polyglot Ltd. for an aggregate of $1.5
million.  The consideration was
determined in negotiations between the parties, and reflects in our opinion the
fair price of the sold shares in each of the companies.  For additional information regarding this
transaction, see Item 7.B. Related Party Transactions.

38

---

---

Purchase of Liraz Shares from Formula and Additional
Shareholders.  In November 2002, as part of our
strategy to acquire complementary businesses, we purchased from Formula and certain other shareholders of Liraz, an
86% controlling interest in Liraz, in a share exchange transaction.
Under this transaction, Formula sold to us its entire 57.9% interest in Liraz
in consideration for Crystal ordinary shares representing 17.3% of Crystal
outstanding share capital. The exchange ratio was negotiated between the
parties and was set at 1:1.67. Our audit committee and our board of directors
received a fairness opinion from a financial advisor, pursuant to which, as of
the date of the agreement, the exchange ratio agreed between the parties was
determined to be fair from a financial point of view, to us.  For additional information regarding this
transaction, see Item 4.B. Business Overview-Strategy.

Purchase
of Alphatech shares from Intercomp.  In December 2002, we purchased from
Intercomp a 65% controlling interest in Alphatech (2000) Srl. for aggregate
consideration of $100,000. The amount of consideration was negotiated between
the parties.   For more information, see
Item 7.B. Related Party Transactions.

Contractual Commitments and Guarantees

In August
1998, our subsidiary, Mainsoft, entered into an agreement with Microsoft, under
which Mainsoft was granted access to the source code of certain software
products of Microsoft and the right to incorporate such source code into
certain software products of Mainsoft. The agreement provides for the payment
of royalties on a per copy basis to Microsoft for products licensed or
distributed. These royalties, net of waivers approved by Microsoft, are
included in the financial statements under cost of sales. Microsoft may
terminate the agreement under certain conditions. Mainsofts ability to
develop, sell and market its products is dependent upon the continued access to
the softwares source code. Furthermore, a change in, or termination of the agreement
could prevent Mainsoft from developing and selling its products and materially
adversely affect our business, results of operations and financial condition.

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.

We are
committed under operating leases for rental of office facilities for the years
2003 until 2005. Annual rental fees under current leases are approximately
$1.6million, and are expected to remain at this level for each of the next five
years.  In connection with these leases,
we issued bank guarantees of $122,000 in the aggregate.

We
guaranteed short-term bank loans of an affiliated company in favor of a bank.
As at December 31, 2002, these guarantees amounted to $530,000.

39

---

---

In
2000, Liraz sold its integrated IT systems activities and outsourcing business
in Israel to EDS. Under the sale agreement, Liraz was obligated to reimburse
the buyer for claims related to the activities during the period prior
to the sale. To date, we are not familiar with any such claims.

During
2000, Liraz provided a bank guarantee to secure a loan of Level 8. As of
December 31, 2002, this guarantee amounted $2.5 million. Level 8 committed to
utilize 10% of any capital funding to repay the loan and reduce the amount of
the guarantee accordingly.

In January
2001, we granted a creditor of Intercomp a put option to sell to us promissory
notes issued by Intercomp in an aggregate amount of $3.5 million, which may be
paid, at our option, in our ordinary shares. 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. The
option is exercisable during a period of two years commencing on January 31,
2004, or, in certain circumstances, earlier. This option is now being modified
for an extension.

In February
2003 Crystal has been issued a income tax assessment for the tax year 1997 in
the amount of NIS 6,950 thousand ($1,467 thousand). We have filed an appeal on
this assessment. Based on the opinion of our tax counsel, it is our belief that
while the outcome of any controversy cannot be predicted with complete
certainty, this dispute with the Israeli income tax authorities will be
resolved so as not to have a material adverse effect on the Companys financial
statements as a whole.

We entered
into an undertaking to indemnify our office holders in specified limited
categories of events and in specified amounts, subject to certain limitations.
This undertaking is subject to a shareholder approval.

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.

40

---

---

On
January 1, 2003, Israels tax laws had undergone a significant tax
reform (Amendment 132 to the Income Tax Ordinance (New Version) - 1961),
referred to as the New Law. The underlying principle of the New Law is to
broaden the categories of taxable income, and reduce the tax rates imposed on
employment income.

Our U.S.
operations are taxed at the effective corporate tax rate in the United States
of 35%. 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%.

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 recent 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
commitments. These changes in purchasing patterns in the IT industry directly
affected 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. We cannot know
whether the global market will recover in the foreseeable future, and how the
economic conditions will 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 the end
of 2002, we acquired the share capital of Liraz. We are in the process of
concluding 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. The achievement of these benefits depends, however, on our
ability to successfully integrate Lirazs business in our business. We may also
encounter difficulties in penetrating markets in which we have no or limited
experience. We cannot assure you that we will be able to successfully integrate
Lirazs business and operations with our own without encountering difficulties.
This in turn may materially adversely affect our business, financial condition
and our quarterly and annual results of operations.

41

---

---

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 May 31, 2003.

|Name                          |  | Age |  | Position                               
|----------------------------- |  | --- |  | ---------------------------------------
|                              |  |     |  |                                        
|Gad
  Goldstein               |  | 44  |  | Chairman of
  the Board                
|Aaron
  Crystal               |  | 59  |  | Vice
  Chairman of the Board, President
|Arie Kilman                   |  | 50  |  | Chief
  Executive Officer (1)          
|Iris Yahal                    |  | 42  |  | Director,
  Chief Financial Officer    
|Dan
  Goldstein               |  | 49  |  | Director                               
|Shai Beilis                   |  | 54  |  | Director                               
|Chanan Weiss                  |  | 56  |  | Director                               
|Professor
  Seev Neumann  (2) |  | 63  |  | Director                               
|Katriel
  Zimet (2)           |  | 76  |  | Director                               

---

(1)  since May 2003
     (2)  An outside director

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 New Applicom Ltd., Matrix IT Ltd., or Matrix, Magic Software
Enterprise Ltd., or Magic and Sivan Training and Systems Ltd., or Sivan, 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 served as our president, chief executive
officer and director since our formation in 1987 to December 1996 and continues
to serve as our president and one of our directors.  Since November 1999, he has 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 inspection in October 2001. Mr. Kilman
previously served as the president of Liraz in which he
founded in 1984, and managed since. Between 1998 and 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.

42

---

---

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 former 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 since 1985. Mr. Goldstein also serves as
Chief Executive Officer of Formula since 1985. 
Mr. Goldstein is also chairman of the boards of directors of other
Formula Group companies, including Matrix and New Applicom and is a director of
Crystal, Magic, Sivan and of other companies within the Formula Group.  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.
Mr. Beilis has also served as a director of Formula since December 1997. 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.

Chanan
Weissjoined us in
April 2001 as a managing director. From February 2002 through May 2003, he
served as our Chief Executive Officer. Since February 2002, Mr. Weiss has also
served as one of our directors.  From
February 2000 until April 2001, Mr. Weiss served as an executive vice president and Chief Operating
Officer of Matrix. Prior to that, from April 1999, Mr. Weiss served as managing
director of Nikuv Computers (Israel) Ltd., a subsidiary of Matrix. From 1988
through 1999 Mr. Weiss occupied various managerial positions in IBM Israel. Mr.
Weiss holds a B.Sc. degree in Physics from the Technion in Haifa.

Professor
Seev Neumann served as one of our independent directors and a member
of our audit committee since May 1997, in accordance with the Nasdaq rules. On
December 31, 1999, he was appointed as one of our outside directors, under the
Israeli Companies Law 1999, or the Companies Law. From 1973 to 1978 and from
1985 to 1989 Prof. Neumann served as dean of the graduate school of business
administration at Tel Aviv University. 
From 1967 to present he has served as a professor and lecturer at Tel
Aviv University.  Prof. Neumann has also
served as a visiting professor at University of California, Los Angeles and
University of California, Davis.  Prof.
Neumann holds a BSS in economics and statistics from the Hebrew University of
Jerusalem, and an MA and a Ph.D. in business administration from University of
California, Los Angeles.

43

---

---

Katriel
Zimet has served as one of our independent directors and a
member of our audit committee since January 1999, in accordance with the Nasdaq
rules. On December 31, 1999, he was appointed as one of our outside directors,
under the Companies Law. From 1992 until November 1997, Mr. Zimet served as a
director of Formula.Since 1987,
Mr. Zimet has served as an independent consultant for information systems
technology to the Israeli national board of education. Until 1986, Mr. Zimet
was director of computing facilities of Telrad Networks Ltd., a major Israeli
telecommunications company.

B.     Compensation

During the
year ended December 31, 2002, we paid to our outside directors and executive
officers an aggregate remuneration of approximately $424,000. 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
Shai Beilis. See Item 7.B. Related Party Transactions.

We maintain
written employment agreements with Aaron Crystal, Chanan Weiss, Arie Kilman and
Iris Yahal.  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. 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. Crystal, Mr. Weiss, Mr. Kilman and Ms. Yahal to
bonuses based on achieving targets set by our board of directors. Under the
terms of Mr. Crystals employment agreement, upon our initial investment
in an unaffiliated entity, Mr. Crystal has the right to co-invest, on the
same terms as we invest, in an amount equal to 10% of our initial investment.

Mr. Kilman,
in his former position as Lirazs chairman of the board of directors was
granted by Liraz in May 2002 a loan of approximately $200,000, 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 in favor of Liraz 200,000 Lirazs shares he owned as a
security for repayment of the loan. Following the share exchange transaction,
Mr. Kilman replaced the pledged shares with 119,760 Crystal shares.

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. Each director, except for the outside
directors described below, 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 a
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.

44

---

---

For
additional information, see Item 7.B. Related Party Transactions.

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. 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.

45

---

---

Audit
Committee

The
Companies Law requires public companies to appoint an audit committee. We have
established an audit committee, consisting of our two outside directors, Prof.
Neumann and Katriel Zimet, as well as Shai Beilis. The responsibilities of the
audit committee under the Companies Law include identifying irregularities in
the management of the companys business and approving related party
transactions as required by law. Under the Companies Law, an audit committee
must consist of at least three directors, including at least two outside
directors. The chairman of the board of directors, any director employed by or
otherwise providing services to the company, and a controlling shareholder or
any relative of a controlling shareholder, may not be a member of the audit
committee.

In
addition, under the rules of the Nasdaq, we are currently required to have at
least two independent directors on our board of 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
rules of the Nasdaq.

Internal
Auditor

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

Approval
of Certain Transactions under the Companies Law

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

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

46

---

---

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 which is considered at a meeting of the board of
directors or the audit committee may not be present at this meeting or vote on
this matter.

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

In a
private placement of securities that will increase the relative holdings of a
shareholder that holds five percent or more of the companys outstanding share
capital (assuming the exercise or conversion of all securities held by 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.

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 which require shareholder approval.

47

---

---

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.                                                                                                             

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 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.

48

---

---

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 certain
limitations. This undertaking  is
subject to shareholder approval.

Limitations on Insurance and Indemnification

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

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

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

We have
obtained directors and officers liability insurance.  However, under the Companies Law the policy
is subject to shareholder approval.

D.     Employees

The table
below presents certain information regarding the number of our employees in the
periods indicated.

|                             |  | 2002 |     | 2001 |  | 2000 | 
|---------------------------- |  | ---- | --- | ---- |  | ---- | 
|                             |  |      |     |      |  |      | 
|Technical
  Experts          |  |      | 280 |      |  | 145  | 
|Research and
  Development   |  |      | 140 |      |  | 60   | 
|Sales and
  Marketing        |  |      | 50  |      |  | 50   | 
|General and
  Administrative |  |      | 70  |      |  | 45   | 
|                             |  |      |     |      |  |      | 
|Total                        |  |      | 540 |      |  | 300  | 
|                             |  |      |     |      |  |      | 
|In Israel                    |  |      | 230 |      |  | 200  | 

49

---

---

These
employees include expert consultants who we train for the implementation
of our modernization tools and methodologies. The increase in the number of our
employees in 2002 compared to 2001 is primarily attributable to the acquisition
of Liraz and Alphatech.

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

E.     Share
Ownership

The
following table presents information regarding the ownership of our ordinary
shares by the persons listed in the table under Directors and Senior Management,
as of June 17, 2003. The percentage of outstanding ordinary shares is based on
13,449,009 ordinary shares outstanding as of June 17, 2003.

|Name                                                    |  | Shares beneficially owned
  Number |  | Percentage of 
  outstanding
  ordinary shares |  | Options to purchase
  ordinary shares
  Number
|------------------------------------------------------- |  | ---------------------------------- |  | ---------------------------------------------- |  | ----------------------------------------------
|                                                        |  |                                    |  |                                                |  |                                               
|Arie Kilman                                             |  | 625,183                            |  | 4.6%                                           |  |                                               
|                                                        |  |                                    |  |                                                |  |                                               
|Dan
  Goldstein                                         |  | 559,000                            |  | 4.2%                                           |  |                                               
|                                                        |  |                                    |  |                                                |  |                                               
|Gad
  Goldstein                                         |  | 321,829                            |  | 2.4%                                           |  |                                               
|                                                        |  |                                    |  |                                                |  |                                               
|Aaron
  Crystal                                         |  | 1,193,
  700(3)                    |  | 8.9%                                           |  |                                               
|                                                        |  |                                    |  |                                                |  |                                               
|All
  directors and officers as a group (10 persons)(1) |  | 2,945,962                          |  | 21.5%                                          |  | 246,250(2)                                    

50

---

---

---

|(1) | Each of the directors and
  executive officers not separately identified in the above table beneficially
  owns less than one percent of our outstanding ordinary shares (including
  options held by each of these persons) and have therefore not been separately
  disclosed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes (i) options to
  purchase 15,000 ordinary shares currently exercisable at an exercise price of
  $6.50 per share and expire in October 2006; (ii) options to purchase 20,000
  ordinary shares currently exercisable at an exercise price of $9.00 per share
  and expire in April 2009; (iii) options to purchase 15,000 ordinary shares
  currently exercisable at an exercise price of $10.50 per share and expire in
  April 2010; (iv) options to purchase 10,000 ordinary shares currently exercisable
  at an exercise price of $5.50 per share and expire in October 2010; (v)
  options to purchase 80,000 ordinary shares at an exercise price of $3.00 per
  share, of which options to purchase 40,000 ordinary shares are currently
  exercisable and the remaining options shall become exercisable in August
  2003. These options expire in February 2012; (vi) options to purchase 75,000
  ordinary shares currently exercisable at an exercise price of $2.25 per share
  and expire in April 2013; and (vii) options to purchase 375,000 ordinary
  shares at an exercise price of $2.25 per share, of which options to purchase
  31,250 ordinary shares are currently exercisable and the remaining options
  shall vest over additional 33 months on a monthly basis. These options expire
  in April 2013.
|(3) | Includes 294 shares that
  Anat Crystal, Mr. Crystals spouse, beneficially owns.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Arrangements
Involving the Issue 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 have been exercised.Pursuant to our other 1996 option plan, as amended, we
reserved 2,700,000 ordinary shares for issuance to our and our subsidiaries
directors, officers, consultants and employees.  As of June 17, 2003, options to purchase 1,833,260 ordinary
shares were outstanding under the plan. The exercise price of the options
granted under the 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. 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
October 6, 2006, except as to options outstanding on that date.

Options Granted to Employees of One of Our
Subsidiaries

In August
2000, in connection with the purchase of a controlling interest in IntraComp
Group Incorporated, we granted to certain employees of IntraComp options to
purchase an aggregate of 125,000 of our ordinary shares. All of these options
are currently exercisable at an exercise price of $9.625 per share. The options
shall expire in August 2010.

51

---

---

Options
Granted to FIMI

In January
2001, we granted certain funds, creditors of our affiliate, Intercomp,
represented by First Israel Mezzanine Investors Ltd., or FIMI, a put option to
sell to us promissory notes issued by Intercomp in an aggregate amount of $3.5
million, which may be paid, at our option, in Crystals ordinary shares. 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. The option is exercisable during a period of two years
commencing on January 31, 2004, or, in certain circumstances, earlier.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS

A.     Major
Shareholders

The
following table presents information regarding the ownership of our ordinary
shares at June 17, 2003 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.

|                                                                            |  | Ordinary Shares
  Beneficially Owned
|--------------------------------------------------------------------------- |  | ------------------------------------
|                                                                            |  |                                     
|Name and Address                                                            |  | Number                              
|                                                                            |  |                                     
|                                                                            |  |                                     
|Formula
  Systems (1985) Ltd.(2)3 Hagalim Boulevard
  Herzlia 46725, Israel |  | 7,909,491                           
|                                                                            |  |                                     
|Aaron
  Crystal                                                             |  | 1,193,700(3)                        

---

|(1) | Percentages
  in the above table are based on 13,449,009 ordinary shares outstanding as of
  June 17, 2003, and do not include 1,870,565 ordinary shares that two of our
  subsidiaries hold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(2) | Formula owns
  of record 7,909,491ordinary shares. Messrs. Dan Goldstein and Gad Goldstein
  have entered into agreements, which require them to vote their ordinary
  shares (an aggregate of 880,829 shares) as instructed by Formula.  These voting agreements have currently no
  effect since Formula owns the majority of our shares. As a result of these
  voting agreements, Formula beneficially owns approximately 65.4% of our
  outstanding shares. Dan Goldstein is chairman of the board and Chief
  Executive Officer of Formula and owns 20.0% of the outstanding shares of
  Formula.  Gad Goldstein is a director
  and president of Formula and owns 3.3% 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

52

---

---

Under
our two buy-back programs (as described in Item 5. Operating and
Financial Review and ProspectsLiquidity and Capital Resources), two of our
subsidiaries purchased 1,870,565 of our ordinary shares, as of June 17, 2003.
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 June 17, 2003, we had 13,449,009 ordinary shares issued and
outstanding, excluding 1,870,565 ordinary shares that two of our subsidiaries
hold. All of our ordinary shares have equal voting rights. However, 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.

As of June
17, 2003, there were 40 record holders of our ordinary shares. Of these record
holders, 26 holders had mailing addresses in the United States owning an
aggregate of approximately 36% of our outstanding ordinary shares, excluding
the shares that our subsidiaries hold.

B.     Related
Party Transactions

Management Agreement with Formula

On
January 1, 1996, we signed a letter agreement with Formula pursuant to
which Formula provides us with administrative and management support, including
business and marketing consulting services and identification of strategic
partners and investors. Pursuant to the letter agreement, we pay to Formula in
return for its services, a management fee equal to 3% of our revenues, up to a
maximum of $180,000 per year. The amount of management fee was negotiated
between us and Formula in 1996 when we initially entered into the management
agreement. We pay the management fee to Formula in installments at the end of
each quarter. For the year ended December 31, 2001, we paid to Formula under
this agreement a management fee of $180,000.  In addition, we reimburse Formula from time to time for expenses
Formula incurred on our behalf.

Registration Rights Agreement, Voting Agreements

In 1997, we
entered into a registration rights agreement with Formula, Dan Goldstein,
Gad Goldstein, Aaron Crystal and Dori Breiman, or collectively, the holders.
Under this registration rights agreement, the holders have certain registration
rights with respect to their ordinary shares, beginning January 31, 1998.  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.

53

---

---

Messrs.
Dan Goldstein and Gad Goldstein have entered into voting agreements which
require them to vote their ordinary shares as instructed by Formula.
These voting agreements have currently no effect since Formula owns the
majority of our ordinary shares.

Purchase
of LetMeKnow Shares and Polyglot Shares by Formula Vision

In
September 2001, we entered into an agreement with Formula Vision Technologies
(F.V.T.) Ltd., pursuant to which we sold to Formula Vision our entire
shareholdings in LetMeKnow Ltd. and Polyglot Ltd., for aggregate consideration
of $1.5 million. The consideration was determined in negotiations between the parties,
and reflects in our opinion the fair price of the sold shares in each of the
companies. In addition, we transferred to Formula Vision our undertakings in
connection with convertible loans in an aggregate of $400,000 and guarantees of
$600,000 extended to LetMeKnow, and a shareholders loan of $82,000 and
guarantees of up to $1.1 million extended to Polyglot. As a result, we were
released from all of our obligations in connection therewith. In connection
with this transaction, Formula Vision has granted us an option, exercisable
within three years from the date of closing, to purchase up to 10% of the
shares sold to Formula Vision, at the same purchase price set out in the
agreement between the parties. This transaction is considered a related party transaction
since Dan and Gad Goldstein serve as directors of Formula Vision and of our
company.

Purchase
of Liraz Shares from Formula

In
November 2002, as part of our strategy to focus on our main
business line, we purchased
from Formula and certain other shareholders of Liraz, an 86% controlling
interest in Liraz, in a share exchange transaction. Under this
transaction, Formula sold to us its entire 57.9% interest in Liraz in
consideration for Crystal ordinary shares representing 26% of Crystal
outstanding share capital. The exchange
ratio was negotiated between the parties and was set at 1:1.67. Our
audit committee and our board of directors received a fairness opinion from a
financial advisor, pursuant to which, as of the date of the agreement, the
exchange ratio agreed between the parties was determined to be fair from a
financial point of view, to us, which
we believe reflects a fair ratio between the values of the two companies.

For
additional information regarding this transaction, see Item 4.B. Business
Overview-Strategy and Item 7.B. Related Party Transactions.

Purchase of Alphatec Shares from Intercomp

In December
2003, we purchased from Intercomp a 65% controlling interest in Alphatech
(2000) Srl. for an aggregate consideration of $100,000. The amount of
consideration was negotiated between the parties. Alphatech, a company
incorporated in Romania, provides software development services.  Alphatech employs 40 employees, of which 35
are professional software engineers.

54

---

---

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 of approximately $200,000, 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 in favor of Liraz 200,000 Lirazs shares he owned as a
security for repayment of the loan. Following the share exchange transaction,
Mr. Kilman replaced the pledged shares with 119,760 Crystal shares.

C.     Interest
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 material legal proceedings. We are also 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.

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, 2002.

55

---

---

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        |  |  | Closing Price Per Share
|---------------------- |  |  | -----------------------
|                       |  |  |                        
|                       |  |  | High                   
|                       |  |  |                        
|                       |  |  | (in $)                 
|1998                   |  |  |                        
|1999                   |  |  |                        
|2000                   |  |  |                        
|2001                   |  |  |                        
|First
  Quarter        |  |  |                        
|Second
  Quarter       |  |  |                        
|Third
  Quarter        |  |  |                        
|Fourth
  Quarter       |  |  |                        
|2002                   |  |  |                        
|First
  Quarter        |  |  |                        
|Second
  Quarter       |  |  |                        
|Third
  Quarter        |  |  |                        
|Fourth
  Quarter       |  |  |                        
|2003                   |  |  |                        
|First Quarter          |  |  |                        
|January                |  |  |                        
|February               |  |  |                        
|March                  |  |  |                        
|April                  |  |  |                        
|May                    |  |  |                        
|June (through June 16) |  |  |                        

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

|Calendar Period                   |  |  | Closing Price Per Share
|--------------------------------- |  |  | -----------------------
|                                  |  |  |                        
|                                  |  |  | High                   
|                                  |  |  |                        
|                                  |  |  | (in NIS)               
|2001                              |  |  |                        
|First
  Quarter (from January 21) |  |  |                        
|Second
  Quarter                  |  |  |                        
|Third
  Quarter                   |  |  |                        
|Fourth
  Quarter                  |  |  |                        
|2002                              |  |  |                        
|First Quarter                     |  |  |                        
|Second Quarter                    |  |  |                        
|Third Quarter                     |  |  |                        
|Fourth Quarter                    |  |  |                        
|2003                              |  |  |                        
|First
  Quarter                   |  |  |                        
|January                           |  |  |                        
|February                          |  |  |                        
|March                             |  |  |                        
|April                             |  |  |                        
|May                               |  |  |                        
|June
  (through June 16)          |  |  |                        

56

---

---

B.   Plan
of Distribution

Not applicable.

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 CRYS. On January 21, 2001 we listed our ordinary
shares for trading also in the Tel-Aviv Stock Exchange, or the TASE.

D.     Selling
Shareholders

Not applicable

E.     Dilution

Not applicable

F.     Expenses
of the Issue

Not applicable

ITEM 10. ADDITIONAL INFORMATION

A.     Share
Capital

Not applicable

B.     Memorandum
and Articles of Association

We are
registered with the Israeli Companies 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;

57

---

---

| |  | the business
  of systems analysis, systems programming and computer programming; and    
| | - | -----------------------------------------------------------------------------------------
| |  | establishing
  facilities for instruction and training for computers and digital systems.

Description
of Our Share Capital

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

58

---

---

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 which require shareholder approval.

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

59

---

---

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.

60

---

---

C.       Material
Contracts

We consider
the agreements related to 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-Strategy.

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

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

On January
1, 2003 Israels tax laws had undergone a significant tax reform (Amendment 132
to Israels Income Tax Ordinance (New Version) - 1961), referred to as the New
Law. The underlying principle of the New Law is to broaden the categories of
taxable income, and reduce the tax rates imposed on employment income. Under
the New Law, individual shareholders (which are not subject to the provisions
of the Inflationary Adjustments Law), selling our ordinary shares shall be
subject to a 15% tax rate on any capital gain accrued after January 1, 2003.
Under the New Law, foreign residents will continue to be exempt from capital
gains tax on sale of traded securities of Israeli companies.  The foregoing does not apply to companies
which are subject to Chapter II of the Income Tax (Inflationary Adjustments)
Law, 1985. In general, Chapter II of the Inflationary Adjustments Law applies
to all Israeli companies, except for 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.

61

---

---

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.

Non-residents
of Israel are subject to income tax on income accrued or derived from sources
in Israel or received in Israel. These sources of income include passive income
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 the holder is a company
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%.

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.;                                                                                                                                                    
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a corporation
  (or another entity taxable as a corporation for U.S. federal income tax
  purposes) created or organized under the laws of the United States or any
  political subdivision thereof;

62

---

---

| |  | an estate,
  the income of which may be included in gross income for U.S. federal income
  tax purposes 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 particular 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 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 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.

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. 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 or
with respect to which the dividend was paid for less than 61 days during the
120-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, a foreign
personal holding company or a foreign investment company (as such terms are
defined in the Code) for any year, dividends paid on our ordinary shares 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.

63

---

---

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 of the distribution. U.S.
holders will have a tax basis in the NIS for U.S. federal income tax purposes
equal to that dollar value. Any subsequent gain or loss in respect of the NIS
arising from exchange rate fluctuations will generally be taxable as U.S.
source ordinary income or loss.

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. 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.  Distributions of current or accumulated
earnings and profits will be foreign source passive income for U.S. foreign tax
credit purposes.

64

---

---

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, if either (1) 75% or more of our
gross income in a 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 a
taxable year 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:

| |  | 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

65

---

---

| |   | 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.                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |   | 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.                                                                                                                                                                                                                                  

66

---

---

| |  | 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 in its
  gross income as ordinary income for that year.  All amounts allocated to prior years of the U.S. holder would
  be taxed at the highest tax rate for each such prior year applicable to
  ordinary income.  The U.S. holder also
  would be liable for interest on the deferred tax liability for each such
  prior year calculated as if such liability had been due with respect to each
  such prior year.  A U.S. holder that
  is an individual is not allowed a deduction for interest on the deferred tax
  liability.  The portions of gains and
  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 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 2002 we were not a PFIC and currently we expect that we will
not be a PFIC in 2003.  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, 2003 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.

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.

67

---

---

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.

F.       Dividend
and Paying Agents

Not applicable.

G.       Statement
by Agents

Not applicable.

68

---

---

H.       Documents
on Display

We are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, applicable to foreign private issuers and fulfill the
obligation with respect to such requirements by filing reports with the
Securities and Exchange Commission.  You
may read and copy any document we file with the Securities and Exchange
Commission without charge at the Securities and Exchange Commissions public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.  Copies of such material may be obtained by
mail from the Public Reference Branch of the Securities and Exchange Commission
at such address, at prescribed rates. 
Please call the Securities and Exchange Commission at l-800-SEC-0330 for
further information on the public reference room.

As a
foreign private issuer, we are exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements, and our 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, we are 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.

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, 2002, we invested substantially all of the cash we held in dollars
and euro currency accounts. 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.  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.

69

---

---

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) Within
90 days prior to the filing date of this Annual Report on Form 20-F, we have
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of 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) There
have been no significant changes in our internal controls or in other factors,
which could significantly affect the internal controls subsequent to the date
of their evaluation.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Not applicable.

ITEM 16B. CODE OF ETHICS

Not applicable.

70

---

---

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         |  | Memorandum
  of Association*                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                 
|1.2         |  | Articles of
  Association as amended on January 15, 2001**                                                                                                                                                      
|            |  |                                                                                                                                                                                                                 
|4.1         |  | Cooperation
  agreement dated August 10, 1999, between ForSoft Ltd. and the Registrant
  (English summary accompanied by Hebrew original) ***                                                                   
|            |  |                                                                                                                                                                                                                 
|4.2         |  | Agreement
  dated December 10, 1999, between the Registrant and Mainsoft Corporation****                                                                                                                        
|            |  |                                                                                                                                                                                                                 
|4.3         |  | Agreement
  dated June 2, 2000, among the Registrant, the owners of all of the issued and
  outstanding common stock of IntraComp Group Incorporated and IntraComp Group
  Incorporated****                     
|            |  |                                                                                                                                                                                                                 
|4.4         |  | Agreement
  dated June 12, 2003, among the Registrant, the owners of all of the issued
  and outstanding common stock of IntraComp Group Incorporated and IntraComp
  Group Incorporated                        
|            |  |                                                                                                                                                                                                                 
|4.5         |  | Agreement
  dated January 11, 2001 among the Registrant, the Israel Mezzanine Fund L.P.,
  The Israel Mezzanine Fund, The Jordan (Bermuda) Investment Company Ltd. and
  First Israel Mezzanine Investors Ltd.**
|            |  |                                                                                                                                                                                                                 
|4.6         |  | Share
  Exchange Agreement dated October 13, 2002 among the Registrant, Formula
  Systems (1985) and certain shareholders of Liraz Systems Ltd.                                                                 
|            |  |                                                                                                                                                                                                                 
|4.7         |  | The 1996
  Share Option Plan  Part One, as amended on January 28, 1997, December 5,
  1999, December 18, 2000 and December 26, 2000**                                                                          
|            |  |                                                                                                                                                                                                                 
|8           |  | List of
  Subsidiaries                                                                                                                                                                                          

71

---

---

|Exhibit No. |  |                                                                                                                                  
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                  
|10.1        |  | Consent of
  BDO Ziv & Haft                                                                                                      
|            |  |                                                                                                                                  
|10.2        |  | Certification
  of the Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act
|            |  |                                                                                                                                  
|10.3        |  | Certification
  of the Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act

*     Incorporated
by reference to the Registration Statement on Form F-1 (File No. 333-6208).
**  Incorporated by reference to the Registrant annual report on Form
20-F filed with the Securities and Exchange Commission on June 29, 2001.
***  Incorporated by reference to the Registrant annual report on
Form 20-F filed with the Securities and Exchange Commission on June 28, 2002.
****  Incorporated by reference to the Registrant annual report on
Form 20-F filed with the Securities and Exchange Commission on June 30, 2000.

72

---

---

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.

| |  | CRYSTAL
  SYSTEMS SOLUTIONS LTD.
| |  | --------------------------------
| |  | (Registrant)                    
| |  |                                 
| |  | By:                             
| |  |                                 
| |  | Iris Yahal                      
| |  | Chief Financial Officer         

Date: June 19, 2003

---

---

CERTIFICATIONS

|I, Arie
  Kilman, certify that:
|-------------------------------
|                               
|1.                             
|                               
|2.                             
|                               
|3.                             
|                               
|4.                             
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|5.                             
|                               
|                               

|   | b.                                                                                                                                                                                                                                                                                                                                                                                               | any fraud,
  whether or not material, that involves management or other employees who have
  a significant role in the registrants internal controls; and
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                           
|6. | The
  registrants other certifying officers and I have indicated in this annual
  report whether or not there were significant changes in internal controls or
  in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.

Date: June 19,
2003

| | /s/ Arie Kilman                             
| | --------------------------------------------
| |                                             
| | Arie Kilman
         Chief Executive Officer

---

---

CERTIFICATIONS

|I, Iris
  Yahal, certify that:
|------------------------------
|                              
|1.                            
|                              
|2.                            
|                              
|3.                            
|                              
|4.                            
|                              
|                              
|                              
|                              
|                              
|                              
|                              
|5.                            
|                              
|                              

|   | b.                                                                                                                                                                                                                                                                                                                                                                                               | any fraud,
  whether or not material, that involves management or other employees who have
  a significant role in the registrants internal controls; and
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                           
|6. | The
  registrants other certifying officers and I have indicated in this annual
  report whether or not there were significant changes in internal controls or
  in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.

Date: June 19,
2003

| |  | /s/ Iris Yahal         
| |  | -----------------------
| |  |                        
| |  | Iris Yahal             
| |  | Chief Financial Officer

---

---

CRYSTAL SYSTEMS SOLUTIONS LTD.

(An Israeli corporation)

2002 Annual Report

---

---

CRYSTAL SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

2002 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

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

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

---

---

---

---

---

Independent
Auditors Report

To the Shareholders of

CRYSTAL SYSTEMS SOLUTIONS LTD.

We have audited the accompanying consolidated balance sheets of Crystal
Systems Solutions Ltd. (the Company) and its subsidiaries as of December 31,
2002 and 2001 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, 2002. 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 generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company and its subsidiaries as of December 31, 2002 and 2001,
and the related consolidated results of its operations and cash flows
for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States.

As discussed in Note 2 to the consolidated financial statements,
effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets.

Tel-Aviv,
Israel

March
4, 2003

except
for Notes 2A, 2B, 2E, 2F, 2I and 17

as
to which the date is June 16, 2003

| | /s/   BDO
  Ziv Haft                 
| | -------------------------------------
| |                                      
| | BDO Ziv Haft                         
| |                                      
| | Certified
  Public Accountants (Isr.)

F-1

---

---



CRYSTAL SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                                                                      |                                                                     | December 31,  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------
|                                                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      |                                                                     | 2002          
|                                                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      |                                                                     | (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, 15A3):                                                                                                                                                                                                                          |                                                                     |               
|                                                                                                                                                                                                                                                      | Cost                                                                |               
|                                                                                                                                                                                                                                                      | Less
  - accumulated depreciation                                   |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|GOODWILL (Note 5)                                                                                                                                                                                                                                     |                                                                     |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND 
    OTHER (Note 6)                                                                                                                                                                                        |                                                                     |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|Total
  assets                                                                                                                                                                                                                                        |                                                                     | $             
|                                                                                                                                                                                                                                                      |                                                                     |               
|LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                |                                                                     |               
|CURRENT
  LIABILITIES (Note 13):                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      | Short-term
  bank credit (Note 7)                                   |               
|                                                                                                                                                                                                                                                      | Accounts
  payable and accruals:                                    |               
|                                                                                                                                                                                                                                                      | Trade                                                               |               
|                                                                                                                                                                                                                                                      | Deferred
  revenue                                                  |               
|                                                                                                                                                                                                                                                      | Other
  (Note 15A4)                                                 |               
|                                                                                                                                                                                                                                                      | Restructuring
  accrual                                             |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      | Total
  current liabilities                                         |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|LONG-TERM LIABILITIES:                                                                                                                                                                                                                                |                                                                     |               
|                                                                                                                                                                                                                                                      | Accrued
  severance pay, net (Note 8)                               |               
|                                                                                                                                                                                                                                                      | Provision
  for losses in formerly-consolidated subsidiary (Note 9) |               
|                                                                                                                                                                                                                                                      | Loans
  from banks (Note 10)                                        |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      | Total
  long-term liabilities                                       |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|MINORITY INTEREST                                                                                                                                                                                                                                     |                                                                     |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|COMMITMENTS AND CHARGES (Note
  11)                                                                                                                                                                                                                   |                                                                     |               
|SHAREHOLDERS EQUITY (Note 12):                                                                                                                                                                                                                       |                                                                     |               
|Share
  capital - ordinary shares of NIS 0.01 par value (authorized - 
       December 31, 2002 and 2001 - 30,000,000 shares;
  issued and outstanding: 
       December 31, 2002 - 13,449,009 shares; December
  31, 2001 - 9,984,850
       shares) |                                                                     |               
|                                                                                                                                                                                                                                                      | Capital
  surplus                                                   |               
|                                                                                                                                                                                                                                                      | Accumulated
  other comprehensive income                            |               
|                                                                                                                                                                                                                                                      | Loans
  against exercise of options                                 |               
|                                                                                                                                                                                                                                                      | Retained
  earnings                                                 |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|Cost
  of 1,870,565 Company shares held by subsidiaries                                                                                                                                                                                               |                                                                     |               
|                                                                                                                                                                                                                                                      | (December
  31, 2001 - 1,766,100 shares)                            |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      | Total
  shareholders equity                                        |               
|                                                                                                                                                                                                                                                      |                                                                     |               
|Total
  liabilities and shareholders equity                                                                                                                                                                                                          |                                                                     | $             
|                                                                                                                                                                                                                                                      |                                                                     |               
|                                                                                                                                                                                                                                                      |                                                                     |               

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

F-2

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                          |                                        | Year ended December 31,                   
|----------------------------------------------------------------------------------------- | -------------------------------------- | ------------------------------------------
|                                                                                          |                                        |                                           
|                                                                                          |                                        | 2002                                      
|                                                                                          |                                        |                                           
|                                                                                          |                                        | (in
  thousands, except per share amounts)
|                                                                                          |                                        |                                           
|Revenues (Note 15B1)                                                                      |                                        | $                                         
|Cost of
  revenues                                                                        |                                        |                                           
|                                                                                          |                                        |                                           
|                                                                                          | Gross profit                           |                                           
|Software
  development costs                                                              |                                        |                                           
|Selling,
  general and administrative expenses                                            |                                        |                                           
|Goodwill
  impairment, restructuring costs and non-recurring 
       expenses (Note 15B2) |                                        |                                           
|                                                                                          |                                        |                                           
|                                                                                          | Operating
  income (loss)              |                                           
|Financial
  income (expenses), net (Note 15B4)                                            |                                        |                                           
|Gain on
  realization of shareholdings (Note 15B5)                                        |                                        |                                           
|Other income
  (expenses), net (Note 15B6)                                                |                                        |                                           
|                                                                                          |                                        |                                           
|                                                                                          | Income (loss)
  before taxes on income |                                           
|Income tax
  expense (Note 14)                                                            |                                        |                                           
|                                                                                          |                                        |                                           
|                                                                                          |                                        |                                           
|Equity in
  losses of affiliated companies, net                                           |                                        |                                           
|Minority
  interest                                                                       |                                        |                                           
|                                                                                          |                                        |                                           
|                                                                                          | 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 financial statements

F-3

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)



CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY

|                           |                                                            | Share Capital                 |           | Capital 
  Surplus |   | Accumulated
  Other
  Comprehensive
  Income |    | Retained
  Earnings |  | Loans
  Against 
  Exercise of
  Options |        | Cost of
  Company
  Shares Held
  by
  Subsidiaries |  | Total
|-------------------------- | ---------------------------------------------------------- | ----------------------------- | --------- | ------------------ | - | -------------------------------------------- | -- | ------------------- |  | ---------------------------------------- | ------ | --------------------------------------------------- |  | -----
|                           |                                                            |                               |           |                    |   |                                              |    |                    
|                           |                                                            | Number of 
  Shares           |           | Amount             |   |                                              |    |                     |  |                                         
|                           |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|                           |                                                            | (in thousands, except shares) |          
|                           |                                                            |                               |          
|Balance at January 1, 2000 |                                                            |                               | 9,911,760 |                    |   | $                                            | 21 |                     |  | $                                        | 37,513 |                                                     |  | $    
|Changes
  during 2000:     |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|                           | Net income                                                 |                               |           | -                  |   |                                              |    | -                   |  |                                          |        | -                                                   |  |      
|                           | Exercise of underwriters
  warrants                       |                               |           | 9,390              |   |                                              |    | -                   |  |                                          |        | 113                                                 |  |      
|                           | Exercise of employee share
  options                       |                               |           | 404,650            |   |                                              |    | 2                   |  |                                          |        | 2,588                                               |  |      
|                           | Tax benefit relating to
  employee options exercised       |                               |           | -                  |   |                                              |    | -                   |  |                                          |        | 418                                                 |  |      
|                           | Purchase of treasury stock                                 |                               |           | (316,700           | ) |                                              |    | -                   |  |                                          |        | -                                                   |  |      
|                           |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|                           | Balance at December 31,
  2000                             |                               |           | 10,009,100         |   |                                              |    | 23                  |  |                                          |        | 40,632                                              |  |      
|                           |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|Changes
  during 2001:     |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|                           | Net loss                                                   |                               |           | -                  |   |                                              |    | -                   |  |                                          |        | -                                                   |  |      
|                           | Exercise of employee share
  options                       |                               |           | 181,850            |   |                                              |    | -                   |  |                                          |        | 499                                                 |  |      
|                           | Purchase of treasury stock                                 |                               |           | (206,100           | ) |                                              |    | -                   |  |                                          |        | -                                                   |  |      
|                           |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|                           | Balance at December 31,
  2001                             |                               |           | 9,984,850          |   |                                              |    | 23                  |  |                                          |        | 41,131                                              |  |      
|                           |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|Changes
  during 2002:     |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|                           | Components of comprehensive
  income:                      |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|                           | Net loss                                                   |                               |           | -                  |   |                                              |    | -                   |  |                                          |        | -                                                   |  |      
|                           | Currency translation
  adjustments                         |                               |           | -                  |   |                                              |    | -                   |  |                                          |        | -                                                   |  |      
|                           |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|                           | 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
  2F)                             |                               |           | 3,478,624          |   |                                              |    | 7                   |  |                                          |        | 12,877                                              |  |      
|                           |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|                           | Balance at December 31,
  2002                             |                               |           | 13,449,009         |   |                                              | $  | 30                  |  |                                          | $      | 54,329                                              |  |      
|                           |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      
|                           |                                                            |                               |           |                    |   |                                              |    |                     |  |                                          |        |                                                     |  |      

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

F-4

---

---

CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                       |                                                                                                | Year ended December 31, |      
|------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ----------------------- | -----
|                                                       |                                                                                                |                         |      
|                                                       |                                                                                                | 2002                    |      
|                                                       |                                                                                                |                         |      
|                                                       |                                                                                                | (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 (losses) of consolidated subsidiaries                          |                         |      
|                                                       | Equity in losses
  of affiliated companies, net                                                |                         |      
|                                                       | Depreciation
  and amortization                                                                |                         |      
|                                                       | Increase
  (decrease) in accrued severance pay, net                                            |                         |      
|                                                       | Loss (gain)
  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                                           |                         |      
|                                                       | Tax benefit
  relating to employee options exercised                                           |                         |      
|                                                       | 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                                                        |                         |      
|                                                       | Increase
  (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
  loans to affiliated and other companies                                         |                         |      
|                                                       | Proceeds
  from sale of investments in and loans to affiliated companies                       |                         |      
|                                                       | 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                                       |                         |      
|                                                       | Exercise of
  options and warrants                                                             |                         |      
|                                                       |                                                                                                |                         |      
|                                                       | Net cash
  provided by (used in) financing activities                                          |                         |      
|                                                       |                                                                                                |                         |      
|EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH        |                                                                                                |                         | 666  
|                                                       |                                                                                                |                         |      
|NET INCREASE (DECREASE) IN
  CASH AND CASH EQUIVALENTS |                                                                                                |                         | 5,932
|CASH AND CASH EQUIVALENTS
  AT BEGINNING OF YEAR       |                                                                                                |                         | 9,374
|                                                       |                                                                                                |                         |      
|                                                       | CASH AND CASH EQUIVALENTS
  AT END OF YEAR                                                     |                         | $    
|                                                       |                                                                                                |                         |      

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

F-5

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                       |                                  | Year ended December 31, |  
|------------------------------------------------------ | -------------------------------- | ----------------------- | -
|                                                       |                                  |                         |  
|                                                       |                                  | 2002                    |  
|                                                       |                                  |                         |  
|                                                       |                                  | (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, |        
|----------------------------------------------- | -------------------------------------------- | ----------------------- | -------
|                                                |                                              |                         |        
|                                                |                                              | 2002                    |        
|                                                |                                              |                         |        
|                                                |                                              | (in thousands)          |        
|Working
  capital, other than cash              |                                              | $                       | (4,551 
|Investment
  in and loans to affiliated company |                                              |                         | 4,156  
|Fixed assets                                    |                                              |                         | (968   
|Minority
  interest                             |                                              |                         | 2,144  
|Goodwill                                        |                                              |                         | (29,885
|Capitalized
  software development costs        |                                              |                         | 890    
|Non-current
  liabilities                       |                                              |                         | 17,935 
|Crystal
  shares issued upon acquisition        |                                              |                         | 12,884 
|                                                |                                              |                         |        
|                                                | Net cash
  provided by (used in) acquisition |                         | $      
|                                                |                                              |                         |        
|                                                |                                              |                         |        

APPENDIX
B - REALIZATION OF PREVIOUSLY-CONSOLIDATED SUBSIDIARIES:

|                                                |       | Year ended December 31, |  
|----------------------------------------------- | ----- | ----------------------- | -
|                                                |       |                         |  
|                                                |       | 2002                    |  
|                                                |       |                         |  
|                                                |       | (in thousands)          |  
|                                                |       |                         |  
|Working
  capital, other than cash              |       |                         | 
|Investment
  in and loans to affiliated company |       |                         | 
|Fixed assets                                    |       |                         | 
|Minority
  interest                             |       |                         | 
|Goodwill                                        |       |                         | 
|Severance
  pay                                 |       |                         | 
|Gain on
  realization of shareholdings          |       |                         | 
|                                                |       |                         |  
|                                                | Total |                         |  
|                                                |       |                         |  
|                                                |       |                         |  

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

F-6

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting
Policies:

A.     General:

The
significant accounting policies, applied on a consistent basis, are as follows:

| | 1. | The Company:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Crystal
  Systems Solutions Ltd. (Crystal) (together with its subsidiaries the
  Company) is an Israeli corporation, which operates in one business segment -
  enterprise IT modernization solutions. The Company develops and markets
  software tools and provides consulting services for efficient modernization
  of legacy systems and cross-platform migration. The Company manages its
  business in various international markets by several entities, including its
  wholly-owned subsidiaries located in: USA, UK, Denmark, Germany, Italy,
  Netherlands, Cyprus, Rumania and Israel. The Company also holds two
  affiliated companies (affiliates). The Company and its affiliates operate
  in one reportable operating segment. Listed below are details relating to
  Crystals significant subsidiaries and affiliates:

| |                                             |  | Shareholding percentage |    | State of 
  incorporation
| | ------------------------------------------- |  | ----------------------- | -- | -------------------------
| |                                             |  |                         |    |                          
| | Name                                        |  | 2002                    |    | 2001                     
| |                                             |  |                         |    |                          
| |                                             |  | %                       |    |                          
| |                                             |  |                         |    |                          
| | Subsidiaries:                               |  |                         |    |                          
| |                                             |  |                         |    |                          
| | Bluephoenix Solutions B.V.  (Bluephoenix) |  | 100 *                   | -  |                          
| |                                             |  |                         |    |                          
| | Advanced
  Systems Europe B.V.              |  | 100                     | -  |                          
| |                                             |  |                         |    |                          
| | Liraz
  Systems Ltd.
  (Liraz)            |  | 90                      | -  |                          
| |                                             |  |                         |    |                          
| | Mainsoft
  Corporation (Mainsoft)         |  | 58                      | 58 |                          
| |                                             |  |                         |    |                          
| | IntraComp
  Group, Inc. (IntraComp)       |  | 53                      | 53 |                          
| |                                             |  |                         |    |                          
| | * Indirectly through Liraz                  |  |                         |    |                          
| |                                             |  |                         |    |                          
| | Affiliates:                                 |  |                         |    |                          
| |                                             |  |                         |    |                          
| | Intercomp
  Ltd. (Intercomp)              |  | 49                      | 49 |                          
| |                                             |  |                         |    |                          
| | Tesnet
  Software Testing Ltd. (Tesnet)   |  | 19                      | 19 |                          
| |                                             |  |                         |    |                          

| | 2. | Principal
  Shareholder:                                                                                                                     
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------
| |    | As a result
  of a series of transactions, Formula Systems (1985) Ltd. (Formula), owns
  58.3% of Crystals shares as of December 31, 2002.
| |    |                                                                                                                                              
| | 3. | Accounting
  Principles:                                                                                                                     
| |    | The
  financial statements are prepared in accordance with accounting principles
  generally accepted (GAAP) in the United States.         

F-7

---

---

CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 (cont.):

A.     General(cont.):

| | 4. | Functional
  Currency:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The currency
  of the primary economic environment in which the operations of Crystal and
  most of its subsidiaries are conducted is the U.S. dollar (dollar). The
  functional currency of the remaining subsidiaries is mainly the Euro. Most of
  the Companys sales are made outside of Israel (see Note 15B1 for export
  sales by geographic areas) and are denominated in dollars. In addition, a
  substantial portion of the Companys costs is incurred in dollars. Thus, the
  functional and reporting currency of the Company is considered to be the
  dollar.                                                                                                                                                                                                       
| |    | For
  consolidated companies whose functional currency is the dollar, transactions
  and balances originally denominated in dollars are presented at their
  original amounts. Balances in non-dollar currencies are translated into
  dollars using historical and current exchange rates for non-monetary and
  monetary balances, respectively. For non-dollar transactions reflected in the
  statements of operations, the exchange rates at transaction dates are used.
  Amortization and depreciation deriving from non-monetary items are based on
  historical exchange rates. The resulting transaction gains or losses (not
  material) are included in the statements of operations.                                                                                      
|
| |    | For consolidated companies
  whose functional currency is other than the dollar, transactions and balances
  have been translated to dollars under the principles prescribed in Statement
  of Financial Accounting Standards (SFAS) No. 52 of the Financial
  Accounting Standards Board (FASB). Assets and liabilities have been translated at period-end exchange
  rates.  Results of operations have
  been translated at appropriately weighted average exchange rates, if
  material.  Differences resulting from
  such translation are presented as a separate component of shareholders
  equity under the caption Accumulated Other Comprehensive Income if material;
  otherwise, they are charged to financial income (expenses) in the statements
  of operations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 5. | Use of
  Estimates and Assumptions in the Preparation of the Financial Statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities, disclosure of
  contingent assets and liabilities at the dates of the financial statements
  and the reported amounts of revenues and expenses during the reporting
  periods.                                                                                                                                                                                                                                                                                                                                                                             
| |    | Actual
  results could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F-8

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note
1 (cont.):

|B. | Principles of Consolidation:                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The
  consolidated financial statements include the accounts of Crystal Systems
  Solutions Ltd. and its subsidiaries in which it has a controlling interest.
  Acquisition of subsidiaries is accounted for under the purchase method. All
  intercompany accounts and transactions have been eliminated in consolidation.                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|C. | 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 management, is
  in doubt.                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|E. | Investments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Investments
  in affiliates over which the Company exercises significant influence are
  accounted for under the equity method. 
  As to goodwill - see Note 1H. 
  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 115 of the
  FASB. Investments in other companies are accounted for under the cost method.
|   | 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. | Fixed Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Fixed assets
  are stated at cost, and are depreciated by the straight-line method, over
  their estimated useful lives.  Annual
  rates of depreciation are as follows:                                                                                                                                                                                                                                                                                                     

| |                                    | %                   | 
| | ---------------------------------- | ------------------- | 
| |                                    |                     | 
| | Computers
  and computer equipment | 20 - 33 (mainly 33) | 
| | Office
  furniture and equipment   | 6 - 15 (mainly 7)   | 
| | Leasehold
  improvements           | 10                  | 
| | Motor
  vehicles                   | 15                  | 

F-9

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli
Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 (cont.):

|G. | Impairment of Long-Lived Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The Companys long-lived assets are reviewed for impairment in
  accordance with SFAS 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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Prior to
  2002, the Company assessed recoverability of goodwill by determining whether
  the amortization of the goodwill balance over its remaining life can be
  recovered through projected undiscounted future cash flows of the acquired
  businesses. In the event it was determined that goodwill is not recoverable,
  its book value was written off and charged to the statement of operations as
  goodwill impairment.                                                                                                                                                                                                                             
|   | In July 2001
  the FASB issued SFAS 142, Goodwill and Other Intangible Assets (SFAS
  142). SFAS 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 142 requires purchased intangible assets other
  than goodwill to be amortized over their useful lives unless these lives are
  determined to be indefinite.                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | SFAS 142 is
  effective for fiscal years beginning after December 15, 2001.The Company
  adopted SFAS 142 effective January 1, 2002. In accordance with SFAS 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 2002. There can be no assurance that future goodwill
  impairment tests will not result in a charge to earnings.                                                                                                                                                                                               

F-10

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 (cont.):

|H. | Goodwill (cont.):                                                                                                                                                                                                          
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The
  following table presents the impact of SFAS 142 on net income (loss) and net
  income (loss) per share had the accounting standard been in effect for 2002,
  2001 and 2000 (in thousands, except per-share amounts):

| |                                                 |                            | Year ended December 31, |       
| | ----------------------------------------------- | -------------------------- | ----------------------- | ------
| |                                                 |                            |                         |       
| |                                                 |                            | 2002                    |       
| |                                                 |                            |                         |       
| |                                                 |                            | (in thousands)          |       
| |                                                 |                            |                         |       
| | Net income (loss) as reported                   |                            | $                       | (3,630
| | Amortization of goodwill                        |                            |                         |      
| |                                                 |                            |                         |       
| |                                                 | Net income (loss) adjusted |                         | $     
| |                                                 |                            |                         |       
| | Basic net income (loss) per share as reported   |                            |                         | (0.35 
| |                                                 |                            |                         |       
| | Basic net income (loss) per share adjusted      |                            |                         | (0.35 
| |                                                 |                            |                         |       
| | Diluted net income (loss) per share as reported |                            |                         | (0.35 
| |                                                 |                            |                         |       
| | Diluted net income (loss) per share adjusted    |                            |                         | (0.35 
| |                                                 |                            |                         |       
| |                                                 |                            |                         |       

|I. | Software 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 SFAS
  No. 86 of the FASB.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Software
  development costs incurred before technological feasibility is established
  are charged to the statement of operations as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | 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 3 years. During the
  year ended December 31, 2002, a consolidated subsidiary capitalized software
  development costs aggregating $2.4 million (2001 - $3.1 million, 2000 - $1.6
  million) and amortized capitalized software development costs aggregating
  $1.5 million (2001 - $1.2 million, 2000 -$0.1 million).
|   | In
  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-11

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 (cont.):

|J. | Employee Stock Options:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | At December
  31, 2002, the Company has one stock-based employee compensation plan, which is
  described more fully in Note 12B.  The
  Company accounts for such 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 such 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 123 of the FASB, Accounting for Stock-Based Compensation,
  to stock-based employee compensation.

|                                                                                                                                                                 |                             | Year ended December 31,                     |       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------- | ------
|                                                                                                                                                                 |                             |                                             |       
|                                                                                                                                                                 |                             | 2002                                        |       
|                                                                                                                                                                 |                             |                                             |       
|                                                                                                                                                                 |                             | (in thousands, except per share 
  amounts) |       
|                                                                                                                                                                 |                             |                                             |       
|Net income (loss) as reported                                                                                                                                    |                             | $                                           | (3,630
|Deduct:  Total stock-based
  employee compensation expense 
       determined under fair value based method for
  all awards, 
       net of related tax effects |                             |                                             | (681  
|                                                                                                                                                                 |                             |                                             |       
|                                                                                                                                                                 | 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.                                      
|   | When a
  project involves significant modification of software, 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.

F-12

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 (cont.):

|K. | Revenue Recognition (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The Company
  recognizes revenues from consulting and training fees (i) with respect to
  projects billed on a time and material basis, based on the number of hours
  performed and (ii) with respect to fixed fee contracts, based upon the
  percentage of completion method. The Company recognizes contract losses, if
  any, in the period in which they first become evident.                                                                                                                                                                
|   | Revenues
  from software maintenance services are recognized ratably over the contract
  period. Unrecognized revenue is recorded as deferred revenue.                                                                                                                                                                                                                                                                                                                                                                                              
|   | Management
  believes that the Companys revenue recognition policies are in accordance
  with the Securities and Exchange Commission Staff Accounting Bulletin
  No. 101, Revenue Recognition in Financial Statements (SAB 101).                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|L. | Advertising Costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | The Company
  expenses advertising costs as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|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 to the statement of operations such results, 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 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 provisions of SFAS
  No. 128 of the FASB (SFAS 128). SFAS 128 requires the presentation of both
  basic and diluted EPS.                                                                                                                                                                                                                                                                                                                                                     
|   | Basic net
  earnings (loss) per share is 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.                                                                                                                                                                                       

F-13

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 (cont.):

|P. | Financial Instruments:                                                                                                                                                                                                                                                                                            
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                   
|   | a.                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                   
|   | b.                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                   
|Q. | Comprehensive Income:                                                                                                                                                                                                                                                                                             
|   | Up until
  2002, the Company had no comprehensive income components other than net
  income. Beginning with 2002, 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.
|   |                                                                                                                                                                                                                                                                                                                   
|R. | Financial Instruments:                                                                                                                                                                                                                                                                                            
|   | The
  application of SFAS 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.                                                                                       

F-14

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 1 (cont.):

|S. | Recently issued accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | In June
  2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
  Exit or Disposal Activities, which addresses the recognition, measurement,
  and reporting of costs associated with exit and disposal activities,
  including restructuring activities. SFAS No. 146 requires that costs
  associated with exit or disposal activities be recognized when they are
  incurred rather than at the date of a commitment to an exit or disposal plan.
  SFAS No. 146 also requires liabilities incurred in respect of such costs to
  be measured at fair value. SFAS No. 146 is effective for all exit or disposal
  activities initiated after December 31, 2002. The Company does not expect the
  adoption of SFAS No. 146 to have a material impact on the Companys results
  of operations or financial position.                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | In
  November 2002, the FASB issued Interpretation No. 45 (FIN 45),
  Guarantors Accounting and Disclosure Requirements for Guarantees. FIN 45
  requires a guarantor to recognize, at the inception of a guarantee, a
  liability for the fair value of the obligation it has undertaken in issuing
  the guarantee. The Company will apply FIN 45 to guarantees, if any, issued
  after December 31, 2002. At adoption, FIN 45 did not have a significant
  impact on the Companys consolidated statements of operations or financial
  position. FIN 45 also requires guarantors to disclose certain information for
  guarantees, including product warranties, outstanding at December 31,
  2002.                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | In January 2003,
  the FASB issued Interpretation No. 46 (FIN 46), Consolidation of
  Variable Interest Entities. FIN 46 clarifies the application of Accounting
  Research Bulletin No. 51, Consolidated Financial Statements, to certain
  entities in which equity investors do not have the characteristics of a
  controlling financial interest or do not have sufficient equity at risk for
  the entity to finance its activities without additional subordinated
  financial support from other parties. FIN 46 is applicable immediately for
  variable interest entities created after January 31, 2003. For variable
  interest entities created prior to January 31, 2003, the provisions of FIN 46
  are applicable no later than July 1, 2003. The Company does not expect this
  Interpretation to have an effect on the consolidated financial statements.

F-15

---

---

CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions:

|A. | Mainsoft:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Since 1999,
  the Company has acquired in a series of transactions 57.8% (as of December
  31,2002) of the outstanding share capital of Mainsoft. In June 2001, due to a
  lack of a liquidation event, as defined in the certificate of incorporation
  of Mainsoft, Crystals shareholdings in Mainsoft were diluted. During 2001,
  Crystal purchased additional shares of Mainsoft for aggregate consideration
  of $6.7 million. Crystal also received 2,997,592 warrants to purchase
  Preferred D Shares of Mainsoft. Out of these warrants, Crystal exercised
  630,000 warrants in May 2003 for an aggregate of $378 thousand, as part of a
  new round of funding. As a result of this exercise and the similar exercise
  of other shareholders warrants in Mainsoft, Crystal currently owns 57.5% of
  Mainsoft.  Following the exercise, all
  remaining warrants expired in May 2003.                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|B. | IntraComp:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | IntraComp
  Group Inc. (IntraComp) provides migration and conversion services for large
  scale systems and back-end integration services. In the second quarter of
  2000, Crystal acquired a 52% controlling interest in IntraComp for aggregate
  consideration of $3.2 million. IntraComps results of operations were
  consolidated in the Companys financial statements beginning with the second
  quarter of 2000.  In the fourth
  quarter of 2000, Crystal increased its shareholdings in IntraComp to 53% by
  investing an additional $240,000. In addition, Crystal lent to IntraComp
  $850,000. During the second quarter of 2003, Crystal purchased from the other
  shareholders of IntraComp the remaining outstanding share capital of
  IntraComp. As a result, the Company currently wholly owns IntraComp. Under
  the agreement with IntraComps selling shareholders, the Company shall pay
  the consideration in two installments, the first installment in August 2004
  and the second in February 2006. The consideration shall be calculated based
  on IntraComps cumulative earnings before interest and taxes during the
  three-year period commencing on January 1, 2003, subject to certain
  conditions.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|C. | MultiConn:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Effective as of July 1999,
  Crystal acquired 51% of the outstanding share capital of M.S.I. MultiConn
  Solutions International (1995) Ltd. (MultiConn). MultiConns results of
  operations were consolidated in the Companys financial statements beginning
  with the third quarter of 1999.  In
  2000, Crystal increased its shareholdings in MultiConn to 60% for additional
  consideration of $950,000. MultiConn develops, through an affiliate, and
  markets eMulticonn and related solutions. During 2000 and 2001, Crystal lent to an affiliate of
  MultiConn $2.1 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-16

---

---

CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|C. | MultiConn (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Effective as of December
  2002, Crystal exercised an option to convert an amount of $1 million of the
  loan into shares of MultiConns affiliated company. Following this
  conversion, the Company currently holds 60% of the outstanding share capital
  of MultiConns affiliated company.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | In the fourth quarter of
  2002, the Company wrote down $1.8 million of the balance of its investment in
  the affiliate, due to impairment of the investment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Under the agreement with
  MultiConn, the other shareholders of MultiConn have a call option, exercisable
  until November 2005, to purchase from the Company a portion of the Companys
  shareholdings in MultiConn and in the affiliated company, for an aggregate
  consideration of $1.1 million. In the event that the shareholders fully
  exercise their call option, the Company holdings in Multiconn and in the
  affiliated company would be decreased to 51%.                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|D. | SCH:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Crystal
  wholly owns SCH- Software Conversion House Ltd., a developer and marketer of
  software conversion tools and services for midrange environments. SCHs
  results of operations were initially consolidated in the Companys 1998
  financial statements. In the second quarter of 2001, Crystal purchased the
  entire remaining outstanding share capital of SCH for an aggregate of $2.3
  million of which $2.0 million was invested in SCH and $330,000 was paid to
  SCHs other shareholders. As a result, Crystal currently wholly owns SCH.
  Following the purchase of the entire interest in SCH, Crystal
  assimilated SCHs business lines into its business, integrating SCHs entire
  activity with its own.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|E. | Alexandria:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | During 1999,
  Crystal purchased 19% of the outstanding share capital of Alexandria
  Migration Technologies Ltd., which develops C-MIDAS. In April 2003, the
  Company purchased from the other shareholder of Alexandria his entire
  shareholdings in Alexandria, constituting 81% of Alexandrias outstanding
  share capital, for an aggregate of $585,000. As a result, the Company
  currently wholly owns Alexandria. As of December 31, 2002, the Company lent
  to Alexandria approximately $5.6 million in the aggregate, of which the
  Company wrote off $2.5 million in 2001 due to the uncertainty of repayment of
  the entire loan amount.                                                                          

F-17

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|F. | Liraz:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | In November
  2002, Crystal 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). BluePhoenix, Lirazs wholly owned subsidiary,
  develops and markets the AppBuilder, a software product used for the
  development of sophisticated and robust applications needed by large
  enterprises.                       
|   | The Company
  acquired Liraz for the purpose of fully integrating Lirazs business within
  its business, and expects that as a result of such integration 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, the Company anticipates that the
  combination of the respective technical personnel will enhance its product
  development capabilities.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | As part of
  the share exchange transaction, Crystal 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 price was determined in September 2002, based on the average
  ratio of Crystals share price to Lirazs share price in the preceding two
  months.                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Following
  are the amounts assigned to major components of Lirazs balance sheet as of
  the date of purchase (in thousands):                                                                                                                                                                                                                                                                                                                                                                                      

| | Current
  assets        |  | $ | 7,938   |  
| | ----------------------- |  | - | ------- | -
| | Long-term
  investments |  | $ | 276     |  
| | Fixed assets            |  | $ | 782     |  
| | Goodwill                |  | $ | 22,300  |  
| | Other assets            |  | $ | 41      |  
| | Current
  liabilities   |  | $ | (11,820 | )
| | Long-term
  liabilities |  | $ | (3,975  | )
| | Minority
  interest     |  | $ | (2,658  | )

F-18

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|F. | Liraz (cont.):                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Lirazs
  results of operations were consolidated in the Companys financial statements
  beginning with the fourth quarter of 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, 2001. 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.

|                              |  | Year ended
  December 31, 2002          |        | Year ended
  December 31, 2001          | 
|----------------------------- |  | --------------------------------------- | ------ | --------------------------------------- | 
|                              |  |                                         |        |                                         | 
|                              |  | (In thousands,
  except per share data) |        | (In thousands,
  except per share data) | 
|                              |  |                                         |        |                                         | 
|                              |  | (Unaudited)                             |       
|                              |  |                                         |       
|Revenues *                    |  | $                                       | 53,100 |                                         | 
|                              |  |                                         |        |                                         | 
|Net income
  (loss) *         |  | $                                       | 1,911  |                                         | 
|                              |  |                                         |        |                                         | 
|Earning per
  share  basic   |  |                                         | 0.14   |                                         | 
|                              |  |                                         |        |                                         | 
|Earning per
  share  diluted |  |                                         | 0.14   |                                         | 
|                              |  |                                         |        |                                         | 

|   | * Revenues and net loss for 2001 include the results of operations of
  Level 8 (see Note 2I) which was sold by Liraz in 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   | In two
  public tender offers that the Company published 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, Crystal 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. Upon completion of the acquisition of Lirazs shares, the
  Company has begun a process of assimilating and integrating Lirazs business
  and activities into the Company business.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|G. | Alphatech:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In December
  2002, Crystal purchased from Intercomp a 65% controlling interest in
  Alphatech (2000) Srl. (Alphatech) for an aggregate consideration of
  $100,000. Alphatech, a company incorporated in Rumania, provides software
  development services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-19

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 2 - Certain
Transactions (cont.):

|H. | SDC:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | In October
  2002, Liraz, through a wholly owned subsidiary, acquired from SDC
  FinansSystems A/S (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 in respect of the purchased activity. Under the purchase
  agreement, the Company paid an aggregate amount of $0.8 million 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 products and
  services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   | Following
  are the amounts assigned to major components of SDCs balance sheet as of the
  date of purchase (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| | Curent
  assets       |  | $ | 1,097  |   | 
| | --------------------- |  | - | ------ | - | 
| | Other assets          |  | $ | 1,023  |   | 
| | Current
  liabilities |  | $ | (1,228 | ) | 
| | Shareholders
  equity |  | $ | (892   | ) | 

|   | Goodwill
  arising upon acquisition was $0.8 million.                                                                                                                                                                                                                                                                                                                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | In addition,
  the Company entered into an agreement with two of the sellers shareholders,
  pursuant to which the shareholders will purchase from the Company IT
  development services during a period of nine months beginning in October
  2002, for an aggregate consideration of approximately $15 million.                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|I. | Level 8:                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | As of
  December 31, 2002, the Company holds several capital instruments, including
  options, rights to receive options and preferred stock, convertible into
  ordinary shares of Level 8 Systems Inc. (Level 8). If the Company exercises
  these capital instruments in full, the Company shareholding in Level 8 would
  reach 9%.  As of June 1, 2003, the Company
  has converted preferred stock and currently holds 1% of the Level 8 ordinary
  shares.

F-20

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 3 - Investments in Affiliates and Other
Companies:

A.     1.     The
investments are composed and presented as follows:

|                                                |  | December 31,   |       
|----------------------------------------------- |  | -------------- | ------
|                                                |  |                |       
|                                                |  | 2002           |       
|                                                |  |                |       
|                                                |  | (in thousands) |       
|                                                |  |                |       
|Cost of
  shares *                              |  | $              | 3,000 
|Less -
  accumulated amortization of goodwill   |  |                | (238  
|Equity in
  post-acquisition accumulated losses |  |                | (2,271
|                                                |  |                |       
|                                                |  |                | 491   
|Loans
  granted to affiliates (2)               |  |                | 2,582 
|Loans
  granted to others (3)                   |  |                | 302   
|Investments
  in other companies                |  |                | 100   
|                                                |  |                |       
|                                                |  |                | 3,475 
|                                                |  |                |       
|* Including
  goodwill - original amount        |  | $              | 613   
|                                                |  |                |       

| | 2. | The loans
  are linked to the dollar and bear annual interest of LIBOR +1%.                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                          
| | 3. | The loans
  are linked to the CPI and bear annual interest at a rate of 4%. (2001- the
  loans are linked to the dollar).

Following are details relating to the financial position and results of
operations of investees in the aggregate:

|                    |  | December 31,   |       
|------------------- |  | -------------- | ------
|                    |  |                |       
|                    |  | 2002           |       
|                    |  |                |       
|                    |  | (in thousands) |       
|                    |  |                |       
|Total assets        |  | $              | 20,747
|                    |  |                |       
|Total
  liabilities |  | $              | (9,677
|                    |  |                |       
|Net loss            |  | $              | (1,001
|                    |  |                |       

F-21

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

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

|B. | Intercomp:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | In 1998,
  Crystal invested in Intercomp Ltd. (Intercomp). In December 2000, Crystal
  exercised an option to purchase additional shares of Intercomp and as a
  result, it currently holds 49% of the outstanding share capital of Intercomp.
  During 2001, Crystal lent to Intercomp approximately $2.6 million, of which
  approximately $1.7 are convertible into preferred shares of Intercomp,
  subject to certain conditions. Crystal granted a creditor of Intercomp a put
  option to sell to Crystal promissory notes issued by Intercomp in an
  aggregate amount of $3.5 million plus interest accrued at 5% per annum, which
  may be paid, at Crystals option, in Crystals ordinary shares. The creditor
  may exercise the put option during a period of two years commencing on
  January 31, 2004 or, in certain circumstances, earlier.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|C. | Tesnet:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Effective as
  of January 1999, Crystal 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 Crystals control of Tesnets board of directors.  Crystal paid for its holding in Tesnet
  approximately $2 million, $1.3 million in 1999 and additional $700,000 in
  2002 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 on the Tel-Aviv
  Stock Exchange. Net proceeds from the offering were $9.5 million. As a
  result, Crystal recorded a capital gain of $1 million and its shareholdings
  in Tesnet decreased to 22%, and consequently the Company ceased controlling
  Tesnets board of directors and consolidating the operating results of Tesnet
  during the first quarter of 2000.                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | During 2000,
  Crystal sold 3% of its holdings in Tesnet and currently holds 19% of the
  outstanding share capital of Tesnet. The Companys investment in Tesnet is
  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 representation on Tesnets board of directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The market
  value of  the Companys holding in
  Tesnet as of December 31, 2002 was $2.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-22

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An
Israeli Corporation)

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS

Note 4 - Fixed Assets:

Composition of assets, grouped by major classifications:

|                          |                                    | December 31,   |       
|------------------------- | ---------------------------------- | -------------- | ------
|                          |                                    |                |       
|                          |                                    | 2002           |       
|                          |                                    |                |       
|                          |                                    | (in thousands) |       
|                          |                                    |                |       
|Cost:                     |                                    |                |       
|                          | Computers
  and computer equipment |                | $     
|                          | Office
  furniture and equipment   |                |       
|                          | Leasehold
  improvements           |                |       
|                          | Motor
  vehicles                   |                |       
|                          |                                    |                |       
|                          |                                    |                | 11,173
|                          |                                    |                |       
|Accumulated Depreciation: |                                    |                |       
|                          | Computers
  and computer equipment |                |       
|                          | Office
  furniture and equipment   |                |       
|                          | Leasehold improvements             |                |       
|                          | Motor
  vehicles                   |                |       
|                          |                                    |                |       
|                          |                                    |                | 7,601 
|                          |                                    |                |       
|Undepreciated
  balance   |                                    | $              | 3,572 
|                          |                                    |                |       

Note
5 - Goodwill:

|                                      |                                | December 31,   |       
|------------------------------------- | ------------------------------ | -------------- | ------
|                                      |                                |                |       
|                                      |                                | 2002           |       
|                                      |                                |                |       
|                                      |                                | (in thousands) |       
|                                      |                                |                |       
|                                      |                                |                |       
|Carrying amounts at beginning of year |                                | $              | 14,737
|Acquired                              |                                |                | 29,958
|Impairment losses recognized          |                                |                |      
|Amortization                          |                                |                |      
|                                      |                                |                |       
|                                      | Carrying amount at end of year |                | $     
|                                      |                                |                |       
|                                      |                                |                |       

F-23

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note
6 - Capitalized Software Development Costs and Other:

Comprised as follows:

| |                                              | December 31,   |      
| | -------------------------------------------- | -------------- | -----
| |                                              |                |      
| |                                              | 2002           |      
| |                                              |                |      
| |                                              | (in thousands) |      
| |                                              |                |      
| | Capitalized
  software development costs (*) |                | $    
| | Deferred
  insurance expenses                |                |      
| | Rent deposit                                 |                |      
| | Deferred tax
  asset                         |                |      
| |                                              |                |      
| |                                              | $              | 6,058
| |                                              |                |      
| | (*)     Original
  amount                    |                | $    
| | Less
  - accumulated amortization            |                |      
| |                                              |                |      
| |                                              | $              | 5,268
| |                                              |                |      
| |                                              |                |      

Note
7 - Short-Term Bank Credit:

The short-term credit is denominated in New Israeli Shekels, dollars
and euros. The weighted average interest rates on short-term bank credit at
December 31, 2002 were as follows: 
CPI-linked New Israeli Shekels: 4.24%-7.6%, unlinked New Israeli
Shekels: 10.6%-17.1%, dollars: 2.5%-3.45%, euro: 3.45%-4.35%.

Note 8 - Accrued Severance Pay, Net:

|A. | The
  Companys liability for severance pay to its employees pursuant to laws
  prevailing in the respective countries of employment and employment
  agreements is covered in part by managers insurance policies under the name
  of the employee, for which the Company makes monthly payments. The severance
  pay liability is calculated on the basis of one months salary for each year
  of service, based on the most recent salary of each employee.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The amounts
  accrued and the amounts funded with managers insurance policies are as
  follows:                                                                                                                                                                                                                                                                                                                                                                

| |                         |  | December 31,   |      
| | ----------------------- |  | -------------- | -----
| |                         |  |                |      
| |                         |  | 2002           |      
| |                         |  |                |      
| |                         |  | (in thousands) |      
| |                         |  |                |      
| | Accrued
  severance pay |  | $              | 3,189
| | Less -
  amount funded  |  |                | 2,258
| |                         |  |                |      
| |                         |  | $              | 931  
| |                         |  |                |      
| |                         |  |                |      

F-24

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note
8 - Accrued Severance Pay, Net (cont.):

|A. | (cont.)                                                                                                                                              
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                      
|   | The Company
  may make withdrawals from the managers insurance policies only for the
  purpose of paying severance pay.                             
|   |                                                                                                                                                      
|B. | The expenses
  in respect of severance pay for the years ended December 31, 2002, 2001 and
  2000 were $461,000, $642,000 and $692,000, respectively.

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

Liraz (see Note 2F) is liable for losses in a subsidiary it had
consolidated up until the second quarter of 2001. The provision for such
liability at December 31, 2002, amounted to $2.5 million, representing the
amount Liraz has guaranteed to secure the liabilities of the said subsidiary.
Under its terms, such guarantee may be reduced to the extent that the
subsidiary raises additional share capital.

Note 10 - Loans from banks:

A.    Composition:

| | 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,
  2002 |  |                 |                |  |                | December 31, 2002        |       | December 31, 2002     | 
| |                     |  | Linkage
  basis |                |  |                |                          |       |                       |  |                                                             |    |                                                             | 
| | %                   |  |                 | (in thousands) |  | (in thousands) |                         
| |                     |  |                 |                |  |                |                          |       |                       |  |                                                             |    |                                                             | 
| | LIBOR+1.75          |  |                 | Dollar         |  |                | $                        | 1,400 |                       |  | $                                                           |   |                                                             | 
| | LIBOR+1.75          |  |                 | Dollar         |  |                |                          | 1,000 |                       |  |                                                             |   |                                                             | 
| | 4.32-7.62           |  |                 | CPI            |  |                |                          | 164   |                       |  |                                                             | 38 |                                                             | 
| | 6.63                |  |                 | Dollar         |  |                |                          | 163   |                       |  |                                                             | 37 |                                                             | 
| |                     |  |                 |                |  |                |                          |       |                       |  |                                                             |    |                                                             | 
| |                     |  |                 |                |  |                | $                        | 2,727 |                       |  | $                                                           | 75 |                                                             | 
| |                     |  |                 |                |  |                |                          |       |                       |  |                                                             |    |                                                             | 
| |                     |  |                 |                |  |                |                          |       |                       |  |                                                             |    |                                                             | 

B.     Maturity
dates:

| |                                   | December 31,   |  
| | --------------------------------- | -------------- | -
| |                                   |                |  
| |                                   | 2002           |  
| |                                   |                |  
| |                                   | (in thousands) |  
| |                                   |                |  
| | First
  year (current maturities) |                | $
| | Second
  year                     |                |  
| | Third
  year                      |                |  
| | Fourth
  year                     |                |  
| | Fifth
  year and thereafter       |                |  
| |                                   |                |  
| | Total                             |                | $
| |                                   |                |  
| |                                   |                |  

F-25

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note
11  Commitments and charges:

Significant Agreements:

|A. | In August
  1998, Mainsoft entered into an agreement (the 1998 Agreement) with
  Microsoft. In May 2002, the parties entered into an amendment to the 1998
  Agreement that expanded Mainsofts access to certain Microsoft development
  technologies (the 2002 Amendment). Together, the 1998 Agreement and the
  2002 Amendment are referred to as the Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Under the
  terms of the Agreement, Mainsoft continues to have access to specified
  software code and documentation for specified versions of Windows, Windows
  NT, Windows XP and Microsoft .NET (collectively the Licensed Software). The
  Agreement grants Mainsoft the right to distribute the Licensed Software as a
  component of certain of its products. The Agreement provides for the payment
  of royalties to Microsoft that are based upon Mainsofts licensing of its
  products which include the Licensed Software. The Agreement has a perpetual
  term, although: 1) Microsoft may terminate the Agreement upon any one of
  certain events regarding change of control of Mainsoft (the Change of
  Control Events), and 2) either party may terminate the Agreement if the
  other fails to comply with the terms of the Agreement or files for
  bankruptcy. Mainsoft must notify Microsoft in the event of a Change of
  Control Event. Upon receipt of such notice, Microsoft may elect to (a) acquire
  any percentage of Mainsoft at the proposed price per share or (b) acquire
  Mainsofts MainWin products at the proposed price. In the event Mainsoft
  ceases the active distribution or licensing of its MainWin products for more
  than one year, Mainsoft will be deemed to have granted to Microsoft a
  worldwide, exclusive, perpetual, irrevocable, royalty-free license to its
  MainWin Studio products.
|   | The
  Agreement provides for the payment of royalties on a per copy basis to
  Microsoft for products licensed or distributed. These royalties, net of
  waivers approved by Microsoft, are included in the financial statements under
  cost of sales. Mainsofts ability to develop, sell and market its products is
  dependent upon the continued access to the Licensed Software. Furthermore, a
  change in or termination of the Agreement could prevent Mainsoft from
  developing and selling its products and materially adversely affect its
  business, results of operation and financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|B. | Crystal is
  obligated to pay Formula management fees in an annual amount equal to 3% of
  revenues, but not more than the Israeli currency equivalent of $180,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|C. | The Company
  is committed under operating leases for rental of office facilities for the
  years 2003-2005. Annual rental fees under current leases are approximately
  $1.6 million for 2003 and $0.5 million for 2004, and are expected to remain
  at this level for each of the next five years. In connection with such
  leases, the Company has issued bank guarantees of $122,000 in favor of the
  leasing companies, for the term of the leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-26

---

---



CRYSTAL SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note
11  Commitments (cont.):

|D. | Crystal has
  guaranteed short-term bank loans of an affiliated company in favor of the
  lending bank. As of December 31, 2002, such guarantee amounted to $0.5
  million. The guarantee is for a one-year term, and may optionally be extended
  for further periods of one year each.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                         
|E. | Crystal has
  granted a creditor of Intercomp an option - See Note 3B.                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                         
|F. | As to a tax assessment issued to Crystal - see Note 14K.                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                         
|G. | As to a guarantee of debt by Liraz  see Note 9.                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                         
|H. | Under
  an agreement entered into in 2000 regarding the sale of its integrated IT
  systems activities and outsourcing business in Israel, Liraz is obligated to
  reimburse the buyer for claims related to the activities during the period
  prior to the sale.                      
|   |                                                                                                                                                                                                                                                                                         
|I. | 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 Lirazs bank credit line.                                                                                                                        

No liability was recorded in the Companys financial statements in
respect of the guarantees mentionedabove, except for the guarantee by Liraz  see Note 9.

Note 12 - Shareholders Equity:

A.     Share
capital:

| | 1. | On January
  31, 1997, 3,120,000 ordinary shares of Crystal were offered in an initial
  public offering (the IPO) at a price of $7.5 per share. Since the above
  transaction, Crystals shares have been traded in the United States on the Nasdaq
  National Market.  Their current symbol
  is CRYS.                                                                                                 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | 2. | On July 22,
  1997, 1,200,000 ordinary shares of Crystal were offered in a second public
  offering, at a price of $27 per share, of which 600,000 ordinary shares were
  issued by Crystal and 600,000 ordinary shares were sold by existing
  shareholders.                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | 3. | During the
  years 1998 through 2002, two subsidiaries of Crystal purchased a total of
  1,870,565 Crystals shares for a total consideration of $14.7 million. All of Crystals ordinary shares have equal voting rights.
  However, under applicable Israeli law, the shares held by Crystals subsidiaries have no voting rights and,
  therefore, are excluded from the number of its outstanding shares.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                              
| | 4. | In January
  2001 Crystals
  ordinary shares were listed for trading on the Tel Aviv Stock Exchange under
  the Dual Listing arrangement.                                                                                                                                                                                                                                                                 

F-27

---

---



CRYSTALSYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

Note
12 - Shareholders Equity (cont.):

A.     Share capital
(cont.):

| | 5. | In November
  2002 Crystal 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  see Note 2F.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B.     Share
Options:

| | 1. | Employee Share Option Plans:
| | -- | ----------------------------
| |    |                             
| |    | a)                          
| |    |                             
| |    |                             
| |    |                             
| |    |                             
| |    |                             
| |    | b)                          
| |    |                             
| |    |                             
| |    |                             

F-28

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note
12 - Shareholders Equity (cont.):

|B. | Share Options (cont.):
|-- | ----------------------
|   |                       
|   |                       
|   |                       
|   |                       

|                                                                        |                                             | 2002                 |           | 2001                                     |   | 2000                
|----------------------------------------------------------------------- | ------------------------------------------- | -------------------- | --------- | ---------------------------------------- | - | --------------------
|                                                                        |                                             |                      |           |                                          |   |                     
|                                                                        |                                             | Number 
  of options |           | Weighted 
  Average 
  Exercise 
  Price |   | Number 
  of options
|                                                                        |                                             |                      |           |                                          |   |                     
|Options
  outstanding at
       beginning of year                       |                                             |                      | 1,193,650 |                                          |   |                     
|Changes
  during the year:                                              |                                             |                      |           |                                          |   |                     
|                                                                        | Granted                                     |                      |           | 353,560                                  |   |                     
|                                                                        | Exercised                                   |                      |           | (90,000                                  | ) |                     
|                                                                        | Forfeited                                   |                      |           | (109,950                                 | ) |                     
|                                                                        |                                             |                      |           |                                          |   |                     
|                                                                        | Options
  outstanding 
      at end of year |                      |           | 1,347,260                                |   |                     
|                                                                        |                                             |                      |           |                                          |   |                     
|                                                                        |                                             |                      |           |                                          |   |                     
|Options
  exercisable at year-end                                       |                                             |                      | 888,333   |                                          |   |                     
|                                                                        |                                             |                      |           |                                          |   |                     
|Weighted-average
  fair 
  value of options granted 
  during the year* |                                             |                      | 1.09      |                                          |   |                     
|                                                                        |                                             |                      |           |                                          |   |                     

|* | 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: 2002 -
  67%, 2001 - 61%, 2000 - 73%, risk-free interest rate: 2002 - 1.75%, 2001 -
  3%, 2000 - 5% and expected life: 2000, 2001 and 2002 - 3 years.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-29

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note
12 - Shareholders Equity (cont.):

|B. | Share Options (cont.):
|-- | ----------------------
|   |                       
|   | 1.                    
|   |                       
|   |                       

|                               |  | Options Outstanding |                                                  | Options Exercisable | 
|------------------------------ |  | ------------------- | ------------------------------------------------ | ------------------- | 
|                               |  |                     |                                                  |                     | 
|Range of 
  Exercise 
  Prices |  |                     | Number 
  Outstanding 
  at December 
  31, 2002 |                     | 
|                               |  |                     |                                                  |                     | 
|$                              |  |                     |                                                  |                     | 
|                               |  |                     |                                                  |                     | 
|3.00                           |  |                     | 80,000                                           |                     | 
|3.00                           |  |                     | 255,660                                          |                     | 
|4.50                           |  |                     | 69,600                                           |                     | 
|5.20                           |  |                     | 139,500                                          |                     | 
|5.50                           |  |                     | 13,000                                           |                     | 
|6.50                           |  |                     | 311,900                                          |                     | 
|8.00                           |  |                     | 92,000                                           |                     | 
|9.00                           |  |                     | 30,000                                           |                     | 
|9.63                           |  |                     | 125,000                                          |                     | 
|10.50                          |  |                     | 230,600                                          |                     | 
|                               |  |                     |                                                  |                     | 
|3.00-10.50                     |  |                     | 1,347,260                                        |                     | 
|                               |  |                     |                                                  |                     | 
|                               |  |                     |                                                  |                     | 

| | 2. | Options granted to FIMI:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | In January
  2001, Crystal granted to the creditors of an affiliate, Intercomp,
  represented by 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, which may be paid, at
  Crystals option, in Crystals ordinary shares.  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.  The option is exercisable during a period of two years
  commencing on January 31, 2004 or, in certain circumstances, earlier.

F-30

---

---

CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note
12 - Shareholders Equity (cont.):

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

Note
13 - Monetary Balances in Non-dollar Currency:

| |                                     | December 31,     |       
| | ----------------------------------- | ---------------- | ------
| |                                     |                  |       
| |                                     | 2002             |       
| |                                     |                  |       
| |                                     | Israeli currency |       
| |                                     |                  |       
| |                                     | (in thousands)   |       
| |                                     |                  |       
| | ASSETS:                             |                  |       
| | Current
  assets                    |                  | $     
| | Long-term
  assets                  |                  |       
| |                                     |                  |       
| |                                     |                  | 14,805
| |                                     |                  |       
| | LIABILITIES:                        |                  |       
| | Current liabilities                 |                  |       
| | Long-term
  liabilities             |                  |       
| |                                     |                  |       
| |                                     |                  | 20,696
| |                                     |                  |       
| | Net monetary
  assets (liabilities) |                  | $     
| |                                     |                  |       
| |                                     |                  |       

F-31

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note
14 - Taxes on Income:

|A. | Tax benefits under the Israeli Law for the Encouragement of Capital
  Investments, 1959 (hereafter - the Law):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Some
  operations of Crystal and certain subsidiaries (Crystal and the
  Subsidiaries) have been granted Approved Enterprise status under the
  Law.  Since Crystal and the
  Subsidiaries have elected to receive alternative benefits under the Law
  (i.e. - waiver of grants in exchange for a tax exemption), the following tax
  rates will apply to its income from the Approved Enterprise (which will be
  determined based on the increase in the revenue of Crystal or the
  Subsidiaries during the year in relation to the revenue in the year preceding
  the first year of their having the abovementioned status):
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Tax
  exemption for 2 years, commencing in the first year it generates taxable
  income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | For the
  remainder of the benefit period - 5 years - a reduced tax rate of 25%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Since
  January 31, 1997, the percentage of Crystals share capital held by foreign
  shareholders has exceeded 25%, and therefore Crystals Approved Enterprises
  qualify for reduced tax rates for an additional three years after the seven
  years mentioned above.                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The period
  of tax benefits described above will terminate after the lapse of 7-10 years
  since the first year in which Crystal or the Subsidiaries have taxable
  income.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The
  entitlement to the above benefits is subject to final ratification by the
  Investment Center in the Ministry of Industry and Trade, such ratification
  being conditional upon fulfillment of all terms of the approved program.                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In the event
  of distribution of a cash dividend out of retained earnings which were tax
  exempt due to the above benefits, Crystal would have to pay approximately
  $4.3 million tax in respect of the amount distributed, see Note 12 C.2.
  Deferred taxes for such taxes were not provided because such undistributed
  earnings are essentially permanent in duration and could be distributed to shareholders
  tax free in liquidation, subject to certain conditions.                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Law also
  provides that an Approved Enterprise is entitled to accelerated depreciation
  on its property and equipment that is included in an approved investment
  program.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In the event
  Crystal or the Subsidiaries fail to comply with the approved program terms,
  the tax benefits may be canceled and Crystal or the Subsidiaries may be
  required to refund  the amount of the
  benefits they utilized, in whole or in part, with the addition of linkage
  differences and interest.                                                                                                                                                                                                                                                                                                                    

F-32

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 (cont.):

|B. | Measurement of results for tax purposes under the Income Tax
  (Inflationary Adjustments) Law, 1985 (hereafter - the Inflationary
  Adjustments Law):                                                                                                                                                                                                                                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Under this
  law, results for tax purposes are adjusted to on the changes in the exchange
  rate of the U.S. dollar.                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|C. | Tax benefits under the Law for the Encouragement of Industry
  (Taxation), 1969:                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Company
  currently qualifies as an Industrial Company as defined by this law, and as
  such is entitled to certain tax benefits including, inter alia, depreciation
  at increased rates as stipulated by regulations published under the
  Inflationary Adjustments Law and the right to deduct for tax purposes, over a
  period of 3 years, expenses relating to public issue of shares.  If realized, any tax benefit relating to
  issuance expenses is credited to capital surplus.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|D. | Tax Rates Applicable to Income from Other Sources in Israel:                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Income not
  eligible for Approved Enterprise benefits mentioned in A. above, is taxed
  at the regular corporate tax rate of 36%.                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|E. | Deferred Income Taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Deferred tax
  assets are comprised as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |                                                                  | December 31,   |       
| | ---------------------------------------------------------------- | -------------- | ------
| |                                                                  |                |       
| |                                                                  | 2002           |       
| |                                                                  |                |       
| |                                                                  | (in thousands) |       
| |                                                                  |                |       
| | Net
  operating loss carry forwards                              |                | $     
| | Software
  development costs                                     |                |       
| | Provisions
  for employee rights and other temporary differences |                |       
| |                                                                  |                |       
| |                                                                  |                | 14,109
| | Valuation
  allowance                                            |                |       
| |                                                                  |                |       
| |                                                                  | $              | 716   
| |                                                                  |                |       
| |                                                                  |                |       

| | For the year
  ended December 31, 2002, the valuation allowance increased by $1,081,000.                                                                                                                                                                                                                                                                                                                       
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                
| | The net
  operating losses mainly relate to Crystal and a U.S. subsidiary initially
  consolidated in the fourth quarter of 1999. In the three years prior to the
  consolidation, the subsidiary incurred substantial tax losses, and therefore
  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-33

---

---



CRYSTAL
SYSTEMS SOLUTIONS LTD.

(An Israeli Corporation)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14 (cont.):

|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, |       
| | ---------------------------------------- | ----------------------- | ------
| |                                          |                         |       
| |                                          | 2002                    |       
| |                                          |                         |       
| |                                          | (in thousands)          |       
| |                                          |                         |       
| | The Company
  and subsidiaries in Israel |                         | $     
| | Subsidiaries
  outside of Israel         |                         |       
| |                                          |                         |       
| |                                          | $                       | (1,432
| |                                          |                         |       

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

|                                   |  | Year ended December 31, |    
|---------------------------------- |  | ----------------------- | ---
|                                   |  |                         |    
|                                   |  | 2002                    |    
|                                   |  |                         |    
|                                   |  | (in thousands)          |    
|                                   |  |                         |    
|For the
  reported year - current: |  |                         |    
|In Israel                          |  | $                       | (3 
|Out of
  Israel                    |  |                         | 204
|                                   |  |                         |    
|                                   |  |                         | 201
|Taxes in
  respect of prior years  |  |                         | 9  
|Deferred
  taxes, net              |  |                         | (50
|                                   |  |                         |    
|                                   |  | $                       | 160
|                                   |  |                         |    

F-34

---

---



CRYSTAL SYSTEMS
SOLUTIONS LTD.

(An Israeli
Corporation)

NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS

Note 14 (cont.):

|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,   |     
| | ----------------------------------------------------------------------------------------- | -------------- | ----
| |                                                                                           |                |     
| |                                                                                           | 2002           |     
| |                                                                                           |                |     
| |                                                                                           | (in thousands) |     
| |                                                                                           |                |     
| | Income
  (loss) before taxes on income, per consolidated statements
       of income      |                | $   
| |                                                                                           |                |     
| | Theoretical
  tax expense                                                                 |                |     
| | Tax benefit
  arising from exempt tax rate as an approved
       enterprise             |                |     
| |                                                                                           |                |     
| |                                                                                           |                | (285
| | 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 in
  respect of previous years                                                      |                |     
| | Temporary
  differences for which deferred taxes were not
       recorded                 |                |     
| | Other                                                                                     |                |     
| |                                                                                           |                |     
| | Taxes on
  income in the consolidated statements of income -
       for the reported year |                | $   
| |                                                                                           |                |     
| | Effective
  tax rate                                                                      |                |     
| |                                                                                           |                |     
| |                                                                                           |                |     

|J. | Tax losses:
|-- | -----------
|  
|   | 1.         
|   |            
|   | 2.         

F-35

---

---



CRYSTAL SYSTEMS
SOLUTIONS LTD.

(An Israeli
Corporation)

NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS

Note 14 (cont.):

|K. | Tax assessments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Crystal has
  been issued a income tax assessment for the tax year 1997 in the amount of
  NIS 6,950 thousand ($1,467 thousand). Crystal has filed an appeal on this
  assessment. The Companys management believes, based on the opinion of its
  tax counsel, that while the outcome of any controversy cannot be predicted
  with complete certainty, this dispute with the Israeli income tax authorities
  will be resolved so as not to have a material adverse effect on the Companys
  financial statements as a whole.                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|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.

Note
15 - Supplementary Financial Statement Information:

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

| |                                        |  | December 31,   |       
| | -------------------------------------- |  | -------------- | ------
| |                                        |  |                |       
| |                                        |  | 2002           |       
| |                                        |  |                |       
| |                                        |  | (in thousands) |       
| |                                        |  |                |       
| | Trade
  accounts receivable            |  | $              | 11,819
| | Less
  provision for doubtful accounts |  |                | (1,008
| |                                        |  |                |       
| |                                        |  | $              | 10,811
| |                                        |  |                |       
| |                                        |  |                |       

F-36

---

---



CRYSTAL SYSTEMS
SOLUTIONS LTD.

(An Israeli
Corporation)

NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS

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

|A. | Balance Sheets (cont.):
|-- | -----------------------
|   |                        
|   | 2.                     

| |                                       |  | December 31,   |      
| | ------------------------------------- |  | -------------- | -----
| |                                       |  |                |      
| |                                       |  | 2002           |      
| |                                       |  |                |      
| |                                       |  | (in thousands) |      
| |                                       |  |                |      
| | Government
  departments and agencies |  | $              | 1,134
| | Advances to
  suppliers and others    |  |                | 48   
| | Employees                             |  |                | 201  
| | Prepaid
  expenses                    |  |                | 829  
| | Related
  parties                     |  |                | 121  
| | Deferred
  taxes                      |  |                | 153  
| | Interest
  income receivable          |  |                | 438  
| |                                       |  |                |      
| |                                       |  | $              | 2,924
| |                                       |  |                |      
| |                                       |  |                |      

|3. | The Companys long-lived assets are as follows:
|-- | -----------------------------------------------

| |        |  | December 31,   |      
| | ------ |  | -------------- | -----
| |        |  |                |      
| |        |  | 2002           |      
| |        |  |                |      
| |        |  | (in thousands) |      
| |        |  |                |      
| | Israel |  | $              | 2,517
| | U.S.A. |  |                | 722  
| | Europe |  |                | 333  
| |        |  |                |      
| |        |  | $              | 3,572
| |        |  |                |      

|4. | Accounts Payable and Accruals - Other:
|-- | --------------------------------------

| |                                                  |  | December 31,   |       
| | ------------------------------------------------ |  | -------------- | ------
| |                                                  |  |                |       
| |                                                  |  | 2002           |       
| |                                                  |  |                |       
| |                                                  |  | (in thousands) |       
| |                                                  |  |                |       
| |                                                  |  |                |       
| | Government
  departments and agencies            |  | $              | 3,997 
| | Employees
  and wage-related liabilities         |  |                | 5,708 
| | Prepaid
  income                                 |  |                |      
| | Accrued
  expenses and other current liabilities |  |                | 4,179 
| |                                                  |  |                |       
| |                                                  |  | $              | 13,884
| |                                                  |  |                |       

F-37

---

---



CRYSTAL SYSTEMS
SOLUTIONS LTD.

(An Israeli
Corporation)

NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS

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

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

|       |  | Year ended December 31, |       
|------ |  | ----------------------- | ------
|       |  |                         |       
|       |  | 2002                    |       
|       |  |                         |       
|       |  | (in thousands)          |       
|       |  |                         |       
|       |  |                         |       
|USA    |  | $                       | 20,847
|Europe |  |                         | 10,315
|Israel |  |                         | 4,636 
|Other  |  |                         | 870   
|       |  |                         |       
|       |  | $                       | 36,668
|       |  |                         |       

Sales by geographic areas are determined
based on the customers location.

| | 2. | Goodwill impairment, restructuring costs and non-recurring expenses:
| | -- | --------------------------------------------------------------------

| |                           |  | Year ended December 31, |    
| | ------------------------- |  | ----------------------- | ---
| |                           |  |                         |    
| |                           |  | 2002                    |    
| |                           |  |                         |    
| |                           |  | (in thousands)          |    
| |                           |  |                         |    
| | Goodwill
  impairment (1) |  | $                       |   
| | Restructuring
  costs (2) |  |                         | 472
| | Non-recurring
  expenses  |  |                         |   
| |                           |  |                         |    
| |                           |  | $                       | 472
| |                           |  |                         |    
| |                           |  |                         |    



| | (1) | Relates to
  the entire balance of goodwill in SCH as of December 31, 2001, which, in the
  estimation of the Companys management, is not recoverable.                                                                                                                                                                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Restructuring
  costs include $322,000 (2001- $2.3 million) in respect of employee termination
  benefits and $150,000 (2001- $363,000) in respect of other exit costs.
  Restructuring costs include an accrual of $182,000 (2001- $734,000). Under
  the Companys restructuring plan, at the end of 2002 5 employees are to be
  terminated, out of the following employee groups: research and development,
  marketing and management.

|3. | Principal customers:                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------
|   | In the period 2000-2002 the Company did not have revenues from any
single customer in excess of 10% of total revenues in the respective period.

F-38

---

---



CRYSTAL SYSTEMS
SOLUTIONS LTD.

(An Israeli
Corporation)

NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS

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

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

| |                                                |  | Year ended December 31, |     
| | ---------------------------------------------- |  | ----------------------- | ----
| |                                                |  |                         |     
| |                                                |  | 2002                    |     
| |                                                |  |                         |     
| |                                                |  | (in thousands)          |     
| |                                                |  |                         |     
| | Interest
  income                              |  | $                       | 648 
| | Gain (loss)
  on sale of marketable securities |  |                         | 24  
| | Interest
  expenses                            |  |                         | (867
| |                                                |  |                         |     
| |                                                |  | $                       | (195
| |                                                |  |                         |     
| |                                                |  |                         |     

| | 5. | Gain on realization of shareholdings:
| | -- | -------------------------------------

| |                       |  | Year ended December 31, |  
| | --------------------- |  | ----------------------- | -
| |                       |  |                         |  
| |                       |  | 2002                    |  
| |                       |  |                         |  
| |                       |  | (in thousands)          |  
| |                       |  |                         |  
| | LetMeKnow             |  | $                       | 
| | Tesnet (Note
  3C)    |  |                         | 
| | Intercomp
  (Note 3B) |  |                         | 
| | Polyglot              |  |                         | 
| |                       |  |                         |  
| |                       |  | $                       | 
| |                       |  |                         |  

| | 6. | Other Income (Expenses), Net:
| | -- | -----------------------------

| |                                               |  | Year ended December 31, |       
| | --------------------------------------------- |  | ----------------------- | ------
| |                                               |  |                         |       
| |                                               |  | 2002                    |       
| |                                               |  |                         |       
| |                                               |  | (in thousands)          |       
| |                                               |  |                         |       
| | Write-down
  of loans to Alexandria (Note 2E) |  | $                       |      
| | Gain (loss)
  from disposal of fixed assets   |  |                         | (37   
| | Expiration
  of options in Tesnet             |  |                         | 112   
| | Write-down
  of shareholdings in an investee  |  |                         | (1,800
| | Other                                         |  |                         | 144   
| |                                               |  |                         |       
| |                                               |  | $                       | (1,581
| |                                               |  |                         |       

F-39

---

---

CRYSTAL SYSTEMS
SOLUTIONS LTD.

(An Israeli
Corporation)

NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS

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

|C. | Earnings (Loss) Per Share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Basic
  earnings per share (EPS) were 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.                                                                                                                                                                                                                                                                                       
|   | Under that
  method zero, zero and 213,577 incremental shares attributed to outstanding
  options in 2002, 2001 and 2000, respectively, were used in the computation of
  diluted EPS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Options to
  purchase 100,000 shares at $28.35 per share were outstanding during the
  entire years of 2002, 2001 and 2000, 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
  1,347,260 and 1,101,000 shares at various prices between $3.00 and $10.50 per
  share were outstanding during the entire year of 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.

Note 16 - Transactions with Related Parties:

|                                                          |    | Year ended December 31,                                                                       | 
|--------------------------------------------------------- | -- | --------------------------------------------------------------------------------------------- | 
|                                                          |    |                                                                                               | 
|                                                          |    | 2002                                                                                          | 
|                                                          |    |                                                                                               | 
|                                                          |    | (in thousands)                                                                                | 
|Formula, its subsidiaries and other associated companies: |    |                                                                                               | 
|                                                          | A. | Selling,
  general and administrative expenses:                                               | 
|                                                          |    | Management
  fees (Note 11B)                                                                  | 
|                                                          | B. | Revenues
  from sale of software conversion tool
    and software services to related parties | 
|                                                          | C. | Cost of
  revenues relating to services from related
    Parties                              | 
|                                                          | D. | Reimbursement
  with respect to services rendered
    to affiliated and other companies       | 
|                                                          | E. | Sale of
  investees to Formula Vision Technologies
    (F.V.T. ) Ltd.                         | 

F-40

---

---



CRYSTAL SYSTEMS
SOLUTIONS LTD.
(An Israeli Corporation)
NOTES TO  CONSOLIDATED FINANCIAL
STATEMENTS

Note
16 - Transactions with Related Parties (cont.):

| | F. | Arik Kilman
  was nominated as Crystals 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 $200,000, 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
  in favor of Liraz 200,000 Lirazs shares he owned as a security for repayment
  of the loan. Following the share exchange transaction, Mr. Kilman replaced
  the pledged shares with 119,760 Crystal shares.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | G. | As to the
  acquisition of Alphatech by Crystal from Intercomp  see Note 2G.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | H. | As to the
  acquisition of Liraz by Crystal from Formula  see Note 2F.H.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Note 17  Subsequent Events:

| | A. | As to an
  exercise of warrants into shares of Mainsoft in May 2003- see Note 2A.                          
| | -- | -----------------------------------------------------------------------------------------------------------
|
| | B. | As to the
  acquisition of the minority interest in IntraComp in the second quarter of
  2003- see Note 2B.
|
| | C. | As to a
  public tender offer to shareholders of Liraz published in March 2003- see
  Note 2F.             

F-41

---

---